SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------------------
FORM 10-K
{x} ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 1997
{ }TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For transition period from................... to ................
Commission file number 1-6150
ALBA-WALDENSIAN, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 56-0359780
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 St. Germain Avenue, S.W.
P.O. Box 100 Valdese, North Carolina 28690
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 704-879-6500
Securities registered pursuant to Section 12 (b) of the Act:
COMMON STOCK ($2.50 PAR VALUE) AMERICAN STOCK EXCHANGE
------------------------------ -----------------------
(Title of class) (Name of exchange on which registered)
Securities registered pursuant to Section to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss..229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. [ ]
State the aggregate market value of the voting stock held by the non-affiliates
of the registrant: Approximately $4,381,000 as of March 16, 1998.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 1,867,403 shares of Common
Stock ($2.50 par value) as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report for the fiscal year ended December 31,
1997 are incorporated by reference into Parts I, II and IV.
Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Parts I and III.
<PAGE>
THIS ANNUAL REPORT ON FORM 1O-K, INCLUDING ANY INFORMATION INCORPORTATED THEREIN
BY REFERENCE, MAY CONTAIN, IN ADDITION TO HISTORICAL INFORMATION, CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES.
SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S BELIEF AS WELL AS
ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, MANAGEMENT PURSUANT
TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE
THE CONTEXT OF THE STATEMENT USUALLY WILL INCLUDE WORDS SUCH AS "THE COMPANY
BELIEVES"; OR; "EXPECTS"; OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT
DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE ALSO
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ADDRESS FUTURE EVENTS AND CONDITIONS
CONCERNING CAPITAL EXPENDITURES, EARNINGS, SALES, LIQUIDITY AND CAPITAL
RESOURCES, AND ACCOUNTING MATTERS.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR
IMPLIED BY, THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN ITEM 1 - DESCRIPTION OF BUSINESS; AND ELSEWHERE IN THE COMPANY'S
ANNUAL REPORT ON FORM 1O-K FOR THE YEAR ENDED DECEMBER 31, 1997, OR IN
INFORMATION INCORPORATED THERIN BY REFERENCE, AS WELL AS FACTORS SUCH AS FUTURE
ECONOMIC CONDITIONS, ACCEPTANCE BY CUSTOMERS OF THE COMPANY'S PRODUCTS, CHANGES
IN CUSTOMER DEMAND, LEGISLATIVE, REGULATORY AND COMPETITIVE DEVELOPMENTS IN
MARKETS IN WHICH THE COMPANY OPERATES AND OTHER CIRCUMSTANCES AFFECTING
ANTICIPATED REVENUES AND COSTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE
PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD LOOKING STATEMENTS THAT
MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS ANNUAL
REPORT ON FORM 1O-K OR TO REFLECT THE OCCURRENCE OF OTHER ANTICIPATED EVENTS.
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Alba-Waldensian, Inc., (the "Company") manufactures a variety of
knitted apparel and health care products at two plants in Valdese, North
Carolina and one plant in Rockwood, TN and markets the products through three
divisions, the Consumer Products Division, the Health Products Division and the
Alba Direct Division.
During 1997, the Company determined that it was able to obtain certain
covered yarn from outside suppliers at a quality level and cost such that
producing such yarn was no longer justified. Accordingly, the Company was able
to close its yarn production facilities and sell most of its yarn covering
machinery. The Company intends to sell or lease the idled production facilities
(the Alba plant).
In order to focus its efforts in the seamless intimate apparel arena,
the Company in 1997 discontinued the production of the "old technology" full
fashion product line and severely curtailed
<PAGE>
production of the circular knit panty. This strategic move resulted in a loss of
approximately $600,000, representing the write-off of the full fashion
manufacturing equipment and certain raw materials and production supplies.
Since its acquisition in 1992, the Byford menswear distribution
business had been unable to generate the volumes necessary to justify the
Company's investment of capital and management time. Accordingly, in 1997 the
Company discontinued the Byford business and began disposing of all remaining
Byford inventories.
In order to maintain its competitive position, in 1997 the Company
established an outsourcing program in Mexico. The Company began importing
hosiery in late December and plans to gradually increase hosiery imports in 1998
with the addition of certain intimate apparel products in late 1998.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is in a single line of business: the manufacturing, processing,
importing and selling of knitted products, which consists of several classes.
Accordingly, no segment information is presented.
PRINCIPAL PRODUCTS
The principal products of the Company's three Divisions are described
below. For additional discussion of the current status of each Division and its
products, please see the Company's 1997 Annual Report to Shareholders, which
contains information expressly incorporated herein by reference.
CONSUMER PRODUCTS DIVISION
Products manufactured and sold by this Division include women's intimate
apparel and women's
<PAGE>
hosiery products. Intimate apparel includes stretch brassieres, briefs and
bodywear, as well as specially designed briefs for maternity wear. Women's
hosiery products include sheer stockings, pantyhose, and trouser socks,
primarily for large-size women and the maternity market.
The Company has developed a process that makes it possible to knit bras,
briefs, tank tops and body suits on seamless knitting equipment. This design
technology, which is patented for the knit bra and various knit-in features for
all seamless products, has allowed the Company to significantly broaden its
product offerings. The seamless knit bra was introduced in 1994 and the tank
tops and body suits were introduced in 1995.
The Company uses state of the art computer-controlled circular-knitting
technology. Such equipment produces apparel that management believes is better
fitting and therefore more comfortable.
HEALTH PRODUCTS DIVISION
Products manufactured and sold by this Division are designed to assist in
healthcare. They include anti-embolism stockings and compression therapy
systems, an intermittent pneumatic compression device, both of which are
designed to improve circulation and reduce the incidence of deep vein
thrombosis; sterile wound dressings such as pre-saturated gauze, petrolatum and
xeroform gauze, non-adhering dressings and gauze strips and XX-Span(R) dressing
retainers, an extensible net tubing designed to hold dressings in place without
the use of adhesive tape. All dressing products are used in wound care therapy,
particularly for the treatment of burns.
In addition, this Division manufactures a knitted stockinette in a
variety of sizes, which is used under fracture casts or is sterile packaged for
use as a supplemental drape in surgical procedures. Heel and elbow pads are
XX-Span(R) sleeves with an inner soft foam pad used to reduce pressure and the
incidence of decubitus ulcers.
<PAGE>
Other products include slip-resistant patient treads, which are knitted soft
patient footwear with slip resistant soles to help prevent patient falls while
keeping feet warm even while in bed; knitted arm sleeves, which provide
protection to the skin of patients with poor circulation; oversize socks for
diabetic patients; baby caps to retain body temperature; and knitted cuffs for
use on surgical gowns.
ALBA DIRECT DIVISION
Alba Direct distributes products from the Consumer Products Division to the
independent specialty retail class of trade via telemarketing. Alba Direct has
developed export customers in Japan and Turkey and is the primary group
responsible for developing the Company's Consumer exporting business.
METHODS OF DISTRIBUTION
The Company's products are sold throughout the United States through
salaried and commissioned salesmen. The Consumer Products Division markets its
products directly to chain store organizations, which sell them under their own
labels and to several companies that market nationally advertised brands.
Products of the Health Products Division for use in hospitals are marketed to
major distributors by the Company's sales representatives. These products are
sold both under private label and under the Company's own Life Span(R) Label.
Alba Direct distributes branded Consumer Products to the independent retail
trade through telemarketing. Sales offices are located in Valdese, North
Carolina and in New York City. Total expenses for marketing and selling of all
products from the Company's continuing operations were 8.2% of sales in 1997 and
9.7% of sales in 1996. (See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" in the Company's 1997 Annual Report to
Shareholders, which is incorporated herein by reference.)
<PAGE>
MANUFACTURING
All Health Products manufacturing and distribution is located at the Rockwood,
Tennessee plant. The Rockwood plant is a 246,000 square foot building, with
space and available labor market for growth. All products are knitted on
circular knitting equipment. Most of this equipment has been purchased in the
past ten years. Automated seaming, printing and packaging are used in the
finishing process.
Consumer Products manufacturing and distribution is located at two plants in
Valdese, North Carolina. Products are knitted on circular knitting equipment.
Most of the circular knitting equipment is the latest equipment available.
Greige seaming and finishing is manual or automated, depending on product and
size of product.
The Company has an ongoing program for the outsourcing of production to augment
certain of its internal production capacities. Domestically, the Company obtains
manual sewing from outside contractors. In 1997, the Company established a
Mexican source for the production and finishing of women's sheer hosiery, with
the first imports being received in late December. The Company intends to
increase its Mexican imports of hosiery in 1998 with the addition of certain
intimate apparel styles in late 1998.
The Company continues to replace older equipment and automate where possible.
The Company expects capital expenditures for 1998 to be approximately
$3,700,000. The capital expenditures in 1998 will be for purchasing new and used
equipment, upgrading remaining older equipment and computer systems, automating,
renovating and improving plant facilities. Based upon anticipated increased
demand for the Company's seamless products in 1998, it may be necessary to
significantly increase expenditures for seamless knitting equipment. The Company
anticipates that it will be able to obtain adequate financing to allow for any
such increased capital expenditures.
<PAGE>
FINANCIAL INFORMATION ABOUT CLASSES OF SIMILAR PRODUCTS
The Company is in a single line of business: manufacturing, processing and
selling knitted products consisting of several classes. The table below
illustrates sales as a percentage of net dollar volume from continuing
operations for each product class for each of the Company's last three years:
1997 1996 1995
---- ------ ----
Women's Intimate Apparel 29.3% 31.1% 30.7%
Women's Hosiery Products 16.1 15.0 17.3
Health Products 54.6 53.9 52.0
--------- ---- -----
100.0% 100.0% 100.0%
Women's intimate apparel consists of regular size bras, briefs and
bodywear as well as maternity and plus size briefs.
Women's hosiery products consist of regular, maternity and plus-size
panty hose, as well as trouser socks and tights.
Health products consist of stockinettes, treads, arm sleeves,
anti-embolism stockings, PAS(R), s sterile wound dressings, heel pads,
elbow pads, oversize socks, baby caps, and knitted cuffs.
Discontinued products are eliminated for the purpose of this table. The
remaining sales percentages of each class were restated after this elimination
to represent sales of each class as a percentage of net dollar volume from
continuing product lines.
NEW PRODUCTS
The Company maintains an active research and development department that
continually evaluates
<PAGE>
new products and processes. Management also evaluates new products, business
opportunities, and acquisitions on an on-going basis and could encounter an
opportunity that would require substantial investment in the future. Such
investments occurred in 1995 with the acquisition of the Balfour Health Products
Division from Kayser-Roth Corporation. (See "Management 's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Shareholders.)
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used by the Company in its manufacturing
processes include various types of yarn, chemicals for dyeing and finishing and
for impregnating medical products and packaging materials for all products. The
Company acquires these materials from a number of sources and is not dependent
on any one source for a significant amount of its raw materials. The Company
anticipates no material change in either the availability or the cost of its raw
materials.
PATENTS AND TRADEMARKS
The only material patents held by the Company are (1) for a device used to
warm wet dressings, which expires in 2002; (2) for a process covering the
manufacture of dressings, which expires in 2002, and (3) a variety of patents
for processes which makes it possible to knit bras and various functional
features in bras and panties on seamless knitting equipment, which expire in
2014. Also, the Company acquired a co-exclusive License Agreement for a patented
process which makes it possible to knit briefs. The agreement is for the life of
the patent, which expires in 2012. The material trademarks held by the
<PAGE>
Company are: Alba(R), All Day Long(R), ComfortKnit(R), SomeBody(R), While You
Wait(R), Comfort Zone(R), Lady Alba(R), Occasionals(R), Ultimates(R),
XX-Span(R),Speed-Roll(R), Life Span(R), Coplex(R), PAS(R), Baby Bogan(R),
Balfour(R), Care-Steps(R), Case Sox(R), Body Makeup(R), Fashion Tread(R), Figure
Perfect(R) and Castmate(R). The Company or its subsidiary, Pilot Research
Corporation, holds numerous other patents and trademarks that, because of
obsolescence or other reasons, are not material to the Company's current
operations.
SEASONALITY
Sales tend to be fairly even throughout the year. For a tabular
presentation of unaudited summary financial information on a quarterly basis,
see the Company's 1997 Annual Report to Shareholders, which information is
incorporated herein by reference.
WORKING CAPITAL
Differences resulting from seasonal fluctuations have not materially
affected the Company's working capital requirements. The Company sells
merchandise on consignment only on a limited basis. Although returns are
permitted when the quality of merchandise sold is below acceptable standards or
when an error in completing an order occurs, the number and amounts of returns
did not have a material effect on working capital of the Company during fiscal
1997 or 1996. Due to the various approaches to manufacturing and distribution
used by the industry, the Company is not aware of any industry-wide norms
relating to sale and delivery requirements.
SIGNIFICANT CUSTOMERS
Allegiance Healthcare Corporation (formerly Baxter Healthcare Corporation)
is the only customer that
<PAGE>
represents ten percent or greater of the Company's sales volume for the years
ended in 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allegiance Healthcare Corporation $13,937,424 $15,932,382 $16,601,252
(formerly Baxter Healthcare Corporation)
Percentage of sales 23.3% 24.2% 26.1%
</TABLE>
While the loss of Allegiance Healthcare Corporation would have a material
adverse effect on the business of the Company, management believes that, because
of the number of departments within Allegiance to which the Company sells, the
likelihood of a material amount of sales loss is reduced.
BACKLOG
The Company's backlog of firm orders at December 31, 1997 and 1996 was
$3,825,000 and $2,867,901 respectively. A majority of the Company's orders are
for delivery within 5 to 60 days; therefore, backlogs are not normally
indicative of orders for the remainder of the year.
COMPETITION
The Company encounters substantial competition in the sale of its products
from numerous competitors, a few of which are known to have larger sales and
capital resources than the Company. Management is unable to estimate the number
of the Company's competitors or its relative position among them. Management
believes that the principal methods of competition in the markets in which the
Company competes include price, delivery, performance, service and the ability
to bring to the market innovative products. Management believes that the Company
is competitive with respect to these factors but is
<PAGE>
unable to identify specific positive and negative aspects of the Company's
business pertaining to such factors. (See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Shareholders.)
RESEARCH AND DEVELOPMENT
The Company estimates that in 1997 it spent $512,900 on Company-sponsored
research and development projects through the Company's Research and Development
Department. This compares to $474,330 in 1996 and $490,824 in 1995.
ENVIRONMENTAL REGULATIONS
In the opinion of management, the Company and its subsidiaries are in
substantial compliance with present federal, state and local regulations
regarding the discharge of materials into the environment. Capital expenditures
required to be made in order to achieve such compliance have had no material
effect upon the earnings or competitive position of the Company or its
subsidiaries. Management believes that continued compliance will require no
material expenditures.
GOVERNMENT REGULATION
The Company is subject to various regulations relating to the maintenance
of safe working conditions and manufacturing practices. In addition, certain of
the products manufactured by the Health Products Division are subject to the
requirements of the Food and Drug Administration with respect to environmentally
controlled facilities. Management believes that it is currently in compliance
with all
<PAGE>
such regulations.
EMPLOYEES
The Company had 692 employees as of December 31, 1997. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its employee relations to be excellent.
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal physical properties are listed below:
<TABLE>
<CAPTION>
Approximate
Square
Name Location Footage Use
- ---- -------- ------- ---
<S> <C> <C> <C>
Alba Valdese, NC 157,000 Not in Use (held for
sale or lease)
John Louis Valdese, NC 178,300 Finishing (Consumer
Products)
Pineburr Valdese, NC 81,000 Knitting (Consumer
Products)
Rockwood Rockwood, TN 245,940 Knitting, Yarn
Processing &
Finishing (Health
Products)
Office Valdese, NC 52,000 Corporate
headquarters
Offices New York City 3,200 Leased Sales Offices and
$86,400 Annually Showroom
Expires April 2000
</TABLE>
All plants are of brick and steel construction, and most areas have been
air-conditioned. All have been maintained in working condition. The Company
leases its New York City office. The rest of the Company's physical properties
are held in fee simple, subject to encumbrances that are described in Note 4 and
5 of Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Shareholders, which information is incorporated herein by reference.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which the Company or any of its
subsidiaries or which any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The information called for by this item appears beneath the heading "Stock
Prices and Dividend Information" in the Company's 1997 Annual Report to
Shareholders, which information is incorporated herein by reference. The
Company's $2.50 par value Common Stock is registered and traded on the American
Stock Exchange under the symbol "AWS". The Board of Directors has no formal
policy with respect to the payment of dividends and no such dividends have been
declared or paid during the past three fiscal years.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this item appears beneath the heading
"Five-Year Selected Financial Data" in the Company's 1997 Annual Report to
Shareholders, which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATIONS
The information called for by this item appears beneath the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 Annual Report to Shareholders, which
information is incorporated herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this item appears in the Company's 1997
Annual Report to Shareholders, which information is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding Directors and Executive Officers called for by
this item appears beneath the heading "Information about Directors and Nominees
for Director" and "Executive Officers" in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders, which information is incorporated herein by
reference. Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the Company's fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this item appears under the heading
"Executive Compensation" in the Proxy Statement for the Company's 1998 Annual
Meeting of Shareholders, which information is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this item appears under the heading "Voting
Securities and Principal Security Holders" in the Company's Proxy Statement for
the 1998 Annual Meeting of Shareholders, which information is incorporated
herein by reference.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
The information called for by this item appears under the heading
"Information About Directors and Nominees for Directors" in the Proxy Statement
for the Company's 1998 Annual Meeting of Shareholders, which information is
incorporated by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following are filed as a part of this report:
(1) Financial statements filed:
(i) The following consolidated financial statements
of the Company and its subsidiaries included in
the Company's 1997 Annual Report to shareholders
are incorporated herein by reference to the
Annual Report as indicated:
Consolidated Balance Sheets - December 31, 1997
and 1996.
Consolidated Statements of Operations - Years
ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity-
Years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows - Years
ended December 31, 1997, 1996, and 1995.
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules filed:
Report of Independent Certified Public Accountants on
Financial Statement Schedule (page S-1 of this
report)
Schedule II (Valuation and Qualifying Accounts) (page
S-2 of this report)
All other schedules are omitted as the required
information is inapplicable or is present in the
financial statements or related notes thereto.
(3) Exhibits filed:
3.1 Certificate of Incorporation, as amended,
which is incorporated herein by reference to
Exhibit 3.1 of the Company's 1986 Annual
Report on Form 10-K.
3.1.1 Amendment to Certificate of Incorporation
adopted by shareholders which is
incorporated herein by reference to Exhibit
3.1 of the Company's 1987 Annual Report on
Form 10-K.
3.2 Bylaws, which are incorporated herein by
reference to Exhibit 3.2 of the Company's
1986 Annual Report on Form 10-K.
4.1 Specimen certificate of common stock, which
is incorporated herein by reference to
Exhibit 4 of the Company's Registration
Statement on Form S-2 (No. 2-83186).
4.3 Undertaking of the Company to file exhibits
pursuant to Item 601 (b) (4) (iii) (A) of
Regulation S-K, which is incorporated herein
by reference to Exhibit
<PAGE>
28 of the Company's 1986 Annual Report on
Form 10-K.
*10.10 1989 Non-Qualified Deferred Compensation
Plan, which is incorporated herein by
reference to Exhibit 10.10 of the Company's
Annual Report on Form 10-K for the year
ended December 31, 1988.
*10.11 1989 Management Incentive Plan which is
incorporated herein by reference to Exhibit
10.10 of the Company's Annual Report on Form
10-K for the year ended December 31, 1988.
*10.13 1993 Long Term Performance Plan, which is
incorporated herein by reference to Exhibit
10.13 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31,
1993.
13 1997 Annual Report to Shareholders
23.1 Consent of Independent Certified Public
Accountants, BDO Seidman, LLP
27 Financial Data Schedule (filed in electronic
format only). This schedule is furnished for
the information of the Commission and is not
deemed to be "filed".
* Identifies compensation plans.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
last quarter of the year ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ALBA-WALDENSIAN, INC.
Date : March 30, 1998 By /s/
------------------- ------------------------------
Lee N. Mortenson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated
/s/ /s/
- -------------------------------- ---------------------------------
Paul H. Albritton, Jr., Director William M. Cousins, Jr., Director
March 30, 1998 March 30, 1998
/s/ /s/
- -------------------------------- ---------------------------------
Clyde Wm. Engle, Director C. Alan Forbes, Director
March 30, 1998 March 30, 1998
/s/ /s/
- -------------------------------- ---------------------------------
James M. Fawcett, Jr., Director Glenn J. Kennedy, Director and
March 30, 1998 Chief Financial Officer (Chief
Accounting Officer)
March 30, 1998
/s/ /s/
- -------------------------------- ---------------------------------
Joseph C. Minio, Director Lee N. Mortenson , Director and
March 30, 1998 Chief Executive Officer
(Principal Executive Officer)
March 30, 1998
<PAGE>
ALBA-WALDENSIAN, INC.
INDEX TO EXHIBITS
Annual Report on Form 10-K for the Fiscal Year ended Commission File No.
December 31, 1997. 1-6150
Exhibit Number Exhibit
- -------------- -------
13 Annual Report to Shareholders
23.1 Consent of Independent Certified Public
Accountants, BDO Seidman, LLP
27 Financial Data schedule (filed in electronic
format only)
[LOGO OF ALBA-WALDENSIAN APPEARS HERE]
ANNUAL REPORT
1997
<PAGE>
CONSUMER PRODUCTS
[PHOTOS OF VARIOUS PRODUCTS APPEARS HERE]
ALL DAY LONG CALVIN KLEIN SEAMLESS COMFORTS DIAHANN CARROLL
SURGICAL DRESSINGS HEEL/ELBOW PROTECTORS ANTI-EMBOLISM STOCKING
IMPERVIOUS STOCKINETTE
<PAGE>
ALBA-WALDENSIAN HISTORY
Headquartered in Valdese, North Carolina, Alba-Waldensian, Inc. was founded
in 1901 by Waldensians who had immigrated from Italy in the late 1800's to start
new lives in the foothills of the Blue Ridge Mountains. From this modest
beginning Alba-Waldensian, Inc. has grown over the last 97 years into a
multi-facility company manufacturing a variety of very innovative knitted
products for domestic as well as international markets.
The current Company's ancestor, Waldensian Hosiery Mills, first began
operations in a 40 x 80 foot building using timber from local farms. The Company
was a long-time producer of full fashioned women's knit hosiery until the 1950's
when they brought their innovative spirit into play and learned to knit women's
stretch panties on their original knitting equipment. Today, the Company uses
the most modern, state-of-the-art computerized knitting technology, to produce a
wide variety of stretch panties, bras, body suits, panty hose and medical
specialty products.
In 1961 Waldensian Hosiery Mills merged with Alba Hosiery Mills to form the
current Alba-Waldensian, Inc. The Company then went public in 1969 with its
stock listed on the American Stock Exchange (AWS).
The Company introduced its first low-tech, consumable medical specialty
products in 1974 utilizing its considerable knitting expertise. The health
products business has grown steadily and today the Alba Health Division is a
leading manufacturer and marketer of products used in hospitals, nursing homes,
physician offices and extended care facilities throughout the world.
The Health Products Division continued to grow in 1994 by acquiring the
Pulsatile Anti-Embolism System (PAS(R)) thereby doubling its vascular care
business. In early 1995 the Company acquired the Balfour Healthcare Division
thereby doubling the size of its healthcare business. During 1995 and 1996 the
Company consolidated all health products manufacturing into the Rockwood,
Tennessee facility that was part of the Balfour acquisition. At the same time,
the Valdese facilities were dedicated to consumer products manufacturing.
The highly innovative spirit that has been the trade-mark of
Alba-Waldensian for close to a century continues today to be our "secret weapon"
that enables us to continue to develop and market highly unique products and be
extremely competitive throughout the world. It is with a keen sense of heritage
that Alba-Waldensian commits itself to the future.
1
<PAGE>
TO OUR SHAREHOLDERS
The Company's loss in 1997 reflects the short-term cost of several
important strategic decisions that were necessary to ensure the Company's
profitable growth. Seamless intimate apparel was recognized as a future growth
category of the Company's consumer products business. In order to focus our
efforts on that goal, production of "old technology" full fashion products was
discontinued, production of circular knit panties was reduced over 50% and
distribution of the Byford line of menswear was discontinued. In order for our
ladies' hosiery line to remain competitive, the decision was made to acquire a
portion of our hosiery production from outside the United States. Key management
changes coupled with expansion of the Company's seamless knitting capacity
rounded out the strategic changes of 1997.
As consumers discover the fit, comfort and figure flattering attributes of
seamless goods: we expect that demand for seamless products will continue to
expand. As one of only four major companies in the world with significant
seamless capacity, we were able in 1997 to sell seamless products to major
accounts such as Sears, JC Penney, Target, Victoria's Secret, Nordstrom's,
Talbot's and others. We are making a major commitment to the further expansion
of our seamless knitting capacity and it is anticipated that our seamless
knitting capacity could increase by 50% or more in 1998. As we develop new
applications of the technology, we see further expansion of our volumes and
profit margins.
To further focus our efforts in the seamless arena, we discontinued the
production of the "old technology" full fashion product line and severely
curtailed production of the circular knit panty. This strategic move resulted in
a loss of approximately $600,000, representing the write-off of our full fashion
manufacturing equipment and certain raw materials and production supplies.
Since its acquisition in 1992, we had been unable to generate the volumes
necessary to bring profits on the Byford menswear distribution business up to a
level that justified the Company's investment of capital and management time.
Accordingly, the decision was made to discontinue the business and dispose of
all remaining Byford inventories, resulting in sales declining by $1,207,000
with inventory write-downs approximating $175,000.
Hosiery volume remained flat in 1997 due to continued softness in the
industry while competitive pressures and production problems combined to result
in margins declining by 3 points in 1997. To recover lost margins and meet
competition, we established an outsourcing program in Mexico. The first
production from Mexico was received in the fourth quarter with shipments to
customers to begin in the first quarter of 1998. The Company plans to gradually
increase its outsourcing of hosiery production over the next three years.
Our Health Products business is facing significant challenges due to the
rapidly changing face of the healthcare industry. Consolidation of both
healthcare providers and suppliers is being fueled by extreme pressure from both
the government and the general public to reduce the cost of providing health
services. Product line consolidation by a major distributor caused a loss of a
portion of our dressing business. The Company experienced problems with its new
pulStar(R) wrap system in 1997 resulting in its re-design and delayed
market-place penetration. The newly re-designed pulStar(R) wrap system is
currently receiving excellent initial acceptance. Sales of our Health Products
division declined $2,113,000 or
[BAR CHARTS APPEARS BELOW WITH THE FOLLOWING INFORMATION:]
NET SALES
$ IN MILLIONS
'92 '93 '94 '95 '96 '97
- --- --- --- --- --- ---
41 51 57 64 66 60
SALES PER
EMPLOYEE
THOUSANDS
'92 '93 '94 '95 '96 '97
- --- --- --- --- --- ---
51 58 67 71 80 80
2
<PAGE>
6.5% in 1997, due primarily to the problems with the introduction of the new
pulStar(R) wrap system and the loss of a portion of our dressing business. These
problems also resulted in gross margins declining 4.4 points in 1997. We were
able to increase sales in our two major product lines: knitted footwear and
surgeon gown cuffs; both areas in which we are market leaders. For 1998 we
expect that the revitalized pulStar(R) product will allow us to return to a
pattern of growing sales and increasing margins.
A net loss of $376,654 or $0.20 per common share was realized in 1997. This
compares with net earnings of $319,895 or $0.17 per common share in the prior
year. Net sales declined by 9% to $59,911,868, primarily due to the decision to
stop production of full fashion products and curtail production of circular knit
intimates in favor of the newly emerging seamless product lines and the
discontinuation of the Byford menswear line. Softness in the hosiery industry
coupled with increased consolidation and contraction of healthcare customers
also combined to result in lower sales in 1997.
Gross margins improved in our consumer products business by 1.8 points as
the switch from full fashion and circular knits to the higher margin seamless
products yielded a 4.3 point increase in intimate apparel margins. Lower margins
in hosiery (down 3 points) highlighted the need for moving to lower cost
outsourcing of production. Gross margins in our healthcare business fell 4.4
points as problems with our new pulStar(R) product combined with cost reduction
pressures within the industry to lower our profit margins.
The Company was successful in controlling spending in 1997. Selling,
general and administrative expenses declined from 20.4% of net sales in 1996 to
19.7% in 1997. This decline was achieved through tight cost controls in the face
of declining sales and in spite of over $400,000 of one-time costs incurred in
connection with the severance arrangement with the Company's former President
and CEO.
Our Company's management team was strengthened in 1997 with twelve key
personnel changes having been made in the top 18 management positions. Ron
Harrison became Vice President of Operations in February 1997, bringing over 25
years of experience in apparel manufacturing to the Company and has been
instrumental in implementation of our outsourcing program and the expansion of
our seamless production capacity. Glenn Kennedy joined Alba in June of 1997 as
chief financial officer after serving on Alba's Board of Directors since 1991.
Glenn brings over 22 years of financial experience in both public accounting and
as chief financial officer of both private and public companies, including
Alba's parent, Sunstates Corporation. I joined the Company as President and
Chief Executive Officer in February 1997 after having spent twelve years as a
member of the Company's Board of Directors and having served as Chief Operating
Officer of Sunstates Corporation and Group Vice President with Gould, Inc. and
Becton Dickinson and Company. I believe that we now have a strong management
team committed to the growth of Alba.
1997 was a year of repositioning for Alba and I believe that many important
steps were taken to enable Alba to go forward into 1998 with renewed growth and
increased profitability. We are excited about our future and believe that a
return to profitability and increased shareholder value lie ahead.
I want to thank you and our valued employees for your continued support.
Sincerely,
/s/ Lee N. Mortenson
Lee N. Mortenson
President and Chief Executive Officer
3
<PAGE>
CONSUMER PRODUCTS DIVISION
Sales of the Division's products fell $2.6 million, all in full fashion and
circular knit panties. Gross margin was up 1.8 points (+4.3 points in intimates,
- -3.4 points in hosiery).
The margin gain in intimates reflects the shift to higher margin seamless
styles from the "old technology" full fashion (all full fashion manufacturing
was discontinued early in 1997) and circular knit.
[PHOTO APPEARS HERE]
The margin decline in hosiery was the result of quality problems and
startup expenses related to the installation of new knitting equipment in late
1996. These problems are now behind us and these new machines, designed to give
greater fit and comfort to the full-figure consumer, are now producing
efficiently. While hosiery margins are still under pressure from Lycra price
increases and retailer resistance to price increases due to the soft market, we
expect to increase our margins in 1998 by:
a) sales of higher margin, value added, products such as tights and trouser
socks;
b) the branded JONES WEAR program; and,
c) selected sourcing from Mexico.
1997 WAS A YEAR OF "CONSOLIDATION" AND "VALIDATION."
CONSOLIDATION: We were able to consolidate styles and products, while
offering the consumer a better line. We reduced SKU's by over 1/3, eliminated
the inefficient full fashion production and reduced our circular knit production
by over 50% to focus on our core hosiery styles, new higher margin tights and
trouser socks plus the emerging seamless intimates market.
[PHOTO APPEARS HERE]
4
<PAGE>
VALIDATION: We were able to validate our commitment to seamless intimates.
We sold seamless products to major accounts such as Sears, JC Penney, Target,
Victoria's Secret, Nordstrom's, Talbot's and others, plus, importantly, we are
becoming a major vendor to branded marketers who want to sell a seamless line.
1998 PLANS
We are poised for continued growth in 1998. Our order backlog at the end of
January was over $3.9 million, approximately five times what it was a year
before.
Most of our growth will come from SEAMLESS INTIMATES. Alba is one of only
four major companies in the world with significant capacity for seamless goods.
As consumers discover the fit and comfort, plus figure flattering attributes of
seamless goods, and we develop new applications of the technology, the future
looks very encouraging.
1998 plans for seamless growth include continued momentum in current styles
and customers plus expansion into new customers and new product categories that
benefit from the attributes only seamless can provide.
In addition we will see growth in current and new LICENSED BUSINESSES.
1. We expect to see a major expansion of the JONES WEAR program introduced
in 1997,
2. We will introduce a line under the DIAHANN CARROLL license, and
3. We continue to seek other strategically focused licenses.
To increase our sale of licensed products we have formed the Alba Design
Group, based in our New York Office headed by Mr. William Bell. Bill formerly
ran the licensee of GIORGIO ARMANI and brings a wealth of experience and
contacts to Alba.
ALBA DIRECT
Alba-Direct is approximately 50% export (mostly to Japan) and 50%
telemarketing to US women's specialty retailers and maternity shops.
Sales in 1997 were essentially the same as 1996, with margins up 3 points
to 24%. Alba-Direct's 1998 plans are:
a) to develop additional export markets, to lessen the impact of the
current economic conditions in Asia;
b) continue to sell to maternity shops and specialty stores, and,
importantly;
c) develop the Internet as a marketing tool for both wholesale and retail
(consumer) markets. Visit us at "Alba1.com" and see how it will work!.
[PHOTO APPEARS HERE
5
<PAGE>
HEALTH PRODUCTS DIVISION
As expected, 1997 was a year of continued consolidation within the
healthcare industry, which resulted in a reduction in sales revenue compared to
1996. A re-design and re-introduction of our new pulStar(R) wrap system also
contributed to the lower volumes in 1997. Although consolidation within the
industry is expected to continue in 1998, the Company believes that
consolidation presents opportunities for growth in addition to the challenges of
maintaining market share. The Company can not predict the effect that such
consolidations may have in 1998.
[PHOTO APPEARS HERE]
Increased sales were achieved in ALBAhealth's two major product lines:
knitted footwear and surgeon gown cuffs. We are market share leaders in both of
these categories.
The decision of a major customer of our dressings to consolidate their
product offering did adversely affect our sales, but a portion of this business
is being retained by sales to other distributors.
Also, the re-design of our new pulStar(R) wrap system resulted in the
writing off of certain parts of our PAS(R) product line further reducing our
profit margins. However, this decision clears the way for the re-introduction of
our new pulStar(R) wrap system that has received excellent initial acceptance.
While consolidation and contraction of customers and product lines has made
it more difficult to sell in our industry, ALBAhealth did increase sales to
McKesson General Medical by 23% and Bergen Brunswig by over 20%. Both these
companies made significant efforts to expand their distribution position to U.S.
healthcare providers. Likewise, our sales increased with Owens & Minor, Burrows,
Dr. Leonard's, and PHS in addition to many other regional dealers.
Our O.E.M. business grew via increases with Kimberly-Clark on gown cuffs
and American Threshold on face mask ties.
We also established a network of dealers in South America and Mexico that
should add significant new volume in 1998.
[PHOTO APPEARS HERE]
Finally, for the third straight year our sales force was awarded the "Best
Field Sales Support" award by Allegiance Healthcare, the nations largest
distributor to U.S. hospitals.
1997 was a transition year for ALBAhealth and our plans for 1998 call for a
return to sales and profit growth.
6
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
($000's except share amounts)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 2,416 $ 294
Accounts receivable (net of allowance for uncollectible accounts of $260 in 1997
and $275 in 1996) 7,823 9,713
Inventories 11,309 12,343
Deferred income tax asset 707 524
Prepaid expenses and other 127 303
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 22,382 23,177
- --------------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 13,254 13,538
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets:
Notes receivable 17 48
Trademarks and patents 492 445
Excess of cost over net assets acquired 7,474 8,063
- --------------------------------------------------------------------------------------------------------------------------------
Total other assets 7,983 8,556
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 43,619 $ 45,271
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 2,350 $ 2,350
Accounts payable 3,118 1,900
Accrued expenses 1,542 1,439
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,010 5,689
Long-Term Debt 7,452 9,913
Deferred Compensation -- 232
Deferred Income Tax Liability 1,746 1,649
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 16,208 17,483
- --------------------------------------------------------------------------------------------------------------------------------
Commitments
Stockholders' Equity:
Common stock - authorized 3,000,000 shares, $2.50 par value; 1,886,580 shares issued;
1,867,403 shares outstanding 4,716 4,716
Additional paid-in capital 9,182 9,182
Retained earnings 13,650 14,027
- --------------------------------------------------------------------------------------------------------------------------------
Total 27,548 27,925
Less treasury stock - at cost (19,177 shares) (137) (137)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders'equity 27,411 27,788
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'equity $ 43,619 $ 45,271
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
7
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and
1995 ($000's except share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 59,912 $ 65,815 $ 63,718
COST OF SALES 47,690 50,624 51,676
- --------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 12,222 15,191 12,042
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,809 13,392 13,140
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 413 1,799 (1,098)
- --------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (1,020) (1,286) (1,246)
Interest income 79 21 25
Loss on sale of property and equipment (77) (9) (110)
Other 14 (21) (41)
- --------------------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (1,004) (1,295) (1,372)
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (591) 504 (2,470)
PROVISION (BENEFIT) FOR INCOME TAXES (214) 184 (814)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (377) $ 320 $ (1,656)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (.20) $ .17 $ (.89)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997,
1996 and 1995 ($000's except share amounts)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained Treasury Stock
Shares* Amount Capital Earnings Shares Amount Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 1,886,580 $ 4,716 $ 9,182 $ 15,362 (23,427) $ (167) $ 29,093
Net loss -- -- -- (1,656) -- -- (1,656)
Exercise of stock options -- -- -- 1 4,250 30 31
- ------------------------------ -----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 1,886,580 4,716 9,182 13,707 (19,177) (137) 27,468
Net income -- -- -- 320 -- -- 320
- ------------------------------- -----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 1,886,580 4,716 9,182 14,027 (19,177) (137) 27,788
Net loss -- -- -- (377) -- -- (377)
- ------------------------------- -----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 1,886,580 $ 4,716 $ 9,182 $ 13,650 (19,177) $ (137) $ 27,411
- ------------------------------- -----------------------------------------------------------------------------------
</TABLE>
*Denotes shares issued.
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
($000's)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (377) $ 320 $ (1,656)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 2,421 2,352 2,304
Provision for bad debts 103 110 145
Loss on sale of property and equipment 77 9 110
Increase (decrease) in deferred income taxes (86) 118 (496)
Provision for inventory obsolescence 1,388 754 1,619
Changes in operating assets and liabilities providing (using) cash:
Accounts receivable 1,767 (408) (153)
Refundable income taxes -- 437 (310)
Inventories (354) 2,061 2,010
Prepaid expenses and other 65 (142) (240)
Accounts payable 1,218 (873) 186
Accrued expenses and other liabilities 102 442 (38)
Deferred compensation (232) (98) (14)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,092 5,082 3,467
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from surrender of life insurance policies -- 328 --
Capital expenditures (1,869) (1,525) (1,610)
Proceeds from sale of property and equipment 233 7 272
Proceeds from collection of notes receivable 127 22 26
Purchase of Balfour Healthcare -- -- (15,322)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,509) (1,168) (16,634)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings under line of credit agreement, net -- (1,268) 89
Proceeds from issuance of long-term debt -- -- 15,000
Principal payments on long-term debt and leases (2,461) (2,408) (2,001)
Cash proceeds from exercise of stock options -- -- 31
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,461) (3,676) 13,119
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,122 238 (48)
CASH, BEGINNING OF YEAR 294 56 104
- --------------------------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 2,416 $ 294 $ 56
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 979 $ 1,281 $ 1,204
Income taxes, net of refunds received $ (54) $ 1 $ 26
</TABLE>
9
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Years Ended December 31, 1997, 1996 and 1995
Operations -- Alba-Waldensian, Inc. (the Company) manufactures and sells an
extensive line of knitted apparel products as well as a variety of surgical
products for the health care industry. The Company's principal market for both
apparel and surgical products is the United States.
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash -- The Company considers short-term investments with original
maturities of less than three months to be cash equivalents and presents such
investments as cash in the accompanying financial statements.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out "FIFO" basis) or market. The Company writes down close-out and
irregular inventory on an ongoing basis based on market conditions. Inventories
reflect valuation allowances necessary to reduce inventories to their net
realizable value. It is possible that these estimates could change in 1998.
Property, Equipment, Depreciation and Amortization -- Property and
equipment are stated at cost. Betterments are capitalized. Maintenance and
repairs are expensed as incurred.
The provision for depreciation is primarily based on the straight-line
method calculated to extinguish the costs of the respective assets over their
estimated useful lives which range from seven to forty years for buildings and
improvements and three to twenty years for furniture, fixtures, machinery and
equipment. Depreciation expense amounted to approximately $1,768,000,
$1,700,000, and $1,789,000 in 1997, 1996 and 1995, respectively. The Company
follows the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of " (SFAS 121), in assessing the carrying value of property and
equipment. The provisions of this statement were adopted in 1996 and no
significant impairment losses have been incurred through December 31, 1997.
Assets under capital leases are amortized in accordance with the Company's
normal depreciation policy for owned assets or over the lease term if shorter.
Intangible Assets -- The costs of acquired or developed trademarks and
patents are amortized using the straight-line method over their estimated useful
lives of approximately seventeen years.
Excess of cost of a company acquired over the fair value of its net assets
at dates of acquisition (goodwill) is being amortized on the straight-line
method over 15 years. Amortization expense charged to operations was
approximately $588,000, $608,000 and $471,000 in 1997, 1996, and 1995,
respectively. The Company periodically reviews the value of its goodwill to
determine if an impairment has occurred. The Company measures the potential
impairment of recorded goodwill by the undiscounted value of expected future
operating cash flows in relation to its net capital investment. Based on its
review, the Company does not believe that an impairment of its goodwill has
occurred.
Revenue Recognition -- The Company recognizes revenue when goods are
shipped.
Concentration of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist of trade
receivables. Any such risk is limited due to the Company's large number of
customers and their geographic dispersion, except as discussed in Note 7.
Advertising Costs -- Advertising costs are charged to operations when
incurred. The Company spent approximately $329,000, $408,000, and $384,000 for
advertising in 1997, 1996 and 1995, respectively.
Research and Development -- The Company sponsors research and development
projects through its research and development department. Expenditures for
research and development are expensed as incurred. The Company spent
approximately $513,000, $474,000, and $490,000 for research and development in
1997, 1996 and 1995, respectively.
Income Taxes -- The Company calculates income taxes using the asset and
liability method specified by Statement of Financial Accounting Standards No.
109.
Net Income Per Common Share -- In February 1997, the Financial Accounting
Standards Board issued SFAS 128,
10
<PAGE>
"Earnings per Share," which established new standards for computations of
earnings per share. SFAS 128 requires the presentation of "basic" earnings
per share and "diluted" earnings per share on the face of the income statement.
Basic earnings per share is computed by dividing the net income available to
common shareholders by the weighted average shares of outstanding common stock
(1,867,403 in 1997 and 1996, and 1,864,618 in 1995). The calculation of diluted
earnings per share is similar to basic earnings per share except the denominator
includes dilutive common stock equivalents such as stock options and warrants.
There was no effect on earnings per share with respect to dilutive stock options
for 1996. For 1997 and 1995, such options were anti-dilutive. The calculation of
earnings per share under SFAS 128 was not different than the previous
calculation of earnings per share.
Deferred Compensation -- The Company allows certain key employees and
officers to defer a portion of their annual compensation until their retirement
from the Company. The agreements allow for deferred amounts to earn interest at
the current prime rate and provide for payment of the accumulated amounts over a
ten-year period beginning on the retirement date. Compensation expense is being
recognized in the year the deferred salary is earned. Interest expense in
recorded as accrued and the reported liability represents the accumulated value
(including interest) of all previously deferred amounts.
Fair Value of Financial Instruments -- Financial instruments of the Company
include long-term debt and line of credit agreements. Based upon the current
borrowing rates available to the Company, estimated fair values of these
financial instruments approximate their recorded carrying amounts. At December
31, 1997, the fair values of the Company's swap agreements were not material.
Interest Rate Swaps -- Interest rate swap agreements are entered into
primarily as a hedge against interest exposure of variable-rate debt. The
difference to be paid or received on swap agreements is included in interest
expense as payments are made or received.
Group Health Insurance -- The Company is self-insured as to group health
insurance for its employees. The Company accrues an amount for estimated claims
incurred but not reported.
401-K Retirement Plan -- The Company sponsors a 401-K retirement plan that
covers substantially all employees. Contributions to the plan are at the
discretion of the Company's Board of Directors and are funded annually (see Note
9).
Reclassification -- Certain 1995 and 1996 amounts have been reclassified to
conform to 1997 classification.
New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board issued SFAS 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Management will implement SFAS 130 in 1998 and will report
comprehensive income when applicable. Results of operations and financial
position, however, will be unaffected by implementations of this standard.
Also in June 1997, the Financial Accounting Standards Board issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information",
which supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS 131 establishes standards for the way that public companies
report information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief decision
makers in deciding how to allocate resources and in assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Management will adopt this standard in 1998 and believes that
additional disclosure will be required to disclose separately certain
information about the profit or loss and the assets of the healthcare and
consumer products divisions. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. ACQUISITION
On March 6, 1995, the Company purchased the Balfour Health Care Division and
manufacturing facility in Rockwood, Tennessee ("Balfour"), a manufacturer of
knitted medical products, from Kayser-Roth Corporation for approximately $15.3
million. The Company financed 100% of the acquisition price with a revolving
loan agreement provided by a bank (see Note 5).
The acquisition has been accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
the net assets acquired (goodwill) of $9.142 million is amortized on a
straight-line basis over 15 years.
2. INVENTORIES
Inventories at December 31, 1997 and 1996 include ($000's):
1997 1996
- ---------------------------------------------------------------
Materials and supplies $ 2,554 $ 2,878
Work-in-process 5,045 4,169
Finished goods. 3,710 5,296
- ---------------------------------------------------------------
Total $ 11,309 $12,343
- ---------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
The Company's property and equipment at December 31, 1997 and 1996 include
($000's):
1997 1996
- ---------------------------------------------------------------
Land $ 256 $ 260
Buildings 8,274 8,366
Machinery and equipment 22,581 22,733
- ---------------------------------------------------------------
Total property and equipment 31,111 31,359
Less: accumulated depreciation
and amortization (17,857) (17,821)
- ---------------------------------------------------------------
Net property and equipment $ 13,254 $ 13,538
- ---------------------------------------------------------------
4. SHORT-TERM BORROWINGS AND LINES OF CREDIT
The Company has an agreement with a bank that provides a seasonal line of credit
of up to $3,000,000, all of which was unused at December 31, 1997. The line of
credit bears interest at the LIBOR rate plus 2.75% (8.72% at December 31, 1997)
and expires June 30, 1998. Indebtedness under this agreement is collateralized
by equipment, inventories and accounts receivable. The loan agreement contains
covenants including, but not limited to, restrictions related to indebtedness,
tangible net worth (not less than $18,363,000 at December 31, 1997), dividends,
capital expenditures and cash flow. (See Note 5)
The following relates to aggregate short-term borrowings in 1997, 1996 and 1995
($000's):
1997 1996 1995
- --------------------------------------------------------------
Amount outstanding
at December 31. $ -- $ -- $ 1,268
Maximum amount
outstanding at any
month end $ 764 $ 2,555 $ 1,466
Average amount outstanding
(based on weighted daily
average balances) $ 71 $ 1,066 $ 672
Weighted average interest
rate during the year 8.65% 7.40% 7.51%
Weighted average interest
RATE AT DECEMBER 31. 8.72% 7.41% 7.44%
- --------------------------------------------------------------
The weighted average interest rate during the year was computed by dividing
total short-term interest expense for the year by the weighted average amount
outstanding during the year.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 is comprised of the following
($000's):
1997 1996
- --------------------------------------------------------------
Variable Rate Term Loan, due $463
quarterly through December 31,
1997 and $588 quarterly from
March 31, 1998 through December
31, 1998, with $7,452 due January
5, 1999 plus interest at LIBOR
rate plus 2.75% (8.72% at
December 31, 1997) $ 9,802 $ 11,763
Equipment Term Loan, due $125
quarterly through December 31, 1997
plus interest at 6.30%. --- 500
- --------------------------------------------------------------
Total 9,802 12,263
Less current maturities 2,350 2,350
- --------------------------------------------------------------
Long-term debt $ 7,452 $ 9,913
- --------------------------------------------------------------
In March 1995, in connection with the acquisition of Balfour, the Company
entered into an agreement with a bank to provide a $15,000,000 variable rate
term loan. The loan agreement contains covenants including, but not limited to,
indebtedness, tangible net worth (not less than $18,363,000 at December 31,
1997), dividends, capital expenditures and cash flow. At December 31, 1997,
after giving effect to a waiver granted by the bank relating to cash flow, the
Company is in compliance with the provisions of the agreement.
At December 31, 1997 and 1996, the Company had outstanding two interest
rate swap agreements under which the Company receives a variable rate based on
LIBOR and pays a fixed rate of 7.95% and 8.03% on notional amounts of $2,817,052
each, as determined in one month intervals through November 30, 1998. These
transactions effectively change a portion of the Company's interest rate
exposure from a variable rate to a fixed rate. The Company is exposed to credit
loss in the event of nonperformance by the other parties to the interest rate
swap agreement. However, the Company does not anticipate nonperformance by the
counterparties.
All of the Company's property and equipment, inventories and accounts
receivable are pledged as collateral for the long-term debt.
Maturities of long-term debt under the existing agreements over the next
two years are as follows ($000's):
Year
- --------------------------------------------------------------
1998 $ 2,350
1999 7,452
- --------------------------------------------------------------
TOTAL $ 9,802
- --------------------------------------------------------------
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS
In June, 1993, the Company adopted the 1993 Long Term Performance Plan (the
1993 Plan), which includes both qualified and nonqualified option provisions and
stock appreciation rights and restricted, performance and other stock-based
awards. Under the 1993 Plan, the Compensation Committee of the Board of
Directors is authorized to grant stock awards to purchase up to 250,000 shares
of the Company's common stock at prices equal to the fair value of the stock on
the dates of grant.
The 1993 Plan options are exercisable over a period determined by the
Compensation Committee at the date of grant (usually 5 years).
The Company adopted the 1992 Nonqualified Stock Option Plan for
Non-employee Directors (the 1992 Plan). Under the 1992 Plan, each non-employee
director was granted options to purchase 2,000 shares of the Company's common
stock at prices equal to the fair value of the stock on the dates of grant. The
1992 Plan expired on December 17, 1997, and was replaced with a new 1997
Nonqualified Stock Option Plan for Directors (subject to shareholder
ratification) which provides for all directors to immediately receive 2,000
shares plus 500 shares in each succeeding year of the Plan.
Transactions involving the Plans are summarized as follows:
Weighted Average
Option Shares Shares Exercise Price
- --------------------------------------------------------------
Outstanding at
January 1, 1995 144,500 $ 8.99
Granted 7,250 8.13
Exercised (4,250) 7.27
Expired and/or cancelled (500) 7.75
- --------------------------------------------------------------
Outstanding at
December 31, 1995 147,000 9.01
Granted 9,250 6.92
Expired and/or cancelled (28,000) 9.27
- --------------------------------------------------------------
Outstanding at
December 31, 1996 128,250 8.79
Granted 131,750 4.98
Expired and/or cancelled (93,000) 8.72
- --------------------------------------------------------------
Outstanding at
December 31, 1997 167,000 $ 5.00
- --------------------------------------------------------------
During 1997, 35,250 options previously issued were modified to an exercise
price of $5.00 with no change to the original contract life. In addition,
131,750 options were issued with a range of exercise prices from $4.88 to $5.50
and a contract life of 5.0 years. At December 31, 1997, these 167,000
outstanding options had a range of exercise prices of $4.88 to $5.50, a
weighted-average exercise price of $5.00 and a weighted-average remaining
contract life of 4.5 years. Of the 167,000 options outstanding, 21,438 were
exercisable at December 31, 1997, with a weighted-average exercise price of
$5.00 and a weighted-average remaining contract life of 4.5 years.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
123, "Accounting for Stock-Based Compensation," effective January 1, 1996. In
accordance with the provisions of SFAS 123, the Company continues to apply APB
Opinion 25 and related interpretations in accounting for its stock option plans
and, accordingly, has not recognized compensation cost. If the Company had
elected to recognize compensation cost based on fair value of the options
granted at the grant date as prescribed by SFAS 123, net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated in the table below ($000's, except per share amounts):
1997 1996 1995
- --------------------------------------------------------------
Net income (loss)-- as reported $ (377) $ 320 $(1,656)
Net income (loss)-- pro forma (427) 308 (1,667)
Earnings per share-- as reported (.20) .17 (.89)
Earnings per share-- pro forma (.23) .16 (.89)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1997 1996 1995
- --------------------------------------------------------------
Expected dividend yield 0.00% 0.00% 0.00%
Expected stock price volatility 18.00% 18.26% 18.59%
Risk-free interest rate 6.21% 5.67% 5.40%
Expected life of options 5 years 5 years 5 years
The weighted average fair values of options granted during 1997, 1996 and
1995 were $1.51, $2.03 and $2.36, respectively.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. MAJOR CUSTOMERS
The Company's single line of business is considered to be the manufacture,
processing and sale of knitted products. The Company has only one customer
representing 10% or more of net sales. Sales to Allegiance Healthcare
Corporation (formerly known as Baxter Healthcare Corporation) totaled
$13,937,424, $15,932,382, and $16,601,252, in 1997, 1996 and 1995, respectively.
While the loss of Allegiance Healthcare Corporation would have a material
adverse effect on the business of the Company, management believes that, because
of the number of departments within Allegiance to which the Company sells, the
likelihood of a material amount of sales loss is reduced.
8. INCOME TAXES
The Company has approximately $2,140,000 of state net operating loss
carryforwards available for reduction of future state taxable income. The
Company also has approximately $264,000 of alternative minimum tax credit
carryover. These carryover amounts begin to expire in 2001.
Components of the income tax provision (benefit) for 1997, 1996 and 1995
included ($000's):
1997 1996 1995
- ---------------------------------------------------------------
Current:
Federal $ -- $ 66 $ (318)
State -- -- --
- ---------------------------------------------------------------
Total current -- 66 (318)
- ---------------------------------------------------------------
Deferred:
Federal (182) 102 (412)
State (32) 16 (84)
- ---------------------------------------------------------------
TOTAL DEFERRED (214) 118 (496)
- ---------------------------------------------------------------
Total provision (benefit)
for income taxes $ (214) $ 184 $ (814)
- ---------------------------------------------------------------
The approximate tax effect of temporary differences and carryforwards that
gave rise to the Company's deferred income tax assets and liabilities for 1997
and 1996 are as follows $(000's):
1997 Assets Liabilities Total
- ----------------------------------------------------------------
Current:
Receivables $ 95 $ -- $ 95
Inventories 610 -- 610
Other 2 -- 2
- ----------------------------------------------------------------
Total current 707 -- 707
- ----------------------------------------------------------------
NONCURRENT:
Property -- (2,129) (2,129)
Deferred compensation 44 -- 44
Insurance reserve 93 -- 93
Benefit of state net
operating loss
carryforward 85 -- 85
Alternative minimum tax
credit carryforward 264 -- 264
All other -- (103) (103)
- ----------------------------------------------------------------
Total noncurrent 486 (2,232) (1,746)
- ----------------------------------------------------------------
Total current and
noncurrent $1,193 $(2,232) $(1,039)
- ----------------------------------------------------------------
1996 Assets Liabilities Total
- ----------------------------------------------------------------
CURRENT:
Receivables $ 101 $ -- $ 101
Inventories 351 -- 351
Benefit of state net operating
loss carryforward 72 -- 72
- ----------------------------------------------------------------
Total current 524 -- 524
- ----------------------------------------------------------------
Noncurrent:
Property -- (2,125) (2,125)
Deferred compensation 127 -- 127
Insurance reserve 89 -- 89
Deferred revenue -- (2) (2)
Alternative minimum tax
credit carryforward 365 -- 365
All other -- (103) (103)
- ----------------------------------------------------------------
Total noncurrent 581 (2,230) (1,649)
- ----------------------------------------------------------------
TOTAL CURRENT AND
Noncurrent $1,105 $(2,230) $(1,125)
- ----------------------------------------------------------------
15
<PAGE>
The Company has not provided valuation allowances for the deferred tax
assets as no conditions exist that require such allowances.
The income tax provision differs from the amount computed by applying the
federal statutory income tax rate of 34% to pre-tax income. The computed amount
is reconciled to total income tax expense as follows:
1997 1996 1995
- ---------------------------------------------------------------
Federal income tax at
statutory rate (benefit) $(201) $ 171 $ (840)
State income taxes, net of
federal benefit (cost) (21) 10 (56)
Change, net of premiums paid
and proceeds, in officers'
life insurance values -- (1) (4)
Expenses which are not
deductible for income
tax purposes 15 21 33
All other (7) (17) 53
- ---------------------------------------------------------------
Total provision (benefit) for
income taxes $(214) $ 184 $ (814)
- ---------------------------------------------------------------
9. EMPLOYEE 401-K RETIREMENT PLAN
The Company has a 401-k retirement plan covering substantially all employees
which allows participants to defer from 2% to 20% of their salaries, or the
maximum allowable under the Internal Revenue Code. The Company's matching
contribution, if any, is discretionary on an annual basis and may not exceed 6%
of participants' compensation. For the three years ended december 31, 1997, the
Company has contributed 40% of the participant's contributions up to 4% of their
compensation. Contribution expenses related to this plan for the years ended
December 31, 1997, 1996 and 1995 were $132,000, $149,000, and $164,000,
respectively.
10. LEASES
The future minimum lease payments under equipment operating leases having
initial or remaining noncancellable lease terms in excess of one year are
summarized as follows ($000's):
Year
- ---------------------------------------------------------------
1998 $ 284
1999 231
2000 146
2001 103
2002 56
Thereafter --
- ---------------------------------------------------------------
Total minimum lease payments $ 820
- ---------------------------------------------------------------
Total rental expense for all operating leases was $515,000 in 1997, $543,000 in
1996, and $398,000 in 1995.
16
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Alba-Waldensian, Inc. is responsible for the accuracy and
consistency of all the information contained in the annual report, including all
accompanying consolidated financial statements. The statements have been
prepared to conform with generally accepted accounting principles and include
amounts based on management's estimates and judgments.
Alba-Waldensian, Inc. maintains a system of internal accounting controls
designed to provide reasonable assurance that financial records are accurate,
Company assets are safeguarded, and financial statements present fairly the
consolidated financial position of the Company.
The Audit Committee of the Board of Directors, composed solely of outside
directors, reviews the scope of audits and the findings of the independent
certified public accountants. The auditors meet regularly with the Audit
Committee to discuss audit and financial issues.
BDO Seidman, LLP, the Company's independent certified public accountants,
has audited the financial statements prepared by management. Their opinion on
the financial statements is presented as follows.
LEE N. MORTENSON GLENN J. KENNEDY
President and Chief Executive Chief Financial Officer
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Alba-Waldensian, Inc.
Valdese, North Carolina
We have audited the accompanying consolidated balance sheets of
Alba-Waldensian,Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alba-Waldensian,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Greensboro, North Carolina
February 6, 1998, except for Note 5
which is as of March 26, 1998
18
<PAGE>
STOCK PRICES AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
Sales Price of Common Shares Sales Price of Common Shares
1997 1996
----------------------------- ------------------------------
High Low High Low
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 6 1/4 5 7 7/8 6 5/8
Second Quarter 5 1/4 4 7/8 8 1/4 6 5/8
Third Quarter 5 1/4 4 13/16 8 6 1/4
Fourth Quarter 5 3/4 4 5/8 6 5/8 5 3/8
</TABLE>
The Company has not paid dividends on its common stock during the two years
ended December 31, 1997. See notes 4 and 5 to the consolidated financial
statements concerning restrictions on the payment of dividends.
CLASSES OF PRODUCTS
Year Women's Women's Men's
Ended Hosiery Intimate Hosiery Health
December 31, Products Products Products Men's Wear Products
- ---------------------------------------------------------------------------
1993 19.2% 37.4% 7.3% 5.5% 30.6%
1994 17.4% 40.2% 7.9% 4.3% 30.2%
1995 15.5% 28.3% 6.2% 2.6% 47.4%
1996 13.8% 28.6% 6.2% 1.8% 49.6%
1997 15.0% 27.3% 6.0% 0.8% 50.9%
Note: Amounts represent percentages of annual net sales.
FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
$000's Except for Per Share Amounts
-----------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Net sales $ 59,912 $ 65,815 $63,718 $ 56,507 $ 50,855
Gross margin 12,222 15,191 12,042 14,254 13,479
Income (loss) before income taxes (591) 504 (2,470) 3,150 1,435
Provision (benefit) for income taxes (214) 184 (814) 1,204 451
Net income (loss) (377) 320 (1,656) 1,946 984
Income (loss) per common share:
Net income (loss) per common share - basic and diluted (.20) .17 (.89) 1.05 .54
Weighted average number of shares of
common stock outstanding 1,867 1,867 1,865 1,849 1,826
At Year End:
Total assets $ 43,619 $ 45,271 $49,250 $ 37,730 $ 35,224
Long-term debt and capital lease obligations 7,452 9,913 12,263 1,058 1,777
Selected Supplementary Financial Data
Property and equipment:
Net investment $ 13,254 $ 13,538 $13,775 $ 11,605 $ 11,474
Current additions 1,869 1,525 1,610 1,919 1,719
Depreciation 1,768 1,700 1,789 1,693 1,688
Other:
Working capital $ 15,372 $17,488 $17,960 $ 19,866 $ 18,293
Stockholders' equity 27,411 27,788 27,469 29,093 26,981
Stockholders' equity per common share 14.68 14.88 14.71 15.62 14.68
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report for a discussion of certain factors which affect the
comparability of the information reflected above.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table details the items in the Consolidated Statements of
Operations as a percentage of sales for 1997, 1996 and 1995.
Percentage of Sales
Year ended December 31,
1997 1996 1995
- -------------------------------------------------------------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 79.6 76.9 81.1
- -------------------------------------------------------------
Gross Margin 20.4 23.1 18.9
Selling, General
and Administrative 19.7 20.4 20.6
- -------------------------------------------------------------
Operating Income/(Loss) 0.7 2.7 (1.7)
Other Income (Expense), Net (1.7) (1.9) (2.2)
- -------------------------------------------------------------
Income (Loss) Before
Income Taxes (1.0) 0.8 (3.9)
Provision (Benefit) for
IncomeTaxes (0.4) 0.3 (1.3)
- -------------------------------------------------------------
Net Income (Loss) (0.6) 0.5 (2.6)
DISCUSSION OF 1997 COMPARED TO 1996
Net Sales by Division for 1997 as compared to 1996 are set forth in the
following table:
$(000's)
---------------------------------------------------
Dec. 31 Dec. 31 Increase/ % Increase/
1997 1996 (Decrease) (Decrease)
- -------------------------------------------------------------------------
Health Products $30,527 $ 32,640 $(2,113) (6.5%)
CONSUMER
Products 23,548 26,120 (2,572) (9.8%)
Alba Direct 1,753 1,749 4 0.0%
Byford 4,084 5,291 (1,207) (22.8%)
AWI Retail -- 15 (15) (100%)
- -------------------------------------------------------------------------
Total $59,912 $ 65,815 $(5,903) (9.0%)
Net sales, as shown in the table above, decreased by $5,903,000 or 9.0%. Health
Products business is down primarily due to problems encountered with its
P.A.S.(R) anti-embolism compression system. The Company was able to redesign the
product and re-introduce its new pulStar(R) wrap system in late 1997.
Consolidation of product lines by a major distributor resulted in the loss of
significant dressing sales in the second half of 1997. These declines were
partially offset by increased sales of tread, footwear, gown, cuffs and
specialty products. The decline in the Consumer Products sales was due to the
decision in early 1997 to discontinue the "old technology" full fashion panty
production and the loss of circular knit business to lower priced imports. The
full fashion loss was offset in part by converting customers to the new seamless
panty line. Ladies hosiery volume remained relatively flat with 1996. Due to
marginal profitability, the Company decided to no longer be a distributor for
the Byford product line. Byford sales in 1998 will only represent the disposal
of remaining inventories and are not anticipated to exceed approximately
$300,000. AWI Retail, the Branson, Mo. factory outlet store, was closed in 1996.
Gross profits decreased in 1997 to 20.4% of net sales, as compared to 23.1% in
1996. Health Products' margins declined 4.4% in 1997 due to problems with its
high margin P.A.S.(R) anti-embolism stocking system, cost reduction pressures
within the healthcare industry and the loss of dressing business to foreign
competition. Consumer Products' margins increased by 1.8% in 1997 reflecting a
4.3 point increase in intimate apparel margins due to a shift to higher margin
seamless products from the "old technology" full fashion and circular knit
lines. This increase in margins was partially offset by a 3-point decline in
hosiery margins resulting from quality problems and startup expenses related to
the installation of new knitting equipment in late 1996. The discontinuation of
the Byford business resulted in the disposition of inventories at substantially
less than normal margins.
Selling, General and Administrative Expenses decreased as a percentage of sales
to 19.7% from 20.4% in 1996. Strong spending controls resulted in the lower
expense percentage in the face of the decline in net sales and in spite of the
one-time costs of approximately $400,000 in connection with the severance
arrangement with the Company's former President and CEO.
Interest expense was $1,020,000 in 1997 as compared to $1,286,000 in 1996.
Average borrowings under the Short-Term Revolver were $71,000 with an average
interest rate of 8.65% compared to average borrowings of $1,066,000 with an
average interest rate of 7.40% in 1996. Additionally, the Company's long-term
debt has continued to decline in 1997, reflecting normal quarterly principal
reductions as well as a special one-time principal reduction of $111,000 in
connection with the sale a substantial portion of the Byford inventories.
20
<PAGE>
MANAGEMENT'S DISCUSSION CONTINUED
DISCUSSION OF 1996 COMPARED TO 1995
Net Sales by Division for 1996 as compared to 1995 are set forth in the
following table:
$(000's)
--------------------------------------------
Dec. 31 Dec. 31 Increase/ % Increase/
1996 1995 (Decrease) (Decrease)
- -----------------------------------------------------------------
Health Products. $32,640 $ 30,203 $ 2,437 8.1%
Consumer Products 26,120 25,853 267 1.0%
ALBA DIRECT 1,749 2,034 (285) (14%)
Byford 5,291 5,548 (257) (4.6%)
AWI Retail 15 80 (65) (81.3%)
- -----------------------------------------------------------------
Total $65,815 $ 63,718 $ 2,097 3.3%
Net sales, as shown in the table above, increased by $2,097,000 or 3.3%. Health
Products sales increased as a result of the Balfour acquisition in March 1995
(See Note 1 to Consolidated Financial Statements). The Health Products
Division's sales represent a full twelve months of Balfour sales in 1996, as
compared to approximately ten months in 1995. Consumer Products sales increased
as a result of sales to a new customer. Alba Direct declined as a result of
weaker sales to its domestic and Japanese customers. Byford sales decreased as a
result of weaker basic sweater sales and the Company's decision to discontinue
the fashion sweater line. Byford's sock sales increased as a result of shipments
made in the fourth quarter under the newly acquired Greg Norman license.
Gross profits increased in 1996 to 23.1% of net sales, as compared to 18.9% in
1995. There were four major factors that contributed to the increase in gross
margin. First, the increase in sales in the Health Products Division carries
higher gross margins. Second, manufacturing costs were lower, due to cost
improvement programs initiated during the year. Third, an additional inventory
markdown of $1,200,000 was taken in 1995 (during third quarter). Such additional
markdowns above normal markdowns did not occur in 1996. Fourth, the Company
completed the consolidation of its Health Products Division to Rockwood, TN in
1996 and did not incur the amount of moving and training costs incurred in 1995.
Selling, General and Administrative Expenses decreased slightly as a percentage
of sales to 20.4% from 20.6% in 1995. Although SG&A expenses decreased as a
percentage of sales due to higher sales volume, actual costs increased by
$253,000. This increase was primarily due to an increase in commissions,
contract programming cost, a full year of goodwill amortization for the Balfour
purchase and an increase in distribution cost caused by shipments of smaller
orders, partially offset by savings in other areas.
Interest expense was $1,286,000 in 1996 as compared to $1,247,000 in 1995.
Average borrowings under the Short Term revolver were $1,066,000 with an average
interest rate of 7.40% compared to average borrowings of $672,000 with an
average interest rate of 7.51% in 1995. Additionally, the long-term debt issued
to finance the Balfour acquisition was outstanding for all of 1996, adding to
overall interest incurred in 1996 (See Note 5 to Consolidated Financial
Statements).
Other Income (Expense), (exclusive of Interest Income and Expense) for 1996
reflected net other expense of $30,000 compared to net other expense in 1995 of
$151,000. Net Other Expense in 1995 included a loss of $90,000 on the sale of
the Main Street Plant and a return to a licensee of $60,000 for the overpayment
of royalties from previous years.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company's working capital has decreased by $2,116,000 since
December 31, 1996, the available working capital continues to be adequate to
support the Company's operations. The working capital decline is primarily
reflected in higher accounts payable and higher accrued expenses. On December
31, 1997, the Company had current working capital of $15,372,000 with a ratio of
3.19 to 1. This is comparable to $17,488,000 or 4.07 to 1 at December 31, 1996.
The decrease in the amount of working capital reflects the Company's concerted
efforts to reduce receivables and inventory levels, which have declined to a
combined total of $19,132,000 at December 31, 1997, from $22,056,000 at December
31, 1996.
Liquidity needs are primarily affected by and related to capital expenditures
and changes in the Company's business volume. These needs are adequately being
met through available working capital, and are supplemented by a short-term line
of credit of $3,000,000, to cover fluctuations. Capital expenditures for 1997
totaled $1,869,000, reflecting renovations to existing plants and the purchase
of new, more efficient knitting equipment. This level of capital expenditures
compares to $1,525,000 for the 1996 year.
The Company has both a seasonal line of credit and long-term debt agreements
with a major bank. On March 26, 1998, the Company renegotiated the terms of
these
21
<PAGE>
agreements wherein the $3,000,000 seasonal line of credit will expire June
30, 1998 and the long-term debt will mature on January 5, 1999.
As the result of significant changes in financing markets, the Company has been
able to obtain very favorable proposals from asset-based lenders who would
provide the Company with significantly more financing availability at
significantly lower costs than its current bank agreement. Accordingly, the
Company has obtained loan proposals from major financial institutions to provide
the Company with up to a $26 million (based upon available collateral) five-year
facility encompassing both a revolving line and a term loan for fixed assets and
future capital expenditures. The Company anticipates that the new financing will
be in place in the second quarter of 1998.
Cash provided by operating activities was $6,092,000 in 1997 as compared to
$5,082,000 in 1996, and $3,467,000 in 1995. The increase in cash provided in
1997 was primarily due to reductions in accounts receivable and increases in
accounts payable. The 1996 cash provided from operations was higher than 1996
mainly as the result of an increase in net income and a reduction in
inventories. Net cash used in investing activities was $1,509,000 in 1997
compared to $1,168,000 and $16,634,000 in 1995. The cash used in 1997 and 1996
was primarily for capital expenditures to expand capacities, and to replace and
update plant and equipment. Cash used in 1995 reflects the purchase of Balfour
Health Products. Net cash used by financing activities was $2,461,000 in 1997 as
compared to $3,676,000 in 1996 and net cash provided of $13,119,000 in 1995. Net
cash used in 1997 and 1996 was primarily for principal payments on long-term
debt and payments to reduce the borrowings under the line of credit. Net cash
provided in 1995 was primarily due to proceeds from issuance of long-term debt
for the acquisition of Balfour Health Products (See Note 5 to Consolidated
Financial Statements).
Anticipated capital expenditures for 1998 will be approximately $3,700,000.
Capital expenditures will be made to renovate existing plant and equipment and
to purchase new, more efficient knitting equipment. Based upon anticipated
increased demand for the Company's seamless products in 1998, it may be
necessary to significantly increase expenditures for seamless knitting
equipment. The Company's new financing facility is anticipated to adequately
provide funds necessary to allow the Company to meet possible expansion needs.
DERIVATIVES
At December 31, 1997, the Company had two outstanding interest rate swap
agreements under which the Company receives a variable rate based on LIBOR and
pays a fixed rate of 7.95% and 8.03% on notional amounts of $2,817,000 each, as
determined in one month intervals through November 30, 1998. These transactions
effectively change a portion of the Company's interest rate exposure from a
variable rate to a fixed rate. The Company is exposed to credit loss in the
event of nonperformance by the other parties to the interest rate swap
agreement. However, the Company does not anticipate nonperformance by the
counterparties.
YEAR 2000 COMPLIANCE
During 1996, for operational reasons the Company made the decision to upgrade
the Company's main manufacturing and financial reporting hardware and software
systems. New IBM AS/400 hardware was acquired in 1996 and the new software was
acquired in 1997. The Company is currently engaged in training and hardware
upgrades necessary to have the new system operational by the end of 1998. The
new hardware and software is Year 2000 Compliant and thereby will eliminate a
major area of concern for the Company. However, there are other computer-based
systems within the Company (eg. telephone answering system, etc.) which may
require upgrading to ensure operational continuity beyond December 31, 1999. The
Company has substantially completed identification of such systems and believes
that all significant systems will be compliant in time to ensure no disruption
to the Company's operations. The cost of bringing these minor systems into
compliance is not anticipated to be material.
EFFECTS OF INFLATION
Management believes that inflation has not had a material effect on the
Company's operations for the years ended December 31, 1997 and 1996.
NEW ACCOUNTING PRONOUNCEMENTS
See "Summary of Significant Accounting Policies -- New Accounting
Pronouncements" in the consolidated financial statements for a discussion of new
accounting pronouncements that will become effective in 1998.
22
<PAGE>
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended ($000's Except per Share Amounts)
1997 1996
------------------------------------------------------------ ----------------------------------------
December 31 September 28 June 29 March 30 December 31 September 29 June 30 March 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 14,710 $15,390 $15,872 $13,940 $ 15,861 $16,279 $ 16,296 $ 17,379
Gross Margin 2,533 3,185 3,500 3,004 3,582 3,694 3,792 4,123
Net Income (Loss) (97) 162 243 (685) 191 23 5 101
Income (Loss) Per Share --
Basic and Diluted (.05) .09 .13 (.37) .10 .01 .01 0.05
Weighted Average Number
of Shares of Common Stock
Outstanding 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867
</TABLE>
23
<PAGE>
Corporate
Management
Clyde Wm. Engle
Chairman of the Board
Lee N. Mortenson
President and CEO
Donald R. Denne
Senior Vice President
Health Products
Dixon R. Johnston
Vice President
Consumer Products
Glenn J. Kennedy
Vice President, Treasurer,
Secretary and CFO
Ronald J. Harrison
Vice President
Operations
Warren R. Nesbit, II
Vice President
Human Resources
James Douglas Dickson, Jr.
Controller and
Assistant Secretary
Corporate
Directors
Term Expiring May 1998
Clyde Wm. Engle
Chairman of the Board
Joseph C. Minio
President Belle Haven Management Ltd.
Greenwich, Connecticut
Term Expiring May 1999
C. Alan Forbes
Management Consultant
Charlotte, North Carolina
James M. Fawcett, Jr.
Registered Representative
and Agent
Equitable Financial Companies
Chicago, Illinois
Lee N. Mortenson
President and
Chief Executive Officer
Term Expiring May 2000
William M. Cousins, Jr.
Management Consultant
Jupiter, Florida
Glenn J. Kennedy
Vice-President, Treasurer,
Secretary and
Chief Financial Officer
Paul H. Albritton, Jr.
Vice President and
Chief Financial Officer
C-Phone Corporation
Wilmington, North Carolina
Corporate
Information
Principal Market
The Company's Common Stock (AWS) is listed on the American Stock Exchange
Transfer Agent - Registrar
First Union National Bank
Charlotte, North Carolina
Number of Shareholders
The Number of holders of record of Alba's Common Stock on March 9, 1998,
was 316.
Annual Meeting
May 13, 1998
Corporate Headquarters
Alba-Waldensian, Inc.
Box 100
201 St. Germain Ave., S.W.
Valdese, North Carolina 28690
Auditor
BDO Seidman, LLP
Greensboro, North Carolina
Offer to Furnish Form 10-K
Upon written request of a shareholder; the Company will provide, without
charge, a copy of its Annual Report on Form 10-K for the fiscal year 1997,
including financial statements and schedules thereto required to be filed with
the Securities and Exchange Commission. Requests should be directed to James
Douglas Dickson, Jr., Assistant Secretary, Alba-Waldensian, Inc., Post Office
Box 100, Valdese, North Carolina, 28690
24
<PAGE>
CONSUMER PRODUCTS
[PHOTOS OF VARIOUS PRODUCTS APPEARS HERE]
SIMPLY MORE JONESWEAR WHILE YOU WAIT BLOOMINGDALE'S
XX-SPAN NON-SKID SLIPPERS BABY BOGGANS PULSTAR
<PAGE>
ALBA-WALDENSIAN, INC.
P.O. BOX 100, 201 ST. GEMAIN AVENUE, S.W.
VALDESE, NC 28690
Consent of Independent Certified Public Accountants
Alba-Waldensian, Inc.
Valdese, NC North Carolina
We hereby consent to the incorporation by reference in the Registration
Statement No. 33-15833 on Form S-8 of our reports dated February 6, 1998,
except for Note 5 which is as of March 26, 1998, relating to the consolidated
financial statements and schedules of Alba-Waldensian, Inc. incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Greensboro, North Carolina BDO Seidman, LLP
March 30, 1998
<PAGE>
(S-1)
Report of Independent Certified Public Accountants
on Financial Statement Schedule
Alba-Waldensian, Inc.
Valdese, North Carolina
The audits referred to in our report dated February 6, 1998, except for Note 5
which is as of March 26, 1998, relating to the consolidated financial statements
of Alba-Waldensian, Inc. and subsidiaries, which is incorporated in Item 8 of
the Form 10-K by reference to the annual report to shareholders for the year
ended December 31, 1997, included the audits of the financial statement
schedules listed in the accompanying index. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedui1es based upon our
audits.
In our opinion, the financial statement schedules present fairly, in all
material respects, the information set forth therein.
Greensboro, North Carolina BDO Seidman, LLP
February 6, 1998
<PAGE>
(S-2)
SCHEDULE II
ALBA-WALDENSIAN, INC.
AND SUBSIDIARIES
VALDESE, NORTH CAROLINA
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO REDUCTION BALANCE
DESCRIPTION/ BEGINNING OF COST AND OF AT END
FISCAL YEAR ENDED PERIOD EXPENSES ALLOWANCE OF PERIOD
----------------- ------ -------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Accounts Receivable - Allowance $275,000 102,877 117,877 $260,000
for uncollectible accounts
Inventory - Reserve for markdowns $722,641 1,387,734 415,082 $1,695,293
YEAR ENDED DECEMBER 31, 1996
Accounts Receivable - Allowance $250,000 109,868 84,868 $275,000
for uncollectible accounts
Inventory - Reserve for markdowns $610,504 754,106 641,969 $722,641
YEAR ENDED DECEMBER 31, 1995
Accounts Receivable - Allowance $180,000 145,199 75,199 $250,000
for uncollectible accounts
Inventory - Reserve for markdowns $385,200 1,619,013 1,393,709 $610,504
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,416
<SECURITIES> 0
<RECEIVABLES> 8,083
<ALLOWANCES> 260
<INVENTORY> 11,309
<CURRENT-ASSETS> 22,382
<PP&E> 31,111
<DEPRECIATION> 17,857
<TOTAL-ASSETS> 43,619
<CURRENT-LIABILITIES> 7,010
<BONDS> 0
0
0
<COMMON> 4,716
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,619
<SALES> 59,912
<TOTAL-REVENUES> 59,912
<CGS> 47,690
<TOTAL-COSTS> 59,499
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,020
<INCOME-PRETAX> (591)
<INCOME-TAX> (214)
<INCOME-CONTINUING> (377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
