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CONTENTS
Common Stock Market Prices and
Dividends.............................................Inside Front Cover
Selected Financial Data..................................................1
Letter to Shareholders.................................................2-3
Management's Discussion and
Analysis............................................................4-11
Operations by Industry
Segment............................................................12-13
Report of Ernst & Young LLP.............................................14
Consolidated Financial
Statements.........................................................15-28
Corporate
Directory..............................................Inside Back Cover
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Common Stock of the Company is listed on the New York Stock Exchange
under the symbol DLW. The stock transfer agent for Delta Woodside
Industries, Inc. is First Union National Bank of North Carolina,
Shareholder Services Group, Two First Union Center, Charlotte, North
Carolina 28288-1154.
The following table presents a two-year history of the high and low stock
sales prices for the Common Stock, as reported by the New York Stock
Exchange composite tape, and cash dividends declared per share:
<TABLE>
<CAPTION>
FISCAL QUARTERS: High 1994 Low High 1993 Low
<S> <C> <C> <C> <C>
First Quarter $ 11 7/8 $ 10 1/4 $ 18 3/8 $ 12 3/4
<CAPTION>
<S> <C> <C> <C> <C>
Second Quarter 11 3/8 10 3/8 16 11 1/2
<CAPTION>
<S> <C> <C> <C> <C>
Third Quarter 12 1/2 9 3/4 16 3/4 12 1/2
<CAPTION>
<S> <C> <C> <C> <C>
Fourth Quarter 12 1/4 10 7/8 14 7/8 11 1/8
<CAPTION>
<CAPTION>
Cash
<S> <C> <C>
First Quarter $.10 $ .10
<S> <C> <C>
Second Quarter .10 .10
<S> <C> <C>
Third Quarter .10 .10
<S> <C> <C>
Fourth Quarter .10 .10
</TABLE>
Fiscal Year: The Company's operations are based on a fifty-two or
fifty-three week fiscal year ending on the Saturday closest to June 30.
As of September 8, 1994 there were approximately 2,283 holders of record
of the Company's Common Stock.
Dividend payments depend upon the Company's earnings, financial
condition, capital requirements and other relevant factors. The most
restrictive of the Company's loan covenants in the new loan facility
described in Note D requires a certain minimum tangible net worth. Under
this loan covenant at July 2, 1994, retained earnings of approximately $7.6
million are available for dividends during fiscal 1995.
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SELECTED FINANCIAL DATA
In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share
Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS (3) 1994(1) 1993(2) 1992 1991 1990 1989 1988 1987
Net Sales $613,776 $686,239 $5705,037 $590,019 $500,894 $569,052 $488,568 $417,461
Cost of Goods Sold 514,840 564,352 563,827 480,396 427,788 470,265 409,231 343,623
Gross Profit 98,936 121,887 141,210 109,623 73,106 98,787 79,337 73,838
Operating Profit (Loss) Excluding
Litigation, Restructuring and Plant
Closing Charges 21,582 55,863 80,628 61,374 37,591 69,245 54,349 49,102
Litigation Charge 27,096
Restructuring and Plant Closing Charges 9,199 2,265
Operating Profit (Loss) (14,713) 55,863 80,628 61,374 35,326 69,245 54,349 49,102
Corporate Expense 3,300 3,278 3,802 2,140 2,249 3,009 2,002 1,167
Earnings (Loss) Before Interest and Taxes (18,013) 52,585 76,826 59,234 33,077 66,513 54,209 46,993
Interest Expense 8,639 7,775 11,479 22,115 25,768 20,929 12,685 12,939
Income (Loss) Before Income Taxes (25,930) 45,172 65,801 37,543 8,029 45,940 41,705 34,238
Income Tax Expense (Benefit) (8,633) 16,968 25,786 13,600 2,020 15,643 13,850 12,667
Income (Loss) Before Cumulative Effect of
Accounting Change (17,297) 28,204 40,015 23,943 6,009 30,297 27,855 21,571
Cumulative Effect of Accounting Change --
Income Taxes (2) (875)
Net Income (Loss) (17,297) 27,329 40,015 23,943 6,009 30,297 27,855 21,571
FINANCIAL DATA (3)
Cash Flow (Net Income (Loss) plus
depreciation and amortization) (10) 9,596 46,148 54,843 39,041 19,263 40,025 32,421 24,908
Capital Expenditures/Capital Leases 29,856 49,575 42,916 15,793 19,250 46,048 32,141 7,924
Depreciation and Amortization (10) 26,893 18,819 14,828 15,098 13,254 9,728 4,566 3,337
Working Capital 241,950 262,111 266,356 105,498 71,967 78,726 60,811 63,602
Long-Term Debt and Capital Leases 161,948 130,464 110,414 71,189 85,704 88,791 35,254 38,832
Funded Debt (4)(7) 162,812 132,200 112,133 188,352 227,097 223,397 118,528 115,732
Shareholders' Equity (5) 284,877 336,249 318,781 172,647 127,575 127,169 86,462 59,015
Capital Employed (6) 447,689 468,449 430,914 360,999 354,672 350,566 204,990 174,747
Total Assets (7) 567,003 573,946 524,756 434,424 414,497 331,066 177,300 149,116
FINANCIAL RATIOS (3)
Net Sales divided by Inventory 3.0 3.5 4.0 4.3 3.5 4.4 6.3 5.8
Net Sales divided by Accounts Receivable 5.2 4.9 4.3 4.2 4.5 4.6 4.9 4.5
Net Sales divided by Capital Employed 1.4 1.5 1.6 1.6 1.4 1.6 2.4 2.4
Operating Income (Loss) as % of Capital
Employed (3.9) 11.3 17.9 16.5 9.5 19.1 26.5 27.0
Current Ratio 3.5 4.1 4.4 1.6 1.4 1.7 2.2 2.2
Interest Coverage (2.1) 6.8 6.7 2.7 1.3 3.2 4.3 3.6
Gross Profit as % of Sales 16.1 17.8 20.0 18.6 14.6 17.4 16.2 17.7
Pre-Tax Income (Loss) as % of Sales (4.2) 6.6 9.3 6.4 1.6 8.1 8.5 8.2
Net Income (Loss) as % of Sales (2.8) 4.0 5.7 4.1 1.2 5.3 5.7 5.2
Net Income (Loss) as % of Beginning Equity (5.1) 8.6 23.2 18.8 4.7 35 47 245
COMMON STOCK DATA (PER SHARE) (3)(8)
Net Income (Loss) (.70) 1.03 1.62 1.27 .32 1.65 1.60 1.36
Dividends .40 .40 .35 .30 .30 .20 .05 --
Book Value 11.75 12.72 12.07 8.17 6.76 6.82 4.97 3.41
Price Range (9) -- High 12 1/2 18 3/8 25 1/4 14 1/8 17 7/8 16 1/2 14 1/4
-- Low 9 3/4 11 1/8 13 1/2 3 5/8 6 1/2 8 3/4 5 1/4
Weighted Average Shares Outstanding 24,550 26,421 24,670 18,879 18,733 18,338 17,385 15,840
Approximate Number of Shareholders 2,221 2,340 2,255 2,062 2,575 1,475 1,250 1,300
<CAPTION>
OPERATIONS (3) 1986 1985
Net Sales $141,810 $94,428
Cost of Goods Sold 118,909 80,534
Gross Profit 22,901 13,894
Operating Profit (Loss) Excluding
Litigation, Restructuring and Plant
Closing Charges 15,027 9,889
Litigation Charge
Restructuring and Plant Closing Charges
Operating Profit (Loss) 15,027 9,889
Corporate Expense 138 117
Earnings (Loss) Before Interest and Taxes 14,889 9,772
Interest Expense 5,197 5,240
Income (Loss) Before Income Taxes 9,983 4,594
Income Tax Expense (Benefit) 4,724 2,219
Income (Loss) Before Cumulative Effect of
Accounting Change 5,259 2,375
Cumulative Effect of Accounting Change --
Income Taxes (2)
Net Income (Loss) 5,259 2,375
FINANCIAL DATA (3)
Cash Flow (Net Income (Loss) plus
depreciation and amortization) (10) 7,494 4,479
Capital Expenditures/Capital Leases 2,478 1,789
Depreciation and Amortization (10) 2,235 2,104
Working Capital 8,808 4,205
Long-Term Debt and Capital Leases 21,530 19,086
Funded Debt (4)(7) 48,263 40,007
Shareholders' Equity (5) 8,803 3,544
Capital Employed (6) 57,066 43,551
Total Assets (7) 56,736 43,537
FINANCIAL RATIOS (3)
Net Sales divided by Inventory 8.2 6.6
Net Sales divided by Accounts Receivable 4.6 4.9
Net Sales divided by Capital Employed 2.5 2.2
Operating Income (Loss) as % of Capital
Employed 26.6 22.6
Current Ratio 1.4 1.2
Interest Coverage 2.9 1.9
Gross Profit as % of Sales 16.1 14.7
Pre-Tax Income (Loss) as % of Sales 7.0 4.9
Net Income (Loss) as % of Sales 3.7 2.5
Net Income (Loss) as % of Beginning Equity 148 203
COMMON STOCK DATA (PER SHARE) (3)(8)
Net Income (Loss) .35 .16
Dividends -- --
Book Value .59 .24
Price Range (9) -- High -- --
-- Low -- --
Weighted Average Shares Outstanding 15,000 15,000
Approximate Number of Shareholders N/A N/A
</TABLE>
(1) During fiscal 1994, the Company recorded litigation and restructuring
charges of $27,096,000 and $9,199,000, respectively.
(2) During fiscal 1993, the Company changed its method of accounting for income
taxes. See Note F.
(3) Financial data reflect the following major business additions from their
respective dates of acquisition: (i) a portion of the knit apparel
operation acquired on March 30, 1985; (ii) a portion of the knit apparel
operation acquired on September 30, 1985; (iii) the major portion of the
woven fabrics operation and the major portion of the knitted fabrics
operation acquired at the beginning of fiscal 1987; (iv) a portion of the
knitted fabrics operation acquired on December 27, 1986; (v) a portion of
the knit apparel operation and a portion of the woven apparel operation
acquired on September 7, 1988; (vi) a portion of the woven apparel
operation (including the "Duck Head" label) acquired on February 1, 1989;
and (vii) Nautilus International and a portion of the affiliated license
products company acquired January 20, 1993.
(4) Funded Debt includes long-and short-term debt, capital leases and offset
factor borrowings. See Note 6.
(5) Shareholders' Equity at June 27, 1992 and June 29, 1991 includes
approximately $113 million and $25.5 million of net proceeds from sales of
Common Stock in October 1991 and June 1991, respectively.
(6) Capital Employed includes shareholders' equity and funded debt.
(7) Prior to fiscal 1990 the Company offset certain assigned receivables and
borrowings relating to its former factor agreements. Had these items not
been offset, the Company's accounts receivable and notes payable at the end
of the 1989, 1988, 1987 and 1986 fiscal years would have each been
increased by approximately $79.4 million, $73.6 million, $64.7 million and
$16.2 million, respectively.
(8) Per share data and weighted average common shares outstanding for fiscal
1987, 1986 and 1985 give retroactive effect to the issuance of 15,000,000
shares of Common Stock relating to the reorganization of companies under
common control effective November 25, 1986. The number of shares
outstanding at July 2, 1994, July 3, 1993, and June 27, 1992 for financial
reporting purposes was 24,245,733, 26,436,886, and 26,400,371,
respectively.
(9) The Company's Common Stock began trading publicly in February 1987.
(10) Depreciation and amortization include certain writedowns of property and
equipment.
1
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TO OUR FELLOW SHAREHOLDERS
(Photo of E. Erwin Maddrey, II)
E. ERWIN MADDREY, II
To Our Fellow Shareholders:
Fiscal 1994 began with most of our markets suffering from weak retail demand
which began to steadily improve as the year progressed. The weakness started
during our 1993 fiscal year and continued into 1994. It was only towards the end
of our fiscal year that we began to feel improved demand. As a result of the
lower demand through the major part of fiscal 1994, our sales dropped 11% to
$614 million from the prior year level. This weakness in demand was caused by
the continuing uncertainty of consumer confidence that has kept apparel
retailers' buying habits very cautious.
During the year, in light of the soft economic conditions, we made an in-depth
analysis of all of our businesses and determined that we should sell our office
products division. We also decided that some restructuring was necessary in our
apparel businesses. During fiscal 1994 we took a restructuring charge of $9.2
million.
Also, in the second quarter, we received the unexpected news that an Alabama
jury had awarded a former sales representative of the Company and two of his
assistants $29 million in a suit over commissions. This award was later reduced
to $23 million by the trial judge. We believe that this award is unjustifiable
and have appealed it to the Alabama Supreme Court. We recorded a litigation
reserve for the entire amount in the second quarter of fiscal 1994.
Because of the poor demand in the first part of the year, the restructuring
charge, and the litigation reserve, we reported a loss of $17 million for the
year.
Our businesses are better and we are looking forward to our 1995 fiscal year.
Our textile fabrics operation has two parts -- a woven division and a knit
division. The woven division, which produces bottom weight fabrics for the
casual pants and dress pants markets as well as a variety of other finished and
unfinished fabrics, had mixed results during the year. Demand on the casual side
was very strong and those plants have run full. However, the demand for casual
products has decreased the demand for dress pants, and that part of the
business, as well as our unfinished fabrics facilities, have run curtailed
operating schedules. We have embarked on a major expansion and modernization
program in this division which will result in increased capacity for casual
fabrics and lower costs for all of the fabrics made by this division. We expect
increased production early in fiscal 1996 which will allow our woven fabrics
division to further improve its important position in the domestic casual pants
market.
We have completed the modernization of our knit fabrics division. Over the
last few years, we have reduced this division's manufacturing facilities from
eight to five. Today, the five plants are producing more pounds than the eight
did. The extensive machinery changes that we went through to reach this point
were very disruptive and expensive and caused this division to be unprofitable
in 1994. Now, with these changes behind us and lower cost manufacturing capacity
in place, we expect this division to become a significant profit contributor.
Our knit apparel division suffered from poor demand in the T-shirt and
sweatshirt markets during the first half of the year. In the last half, demand
returned to more normal levels and our operations improved as running schedules
increased.
2
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Since the purchase of Duck Head in 1989 we have been trying to catch up with
demand for the product. Because some of our systems were not able to handle the
increased volume, we began experiencing delivery problems in fiscal 1992 and did
a poor job servicing our customers. We lost some customers because of this, and
we have shrunk this business back to a more manageable level. As we become
confident in our systems, we will begin to grow again. A major element is a new
distribution center to replace several smaller distribution centers. This will
be built during calendar 1995.
We have been pleased with the growth of Nautilus' core commercial business. We
are beginning to test market a consumer line. Hopefully, this will allow us to
begin participating in the much larger consumer market.
During 1994, we spent $30 million on capital expenditures. In 1995, we plan to
spend $45 million on new capital programs. The major items will be the
acceleration of the Delta Mills expansion and modernization program and the Duck
Head distribution center.
In June, we completed the sale of our office products division, Harper
Brothers, to Denver based Corporate Express, Inc. Our analysis of our business
led us to conclude that Harper Brothers would be better owned by someone in the
office products business.
Fiscal 1994 was a tough year and, frankly, one that we are glad to have behind
us. We are pleased with the condition of our businesses today and are looking
forward to the better results that better markets bring.
(Photo of Bettis C. Rainsford)
BETTIS C. RAINSFORD
(Signature of E. Erwin Maddrey, II)
E. Erwin Maddrey, II
President and
Chief Executive Officer
(Signature of Bettis C. Rainsford)
Bettis C. Rainsford
Executive Vice President, Treasurer
and Chief Financial Officer
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED COMPANY RESULTS
FISCAL 1994 VERSUS FISCAL 1993
Consolidated net sales for the fiscal year ended July 2, 1994 (52 weeks) were
$613,776,000, a decrease of $72,463,000 from the prior year's $686,239,000 (53
weeks). Net sales in fiscal 1994 decreased in both the textile and apparel
segments as compared with net sales in fiscal 1993.
Consolidated gross profit margin for fiscal 1994 decreased to 16% compared to
18% in fiscal 1993. Gross margins in fiscal 1994 were impacted by disruption
costs associated with the consolidation of the Company's knit finishing plants,
by low prices on the sale of closeout apparel merchandise, and by cotton costs
rising more rapidly than prices in the January-June 1994 period.
(Net Sales bar chart appears here--see appendix)
Consolidated selling, general, and administrative expense for fiscal 1994 was
$82.2 million, or 13% of sales, compared to $73.4 million, or 11% of sales,
incurred in fiscal 1993.
In fiscal 1994, the Company charged income for $27.1 million to establish a
reserve for a judgment entered by an Alabama court in connection with a jury
award made on November 24, 1993 in favor of a former independent sales
representative of a subsidiary of the Company and two of his assistants (the
"Alabama litigation"), interest costs on that judgment, and related legal
expenses in connection with the appeals process. The appeal is now before the
Alabama Supreme Court. The Company believes that this charge to fiscal 1994
income fully reserves future costs associated with this action.
In view of weak market conditions and the Company's poor performance in the
July to December 1993 period, the Company made certain restructuring decisions
at the end of its second fiscal quarter.
One of these decisions was to dispose of its Harper Brothers office products
distribution division by sale or liquidation. The Company hoped that it would be
able to find a qualified buyer who was experienced in the office supply business
so that the employees in that division would not be displaced. The Company was
successful in finding such a buyer, a subsidiary of Corporate Express, Inc., and
the sale of Harper Brothers was completed as of June 4, 1994. The restructuring
charge, as adjusted, for this decision was $3.2 million.
The Company had been working on plans to convert its former spinning plant
building in Edgefield, South Carolina into an outlet mall. Plans were drawn,
cleanup work had been started, but after several months of research were
completed, in December 1993 the decision was made to abandon this plan and write
off the assets involved. The restructuring charge for this decision was $1.3
million.
The Company's branded apparel business incurred operating losses in the July
to December 1993 period for the first time since it was acquired in February
1989. The Company decided to close its girls and juniors branded apparel line,
including liquidating this line's inventory, and focus on its core young mens
business. The restructuring charge for this decision was $1.3 million. At the
same time, the decision was made to consolidate the branded apparel distribution
operations from several geographically scattered warehouses into a central
distribution and office complex to be constructed in calendar 1995. The
restructuring charge for this decision was $1.1 million.
The remainder of the restructuring charges to pre-tax income incurred in the
second quarter of fiscal 1994 involved several smaller projects, principally
those relating to the consolidation of the physical facilities of the knit
textile division.
These restructuring decisions included write-downs of $1.6 million of goodwill
and $2.1 of property plant and equipment. At July 2, 1994, $2.4 million remain
in accrued liabilities related
4
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primarily to leases on vacant facilities and other future costs of the
restructuring plan.
Net interest expense totalled $7.9 million during fiscal 1994 as compared to
$7.4 million incurred in fiscal 1993. The Company's outstanding debt at July 2,
1994 was $162.8 million compared with $132.2 million at July 3, 1993. During the
first six months of fiscal 1994, the Company repurchased 2.3 million shares of
its Common Stock for approximately $25.3 million.
Net losses for the year ended July 2, 1994 were $17.3 million compared with
net income of $27.3 million for the prior fiscal year. If the charges taken in
fiscal 1994 for the Alabama litigation and restructuring were excluded, a fiscal
1994 net income of approximately $5.7 million would have resulted.
Total Company inventories increased to $203.8 million at July 2, 1994 compared
to $198.3 million at the end of fiscal 1993, an increase of 3%.
Consolidated order backlogs totalled $151.5 million at July 2, 1994, a
decrease of $10.6 million, or 7%, from total backlogs at July 3, 1993. Order
backlogs for woven textiles and branded apparel were lower, and backlogs for
knitted textiles and apparel were higher, at the end of fiscal 1994 as compared
to fiscal 1993. The Company believes that order backlogs are generally
indicative of future sales.
Order intake and billings of the Company's unfinished woven fabrics (griege
goods) softened considerably during the second half of fiscal 1994, and they
remain very soft. Sales of finished all-cotton woven fabrics remain strong, but
sales of synthetic fiber woven fabrics are weak due to low levels of women's
wear activity at retail. As noted above, both the knitted textile and knitted
apparel operations are working off higher order backlogs than a year ago,
although recent signs indicate that the T-shirt pipeline is refilling. The
Company's results are highly dependent on retail activity in its product
categories. So far in calendar 1994, growth in sales of durable goods has
outpaced sales growth for soft goods. The Company is unable to predict when
consumers will move more of their purchases into the soft goods sector.
FISCAL 1993 VERSUS FISCAL 1992
Consolidated net sales for the fiscal year ended July 3, 1993 (53 weeks) were
$686,239,000, a decrease of $18,798,000 from the prior year's (52 weeks) record
high of $705,037,000. Net sales in fiscal 1993 decreased in the Company's
textile segment and increased in the apparel segment as compared with net sales
in fiscal 1992. Net sales in fiscal 1993 in the Company's other businesses
increased due to the acquisition of Nautilus International, Inc. in January
1993. Nautilus' sales of $7.8 million for five months beginning February 1993
are included in the Company's consolidated results for fiscal 1993.
(Net Income (Loss) bar chart appears here--see appendix)
Consolidated gross profit margin for fiscal 1993 decreased to 18% compared to
20% achieved in the prior fiscal year. Gross margins in fiscal 1993 were
adversely impacted by lower prices for knit textiles and apparel, lower prices
for unfinished woven fabrics, and higher unit sales of apparel at closeout
prices.
Consolidated selling, general, and administrative expense for fiscal 1993 was
$73.4 million, or 11% of sales, compared to $64.2 million, or 9% of sales,
incurred in fiscal 1992. These expenses were flat in the textile segment but
were higher in the Company's apparel segment in fiscal 1993 as compared to the
prior fiscal year. In addition, about one half of the increased selling,
general, and administrative expense increase over fiscal 1992 was attributable
to the inclusion of Nautilus in the Company's consolidated results for the year
ended July 3, 1993.
Interest expense decreased by $3.7 million from the prior year to the current
year. The Company's borrowing costs decreased along with the general decline in
interest rates. The Company's outstanding debt at July 3, 1993 was $132.2
million compared with $112.1 million at the beginning of fiscal 1993. During
fiscal 1993, about $20.5 million of the Company's revolving line of credit was
used in connection with the acquisition of 100% of the stock of Nautilus
International, Inc. and 70% of the stock of Apparel Marketing Corporation.
During fiscal 1993, the Company adopted FASB Statement 109, "Accounting for
Income Taxes." The cumulative effect on prior years of adopting
5
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the Statement resulted in a charge of $875,000, or $.04 per share.
Net income for fiscal year 1993 was $27.3 million compared to $40.0 million
earned in fiscal year 1992, a decrease of 32%. Net income for the year ended
July 3, 1993 includes approximately $1.5 million arising from a gain related to
the fire at one of the Company's Nautilus plants at Independence, Virginia on
March 13, 1993.
Total Company inventories increased to $198.3 million at July 3, 1993 from
$177.6 million at June 27, 1992, an increase of 12%. Inventory levels in all the
Company's segments increased in fiscal 1993, due principally to weakness in the
woven greige goods markets and to lower than anticipated apparel sales in the
first six months of calendar 1993. Nautilus' inventories at the end of fiscal
1993 were $2.9 million.
DIVISION RESULTS
TEXTILE SEGMENT
FISCAL 1994 VERSUS FISCAL 1993
The Company's textile segment consists of finished woven and knitted textile
fabrics sold principally to manufacturers of apparel products. The Company also
sells greige goods to fabric converters for various end uses, including
pocketing, linings, and lightweight apparel.
(Net Income as a % of Sales bar chart appears here--see appendix)
Net sales in this segment decreased from $444.9 million in the fiscal year
ended July 3, 1993 to $391.4 million in the fiscal year ended July 2, 1994. Net
sales of knitted textiles were down 14% from fiscal 1993, due to the lower
number of units sold, to lower unit sales prices, and to disruptions in the
Company's knit fabric finishing operations resulting from the combining of two
finishing plants into one during the year. Average prices in all knit fabric
categories during the first three quarters of fiscal 1994 decreased from levels
of the prior year, but began to return toward prior year levels during the last
fiscal quarter of 1994. Sales of woven textiles were 11% lower in fiscal 1994
than in fiscal 1993. Higher sales of all cotton finished fabric (1% increase)
were more than offset by a sharp decline in sales of synthetic fiber finished
fabrics (19% decrease) and greige goods (24% decrease).
Gross profit margins in the textile segment declined from 13% in fiscal 1993
to 12% in fiscal 1994. While gross profit margins in woven textiles were equal
in fiscal 1994 to those of the prior year, margins in knitted textiles were 4.4
percentage points lower. The drop in knitted textile margins was due to the
lower unit selling prices noted above, and to high unfavorable manufacturing
variances associated with the disruption caused by the finishing plants'
consolidation.
Selling, general and administrative costs in the textile segment were slightly
higher in fiscal 1994 than in fiscal 1993 in dollars. As a percent of net sales,
these costs were 6.1% in fiscal 1994 as compared to 5.2% in fiscal 1993.
(Shareholders' Equity bar chart appears here--see appendix)
Operating profits in the textile segment decreased $15.1 million, or 43%, from
fiscal 1993 to fiscal 1994. The lower volume and lower gross margins discussed
above were the principal contributors to this decrease.
During fiscal 1994, the textile segment contributed 64% of the Company's
consolidated net sales and 46% of the Company's consolidated gross profit.
Textile segment inventories increased by $8.2 million from the end of fiscal
1993 to the end of fiscal 1994. The major part of this increase was in woven
greige goods inventory.
6
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The textile segment's capital expenditures totalled approximately $18.3
million for the fiscal year ended July 2, 1994. The major portion of this amount
was for the knitted textile plant consolidation project and knitted fabric
finishing equipment. Also included were initial expenditures for the woven
textile long-term modernization project.
The Company expects that its knit textile facilities and its woven all cotton
facilities will run at or near full capacity during fiscal 1995. However, woven
synthetic and greige goods facilities are not expected to run full schedules for
at least the first half of fiscal 1995.
Cotton prices increased sharply in the second half of fiscal 1994. Although
some textile fabric prices have increased, the Company has not yet passed its
total cotton cost increases to its customers. Profits of the textile segment are
sensitive to the amount of its manufacturing capacity utilized, to the cost and
availability of raw materials, and to the mix of goods produced.
FISCAL 1993 VERSUS 1992
Net sales in the textile segment decreased from $472.8 million in the fiscal
year ended June 27, 1992 to $444.9 million in the fiscal year ended July 3,
1993. Net sales of knitted textiles were down 12% to $119.9 million and net
sales of woven fabrics decreased 4% to $325.1 million from fiscal 1992 to fiscal
1993.
Sales of knitted textiles were affected adversely by prices which were 13%
lower, on average, in fiscal 1993 than in fiscal 1992. Unit sales of knitted
fabrics increased by 3%. Sales of woven camouflage and other military-type
fabrics sold primarily to the U.S. Defense Department contractors decreased to
$23.6 million in fiscal 1993 from $63.6 million in fiscal 1992, but the sales
shortfall in this area was more than offset by increases in sales of finished
woven fabrics to manufacturers of men's and women's apparel. Sales of unfinished
woven textiles were very weak for the first six months of fiscal 1993, resulting
in a year to year decline of 24% in the greige goods area. On balance, sales
increases of woven finished textiles were more than offset by decreased sales of
greige goods.
Gross profit margins in the textile segment declined from 16% in fiscal 1992
to 13% in fiscal 1993. The principal cause of this decline was the lower prices
for knitted fabrics referred to above. In addition, profit margins for
unfinished woven fabrics were significantly lower in fiscal 1993 than in the
prior fiscal year. Another factor contributing to the gross profit margin
decline was related to the rapid growth during the fiscal year in demand for the
Company's woven and dyed all cotton sportswear fabrics. Some of the Company's
woven fabrics spinning and weaving plants found it difficult to meet quality
expectations for all cotton dyed fabrics. As a result, off quality losses were
higher in fiscal 1993 than in fiscal 1992. The Company began long term capital
projects to address this issue.
Selling, general and administrative costs in the textile segment were about
the same in fiscal 1993 as in the prior fiscal year. However, as a percent of
net sales, these costs were 5.2% for the year ended July 3, 1993 as compared to
4.9% in the year ended June 27, 1992.
Operating profits in the textile segment decreased $18.3 million, or 35%, in
fiscal 1993 compared to the prior year. The lower prices for knitted fabrics and
lower demand for woven greige goods were the principal causes of the decline in
operating profits.
During fiscal 1993, the textile segment contributed 65% of the Company's
consolidated net sales and 47% of the Company's consolidated gross profit.
Inventories in the textile segment increased by less than $1 million from the
end of fiscal 1992 to the end of fiscal 1993. Inventories of knit textiles and
finished woven textiles decreased. Inventories of woven greige goods increased.
(Earnings (Loss) Per Share bar chart appears here--see appendix)
Capital expenditures in the textile segment were about $34.4 million during
the fiscal year ended July 3, 1993. The major part of these expenditures was in
the knitted textile area, including the completion of the Rainsford yarn plant
in Edgefield, SC. During the year, the Company closed its two older knit yarn
plants in North Carolina. All of the Company's internally produced yarn for
knitting now comes from its two modern yarn plants in Spartanburg and Edgefield,
SC.
7
<PAGE>
<PAGE>
APPAREL SEGMENT
FISCAL 1994 VERSUS FISCAL 1993
The Company's apparel segment consists of woven and knit branded apparel and
knit apparel sold to screen printers and private label accounts. Net sales in
this segment decreased by $31.1 million to $178.7 million from fiscal 1993 to
fiscal 1994. Sales of branded apparel decreased significantly and sales of
non-branded knit apparel increased slightly. Sales of branded apparel in fiscal
1994 decreased 26% to $95 million as compared to sales in fiscal 1993, with both
unit sales and average unit price being lower in the same comparative period.
Sales of non-branded knit apparel increased 3% to $84 million as compared to
sales in fiscal 1993, with unit sales being higher and average unit price being
slightly lower in the same comparative period.
Although consumer demand for its "Duck Head" branded apparel remains good, the
Company believes that the delivery problems encountered by its retailer
customers during the rapid growth of the brand in the preceding two fiscal years
were the principal cause of lower sales in the latest fiscal year. The Company
has developed and will install what it believes are better planning and
distribution systems to materially improve its orders shipped to orders received
ratio. In addition, the Company has decided to build a new, central distribution
and office center for the "Duck Head" products. A site has been selected, and
construction will begin in fiscal 1995 and is expected to be completed in early
fiscal 1996. The number of Duck Head retail outlet stores increased from 33 at
the beginning of fiscal 1994 to 36 at present.
Gross profit margins decreased from 26% in fiscal 1993 to 20% in fiscal 1994.
A gross margin increase in knit apparel was more than offset by decreased gross
margins in branded apparel and outlet store operations. A significant amount of
branded apparel inventories which were carried into fiscal 1994 were sold at
closeout prices, and additional reserves were established during fiscal 1994 for
future closeout inventory sales.
The apparel segment represented 29% of the Company's fiscal 1994 consolidated
net sales and 36% of the Company's fiscal 1994 gross profit.
The apparel segment's selling, general, and administrative expenses in fiscal
1994 were $37.1 million as compared to $35.1 million in fiscal 1993. These
expenses were 21% of net sales in fiscal 1994 as compared to 17% for fiscal
1993. Knit apparel selling expenses increased significantly due to efforts to
merchandise and sell a new line of "Nautilus" knit apparel, and the greater
number of outlet stores required additional expenses.
Other income and expense in the apparel segment included $30.0 million of
charges taken to establish reserves for the Alabama case and certain
restructuring items.
Fiscal 1994 operating losses for the apparel segment totalled $31.3 million,
including the $30.0 million of other expenses noted above, as compared to
operating profits of $18.9 million in fiscal 1993.
Inventories in the apparel segment at July 2, 1994 totalled $110.3 million,
compared to $110.0 million at July 3, 1993. Branded apparel inventories fell
slightly and non-branded knit apparel inventories rose slightly during fiscal
1994.
Capital expenditures in the apparel segment were $3.8 million during fiscal
1994. These repre-
sented improvements in the knitting, fabric finishing, and sewing facilities in
this segment.
The apparel segment's operating results are highly dependent on orders from
retailers, and from screen printers who supply finished product to retailers.
Generally, when retail sales of apparel are strong, the Company's apparel
segment benefits. The Company cannot be certain when (or if) retail sales of its
product categories will return to growth levels similar to those of the Spring
of 1992.
This segment's operating results are also dependent upon the utilization of
its owned manufacturing facilities. The Company believes that the internal
capacity utilization by its apparel segment will be satisfactory in fiscal 1995.
A law suit with allegations similar to those in the Alabama case referred to
above is pending in the United States District Court for the Western District of
Kentucky brought by an individual who previously served as an independent sales
representative for the Duck Head division. The amount of damages claimed in this
suit has not yet been determined.
FISCAL 1993 VERSUS FISCAL 1992
Net sales in the apparel segment increased slightly to $209.8 million for the
year ended July 3, 1993 from $206.8 million in the prior fiscal year. Net sales
of woven apparel fell 3% from the fiscal 1992 level while net sales of knit
apparel increased by 9%. Gross sales of "Duck Head" labeled products were
approximately the same in fiscal 1993 as in fiscal 1992. Knit apparel sales were
higher in fiscal 1993 than in fiscal 1992 in both the screen printing and
private label areas.
Apparel sales for fiscal 1993 were impacted adversely by generally sluggish
retail apparel sales from January to June 1993. The Duck Head retail outlet
operation opened 11 new stores during fiscal 1993, bringing the total at fiscal
year end
8
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<PAGE>
to 33 stores with total sales more than twice those in fiscal 1992.
Gross profit margins in the apparel segment decreased to 26% in fiscal 1993
from 28% in fiscal 1992. Excess inventories of knitted T-shirts throughout the
industry depressed prices for these products. Lower than anticipated "in season"
sales led to higher levels of closeout sales than in the prior fiscal year. "In
season" sales of branded apparel were depressed both by the poor spring weather,
which led to very low levels of reorders for spring season merchandise, and by
generally sluggish retail apparel sales throughout the country.
Selling, general and administrative expenses increased to $35.1 million in
fiscal 1993 from $29.6 million in fiscal 1992. These costs were 17% of net sales
in fiscal 1993 as compared to 14% in fiscal 1992. Higher advertising costs for
the "Duck Head" brand and costs associated with operating the additional retail
outlet stores were the major factors that caused these increased costs.
The combination of lower gross profit margins and higher selling, general and
administrative costs as described above led to a 30% decrease in operating
earnings from the apparel segment in fiscal 1993 as compared to fiscal 1992.
The apparel segment represented 31% of the Company's fiscal 1993 consolidated
net sales and 44% of the Company's fiscal 1993 gross profit.
Inventories in the apparel segment were $110.0 million at July 3, 1993 as
compared to $90.9 million at June 27, 1992. The major increase occurred in
finished goods inventories of branded apparel, caused by products that had been
acquired in anticipation of higher sales than actually occurred.
Capital expenditures in the apparel segment were $10.9 million during fiscal
1993. Capital expenditures included improvements in the Maiden, North Carolina
knitting and finishing plant as well as improvements in the segment's sewing
plants in the United States and Costa Rica.
(Funded Debt to Equity Ratio bar chart appears here--see appendix)
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1994, the Company financed its operations, capital expenditures,
dividends, and acquisitions primarily through cash generated from operations and
borrowings under its bank credit facility.
The Company generated cash flows from its operations of $32.8 million, $62.7
million, and $9.6 million for the 1994, 1993, and 1992 fiscal years,
respectively. During these periods, cash generated from operations, and from
sales of the Company's Common Stock, has been used primarily to reduce debt,
finance capital expenditures, including equipment purchases, pay dividends,
acquire 100% of the stock of Nautilus International, Inc., and of Armonia Textil
S.A. (Costa Rica) and its related assets, and 70% of the stock of Apparel
Marketing Corporation, and repurchase approximately 2.3 million shares of the
Company's Common Stock.
During fiscal 1994, cash used by investing activities included $30.5 million
for purchases of property, plant, and equipment. Fiscal 1994 cash used in
financing activities of $4.5 million resulted primarily from net increases in
bank debt of $32.3 million offset by $9.8 million paid in dividends and $25.3
million used to repurchase the Company's Common Stock. The repurchase of shares
resulted in a lower weighted average shares outstanding for fiscal 1994 as
compared to fiscal 1993. The lower number of shares outstanding resulted in a
proportional increase in the loss per share. In addition, borrowings to finance
the repurchase resulted in additional interest expense.
As of July 2, 1994, the Company had working capital of $242 million, as
compared to $262 million at July 3, 1993. Net accounts receivable were $22.9
million lower, and inventories were $5.5 million higher at the end of fiscal
1994 as compared to balances at the end of fiscal 1993. In addition, current
deferred tax assets were $11.3 million higher, influenced primarily by the
Alabama litigation.
On September 7, 1994, the Company obtained a $275 million long-term Revolving
Loan Facility (the "Credit Facility"). The Credit Facility has a limit of $25
million for the purpose of issuing letters of credit, and a separate $29 million
limit for the letter of credit issued in connection with the Alabama litigation
(the "Alabama L/C"). Upon termination of the Alabama L/C, whether by a drawing
or otherwise, this letter of credit facility will expire and the total Credit
Facility will be reduced by the amount of the undrawn and expired portion of the
Alabama L/C. The new Credit Facility will mature on September 30, 1997, with a
provision for one year extensions and (if the extension is made) on each
anniversary of the
9
<PAGE>
<PAGE>
termination date thereafter, such extension to be available only if consented to
by all of the lenders. The Company's initial interest rate is LIBOR plus .50%
per annum, but the Credit Facility contains provisions that may increase or
decrease the spread over LIBOR depending upon certain financial ratios achieved
by the Company. The Credit Facility is an unsecured general obligation of the
Company. The Company has used the proceeds of the Credit Facility to refinance
the bank debt that existed under its previous credit facilities and to provide
ongoing working capital financing needs.
At July 2, 1994, borrowings under the Company's loan facilities totaled $160.4
million at a weighted average interest rate of 5.18% per annum as compared to
3.7% at July 3, 1993. Availability under the new Credit Facility is reduced by
outstanding letters of credit, which at July 2, 1994 aggregated approximately
$14.3 million. Certain conditions apply to the Company's ability to borrow under
its Credit Facility, including continued compliance with financial covenants.
See Note D of the accompanying financial statements for a description of loan
covenants.
The Company spent approximately $29.9 million in capital expenditures during
fiscal 1994. Of this amount, approximately $18 million was spent in the textile
segment with the major expenditures being for consolidation of knitted fabric
manufacturing facilities and weaving machines for the woven fabrics business as
the beginning of its major, long term modernization project. Approximately $4
million was spent in the apparel segment, and approximately $7 million was spent
in the Company's fitness equipment business, largely to rebuild facilities that
were destroyed by fire in March of 1993.
During fiscal 1995, the Company plans to spend approximately $45 million for
capital improvements and new equipment. The majority of this amount is expected
to be spent in continuing the woven fabrics modernization program. The Company
also expects to begin construction of a new, centralized distribution center for
its branded apparel division in fiscal 1995. The Company believes that its
equipment and facilities are generally adequate to allow it to remain
competitive with its principal competitors.
The Company's Board of Directors authorized a plan to repurchase up to five
million shares of the Company's outstanding Common Stock at prices and at times
at the discretion of the Company's top management. During fiscal 1994, the
Company repurchased and retired approximately 2.3 million shares at a total cost
of approximately $25.3 million. These purchases were funded by use of the
Company's revolving credit line. The Company currently has approximately 24.2
million shares outstanding.
The Company believes that cash flow generated by its operations and funds
available under its existing credit lines should be sufficient to service its
bank debt, to satisfy its day-to-day working capital needs, to fund its planned
capital expenditures and to continue the payment of dividends.
ENVIRONMENTAL MATTERS
The Company's Nautilus business has been named as a "potentially responsible
party" ("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to three sites in North Carolina, South
Carolina, and Mississippi. To the Company's knowledge, all of the transactions
with these sites were conducted by a corporation (the "Selling Corporation")
whose assets were sold in 1990 pursuant to the terms of an order of the United
States Bankruptcy Court to another corporation, the stock of which was
subsequently acquired by the Company in January 1993.
At the North Carolina site, the Company's information is that there are over
1,400 PRPs and the Selling Corporation is listed as a "de minimis" party. The
Company's most recent information indicates that the Selling Corporation's share
of the costs of the surface removal action (the removal of drums, equipment and
materials) for this site will be immaterial. The Company does not currently have
information respecting the soil and groundwater cleanup costs that may be
incurred with respect to this site.
At the South Carolina site, there are over 700 PRPs, and the Selling
Corporation has been listed as an "insolvent" party and would appear to qualify
as a "de minimis" party. The site's PRP group has completed a surface removal
action, the Selling Corporation's part of which is immaterial. The PRP group is
investigating soil and groundwater contamination at the site, but there is
currently insufficient information available to estimate the cost of remediating
that contamination.
At the Mississippi site, the PRP Group is in the process of performing a
surface removal action and is investigating soil and groundwater contamination,
both at the site and in the surrounding area. The Company's latest information
is that the Selling Corporation is ranked 11th out of a total of over 300 PRPs
in contributions of material to the site, and, based on volume, the Selling
Corporation contributed approximately 3% of the site's material. To the
Company's knowledge, latest estimates of costs to clean up the site range up to
$4 million. Trichloroethane, one of the substances delivered by the Selling
Corporation to the site, has been found in the site's groundwater and at nearby
residential drinking water wells.
Although no assurance can be provided, the Company believes that it is
shielded from liability
10
<PAGE>
<PAGE>
at these three sites by the order of the United States Bankruptcy Court pursuant
to which the Selling Corporation sold its assets to the corporation subsequently
acquired by the Company.
The Company, therefore, has denied any responsibility at the sites and has
declined to participate as a member of the respective PRP groups. Accordingly,
the Company has not provided for any reserves for costs or liabilities
attributable to the Selling Corporation.
INCOME TAXES
The effective income tax rates for the 1994, 1993 and 1992 fiscal years were
33.3%, 39.5%, and 39%, respectively. As of June 28, 1992, the Company changed
its method of accounting for income taxes from the deferred method to the
liability method required by FASB Statement No. 109, "Accounting For Income
Taxes" (see Note F of the accompanying consolidated financial statements). The
cumulative effect of adopting Statement 109 as of June 28, 1992 was to decrease
fiscal 1993 net income by approximately $875,000, which is reflected in the
effective rate above for that year.
The Company made income tax payments of approximately $2,350,000, $20,171,000
and $19,678,000 during the 1994, 1993 and 1992 fiscal years, respectively. In
fiscal 1992, the Company utilized alternative minimum tax credits of $4.4
million generated in fiscal years 1989, 1990 and 1991 to reduce its fiscal 1992
tax liability. In addition, the Company utilized in fiscal 1992 $225,000 of
business credit carryforwards which were acquired in the Stanwood acquisition.
During fiscal 1993, the IRS concluded its audit of the Company's consolidated
tax returns for fiscal years 1988 and 1989 with no material adjustments.
Prior to its acquisition by the company, O'Bryan Brothers Inc. (which owned
the "Duck Head" trademarks) had established for income tax purposes the basis of
customer lists in the amount of $3.6 million. The IRS had audited this matter
for years prior to inclusion in the consolidated federal income tax return of
the Company and had originally disallowed the deduction of this basis. During
fiscal 1994, the IRS and the Company agreed to settle this issue which resulted
in approximately $149,000 of tax due. This tax settlement has been considered in
the above effective tax rate for 1994.
In fiscal 1994, the Company paid alternative minimum tax ("AMT") of
approximately $2 million. To the extent that the Company pays AMT, it can later
apply the AMT previously paid as a credit against future regular tax
liabilities.
At July 2, 1994, the Company had net operating loss ("NOL") carryforwards of
$11.1 million for income tax purposes that expire in fiscal years 1995 through
2003. Approximately, $1.9 million of these carryforwards is attributable to a
company acquired in 1986. This carryover will expire in fiscal years ending in
1995 and 1996.
The remaining carryover of approximately $9.2 million was generated by a
subsidiary of Stanwood Corporation, which was acquired by the Company during its
1989 fiscal year. The total net operating loss carryforward of the Stanwood
group at the time of acquisition amounted to $10.9 million of which $1.7 million
was utilized by the Company in its fiscal 1991 tax return. In addition to net
operating loss carryforwards, at the time of acquisition, Stanwood Corporation
had general business credit carryforwards which totalled $835,000 and expire
June 1999 through June 2003. The business credit carryforward at the end of
fiscal 1994 from this acquisition was approximately $610,000.
Although the Tax Reform Act of 1986 placed annual limitations on utilizing
NOLs and tax credits from companies which have changed ownership, this should
not impact the Company's ability to ultimately utilize the carryovers. The
maximum annual usage of the Stanwood NOL is limited by applicable provisions of
the Internal Revenue Code to approximately $1 million per year. The Company
expects to utilize the Stanwood NOL prior to the expiration dates of June 2002
and June 2003.
The Company has recognized cumulative deferred tax assets of approximately $28
million, arising principally from litigation accruals, basis differences between
the recorded value for financial reporting purposes and tax basis of fixed
assets, net operating loss and general business credit carryforwards of acquired
companies and book accruals which will be future tax deductions. Such deferred
tax assets have been reduced by a valuation allowance of approximately $3.9
million. The valuation allowance will be adjusted from time to time as the tax
benefits are realized. Although the Company's business is cyclical, its history
of generating taxable income indicates it is likely that the Company will be
able to realize its deferred tax assets.
Although the Company believes that it has been, and will continue to be,
entitled to utilize the NOLs, credit carryovers and basis differences described
above, no assurance can be given that the IRS will not be able to successfully
challenge any such items on the grounds that they were not validly incurred for
Federal income tax purposes or that their use is restricted by various tax
provisions.
11
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<PAGE>
OPERATIONS BY INDUSTRY SEGMENT
The Company operates principally in two segments: textiles and apparel. The
textile segment's principal products are woven and knitted fabrics for apparel
and home furnishings manufacturers. The apparel segment is the manufacturer of
the "Duck Head" brand of casualwear, completed T-shirts, fleece goods and
sportswear, and includes a retail apparel business. The apparel segment sells
primarily to department stores and other apparel retailers. The Company also
manufactures and sells Nautilus fitness equipment primarily to the institutional
market.
<TABLE>
<CAPTION>
July 2, July 3, June 27,
1994 1993 1992
<S> <C> <C> <C>
Net Sales:
Textiles
Unaffiliated customers....................................................... $391,401,000 $444,921,000 $472,766,000
Intersegment................................................................. 15,660,000 12,331,000 12,433,000
407,061,000 457,252,000 485,199,000
Apparel, including retail stores:
Unaffiliated customers....................................................... 178,681,000 209,789,000 206,796,000
Intersegment................................................................. 1,000
178,681,000 209,790,000 206,796,000
Fitness equipment, office products and other
Unaffiliated customers....................................................... 43,694,000 31,529,000 25,475,000
Intersegment................................................................. 1,474,000 1,269,000 976,000
45,168,000 32,798,000 26,451,000
Intersegment Eliminations...................................................... (17,134,000) (13,601,000) (13,409,000)
Total...................................................................... $613,776,000 $686,239,000 $705,037,000
Gross Profit:
Textiles....................................................................... $ 45,355,000 $ 57,075,000 $ 75,924,000
Apparel, including retail stores............................................... 35,846,000 53,523,000 56,950,000
Fitness equipment, office products and other................................... 17,735,000 11,289,000 8,336,000
Total...................................................................... $ 98,936,000 $121,887,000 $141,210,000
Operating Profit (Loss):
Textiles....................................................................... $ 19,606,000 $ 34,655,000 $ 52,990,000
Apparel, including retail stores............................................... (31,327,000) 18,900,000 27,032,000
Fitness equipment, office products and other................................... (2,992,000) 2,308,000 606,000
Total Operating Profit (Loss).............................................. (14,713,000) 55,863,000 80,628,000
Interest expense............................................................... (8,639,000) (7,775,000) (11,479,000)
Corporate expense.............................................................. (3,300,000) (3,278,000) (3,802,000)
Interest Income................................................................ 722,000 362,000 454,000
Income (Loss) Before Income Taxes.......................................... $(25,930,000) $ 45,172,000 $ 65,801,000
Identifiable Assets:
Textiles....................................................................... $314,378,000 $331,036,000 $320,164,000
Apparel, including retail stores............................................... 195,370,000 203,166,000 193,736,000
Fitness equipment, office products and other................................... 55,811,000 38,124,000 9,536,000
Corporate...................................................................... 1,444,000 1,620,000 1,320,000
Total...................................................................... $567,003,000 $573,946,000 $524,756,000
Depreciation and amortization:
Textiles....................................................................... $ 16,552,000 $ 13,087,000 $ 10,414,000
Apparel, including retail stores............................................... 6,210,000 4,649,000 3,844,000
Fitness equipment, office products and other................................... 3,669,000 669,000 328,000
Corporate...................................................................... 462,000 414,000 242,000
Total...................................................................... $ 26,893,000 $ 18,819,000 $ 14,828,000
Capital expenditures:
Textiles....................................................................... $ 18,334,000 $ 34,446,000 $ 37,753,000
Apparel, including retail stores............................................... 3,844,000 10,941,000 4,745,000
Fitness equipment, office products and other................................... 7,659,000 3,611,000 212,000
Corporate...................................................................... 19,000 577,000 206,000
Total...................................................................... $ 29,856,000 $ 49,575,000 $ 42,916,000
</TABLE>
12
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<PAGE>
The textile segment sells to the apparel segment at a rate approximately 1%
over cost. All other intersegment sales are at prices comparable to unaffiliated
customers sales. Intersegment operating profit related to the intersegment sales
is not significant. Operating profit is total revenue less operating expenses,
excluding interest expense, corporate expense and interest income. Included in
1993 operating profit is a net gain on an involuntary conversion in the fitness
equipment division. (See Note K).
During fiscal 1994, the apparel segment recognized a charge of $27 million in
connection with a law suit, and the textile, apparel and office products and
other divisions recorded restructuring charges of $1,700,000, $2,900,000, and
$4,600,000, respectively. Depreciation and amortization include certain
writedowns of property and equipment
Identifiable assets are those assets that are used in the operations of each
segment. Amounts shown for corporate assets consist principally of corporate
office equipment, deferred loan costs and certain life insurance policies. (See
Note H). Capital expenditures include related accounts payable of $1,010,000,
$1,694,000 and $6,610,000 for the 1994, 1993 and 1992 fiscal years,
respectively.
13
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<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
DELTA WOODSIDE INDUSTRIES, INC.
We have audited the accompanying consolidated balance
sheets of Delta Woodside Industries, Inc. as of July 2,
1994 and July 3, 1993, and the related consolidated
statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended July
2, 1994. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Delta Woodside Industries, Inc. at
July 2, 1994 and July 3, 1993, and the consolidated results
of its operations and its cash flows for each of the three
years in the period ended, in conformity with generally
accepted accounting principles.
(Signature of Ernst & Young LLP)
Greenville, South Carolina
August 17, 1994, except for
the third paragraph of Note D,
as to which the date is
September 7, 1994.
14
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<PAGE>
CONSOLIDATED BALANCE SHEETS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
JULY 2, 1994 July 3, 1993
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 2,077,000 $ 3,730,000
Accounts receivable:
Factor -- Note C.............................................................. 55,440,000 70,985,000
Customers..................................................................... 64,921,000 74,491,000
120,361,000 145,476,000
Less allowances for doubtful accounts and returns............................. 3,275,000 5,537,000
117,086,000 139,939,000
Inventories -- Note A
Finished goods................................................................ 112,101,000 111,372,000
Work in process............................................................... 69,402,000 63,027,000
Raw materials and supplies.................................................... 22,300,000 23,865,000
203,803,000 198,264,000
Deferred income taxes............................................................ 12,028,000 713,000
Prepaid expenses and other current assets........................................ 1,942,000 3,615,000
TOTAL CURRENT ASSETS 336,936,000 346,261,000
PROPERTY, PLANT AND EQUIPMENT, at cost --
Notes D and J
Land and land improvements.................................................... 5,318,000 5,149,000
Buildings..................................................................... 64,497,000 59,782,000
Machinery and equipment....................................................... 191,267,000 171,900,000
Furniture and fixtures........................................................ 6,943,000 5,984,000
Leasehold improvements........................................................ 2,517,000 2,903,000
Construction in progress...................................................... 9,271,000 8,397,000
279,813,000 254,115,000
Less accumulated depreciation................................................. 89,782,000 68,969,000
190,031,000 185,146,000
EXCESS OF COST OVER ASSIGNED VALUE OF NET ASSETS ACQUIRED, less accumulated
amortization of $3,965,000 (1994) and $4,030,000 (1993).......................... 28,164,000 31,169,000
OTHER ASSETS....................................................................... 11,872,000 11,370,000
$567,003,000 $573,946,000
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
JULY 2, 1994 July 3, 1993
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable........................................................... $ 46,712,000 $ 62,374,000
Accrued employee compensation.................................................... 6,806,000 8,049,000
Litigation accrual -- Note J..................................................... 25,594,000
Accrued and sundry liabilities................................................... 15,010,000 11,991,000
Current portion of long-term debt -- Note D...................................... 864,000 1,736,000
TOTAL CURRENT LIABILITIES 94,986,000 84,150,000
LONG-TERM DEBT -- Note D........................................................... 161,948,000 130,464,000
DEFERRED INCOME TAXES -- Note F.................................................... 18,808,000 17,595,000
OTHER LIABILITIES AND DEFERRED CREDITS -- Note H................................... 6,384,000 5,488,000
SHAREHOLDERS' EQUITY -- Notes D, E and H
Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued
and outstanding 24,246,000 shares (1994) and 26,437,000 shares (1993)......... 242,000 264,000
Additional paid-in capital....................................................... 162,114,000 186,381,000
Retained earnings................................................................ 122,521,000 149,604,000
284,877,000 336,249,000
COMMITMENTS AND CONTINGENCIES --
Notes D and J
$567,003,000 $573,946,000
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Woodside Industries, Inc
<TABLE>
<CAPTION>
Year Ended
JULY 2, 1994 July 3, 1993 June 27, 1992
<S> <C> <C> <C>
Net sales...................................................... $613,776,000 $686,239,000 $705,037,000
Cost of goods sold............................................. 514,840,000 564,352,000 563,827,000
Gross profit................................................... 98,936,000 121,887,000 141,210,000
Selling, general and administrative expenses................... 82,223,000 73,404,000 64,204,000
Litigation charge -- Note J.................................... 27,096,000
Restructuring charge -- Note J................................. 9,199,000
(19,582,000 ) 48,483,000 77,006,000
Other (expense) income:
Interest expense............................................. (8,639,000 ) (7,775,000 ) (11,479,000 )
Interest income.............................................. 722,000 362,000 454,000
Other -- Note K.............................................. 1,569,000 4,102,000 (180,000 )
(6,348,000 ) (3,311,000 ) (11,205,000 )
INCOME (LOSS) BEFORE INCOME TAXES (25,930,000 ) 45,172,000 65,801,000
Income tax expense (benefit) -- Note F......................... (8,633,000 ) 16,968,000 25,786,000
Income (loss) before cumulative effect of accounting change.... (17,297,000 ) 28,204,000 40,015,000
Cumulative effect of change in the method of accounting for
income taxes -- Note F....................................... (875,000 )
NET INCOME (LOSS) $(17,297,000 ) $ 27,329,000 $ 40,015,000
Earnings (loss) per share of Common Stock before cumulative
effect of accounting change.................................. $ (.70 ) $ 1.07 $ 1.62
Cumulative effect of change in the method of accounting for
income taxes -- Note F....................................... (.04 )
Earnings (loss) per share of Common Stock...................... $ (.70 ) $ 1.03 $ 1.62
Weighted average number
of shares outstanding........................................ 24,550,000 26,421,000 24,670,000
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Delta Woodside Industries, Inc
<TABLE>
<CAPTION>
Prepaid
Additional Contribution Total
Common Stock Paid-In Retained To Retirement Shareholders'
Shares Amount Capital Earnings Plan Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1991................ 21,129,150 $211,000 $ 71,403,000 $101,665,000 $ (632,000) $172,647,000
Incentive Stock Award Plan
Shares issued Note E................ 74,343 1,000 343,000 344,000
Stock Option Plan, shares issued --
Note E.............................. 17,874 136,000 136,000
Tax benefits of stock plans........... 72,000 72,000
Issuance of Common Stock in public
offering -- Note E.................. 5,175,000 52,000 113,239,000 113,291,000
Net income for the year ended
June 27, 1992....................... 40,015,000 40,015,000
Cash dividends paid --
$.35 a share........................ (8,836,000) (8,836,000 )
Allocation of shares of Common Stock
(65,970) in Retirement Plan -- Note
H................................... 403,000 632,000 1,035,000
Other................................. 4,004 77,000 77,000
Balance at June 27, 1992................ 26,400,371 264,000 185,673,000 132,844,000 -0- 318,781,000
Incentive Stock Award Plan
Shares issued Note E................ 2,502 37,000 37,000
Stock Option Plan, shares issued --
Note E.............................. 33,188 265,000 265,000
Tax benefits of stock plans........... 262,000 262,000
Net income for the year ended
July 3, 1993........................ 27,329,000 27,329,000
Cash dividends paid --
$.40 a share........................ (10,569,000) (10,569,000 )
Other................................. 825 144,000 144,000
Balance at July 3, 1993................. 26,436,886 264,000 186,381,000 149,604,000 -0- 336,249,000
INCENTIVE STOCK AWARD PLAN
SHARES ISSUED NOTE E................ 82,309 1,000 666,000 667,000
STOCK OPTION PLAN, SHARES
ISSUED -- NOTE E.................... 22,188 194,000 194,000
TAX BENEFITS OF STOCK PLANS........... 144,000 144,000
PURCHASE AND RETIREMENT OF COMMON
STOCK -- NOTE E..................... (2,295,650) (23,000) (25,271,000) (25,294,000 )
NET LOSS FOR THE YEAR ENDED
JULY 2, 1994........................ (17,297,000) (17,297,000 )
CASH DIVIDENDS PAID --
$.40 A SHARE........................ (9,786,000) (9,786,000 )
BALANCE AT JULY 2, 1994 24,245,733 $242,000 $162,114,000 $122,521,000 $ -0- $284,877,000
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Woodside Industries, Inc
<TABLE>
<CAPTION>
Year Ended
JULY 2, 1994 July 3, 1993 June 27, 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................ $ (17,297,000) $ 27,329,000 $ 40,015,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................................. 21,344,000 17,090,000 13,711,000
Amortization.............................................. 1,859,000 1,729,000 1,117,000
Reduction in excess of cost over assigned value of net
assets acquired........................................ 1,549,000
Writedown of property and equipment....................... 2,141,000
Provision for losses on accounts
receivable............................................. 3,886,000 2,025,000 3,350,000
Provision for deferred income taxes....................... (10,810,000) 2,398,000 2,143,000
Losses (gains) on disposition of property
and equipment.......................................... 113,000 (2,916,000) 173,000
Compensation under stock plans............................ 1,005,000 317,000 1,518,000
Deferred compensation..................................... 928,000 1,126,000 1,206,000
Other..................................................... 708,000 753,000 (127,000 )
Changes in operating assets and liabilities
net of effects from business
acquisitions:
Accounts receivable.................................... 17,635,000 23,600,000 (25,736,000 )
Inventories............................................ (6,265,000) (17,217,000) (39,505,000 )
Other current assets................................... 1,610,000 (1,785,000) 156,000
Litigation accrual..................................... 25,594,000
Accounts payable and accrued
expenses............................................ (11,183,000) 8,255,000 11,621,000
NET CASH PROVIDED BY
OPERATING ACTIVITIES 32,817,000 62,704,000 9,642,000
INVESTING ACTIVITIES
Acquisitions of businesses, net of
cash acquired............................................. (1,565,000) (20,194,000)
Property, plant and equipment:
Purchases................................................. (30,525,000) (54,409,000) (36,246,000 )
Proceeds of dispositions.................................. 698,000 5,878,000 219,000
Sale of business............................................. 2,102,000
Other........................................................ (697,000) (280,000) (473,000 )
NET CASH USED BY
INVESTING ACTIVITIES (29,987,000) (69,005,000) (36,500,000 )
</TABLE>
19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
JULY 2, 1994 July 3, 1993 June 27, 1992
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit...................... $ 33,000,000 $ 194,000,000 $259,871,000
Repayments on revolving lines of credit...................... (11,000,000) (172,640,000) (315,500,000 )
Net borrowings on short term line of credit.................. 10,347,000
Scheduled principal payments of long-term debt............... (1,781,000) (1,692,000) (13,802,000 )
Principal prepayments of long-term debt...................... (7,500,000 )
Net proceeds from sale of Common Stock....................... 113,291,000
Repurchase and retirement of shares of Common Stock.......... (25,294,000)
Dividends paid............................................... (9,786,000) (10,569,000) (8,836,000 )
Other........................................................ 31,000 82,000 (173,000 )
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (4,483,000) 9,181,000 27,351,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (1,653,000) 2,880,000 493,000
Cash and cash equivalents at beginning of
year......................................................... 3,730,000 850,000 357,000
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,077,000 $ 3,730,000 $ 850,000
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Delta Woodside Industries, Inc.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Delta Woodside Industries, Inc. (the "Company") and its subsidiaries
(all of which are wholly-owned, except for Apparel Marketing Corporation which
is 70% owned). All significant intercompany balances and transactions have been
eliminated. Certain amounts for the 1993 fiscal year end have been reclassified
to conform to the 1994 presentation.
INVENTORIES: Inventories are stated at the lower of cost or market. As of July
2, 1994 and July 3, 1993, cost for certain inventories of the apparel segment
are determined under the last-in, first-out (LIFO) method representing 35% and
32%, respectively, of the cost of consolidated inventories. The balance of the
cost of consolidated inventories is determined under the first-in, first-out
(FIFO) method. If the inventories of the apparel segment had been determined by
the FIFO method, they would have been approximately the same as the reported
amounts.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the
basis of cost. Depreciation is computed by the straight-line method for
financial reporting based on estimated useful lives of three to thirty-two
years, and by accelerated methods for income tax reporting.
REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific
goods for later shipment at customers' request with related risk of ownership
passing to such customers.
AMORTIZATION: Amortization is computed using the straight-line method. The
excess of cost over assigned value of net assets acquired relating to certain
business combinations is being amortized to expense over periods of 5, 15 or 40
years. The excess of assigned value of net assets acquired over cost relating to
other business combinations is being amortized to income over 5 and 40 years.
Loan acquisition costs are being amortized over 3 years. Other intangible assets
are being amortized over periods of 3 to 40 years.
INCOME TAXES: The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which required a change from the deferred method to the liability method
of accounting for income taxes. Under the liability method, deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. Under the deferred method, deferred taxes were recognized using
the tax rate applicable to the year of the calculation and were not adjusted for
subsequent changes in tax rates.
The Company adopted SFAS 109 in the first quarter of fiscal 1993 and reported
the cumulative effect on the change in method of accounting for income taxes as
of the beginning of the 1993 fiscal year. Net income was reduced by $875,000 as
a result of the cumulative effect adjustment resulting from the change in
accounting for income tax expense.
CASH EQUIVALENTS: The Company considers all highly liquid investments of three
months or less when purchased to be cash equivalents.
EARNINGS PER COMMON SHARE: Per share data are computed based on the weighted
average number of shares of Common Stock outstanding during each period.
Unallocated shares in the Company's Retirement Plan are not considered
outstanding.
FISCAL YEAR: The Company's operations are based on a fifty-two, fifty-three week
fiscal year ending on the Saturday closest to June 30. The 1994 and 1992 fiscal
years consist of 52 weeks, whereas the 1993 fiscal year was 53 weeks.
21
<PAGE>
<PAGE>
NOTE B -- ACQUISITION OF BUSINESSES
On January 20, 1993, the Company acquired all of the outstanding stock of
Nautilus International, Inc., parent company of Nautilus Acquisition
Corporation, a manufacturer of fitness equipment. Concurrent with this
acquisition, the Company acquired 70% of the stock of Apparel Marketing
Corporation which owns the apparel and related accessory licensing rights to the
Nautilus name. These acquisitions have been accounted for by the purchase method
of accounting, and the accompanying consolidated financial statements include
the operations of the acquired businesses from the dates of their respective
acquisitions. The total purchase price for the stock acquired in these two
transactions was approximately $9.1 million. An additional $11.4 million was
paid to retire indebtedness of Nautilus. The total cost of the acquisitions
amounted to approximately $20.5 million. The cost exceeded the fair value of net
assets acquired by approximately $4.9 million, which has been recorded as
goodwill and is being amortized over 40 years for Nautilus International and 5
years for Apparel Marketing Corporation. The following unaudited pro forma
summary presents the consolidated results of operations as if the acquisitions
had occurred as of the beginning of the periods presented.
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
(In thousands,
except per share
amounts)
Net sales.......................... $697,802 $723,840
Net income before cumulative effect
adjustment of income taxes....... 27,665 39,289
Net income......................... 26,790 39,289
Earnings per share before
cumulative effect adjustment
of income taxes.................. 1.05 1.59
Earnings per share................. 1.01 1.59
</TABLE>
In addition, the Company acquired certain other immaterial businesses during
both fiscal 1994 and 1993.
NOTE C -- ACCOUNTS RECEIVABLE
The woven fabrics operation assigns a substantial portion of its trade accounts
receivable to a bank under a factor agreement. The assignment of these
receivables is primarily without recourse, provided that customer orders are
approved by the bank prior to shipment of goods, up to a maximum for each
individual account. At July 2, 1994 the Company had no significant
concentrations of
credit risk, since substantially all of the Company's accounts receivable are
due from many companies that produce apparel, home furnishings and other
products and from department stores and specialty apparel retailers located
throughout the United States. The Company generally does not require collateral
for its accounts receivable.
22
<PAGE>
<PAGE>
NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND LEASES
Long-term debt consists of:
<TABLE>
<CAPTION>
July 2, 1994 July 3, 1993
<S> <C> <C>
Long-term revolving credit facility (5.2% at July 2, 1994), with interest payable monthly
refinanced................................................................................. $150,005,000 $128,005,000
Short-term note payable -- refinanced........................................................ 10,347,000
Industrial Revenue Bond payable monthly, through 2001 at 72% of a bank's base rate........... 1,535,000 1,775,000
Notes, payable in varying annual amounts, through 1996 at rates varying from
6% to 10%.................................................................................. 148,000 371,000
Capital leases payable monthly or annually................................................... 777,000 2,049,000
162,812,000 132,200,000
Less current portion......................................................................... 864,000 1,736,000
$161,948,000 $130,464,000
</TABLE>
Certain property, plant and equipment with a net book value of approximately
$13,882,000 is collateral for certain long-term debt of $1,551,000 at July 2,
1994.
At July 2, 1994 the company had an unsecured revolving credit facility for $175
million and two additional bank credit lines that aggregated $75 million. The
Company's loan covenants generally limited the Company's total indebtedness to
$225 million, plus an amount required to fund the Alabama jury award. See Note
J. At July 2, 1994 outstanding letters of credit of $14,332,000 issued to
certain suppliers and not included in the accompanying financial statements
reduced the unused portion of the facility to $50,316,000. Interest on the short
term facility was based on a bank's floating CD rate.
On September 7, 1994 the Company obtained a $275 million unsecured Revolving
Loan Facility. The new Credit Facility has a limit of $25 million for the
purpose of issuing letters of credit and a separate limit of $29 million for the
letter of credit issued in connection with certain litigation. The new Credit
Facility will mature on September 30, 1997, with a provision for one year
extensions. The Company's initial interest rate is LIBOR plus .5%, but the
Credit Facility contains provisions that may increase or decrease the spread
over LIBOR depending upon certain financial ratios achieved by the Company. The
Company used the proceeds of the new Credit Facility to refinance its revolving
credit facility and a note payable, accordingly, these have been classified as
long-term.
The new long-term revolving credit facility contains various restrictive
covenants requiring minimum tangible net worth and certain other minimum
financial ratios. The agreement also restricts additional indebtedness,
dividends and capital expenditures. The Company is permitted, absent a default,
to pay cash dividends up to $25 million. At July 2, 1994 the minimum tangible
net worth requirement under the new credit facility would have limited available
dividends to $7.6 million.
Total interest expense incurred by the Company was $8,639,000, $8,005,000 and
$11,807,000 in the 1994, 1993 and 1992 fiscal years, respectively, of which
approximately $230,000 and $328,000 was capitalized in fiscal 1993 and 1992,
respectively. Total interest paid during the 1994, 1993 and 1992 fiscal years
was $8,275,000, $9,012,000 and $12,234,000, respectively.
Rent expense relating to operating leases was approximately $5,617,000 (1994),
$5,235,000 (1993) and $4,292,000 (1992). Future minimum payments under
noncancelable operating leases with initial terms of one year or more for the
five fiscal years ended after July 2, 1994 are: $3,783,000 (1995), $2,889,000
(1996), $2,563,000 (1997), $1,896,000 (1998) and $1,319,000 (1999).
Assets recorded under capital leases are included in property, plant and
equipment. Amortization of leased assets is included in depreciation.
Aggregate principal maturities of all long-term debt and minimum payments under
capital leases are as follows:
<TABLE>
<CAPTION>
Long-term Capital
Fiscal Year Ending In debt leases
<S> <C> <C>
1995...................... $ 285,000 $621,000
1996...................... 340,000 63,000
1997...................... 239,000 50,000
1998...................... 160,591,000 50,000
1999...................... 239,000 47,000
Later Years............... 341,000 64,000
$162,035,000 895,000
Amounts representing
interest.................... (118,000 )
Present value of minimum lease
payments (including current
portion of $579,000)........ $777,000
</TABLE>
23
<PAGE>
<PAGE>
NOTE E -- SHAREHOLDERS' EQUITY
During the first six months of fiscal 1994, the Company repurchased 2,296,000
shares of Common Stock for $25.3 million. In October 1991, the Company sold
5,175,000 shares of Common Stock in a public offering resulting in net proceeds
of $113 million. Proceeds from the sale of Common Stock were used to reduce debt
under the Company's lines of credit. Registration costs of $404,000 were charged
to additional paid-in capital. Had the October 1991 sale of Common Stock and
corresponding repayment of borrowings occurred as of the beginning of the 1992
fiscal year, unaudited pro forma earnings per share for fiscal 1992 would have
been $1.59.
During fiscal 1991, the shareholders approved a new Incentive Stock Award Plan
and a Stock Option Plan. Each of the plans gives the Company the right to grant
awards or options for up to 300,000 shares of Common Stock to employees. The
Board of Directors intends to seek authorization to award additional shares
under the Incentive Stock Award Plan in the annual shareholders' meeting in the
Fall of 1995.
Transactions under the Stock Option Plan are as follows:
<TABLE>
<CAPTION>
Available
Prices Outstanding Exercisable for Grant
<S> <C> <C> <C> <C>
June 29, 1991....................................................... $ 4.00 195,500 104,500
Granted........................................................... 8.81-9.94 39,500 (39,500 )
Became exercisable................................................ 4.00 47,625
Exercised......................................................... 4.00 (17,874) (17,874)
Cancelled......................................................... 4.00 (17,750) 17,750
June 27, 1992....................................................... 4.00-9.94 199,376 29,751 82,750
Granted........................................................... 7.00-7.68 16,000 (16,000 )
Became exercisable................................................ 4.00-9.94 52,792
Exercised......................................................... 4.00-9.94 (33,188) (33,188)
Cancelled......................................................... 4.00-9.19 (5,500) 5,500
July 3, 1993........................................................ 4.00-9.94 176,688 49,355 72,250
Granted........................................................... 5.44 20,000 (20,000 )
Became exercisable................................................ 4.00-9.94 69,959
Exercised......................................................... 4.00-9.94 (22,188) (22,188)
Cancelled......................................................... 4.00-9.94 (35,374) 35,374
July 2, 1994........................................................ 4.00-9.94 139,126 97,126 87,624
</TABLE>
The average exercise price for all options outstanding was $5.13 per share at
July 2, 1994. These options expire on various dates beginning November 17, 1995
and ending on December 12, 1997. The options generally become exercisable in
equal amounts on the first through fourth anniversaries of the date of grant and
remain exercisable until the fifth anniversary of the date of grant. The excess
of the fair market value over the exercise price at the date of grant is
recognized as compensation expense over the period during which the options
become exercisable. Related compensation expense was $232,000, $186,000 and
$110,000 during fiscal 1994, 1993 and 1992, respectively.
Under the 1991 Incentive Stock Award Plan, awards for the right to purchase for
$.01 per share up to 260,581 shares, 4,164 shares and 14,303 shares were granted
to certain management and key employees during fiscal 1994, 1993 and 1992,
respectively. The shares granted during fiscal 1994 in excess of shares
available are contingent upon shareholder approval. Generally, each award vests
based in part on service and in part on achievement of certain performance goals
over a three-year period. Compensation expense for the service portion is based
on the market price of the stock on the date of award. Compensation expense for
the performance portion is based on the prevailing market price of the stock.
Tax benefits arising from the difference in market value between the date of
grant and the date of issuance of common stock are recorded as an adjustment to
additional paid-in capital. Compensation expense for the Company's incentive
stock award plan including related tax assistance was $1,111,000, $561,000 and
$971,000 for the fiscal years 1994, 1993 and 1992, respectively. Shares
available for grant were 113,813, and 113,937 at July 3, 1993 and June 27, 1992,
respectively.
During November 1991, the shareholders authorized the Board of Directors to
issue up to 10,000,000 shares of preferred stock with a maximum aggregate par
value of $250,000,000. The Board of Directors was also authorized to establish
the particular terms including dividend rates, conversion prices, voting rights,
redemption prices and similar matters.
24
<PAGE>
<PAGE>
NOTE F -- INCOME TAXES
Effective June 28, 1992 the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes." As permitted under the new
rules, prior years' financial statements were not restated. The cumulative
effect of adopting Statement 109 as of June 28, 1992 was to decrease fiscal 1993
net income by approximately $875,000.
The Company paid alternative minimum tax ("AMT") of approximately $2 million for
fiscal 1994 since its AMT liability was greater than its regular tax liability.
To the extent that the Company pays AMT, it can later apply the AMT previously
paid as a credit against regular tax liabilities. The Company expects to utilize
future AMT credits as taxable income increases and current temporary differences
reverse.
At July 2, 1994, the Company has net operating loss carryforwards of $11.1
million for income tax purposes that expire in years 1995 through 2003. Those
carryforwards resulted from the Company's 1986 acquisition of certain companies
from J.P. Stevens & Co., Inc. and from the 1988 acquisition of Stanwood
Corporation. In addition to net operating loss carryforwards, at the time of
acquisition, Stanwood Corporation had general business credit carryforwards
which totalled $835,000. The Company utilized $225,000 of these general business
credit carryforwards in its fiscal 1992 federal income tax return. The remaining
business credit carryforwards will expire in fiscal years ending 1999 through
2003. The Company expects the net operating loss remaining from the Stanwood
acquisition of $9.2 million and general business credit carryforwards of
$610,000 will be utilized prior to the expiration of the carryforward periods.
For financial reporting purposes, a valuation allowance of $3.5 million was
recognized in fiscal 1993 to offset the deferred tax assets recorded related to
those carryforwards. When realized, the tax benefits for a portion of those
items will be applied to reduce goodwill related to business acquisitions.
During fiscal 1994 the valuation allowance increased by $286,000 for the tax
effect of Apparel Marketing's current year net operating loss, and by $86,000
for the increase in tax rates.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement amounts and amounts used for income tax
purposes. Deferred income taxes also reflect the increase in the federal tax
rate from 34% to 35%.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Assets
Litigation accrual............ $10,316,000
Net operating loss
carryforward................ 4,971,000 $ 3,793,000
Inventory..................... 4,147,000 1,775,000
Tax credit carryforward....... 2,560,000 610,000
Deferred compensation......... 2,010,000 2,205,000
Stock compensation accruals... 810,000
Accrued vacation.............. 551,000 633,000
Workers' compensation......... 320,000 508,000
Allowance for doubtful
accounts.................... 235,000 559,000
Other......................... 2,068,000 419,000
Subtotal...................... 27,988,000 10,502,000
Valuation allowance........... (3,925,000) (3,553,000)
Deferred tax assets........... $24,063,000 $ 6,949,000
Liabilities
Depreciation.................. 22,838,000 17,580,000
Inventory -- LIFO basis
difference.................. 3,509,000 2,994,000
Intangibles................... 2,364,000 2,731,000
Other......................... 2,132,000 526,000
Deferred tax liabilities...... 30,843,000 23,831,000
Net deferred
tax liabilities......... $ 6,780,000 $16,882,000
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Deferred
Liability Method Method
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal income taxes.......................................................... $ 2,029,000 $11,980,000 $18,892,000
State income taxes............................................................ 148,000 2,590,000 4,751,000
Total current............................................................... 2,177,000 14,570,000 23,643,000
Deferred:
Federal income taxes (benefits)............................................... (9,593,000) 1,901,000 1,846,000
State income taxes (benefits)................................................. (1,217,000) 497,000 297,000
Total deferred.............................................................. (10,810,000) 2,398,000 2,143,000
Total provision................................................................. $ (8,633,000) $16,968,000 $25,786,000
</TABLE>
25
<PAGE>
<PAGE>
NOTE F -- INCOME TAXES (CONTINUED)
The components of the provision for deferred income taxes for the year ended
June 27, 1992 are as follows:
<TABLE>
<CAPTION>
1992
<S> <C>
Depreciation.................................................................................................. $2,639,000
Health claims accrued......................................................................................... 1,032,000
Inventory..................................................................................................... (256,000)
Deferred compensation......................................................................................... (644,000)
Amortization of intangibles................................................................................... (149,000)
Allowance for doubtful accounts............................................................................... (456,000)
Contingent liabilities........................................................................................ (46,000)
Other......................................................................................................... 23,000
$2,143,000
</TABLE>
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rates.................................. $(9,076,000) $15,358,000 $22,372,000
State taxes (benefits), net of federal benefit................................... (695,000) 1,951,000 3,332,000
Permanent differences............................................................ 1,576,000 (341,000) (320,000)
State NOL benefits............................................................... (736,000)
Other............................................................................ 298,000 402,000
$(8,633,000) $16,968,000 $25,786,000
</TABLE>
The Company made income tax payments of approximately $2,350,000, $20,171,000,
and $19,678,000 during the 1994, 1993 and 1992 fiscal years, respectively.
NOTE G -- OPERATIONS BY INDUSTRY SEGMENT
Industry segment information for the Company presented on pages 12 and 13 of
this Annual Report is an integral part of these financial statements.
NOTE H -- EMPLOYEE BENEFIT PLANS
Under the terms of the Delta Woodside Industries Employee Retirement Plan, the
Board of Directors has the discretion to authorize contributions from time to
time to the Retirement Plan of cash or a maximum of 504,790 shares of the
Company's Common Stock. A trustee holds the assets of the Retirement Plan for
the benefit of the participants who may withdraw amounts or shares only upon
retirement, death, disability or other termination of employment. All employees
of the Company who are at least 21 years of age with one year of service
participate in the Retirement Plan. Amounts allocated to participant accounts
generally vest over a five-year period. Each participant has the right to direct
the trustee as to the manner in which shares held are to be voted. The
Retirement Plan qualifies as an Employee Stock Ownership Plan ("ESOP") under the
Internal Revenue Code as a defined contribution plan.
The Company's 1994, 1993 and 1992 contributions allocated to participants were
$363,000, $1,581,000 and $2,303,000, respectively. The 1994 and 1993
contributions were made in cash and the 1992 contribution included both cash
contributions and allocations of stock purchased with excess funds the
Retirement Plan received from terminated defined benefit plans the Company
acquired in a business acquisition in fiscal 1989.
The Company maintains a 401(k) employee savings and investment plan for
employees meeting certain eligibility requirements. The Company made no
contributions to the plan for any year presented.
In April 1989, the Company established a 501(c)(9) trust, the Delta Woodside
Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and
employee contributions from the Company and makes disbursements for health
claims and other qualified benefits.
The Company has a Deferred Compensation Plan which permits certain management
employees to defer a portion of their compensation. Deferred compensation
accounts are credited with interest and are distributable after retirement,
disability or employment termination. As of July 2, 1994 and July 3, 1993, the
total liability amounted to $4,428,000 and $3,496,000, respectively. The Company
insured the lives of certain management employees to assist in funding of the
deferred compensation liability. The Company is the owner and beneficiary of the
insurance policies.
NOTE I -- AFFILIATED PARTY TRANSACTIONS
The Company leases its corporate and other office space from a corporation whose
stock is owned one-half each by the president and a vice president of the
Company. Additional office space and retail store space is leased from the
executive vice president. Certain of these leases are on a monthly basis with
others expiring in 1997. Under the leases, the Company made payments of
approximately $292,000, $226,000, and $137,000 for the 1994, 1993 and 1992
fiscal years, respectively.
26
<PAGE>
<PAGE>
NOTE J -- COMMITMENTS AND CONTINGENCIES
During fiscal 1995 the Company plans to spend approximately $45 million for
capital improvements and new equipment. About three-quarters of this amount is
expected to be incurred in the continuation of the modernization program for the
woven fabrics division of the Company's textile segment. The remainder of the
fiscal 1995 capital expenditures are planned to include the start of
construction on the "Duck Head" central distribution center, and various other
projects across all of the Company's business segments. The Company believes
that its facilities and equipment are adequate to allow it to remain competitive
with its primary competitors.
In fiscal 1994, the Company charged income for $27.1 million to establish a
reserve for a judgment entered by an Alabama court in connection with a jury
award made on November 24, 1993 in favor of a former independent sales
representative of a subsidiary of the Company and two of his assistants,
interest costs on that judgement, and related legal expenses in connection with
the appeals process. The appeal is now before the Alabama Supreme Court.
During fiscal 1994, the Company made certain decisions regarding its operations
which resulted in a restructuring charge. These decisions included restructuring
charges of $3.2 million for the sale of the office products business, $1.3
million to abandon plans to develop a spinning plant building and $2.4 million
in the apparel segment to discontinue a women's line of apparel and consolidate
distribution operations. These restructuring decisions include write-downs of
$1.6 million of goodwill and $2.1 of property plant and equipment. At July 2,
1994, $2.4 million remain in accrued liabilities related primarily to leases on
vacant facilities and other future costs of the restructuring plan.
Prior to its acquisition by the Company, O'Bryan Brothers, Inc. had established
for income tax purposes the basis of customer lists in the amount of $3.6
million. The Internal Revenue Service had audited this matter for the years
prior to inclusion in the consolidated federal tax return of the Company and had
disallowed the deduction of this basis. The full amount of the customer list was
deducted by June 29, 1991. The Company appealed the disallowance. In April,
1994, the Internal Revenue Service offered a choice between two options to the
Company in an attempt to settle this case. The Company could also have chosen to
remain in the appeals process. After analyzing its options, the Company chose
one of the settlement options offered by the Internal Revenue Service. The
effect of choosing this option had no material effect on the Company's results.
The Company's Nautilus business has been named as a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation, and
Liability Act with respect to three hazardous waste sites. To the Company's
knowledge, all of the transactions with these sites were conducted by a
corporation whose assets were sold in 1990 pursuant to the terms of an order of
the United States Bankruptcy Court to another corporation, the stock of which
was subsequently acquired by the Company in January 1993. The Company,
therefore, has denied any responsibility at the sites and has declined to
participate in any settlements. Accordingly, the Company has not provided for
any reserves for costs or liabilities attributable to the previous corporation.
At two sites the previous company is listed as a "de minimis" party. At the
third site the previous company is ranked eleventh out of a total of over 300
potentially responsible parties based on the company's volume of contribution of
about 3%. Latest estimates of the cost to clean up the site range up to $4
million. Although there is uncertainty as to several legal issues, the Company
believes that it has certain defenses to liability at these sites. Based on the
information currently known to it, the Company does not believe that the
potential liabilities arising from these three sites will have a materially
adverse impact on the Company.
A law suit with allegations similar to those in the Alabama case referred to
above is pending in the United States District Court for the Western District of
Kentucky brought by an individual who previously served as an independent sales
representative for the Duck Head division. The amount of damages claimed in this
suit has not yet been determined.
From time to time the Company and its subsidiaries are defendants in legal
actions involving claims arising in the normal course of business, including
product liability claims. The Company believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with parties
believed to be financially capable, none of these actions should have a material
effect on its operations or financial condition.
27
<PAGE>
<PAGE>
NOTE K -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended July 2, 1994 and July 3, 1993:
<TABLE>
<CAPTION>
Quarter Ended
October 2 January 1 April 2 July 2
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1994
Net sales.......................................................... $146,426 $ 149,344 $155,194 $162,812
Gross profit....................................................... 24,369 17,989 28,156 28,422
Net income (loss).................................................. 1,794 (31,995) 6,581 6,323
Earnings (loss) per share of Common Stock.......................... .07 (1.31) .27 .26
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
September 26 December 26 March 27 July 3
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1993
Net sales.......................................................... $152,884 $ 162,716 $176,412 $194,227
Gross profit....................................................... 29,872 26,623 34,501 30,891
Income:
Before cumulative effect of change in accounting for income
taxes.......................................................... $ 7,305 $ 6,100 $ 9,340 $ 5,459
Cumulative effect adjustment..................................... (875)
Net income....................................................... $ 6,430 $ 6,100 $ 9,340 $ 5,459
Earnings per share of Common Stock
Before cumulative effect of change in accounting for income
taxes.......................................................... $ .28 $ .23 $ .35 $ .21
Cumulative effect adjustment..................................... (.04)
Net income....................................................... $ .24 $ .23 $ .35 $ .21
</TABLE>
During the second quarter of fiscal 1994, the Company recorded charges of $33
million for a lawsuit and $12.7 million for restructuring. The litigation charge
was reduced to $27.1 million during the third quarter and the restructuring
charge was reduced to $9.2 million during the fourth quarter due principally to
a change in estimate related to the sale of the office products business.
Included in the fourth quarter of fiscal 1993 is a pretax gain of $2,487,000
arising from insurance proceeds related to a fire at the Nautilus plant in March
1993.
The Company made certain adjustments in the fourth quarter of fiscal 1994
resulting from changes in estimates that were material to the results of
operations. The aggregate effect of the adjustments after applicable income
taxes was an increase in net income of $2,432,000.
28
<PAGE>
<PAGE>
CORPORATE DIRECTORY
OPERATING COMPANIES OF
DELTA WOODSIDE INDUSTRIES, INC.
DELTA MILLS MARKETING COMPANY
1071 Avenue of the Americas
New York, NY 10018
STEVCOKNIT FABRICS COMPANY
P.O. Box 1500
Greer, SC 29652
DUCK HEAD APPAREL COMPANY
P.O. Box 688
89 East Athens Street
Winder, GA 30680
DELTA APPAREL COMPANY
3355 Breckinridge Boulevard
Suite 100
Duluth, GA 30136
DUCK HEAD RETAIL OPERATIONS
233 N. Main St., Suite 250
Greenville, SC 29601
APPAREL MARKETING CORP.
80 West 40th Street, Suite 80
New York, New York 10018
NAUTILUS INTERNATIONAL
9800 West Kincey Avenue
Huntersville Business Park, Suite 150
Huntersville, NC 28078
CORPORATE OFFICERS
E. ERWIN MADDREY, II
President and Chief Executive Officer
BETTIS C. RAINSFORD
Executive Vice President, Treasurer
and Chief Financial Officer
JANE H. GREER
Vice President and Secretary
DOUGLAS J. STEVENS
Controller and Assistant Secretary
BRENDA L. JONES
Assistant Secretary
BOARD OF DIRECTORS
* C. C. GUY**
President
RSI Holdings, Inc.
* DR. JAMES F. KANE**
Dean Emeritus, College of Business
University of South Carolina
* DR. MAX LENNON**
President and
Chief Executive Officer
Eastern Foods, Inc.
E. ERWIN MADDREY, II
President and
Chief Executive Officer
Delta Woodside Industries, Inc.
BUCK A. MICKEL**
Vice President, RSI Holdings, Inc.
BUCK MICKEL**
Chairman of the Board and
Chief Executive Officer
RSI Holdings, Inc.
BETTIS C. RAINSFORD
Executive Vice President, Treasurer
and Chief Financial Officer
Delta Woodside Industries, Inc.
* Member Audit Committee
** Member Compensation Committee
FORM 10-K
Upon written request, the Company will furnish without charge to any Delta
Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for
the fiscal year ended July 2, 1994 including financial statements and
schedules, but excluding exhibits. Requests should be directed to
Jane H. Greer, Vice President and Secretary, Delta Woodside Industries,
Inc., 233 North Main Street, Hammond Square, Suite 200, Greenville, South
Carolina 29601.
ANNUAL MEETING
The Annual Meeting of Shareholders of
Delta Woodside Industries, Inc. will be held on Thursday, November 10, 1994,
at 10:30 a.m., at the Dorothy Gunter Theater of the Peace Center, 101 West
Broad Street, Greenville, South Carolina.
<PAGE>
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
233 N. Main Street
Hammond Square, Suite 200
Greenville, SC 29601
(803) 232-8301
<PAGE>
*****************************************************************************
APPENDIX
On Page 2 a photo of E. Erwin Maddrey, II appears where indicated.
On Page 3 a photo of Bettis C. Rainsford, and signatures of E. Erwin
Maddrey, II and Bettis C. Rainsford appears where indicated.
On Page 4 a bar graph appears where indicated. Plot points are listed
below:
NET SALES
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1989 1990 1991 1992 1993 1994
569,052 500,894 590,019 705,037 686,239 613,776
On Page 5 a bar graph appears where indicated. Plot points are listed
below:
NET INCOME (LOSS)
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1989 1990 1991 1992 1993 1994
30,297 6,009 23,943 40,015 27,329 (17,297)
On Page 6 two bar graphs appear where indicated. Plot points are listed
below:
NET INCOME AS A % OF SALES
FISCAL YEARS ENDED JUNE OR JULY
1989 1990 1991 1992 1993 1994
5.3 1.2 4.1 5.7 4.0 -2.8
SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1989 1990 1991(1) 1992(2) 1993 1994
127,169 127,575 172,647 318,781 336,249 284,877
(1) 1991 Common Stock Offering Proceeds: $25,497
(2) 1992 Common Stock Offering Proceeds: $113,291
On Page 7 a bar graph appears where indicated. Plot points are listed
below:
EARNINGS (LOSS) PER SHARE
FISCAL YEARS ENDED JUNE OR JULY
DOLLARS PER SHARE
1989 1990 1991 1992 1993 1994
1.65 .32 1.27 1.62 1.03 -.70
1898 Weighted Average Shares Outstanding--18,288,000
1990 Weighted Average Shares Outstanding--18,733,000
1990 Weighted Average Shares Outstanding--18,879,000
1990 Weighted Average Shares Outstanding--24,670,000
1990 Weighted Average Shares Outstanding--26,421,000
1990 Weighted Average Shares Outstanding--24,550,000
On Page 9 a bar graph appears where indicated. Plot points are listed
below:
FUNDED DEBT TO EQUITY RATIO*
FISCAL YEARS ENDED JUNE OR JULY
1989 1990 1991 1992 1993 1994
1.8 to 1 1.8 to 1 1.1 to 1 0.4 to 1 0.4 to 1 0.6 to 1
*For purposes of this chart only, funded debt includes long- and
short-term debt, capital leases and offset factor borrowings.
On Page 14 the signature of Ernst & Young LLP appears where indicated.
