<PAGE>
1995 ANNUAL REPORT
<PAGE>
(Delta Woodside logo appears here)
CONTENTS
Common Stock Market Prices and
Dividends.............................................Inside Front Cover
Selected Financial Data..................................................1
Letter to Shareholders.................................................2-3
Management's Discussion and
Analysis............................................................4-10
Operations by Industry
Segment............................................................11-13
Report of KPMG Peat
Marwick 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>
1995 1994
FISCAL QUARTERS: High Low High Low
<S> <C> <C> <C> <C>
First Quarter $12 $10 5/8 $11 7/8 $10 1/4
Second Quarter 11 1/2 9 1/8 11 3/8 10 3/8
Third Quarter 11 8 3/8 12 1/2 9 3/4
Fourth Quarter 9 3/8 7 5/8 12 1/4 10 7/8
</TABLE>
<TABLE>
<CAPTION>
Cash
Dividends Declared
<S> <C> <C>
First Quarter $.10 $.10
Second Quarter .10 .10
Third Quarter .10 .10
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 August 22, 1995 there were approximately 2,201 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 loan facility, described
in Note E, requires a certain minimum tangible net worth. Under this loan
covenant at July 1, 1995, retained earnings of approximately $10.5 million
are available for dividends during fiscal 1996.
<PAGE>
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 (1) 1995 1994 1993 1992 1991 1990 1989 1988
Net Sales $597,541 $613,776 $686,239 $5705,037 $590,019 $500,894 $569,052 $488,568
Cost of Goods Sold 499,093 514,840 564,352 563,827 480,396 427,788 470,265 409,231
Gross Profit 98,448 98,936 121,887 141,210 109,623 73,106 98,787 79,337
Operating Profit (Loss) excluding
Litigation, Restructuring Charges 25,058 21,582 55,863 80,628 61,374 37,591 69,245 54,349
Litigation (Credit) Charge (7,000) 27,096
Restructuring (Credit) Charges (553) 9,199 2,265
Operating Profit (Loss) 32,611 (14,713) 55,863 80,628 61,374 35,326 69,245 54,349
Corporate Expense 3,448 3,300 3,278 3,802 2,140 2,249 3,009 2,002
Earnings (Loss) Before Interest and Taxes 31,367 (18,013) 52,585 76,826 59,234 33,077 66,513 54,209
Interest Expense 13,646 8,639 7,775 11,479 22,115 25,768 20,929 12,685
Income (Loss) Before Income Taxes 17,770 (25,930) 45,172 65,801 37,543 8,029 45,940 41,705
Income Tax Expense (Benefit) 7,672 (8,633) 16,968 25,786 13,600 2,020 15,643 13,850
Income (Loss) Before Cumulative Effect of
Accounting Change 10,098 (17,297) 28,204 40,015 23,943 6,009 30,297 27,855
Cumulative Effect of Accounting Change --
Income Taxes (875)
Net Income (Loss) 10,098 (17,297) 27,329 40,015 23,943 6,009 30,297 27,855
FINANCIAL DATA (1)
Cash Flow (Net Income (Loss) plus
Depreciation and Amortization) (8) 34,690 9,596 46,148 54,843 39,041 19,263 40,025 32,421
Capital Expenditures/Capital Leases 41,834 29,856 49,575 42,916 15,793 19,250 46,048 32,141
Depreciation and Amortization (8) 24,592 26,893 18,819 14,828 15,098 13,254 9,728 4,566
Working Capital 286,887 241,950 262,111 266,356 105,498 71,967 78,726 60,811
Long-Term Debt and Capital Leases 219,119 161,948 130,464 110,414 71,189 85,704 88,791 35,254
Funded Debt (2)(5) 219,395 162,812 132,200 112,133 188,352 227,097 223,397 118,528
Shareholders' Equity (3) 286,499 284,877 336,249 318,781 172,647 127,575 127,169 86,462
Capital Employed (4) 505,894 447,689 468,449 430,914 360,999 354,672 350,566 204,990
Total Assets (5) 610,296 567,003 573,946 524,756 434,424 414,497 331,066 177,300
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 2.6 3.0 3.5 4.0 4.3 3.5 4.4 6.3
Net Sales divided by Accounts Receivable 4.9 5.2 4.9 4.3 4.2 4.5 4.6 4.9
Net Sales divided by Capital Employed 1.2 1.4 1.5 1.6 1.6 1.4 1.6 2.4
Operating Income (Loss) as % of Capital
Employed 6.2 (3.9) 11.3 17.9 16.5 9.5 19.1 26.5
Current Ratio 4.8 3.5 4.1 4.4 1.6 1.4 1.7 2.2
Interest Coverage 2.3 (2.1) 6.8 6.7 2.7 1.3 3.2 4.3
Gross Profit as % of Sales 16.5 16.1 17.8 20.0 18.6 14.6 17.4 16.2
Pretax Income (Loss) as % of Sales 3.0 (4.2) 6.6 9.3 6.4 1.6 8.1 8.5
Net Income (Loss) as % of Sales 1.7 (2.8) 4.0 5.7 4.1 1.2 5.3 5.7
Net Income (Loss) as % of Beginning Equity 3.5 (5.1) 8.6 23.2 18.8 4.7 35 47
COMMON STOCK DATA (PER SHARE) (1)(6)
Net Income (Loss) .42 (.70) 1.03 1.62 1.27 .32 1.65 1.60
Dividends .40 .40 .40 .35 .30 .30 .20 .05
Book Value 11.76 11.75 12.72 12.07 8.17 6.76 6.82 4.97
Price Range (7) -- High 12 12 1/2 18 3/8 25 1/4 14 1/8 17 7/8 16 1/2 14 1/4
-- Low 7 5/8 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 24,317 24,550 26,421 24,670 18,879 18,733 18,338 17,385
Approximate Number of Shareholders 2,154 2,221 2,340 2,255 2,062 2,575 1,475 1,250
<CAPTION>
OPERATIONS (1) 1987 1986
Net Sales $417,461 $141,810
Cost of Goods Sold 343,623 118,909
Gross Profit 73,838 22,901
Operating Profit (Loss) excluding
Litigation, Restructuring Charges 49,102 15,027
Litigation (Credit) Charge
Restructuring (Credit) Charges
Operating Profit (Loss) 49,102 15,027
Corporate Expense 1,167 138
Earnings (Loss) Before Interest and Taxes 46,993 14,889
Interest Expense 12,939 5,197
Income (Loss) Before Income Taxes 34,238 9,983
Income Tax Expense (Benefit) 12,667 4,724
Income (Loss) Before Cumulative Effect of
Accounting Change 21,571 5,259
Cumulative Effect of Accounting Change --
Income Taxes
Net Income (Loss) 21,571 5,259
FINANCIAL DATA (1)
Cash Flow (Net Income (Loss) plus
Depreciation and Amortization) (8) 24,908 7,494
Capital Expenditures/Capital Leases 7,924 2,478
Depreciation and Amortization (8) 3,337 2,235
Working Capital 63,602 8,808
Long-Term Debt and Capital Leases 38,832 21,530
Funded Debt (2)(5) 115,732 48,263
Shareholders' Equity (3) 59,015 8,803
Capital Employed (4) 174,747 57,066
Total Assets (5) 149,116 56,736
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 5.8 8.2
Net Sales divided by Accounts Receivable 4.5 4.6
Net Sales divided by Capital Employed 2.4 2.5
Operating Income (Loss) as % of Capital
Employed 27.0 26.6
Current Ratio 2.2 1.4
Interest Coverage 3.6 2.9
Gross Profit as % of Sales 17.7 16.1
Pretax Income (Loss) as % of Sales 8.2 7.0
Net Income (Loss) as % of Sales 5.2 3.7
Net Income (Loss) as % of Beginning Equity 245 148
COMMON STOCK DATA (PER SHARE) (1)(6)
Net Income (Loss) 1.36 .35
Dividends -- --
Book Value 3.41 .59
Price Range (7) -- High 16 1/2 --
-- Low 9 7/8 --
Weighted Average Shares Outstanding 15,840 15,000
Approximate Number of Shareholders 1,300 N/A
</TABLE>
(1) Financial data reflect the following major business additions from their
respective dates of acquisition: (i) a portion of the knit apparel
operation acquired on September 30, 1985; (ii) the major portion of the
woven fabrics operation and the major portion of the knitted fabrics
operation acquired at the beginning of fiscal 1987; (iii) a portion of the
knitted fabrics operation acquired on December 27, 1986; (iv) a portion of
the knit apparel operation and a portion of the woven apparel operation
acquired on September 7, 1988; (v) a portion of the woven apparel operation
(including the "Duck Head" label) acquired on February 1, 1989; and (vi)
Nautilus International and a portion of the affiliated license products
company acquired January 20, 1993.
(2) Funded Debt includes long- and short-term debt, capital leases and offset
factor borrowings. See Note 4.
(3) 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.
(4) Capital Employed includes shareholders' equity and funded debt.
(5) 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.
(6) 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 1, 1995, July 2, 1994 and July 3, 1993 for financial
reporting purposes was 24,357,000, 24,246,000 and 26,437,000 respectively.
(7) The Company's Common Stock began trading publicly in February 1987.
(8) Depreciation and amortization include certain write-downs of property and
equipment.
1
<PAGE>
TO OUR FELLOW SHAREHOLDERS
(Photo of E. Erwin Maddrey, II appears here)
E. ERWIN MADDREY, II
To Our Fellow Shareholders:
Although our fiscal 1995 net sales and operating profits from continuing
businesses (excluding special credits and charges) moved up slightly from last
fiscal year, we do not consider our results satisfactory. Several of our
business units operated in difficult markets caused by a poor climate for soft
goods sales at retail. Poor retail times are followed by good periods. Our
emphasis this past year has been to continue our efforts to reduce manufacturing
costs so that we can compete on a world-wide basis.
We began our long-range program to modernize our woven textile facilities,
operated by Delta Mills Marketing Company. This is Delta Woodside's largest
operation and one that has been consistently profitable ever since we acquired
it in 1986. This operation is a leader in bottomweight finished fabrics, and we
intend to expand its position in these markets. During fiscal 1996, we will move
a large spinning and weaving mill out of commodity lightweight unfinished fabric
(printcloth) production into production of heavier fabrics for finishing.
Simultaneously, we will add a finishing line to our continuous finishing plant
to accommodate this additional production for finishing. During fiscal 1995, we
began replacing older weaving machines with new, more efficient, machines. We
will continue to do this during fiscal 1996. This long-term program has caused
varying degrees of internal disruption to the operations of this business, and
we expect these disruptions to continue as this program progresses.
We began site preparation for our new Duck Head distribution center in Winder,
Georgia during fiscal 1995. We expect to begin moving finished goods into this
new facility towards the end of this calendar year, and to open our new Duck
Head Apparel and Duck Head Retail Outlet Stores headquarters in this facility
early in calendar 1996. This should lower our branded apparel distribution costs
and contribute to more efficient administrative operations for these two
businesses.
During fiscal 1995, we intentionally pulled back our branded apparel business
volume while we re-engineered the systems that had previously failed to support
the rapid growth of this business in previous years. Consequently, service to
our retail customers during our Spring and Fall 1995 seasons showed great
improvement over that of previous years. We feel that we are now ready to
support a regrowth of this business with reliable systems.
Due to prior years' failure to properly match inventory deliveries to our
facilities with commitments to our retail customers, our branded apparel
inventories have gotten too high. Since our branded apparel lines are
traditionally styled, we believe that it is in the Company's best interest to
reduce excess inventory in an orderly manner over a period of time rather than
sell them in large quantities at distressed prices. We are opening several Duck
Head Clearance Stores to offer this merchandise to consumers at prices
attractive to them and to us.
Our knitted non-branded apparel operation, Delta Apparel, had a record year
both in sales and operating profits. Net sales passed the $100 million mark and
profit margins were improved substantially. During fiscal 1995, we decided to
start up a new sewing operation in Honduras to lower our average costs of
producing garments for this business. We have begun hiring and training on our
selected site, near San Pedro Sula, and expect to begin occupying our sewing
facility before the end of the 1995 calendar year.
Our knitted textile operation, Stevcoknit Fabrics, began fiscal 1995 with the
advantages from its modernization and consolidation programs completed during
fiscal 1994. Positive results were achieved for the first nine months of fiscal
1995, but beginning in March of this year, demand for fabrics prepared for
printing and sold to converters slowed dramatically. This market decline
impacted our knitted textile plant utilization
2
<PAGE>
severely, and results from this business in the last quarter of fiscal 1995 were
negative. Lack of any substantial demand for these products is expected to
continue at least through the first half of fiscal 1996.
We have made the decision to enter the consumer market with products from our
Nautilus fitness equipment business. We offered our first products for consumers
through direct sales during fiscal 1995. We expect to put costs into this effort
for at least two years before sales rise to a breakeven level, but we are aware
that the consumer market for fitness products is substantially larger than
Nautilus' traditional commercial markets. At the same time, we intend to
maintain our position as a leading supplier of fitness equipment to these
traditional Nautilus markets.
We are moving into fiscal 1996 with consumer apparel purchases still remaining
at relatively low levels. At the same time, imports of textiles and apparel have
continued to increase. The combination of these factors, together with
historically high-priced cotton and synthetic fibers, will continue to squeeze
our profit margins during the first half of fiscal 1996.
However, we have been dramatically reducing our manufacturing costs for a
number of years now, and have confidence that these improvements in our
competitive position will insure the continued viability of our company as the
movement of textile and apparel production and marketing around the world
accelerates. We are therefore optimistic that we will begin to see better
earnings performance in the second half of fiscal 1996.
(Photo of Bettis C. Rainsford appears here)
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CONSOLIDATED COMPANY RESULTS
FISCAL 1995 VERSUS FISCAL 1994
Consolidated net sales for the year ended July 1, 1995 were $597.5 million as
compared to $613.8 million in the fiscal year ended July 2, 1994, a decrease of
3%. Sales in fiscal 1994 included $17.5 million from the Company's Harper
Brothers operation which was sold in June of 1994. Net sales in fiscal 1995
increased in the textile segment and decreased in the apparel segment as
compared with net sales in fiscal 1994.
Consolidated gross profit margin for fiscal 1995 was 16.5%, as compared to the
gross profit margin of 16.1% in the prior fiscal year. Gross margins improved
slightly in the apparel segment, and decreased in the Company's textile and
"other business" segment.
Consolidated selling, general, and administrative expense for fiscal 1995
totaled $77.0 million, or 13% of net sales, compared to $82.2 million, or 13% of
net sales, incurred in fiscal 1994.
(Bar graph appears here with the following plot points)
NET SALES
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1990 1991 1992 1993 1994 1995
500,894 590,019 705,037 686,239 613,776 597,541
Net interest expense totaled $13.6 million for the year ended July 1, 1995 as
compared to $7.9 million incurred in fiscal 1994, due to the combination of
higher interest rates and higher average debt levels. The Company's outstanding
debt at July 1, 1995 was $219.4 million compared with $162.8 million at July 2,
1994. Final settlement of the Alabama litigation, higher accounts receivable and
inventories, and higher capital expenditures accounted for the major part of the
Company's need for additional borrowed funds during the latest fiscal year.
The effective income tax rates for the 1995 and 1994 fiscal years were 43% and
33%, respectively. The lower tax rate for fiscal 1994 was primarily due to the
different effects that permanent nondeductible tax items had on the pretax
losses in fiscal 1994, as compared to the effect on pretax income in fiscal
1995.
Net income for the year ended July 1, 1995 was $10.1 million as compared to a
net loss of $17.3 million in the year ended July 2, 1994. Net income for fiscal
1995 included pretax credits to income of $7.6 million from the reversal of
certain reserves established in fiscal 1994 and referenced in the next sentence.
In fiscal 1994, the Company charged pretax income for $27.1 million to establish
a reserve for a judgment entered by an Alabama court with respect to a jury
award made on November 24, 1993, to three former independent sales
representatives of a subsidiary of the Company (the "Alabama litigation").
During fiscal 1995, the Alabama litigation was settled, and all reserves and
accruals relating to this action were adjusted appropriately. In addition, in
fiscal 1994 the Company charged pretax income $9.2 million for expenses related
to restructuring decisions made during that year. Without these special credits
and charges, net income of approximately $5.5 million and $5.7 million would
have resulted for fiscal years 1995 and 1994, respectively. The Company also
retained approximately $1.8 million in its restructuring reserve, principally
for rent payments on its former Harper Brothers facilities not yet sublet, and
for costs associated with the centralization of Duck Head's distribution system.
Net income for fiscal 1995 includes life insurance proceeds of $2.2 million.
Consolidated inventories totaled $226.0 million at July 1, 1995 as compared to
$203.8 million at July 2, 1994, an increase of 11%. Ending inventories were
higher in all three of the Company's business segments at July 1, 1995 than at
July 2, 1994, due principally to shipments during the last several months of
fiscal 1995 not reaching anticipated levels.
The Company's order backlog at July 1, 1995 stood at $140.0 million as
compared to $151.5 million at July 2, 1994, a decrease of $11.5 million, or 8%.
Order backlogs were lower in the textile and apparel segments, and higher in the
Company's "other business" segment at the end of fiscal 1995 than they were at
the end of fiscal 1994.
4
<PAGE>
The Company believes that its profit margins for the first half of fiscal 1996
will remain under severe pressure due principally to historically high-priced
cotton and synthetic fibers, and due to continued weak demand for knit textiles
prepared for printing.
FISCAL 1994 VERSUS FISCAL 1993
Consolidated net sales for the fiscal year ended July 2, 1994 (52 weeks) were
$613.8 million, a decrease of $72.4 million from the prior year's $686.2 million
(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.
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 in
fiscal 1993.
In fiscal 1994, the Company charged income for $27.1 million to establish a
reserve for litigation. The Alabama litigation was settled in June of fiscal
1995 and the Company reduced the litigation reserve by $7 million.
(Bar graph appears here with the following plot points)
NET INCOME (LOSS)
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1990 1991 1992 1993 1994 1995
6,009 23,943 40,015 27,329 (17,297) 10,093
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 1994 fiscal quarter. Among others, these decisions
included the sale of the office products division, the closing of a former
spinning plant building and discontinuing the girls and juniors line in the Duck
Head Apparel division.
The remainder of the restructuring charges to pretax 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 million of property, plant and equipment.
Net interest expense totaled $7.9 million during fiscal 1994 as compared to
$7.4 million 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.
The effective income tax rates for the 1994 and 1993 fiscal years were 33% and
39%, respectively. The lower tax rate for fiscal 1994 was primarily due to the
different effects that permanent nondeductible tax items had on the pretax
losses in fiscal 1994, as compared to the effect on pretax income in fiscal
1993.
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.
Consolidated order backlogs totaled $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.
DIVISION RESULTS
TEXTILE SEGMENT
FISCAL 1995 VERSUS FISCAL 1994
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.
Net sales in the Company's textile segment increased from $391.4 million in
the fiscal year ended July 2, 1994 to $393.7 million in the fiscal year ended
July 1, 1995. Sales of both woven and knitted textiles were slightly higher in
the latest fiscal year than in the prior fiscal year. In the woven textile
sector, lower sales of unfinished
5
<PAGE>
fabrics were more than offset by higher sales of finished cotton and blended
fiber fabrics. Sales of woven textiles accounted for approximately 47%, 47% and
49% of the Company's consolidated net sales for fiscal years 1993, 1994 and
1995, respectively. Sales of knit textiles accounted for approximately 17%, 17%
and 17% in each of the three most recent fiscal years.
(Bar graph appears here with the following plot points)
NET INCOME AS A
% OF SALES
FISCAL YEARS ENDED JUNE OR JULY
1990 1991 1992 1993 1994 1995
1.2 4.1 5.7 4.0 -2.8 1.7
Gross profit margins in the textile segment declined from 12% in fiscal 1994
to 11% in fiscal 1995. Gross margins for knitted textiles improved from fiscal
1994 to fiscal 1995, despite a dramatic slowdown since March 1995 in demand for
textiles knitted and prepared for printing. Gross margins for woven textiles
declined from fiscal 1994 to fiscal 1995, being adversely impacted by poor
prices obtained in sales of unfinished fabrics, by higher raw material costs,
and by certain manufacturing disruptions caused by the Company's plant
modernization program. The Company expects continuing disruptions to occur as
the major modernization program in its woven textile facilities progresses over
the next several years. The purpose of this large capital project is to expand
the Company's position in bottomweight finished fabric markets and to lower
production costs.
Selling, general, and administrative expenses in the textile segment for the
year ended July 1, 1995 totaled $22.1 million as compared with $23.9 million in
the fiscal year ended July 2, 1994. As a percent of net sales, these costs were
5.6% in fiscal 1995 as compared to 6.1% in fiscal 1994.
(Bar graph appears here with the following plot points)
SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
1990 1991 (1) 1992 (2) 1993 1994 1995
127,575 172,647 318,781 336,249 284,877 286,499
1 1991 Common Stock Offering Proceeds: $25,497
2 1992 Common Stock Offering Proceeds: $113,291
Operating profits in the textile segment increased $2.7 million, or 14%, from
fiscal 1994 to fiscal 1995.
During fiscal 1995, the textile segment contributed 66% of the Company's
consolidated net sales and 45% of the Company's consolidated gross profit, as
compared to 64% and 46%, respectively, in fiscal 1994.
Textile segment inventories were 3.3% higher at July 1, 1995 than at July 2,
1994. Knitted textiles accounted for the increase in the segment's inventory
level, due to a marked slowdown towards the end of fiscal 1995 in new orders for
fabric prepared for printing.
The textile segment's capital expenditures totaled approximately $35.2 million
for fiscal 1995. The major portion of these expenditures were related to the
woven textile long-term modernization project.
The Company expects that its woven textile facilities will operate at, or near
full capacity, during fiscal 1996. However, its knitted textile facilities are
not expected to run near full capacity for at least the first six months of
fiscal 1996.
Cotton prices reached a twentieth century record high during the last months
of fiscal 1995. At the same time, prices of synthetic fibers utilized by the
Company also escalated. The Company has been able to negotiate higher prices for
many of its finished textile fabrics, but not at prices high enough to cover
increases in its current average fiber costs. Profits in the textile segment are
sensitive to the amount of its manufacturing capacity that is utilized, to the
cost and availability of its principal raw materials, and to the mix of goods
produced.
6
<PAGE>
FISCAL 1994 VERSUS FISCAL 1993
Net sales in the textile 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 declined during most of fiscal 1994 as compared to fiscal 1993. 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).
(Bar graph appears here with the following plot points)
EARNINGS (LOSS) PER SHARE
FISCAL YEARS ENDED JUNE OR JULY
DOLLARS PER SHARE
1990 1991 1992 1993 1994 1995
.32 1.27 1.62 1.03 -.70 .42
1990 Weighted Average Shares Outstanding--18,733,000
1991 Weighted Average Shares Outstanding--18,879,000
1992 Weighted Average Shares Outstanding--24,670,000
1993 Weighted Average Shares Outstanding--26,421,000
1994 Weighted Average Shares Outstanding--24,550,000
1995 Weighted Average Shares Outstanding--24,317,000
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. As a percent of net sales, these
costs were 6.1% in fiscal 1994 as compared to 5.2% in fiscal 1993.
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.
The textile segment contributed 64% and 65% of the Company's consolidated net
sales and 46% and 47% of the Company's consolidated gross profit for the fiscal
years 1994 and 1993, respectively.
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.
The textile segment's capital expenditures totaled approximately $18 million
for fiscal 1994. The major portion of this amount was for the knitted textile
plant consolidation project and knitted fabric finishing equipment.
APPAREL SEGMENT
FISCAL 1995 VERSUS FISCAL 1994
The Company's apparel segment consists of woven and knit branded apparel sold
primarily to retailers and knit apparel sold to screen printers, distributors,
and private label accounts. Net sales in this segment decreased by $2.8 million,
or 2%, from fiscal 1994 to fiscal 1995. Increased sales of non-branded knit
apparel were more than offset by decreases in sales of branded apparel.
Increased sales of non-branded knit apparel were due to both increased units and
average prices. Lower sales of branded apparel were due to fewer units being
sold. Sales of non-branded knit apparel accounted for approximately 12%, 14%,
and 17% of the Company's consolidated net sales for fiscal years 1993, 1994 and
1995, respectively. Sales of branded apparel accounted for approximately 19%,
15% and 12% for fiscal years 1993, 1994 and 1995, respectively.
During fiscal 1995, the Company decided to establish a new sewing operation
for non-branded knit apparel items in Honduras. The Company has begun hiring and
training at its selected site, and expects to begin occupying this facility
before the end of calendar 1995.
Construction of the Company's branded apparel distribution center in Winder,
Georgia, is in progress. The Company expects to begin moving stock into this new
consolidated warehouse in November of 1995, and to open its new Duck Head
Apparel and Duck Head Retail Outlet Stores headquarters early in calendar 1996.
The Company believes that this facility will lower its branded apparel
distribution costs and contribute to more efficient administrative operations
for these two businesses. The Company believes that its systems for planning
inventory acquisitions and its distribution systems are now operating
satisfactorily.
7
<PAGE>
Gross profit margins in the apparel segment increased from 20% in fiscal 1994
to 25% in fiscal 1995. Gross margins improved in both non-branded knit apparel
as well as branded apparel, due to better average prices for knit non-branded
apparel as compared to the prior fiscal year, and to better managed sales of
closeout branded apparel as compared to the prior fiscal year.
The apparel segment represented 29% of the Company's fiscal 1995 consolidated
net sales and 44% of the Company's fiscal 1995 consolidated gross profit, as
compared to 29% and 36%, respectively, in fiscal 1994.
Selling, general, and administrative expenses in the apparel segment totaled
$35.7 million in fiscal 1995, a 4% reduction from fiscal 1994. These expenses
were 20% of net sales in fiscal 1995 as compared to 21% in fiscal 1994.
Fiscal 1995 operating profits in the apparel segment totaled $14.7 million as
compared to an operating loss of $31.3 million in fiscal 1994. When the unusual
credit and charges to operating profits referred to earlier are removed from
both years, operating profits would have been $7.7 million in fiscal 1995 as
compared with an operating loss of $1.3 million in fiscal 1994.
Inventories in the apparel segment at July 1, 1995 totaled $127.3 million,
compared to $110.3 million at July 2, 1994. Inventories of non-branded knit
apparel increased in proportion to the increase in sales of these products.
Inventories of branded apparel increased due to sales of these products being
less than anticipated. As reported previously, the Company considers a portion
of its branded apparel inventories excessive. At July 1, 1995, the Company
estimates that $30 to $50 million of this inventory is in excess of its current
requirements. Since the Company's branded apparel lines are traditionally
styled, the Company believes that it is best to reduce excess inventory in an
orderly manner over a period of time rather than to sell these inventories in
large quantities at distressed prices. Management has developed a program to
reduce these inventories over the next three years through its retail outlet
stores and by reducing production. Although the Company feels that it has
adequate reserves to cover any future price markdowns of these inventories, no
estimate can be made of the range of amounts of loss that are reasonably
possible should the program not be successful.
Capital expenditures in the apparel segment were $4.8 million during fiscal
1995. These represented improvements in the knitting, fabric finishing, and
sewing facilities in this segment. The Company presently is establishing a new
sewing facility in Honduras. It is contemplated that the facility will be
leased, but the Company may make capitalized leasehold improvements and will
make additional capital investments for equipment to be used in this facility.
The apparel segment's operating results are dependent in large part on orders
from retailers, distributors, and screen printers who supply finished garments
to retailers. Generally, when retail sales of apparel are strong, the Company's
apparel segment benefits. This segment's operating results are also dependent on
the utilization of its owned and leased manufacturing facilities. The Company
believes that it will operate its non-branded knit apparel facilities at or near
full capacity during fiscal 1996. However, it does not believe that its branded
apparel facilities will be fully utilized during part or all of fiscal 1996.
A lawsuit with allegations similar to those in the Alabama litigation had been
pending in the United States District Court for the Western District of
Kentucky. During fiscal 1995, this case was settled out of court for an amount
not considered material by the Company.
FISCAL 1994 VERSUS FISCAL 1993
Net sales in the apparel 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.
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.
The apparel segment represented 29% and 31% of the Company's consolidated net
sales, and 36% and 44% of the Company's gross profit for the fiscal years 1994
and 1993, respectively.
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.
Fiscal 1994 operating losses for the apparel segment totaled $31.3 million,
including $30 million for litigation, as compared to operating profits of $18.9
million in fiscal 1993.
Inventories in the apparel segment at July 2, 1994 totaled $110.3 million,
compared to $110.0
8
<PAGE>
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 and $10.9
million during fiscal 1994 and 1993, respectively. These represented
improvements in the knitting, fabric finishing, and sewing facilities in this
segment.
(Bar graph appears here with the following plot points)
FUNDED DEBT
TO EQUITY RATIO*
FISCAL YEARS ENDED JUNE OR JULY
1990 1991 1992 1993 1994 1995
1.8 to 1 1.1 to 1 0.4 to 1 0.4 to 1 0.6 to 1 0.8 to 1
*For purposes of this chart only, funded debt includes long-and short-term
debt, capital leases and offset factor borrowings.
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1995, the Company financed its operations, capital expenditures,
and dividends primarily through borrowings under its bank credit facility.
The Company used $15.5 million to fund its operations in fiscal 1995. The
Company generated operating cash flows of $32.8 million, and $62.7 million for
the 1994 and 1993 fiscal years, respectively. During these periods, cash
generated from operations and borrowings was used primarily to finance capital
expenditures, including equipment purchases, pay dividends, acquire in fiscal
1993 100% of the stock of Nautilus International, Inc., 100% of the stock of
Armonia Textil S.A. (Costa Rica) and its related assets, and 70% of the stock of
Apparel Marketing Corporation, and in fiscal 1994 repurchase approximately 2.3
million shares of the Company's Common Stock.
During fiscal 1995, cash used by investing activities included $32.2 million
for purchases of property, plant, and equipment. Fiscal 1995 cash generated from
financing activities of $46.1 million resulted primarily from net increases in
bank debt of $57.5 million, partially offset by $9.7 million paid in dividends.
As of July 1, 1995, the Company had working capital of $287 million, as
compared to $242 million at July 2, 1994. Accounts receivable and inventories
were $4.5 million and $22.2 million higher, respectively, at July 1, 1995 than
at July 2, 1994. Accrued liabilities were $22.0 million lower at July 1, 1995
than at July 2, 1994, due primarily to the settlement of the Alabama litigation
during fiscal 1995.
As of June 9, 1995, the Company obtained certain amendments to its long-term
Revolving Loan Facility (the "Credit Facility"). These amendments include
adjustments to the amount of tangible net worth that the Company is required to
maintain, as well as adjustments to the multiple of interest that the Company is
required to cover by earnings before interest and taxes on a quarterly basis. As
of that date, the requirement under the Credit Facility to cover certain fixed
charges by a specified multiple was eliminated for fiscal 1995. Under the
amendment, the amount of credit committed under the Credit Facility will be
reduced by $15 million at the end of fiscal 1996 and by an additional $15
million at the end of each subsequent fiscal year.
Upon settlement of the Alabama litigation, the original commitment under the
Credit Facility of $275 million was reduced to $263.5 million as contemplated in
the original credit agreement. The Credit Facility has a limit of $25 million
for the purpose of issuing letters of credit. Availability under the Credit
Facility is reduced by outstanding letters of credit which at July 1, 1995
totaled approximately $5.9 million.
At July 1, 1995, borrowings under the Company's Credit Facility totaled $217.8
million at a weighted average interest rate of 6.8% per annum as compared to
5.18% at July 2, 1994. Certain conditions apply to the Company's ability to
borrow under its Credit Facility, including continued compliance with financial
covenants. See Note E of the accompanying financial statements for a description
of loan covenants, which information is incorporated herein by reference.
The Credit Facility will mature September 30, 1997, with a provision for one
year extensions and (if the extension is made) on each anniversary of the
termination date thereafter, such extension to be available only if consented to
by all of the lenders. The Company's current interest rate on the major portion
of funds borrowed under the Credit Facility is LIBOR plus .75% per annum, but
the Credit Facility contains provisions that may 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.
During fiscal 1995, the Company spent approximately $41.8 million in
expenditures (on an accrual basis) for property, plant, and equipment. Of this
amount, approximately $35.2 million was spent in the textile segment with the
major expenditures relating to the long-term capital project for modernizing the
Company's woven textile
9
<PAGE>
production facilities. Approximately $4.8 million was spent in the apparel
segment, and approximately $1.9 million was spent in the Company's "other
business" segment.
During fiscal 1996, the Company plans to spend approximately $58 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 complete in fiscal 1996 the construction of its new branded
apparel distribution center in Georgia. The Company believes that its equipment
and facilities are generally adequate to allow it to remain competitive with its
principal competitors.
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. Based on the
Company's history of generating taxable income, it is also likely that the
Company will be able to realize its deferred tax assets as discussed in Note G.
ENVIRONMENTAL MATTERS
The Company believes that it is in compliance in all material respects with
federal, state, and local environmental statutes and requirements.
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 eleventh 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 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 has denied any
responsibility at these three sites, has declined to participate as a member of
the respective PRP groups, and has not provided for any reserves for costs or
liabilities attributable to the Selling Corporation.
10
<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 1, 1995 July 2, 1994 July 3, 1993
<S> <C> <C> <C>
Net Sales:
Textiles
Unaffiliated customers....................................................... $393,736,000 $391,401,000 $444,921,000
Intersegment................................................................. 20,192,000 15,660,000 12,331,000
413,928,000 407,061,000 457,252,000
Apparel, including retail stores
Unaffiliated customers....................................................... 175,866,000 178,681,000 209,789,000
Intersegment................................................................. 1,000
175,866,000 178,681,000 209,790,000
Fitness equipment and other
Unaffiliated customers....................................................... 27,939,000 43,694,000 31,529,000
Intersegment................................................................. 866,000 1,474,000 1,269,000
28,805,000 45,168,000 32,798,000
Intersegment Eliminations...................................................... (21,058,000) (17,134,000) (13,601,000)
Total...................................................................... $597,541,000 $613,776,000 $686,239,000
Gross Profit:
Textiles....................................................................... $ 44,321,000 $ 45,355,000 $ 57,075,000
Apparel, including retail stores............................................... 43,514,000 35,846,000 53,523,000
Fitness equipment and other.................................................... 10,613,000 17,735,000 11,289,000
Total...................................................................... $ 98,448,000 $ 98,936,000 $121,887,000
Operating Profit (Loss):
Textiles....................................................................... $ 22,272,000 $ 19,606,000 $ 34,655,000
Apparel, including retail stores............................................... 14,663,000 (31,327,000) 18,900,000
Fitness equipment and other.................................................... (4,324,000) (2,992,000) 2,308,000
Total Operating Profit (Loss).............................................. 32,611,000 (14,713,000) 55,863,000
Interest expense............................................................... (13,646,000) (8,639,000) (7,775,000)
Insurance proceeds............................................................. 2,204,000
Corporate expense.............................................................. (3,448,000) (3,300,000) (3,278,000)
Interest income................................................................ 49,000 722,000 362,000
Income (Loss) Before Income Taxes.......................................... $ 17,770,000 $(25,930,000) $ 45,172,000
Identifiable Assets:
Textiles....................................................................... $326,926,000 $314,378,000 $331,036,000
Apparel, including retail stores............................................... 234,811,000 195,370,000 203,166,000
Fitness equipment and other.................................................... 46,342,000 55,811,000 38,124,000
Corporate...................................................................... 2,217,000 1,444,000 1,620,000
Total...................................................................... $610,296,000 $567,003,000 $573,946,000
Depreciation and Amortization:
Textiles....................................................................... $ 16,867,000 $ 16,552,000 $ 13,087,000
Apparel, including retail stores............................................... 5,824,000 6,210,000 4,649,000
Fitness equipment and other.................................................... 1,423,000 3,669,000 669,000
Corporate...................................................................... 478,000 462,000 414,000
Total...................................................................... $ 24,592,000 $ 26,893,000 $ 18,819,000
Capital Expenditures:
Textiles....................................................................... $ 35,182,000 $ 18,334,000 $ 34,446,000
Apparel, including retail stores............................................... 4,812,000 3,844,000 10,941,000
Fitness equipment and other.................................................... 1,810,000 7,659,000 3,611,000
Corporate...................................................................... 30,000 19,000 577,000
Total...................................................................... $ 41,834,000 $ 29,856,000 $ 49,575,000
</TABLE>
11
<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.
During the fourth quarter of fiscal 1995, the apparel segment settled a
lawsuit and reduced related litigation reserves by $7,000,000. Previously during
fiscal 1994, the apparel segment had recognized a charge of $27 million in
connection with the lawsuit, 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 and deferred loan costs. Capital expenditures include related
accounts payable of $9,178,000, $1,010,000 and $1,694,000 for the 1995, 1994 and
1993 fiscal years, respectively.
12
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
MARKETING STRUCTURE
TEXTILES OTHER
FITNESS
EQUIPMENT
DELTA MILLS STEVCOKNIT
MARKETING CO. FABRICS CO. NAUTILUS
INTERNATIONAL
MARKETS SERVED: MARKETS SERVED: MARKETS SERVED:
APPAREL: APPAREL:
Bottomweight Fabrics, Childrens, Health Clubs,
Women's Blouses & Men's, Women's Public Sector,
Dresses, Suit Linings, Athletic Wear, YMCAs & Similar
Government & Topweight & Institutions,
Uniform Trade Bottomweight Medical,
OTHER: Dress Fabrics, Amenity Facilities,
Lamp Shades, Shirtings, Terry, Corporate Fitness Centers,
Surgical Tapes Fleece, Jersey, Consumer Products
Rib Fabrics
<TABLE>
<CAPTION>
APPAREL
RETAIL LICENSED
OPERATIONS PRODUCTS
DUCK HEAD DELTA
APPAREL CO. APPAREL CO. DUCKHEAD INTERNATIONAL
OUTLET STORES APPAREL MARKETING
CORP.
MARKETS SERVED: MARKETS SERVED: MARKETS SERVED: MARKETS SERVED:
<S> <C> <C> <C>
Department Stores & Screen Printers, Retail Consumers Department Stores,
Specialty Retailers Sporting Goods Stores Sporting Goods Stores,
Specialty Stores,
Branded & Private-Label Direct Mail,
Premiums,
Clubs,
Military
</TABLE>
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
DELTA WOODSIDE INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheet
of Delta Woodside Industries, Inc. as of July 1, 1995, and
the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our audit. The
accompanying financial statements of Delta Woodside
Industries, Inc. as of July 2, 1994 and July 3, 1993, were
audited by other auditors whose report thereon dated August
17, 1994, except for the first sentence of the second paragraph
of Note E, as to which the date is September 7, 1994, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Delta Woodside Industries, Inc.
at July 1, 1995, and the results of their operations and
their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
August 18, 1995
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
JULY 1, 1995 July 2, 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 719,000 $ 2,077,000
Accounts receivable:
Factor........................................................................ 63,085,000 55,440,000
Customers..................................................................... 64,143,000 64,921,000
127,228,000 120,361,000
Less allowances for doubtful accounts and returns............................. 5,634,000 3,275,000
121,594,000 117,086,000
Inventories
Finished goods................................................................ 137,675,000 112,101,000
Work in process............................................................... 58,806,000 69,402,000
Raw materials and supplies.................................................... 29,553,000 22,300,000
226,034,000 203,803,000
Deferred income taxes............................................................ 8,951,000 12,028,000
Prepaid expenses and other current assets........................................ 5,826,000 1,942,000
TOTAL CURRENT ASSETS 363,124,000 336,936,000
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements.................................................... 5,783,000 5,318,000
Buildings..................................................................... 66,928,000 64,497,000
Machinery and equipment....................................................... 210,200,000 191,267,000
Furniture and fixtures........................................................ 8,112,000 6,943,000
Leasehold improvements........................................................ 2,778,000 2,517,000
Construction in progress...................................................... 18,651,000 9,271,000
312,452,000 279,813,000
Less accumulated depreciation................................................. 104,393,000 89,782,000
208,059,000 190,031,000
EXCESS OF COST OVER ASSIGNED VALUE OF NET ASSETS ACQUIRED, less accumulated
amortization of $4,819,000 (1995) and $3,965,000 (1994).......................... 27,310,000 28,164,000
OTHER ASSETS....................................................................... 11,803,000 11,872,000
$610,296,000 $567,003,000
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
JULY 1, 1995 July 2, 1994
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable........................................................... $ 50,593,000 $ 46,712,000
Accrued employee compensation.................................................... 5,758,000 6,806,000
Litigation accrual -- Note L..................................................... 25,594,000
Accrued and sundry liabilities................................................... 19,610,000 15,010,000
Current portion of long-term debt................................................ 276,000 864,000
TOTAL CURRENT LIABILITIES 76,237,000 94,986,000
LONG-TERM DEBT..................................................................... 219,119,000 161,948,000
DEFERRED INCOME TAXES.............................................................. 21,473,000 18,808,000
OTHER LIABILITIES AND DEFERRED CREDITS............................................. 6,968,000 6,384,000
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued
and outstanding 24,357,000 shares (1995) and 24,246,000 shares (1994)......... 244,000 242,000
Additional paid-in capital....................................................... 163,364,000 162,114,000
Retained earnings................................................................ 122,891,000 122,521,000
286,499,000 284,877,000
COMMITMENTS AND CONTINGENCIES
$610,296,000 $567,003,000
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JULY 1, 1995 July 2, 1994 July 3, 1993
<S> <C> <C> <C>
Net sales....................................................... $597,541,000 $613,776,000 $686,239,000
Cost of goods sold.............................................. 499,093,000 514,840,000 564,352,000
Gross profit.................................................... 98,448,000 98,936,000 121,887,000
Selling, general and administrative expenses.................... 77,037,000 82,223,000 73,404,000
Litigation (credit) charge...................................... (7,000,000) 27,096,000
Restructuring (credit) charge................................... (553,000) 9,199,000
28,964,000 (19,582,000) 48,483,000
Other (expense) income:
Interest expense.............................................. (13,646,000) (8,639,000) (7,775,000)
Interest income............................................... 49,000 722,000 362,000
Other......................................................... 2,403,000 1,569,000 4,102,000
(11,194,000) (6,348,000) (3,311,000)
INCOME (LOSS) BEFORE INCOME TAXES 17,770,000 (25,930,000) 45,172,000
Income tax expense (benefit).................................... 7,672,000 (8,633,000) 16,968,000
Income (loss) before cumulative effect of accounting change..... 10,098,000 (17,297,000) 28,204,000
Cumulative effect of change in the method of accounting for
income taxes.................................................. (875,000)
NET INCOME (LOSS) $ 10,098,000 $(17,297,000) $ 27,329,000
Earnings (loss) per share of Common Stock before cumulative
effect of accounting change................................... $ .42 $ (.70) $ 1.07
Cumulative effect of change in the method of accounting for
income taxes.................................................. (.04)
Earnings (loss) per share of Common Stock....................... $ .42 $ (.70) $ 1.03
Weighted average number
of shares outstanding......................................... 24,317,000 24,550,000 26,421,000
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at June 27, 1992............................... 26,400,371 $264,000 $185,673,000 $132,844,000 $318,781,000
Incentive Stock Award Plan, shares issued............ 2,502 37,000 37,000
Stock Option Plan, shares issued..................... 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................................ 26,436,886 264,000 186,381,000 149,604,000 336,249,000
Incentive Stock Award Plan, shares issued............ 82,309 1,000 666,000 667,000
Stock Option Plan, shares issued..................... 22,188 194,000 194,000
Tax benefits of stock plans.......................... 144,000 144,000
Purchase and retirement of Common Stock.............. (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................................ 24,245,733 242,000 162,114,000 122,521,000 284,877,000
INCENTIVE STOCK AWARD PLAN, SHARES ISSUED............ 52,820 1,000 605,000 606,000
STOCK OPTION PLAN, SHARES ISSUED..................... 59,000 1,000 465,000 466,000
TAX BENEFITS OF STOCK PLANS.......................... 24,000 24,000
NET INCOME FOR THE YEAR ENDED JULY 1, 1995........... 10,098,000 10,098,000
CASH DIVIDENDS PAID -- $.40 A SHARE.................. (9,728,000) (9,728,000)
OTHER................................................ (475) 156,000 156,000
BALANCE AT JULY 1, 1995 24,357,078 $244,000 $163,364,000 $122,891,000 $286,499,000
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JULY 1, 1995 July 2, 1994 July 3, 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 10,098,000 $(17,297,000) $ 27,329,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................................ 22,532,000 21,344,000 17,090,000
Amortization................................................ 2,060,000 1,859,000 1,729,000
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................. 3,311,000 3,886,000 2,025,000
Provision for deferred income taxes......................... 6,603,000 (10,810,000) 2,398,000
Losses (gains) on disposition of property
and equipment............................................ 507,000 113,000 (2,916,000)
Compensation under stock plans.............................. 1,096,000 1,005,000 317,000
Deferred compensation....................................... 738,000 928,000 1,126,000
Other....................................................... (70,000) 708,000 753,000
Changes in operating assets and liabilities
net of effects from business acquisitions:
Accounts receivable...................................... (7,819,000) 17,635,000 23,600,000
Inventories.............................................. (22,231,000) (6,265,000) (17,217,000)
Other current assets..................................... (3,884,000) 1,610,000 (1,785,000)
Litigation accrual....................................... (25,594,000) 25,594,000
Accounts payable and accrued expenses.................... (2,844,000) (11,183,000) 8,255,000
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (15,497,000) 32,817,000 62,704,000
INVESTING ACTIVITIES
Acquisitions of businesses, net of
cash acquired............................................... (1,565,000) (20,194,000)
Property, plant and equipment:
Purchases................................................... (32,224,000) (30,525,000) (54,409,000)
Proceeds of dispositions.................................... 734,000 698,000 5,878,000
Sale of business............................................... 2,102,000
Other.......................................................... (457,000) (697,000) (280,000)
NET CASH (USED) BY
INVESTING ACTIVITIES (31,947,000) (29,987,000) (69,005,000)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended
JULY 1, 1995 July 2, 1994 July 3, 1993
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit........................ $ 348,849,000 $ 33,000,000 $ 194,000,000
Repayments on revolving lines of credit........................ (291,395,000) (11,000,000) (172,640,000)
Net borrowings on short-term line of credit.................... 10,347,000
Scheduled principal payments of long-term
debt........................................................ (871,000) (1,781,000) (1,692,000)
Repurchase and retirement of shares of
Common Stock................................................ (25,294,000)
Dividends paid................................................. (9,728,000) (9,786,000) (10,569,000)
Other.......................................................... (769,000) 31,000 82,000
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 46,086,000 (4,483,000) 9,181,000
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (1,358,000) (1,653,000) 2,880,000
Cash and cash equivalents at beginning of year................... 2,077,000 3,730,000 850,000
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 719,000 $ 2,077,000 $ 3,730,000
</TABLE>
See notes to consolidated financial statements.
20
<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 International Apparel Marketing
Corporation which is 70% owned). All significant intercompany balances and
transactions have been eliminated.
INVENTORIES: Inventories are stated at the lower of cost or market determined
using both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods.
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, but predominantly over seven to ten 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.
INTANGIBLE ASSETS: 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 primarily over periods of 40
years with other amounts amortized over 5 or 15 years. Loan acquisition costs
are being amortized over 3 years. Other intangible assets are being amortized
over periods of 3 to 40 years, but averaging approximately 10 years. The Company
assesses the recoverability of its intangible assets by determining whether the
amortization of the intangible balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
INCOME TAXES: Under Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" 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.
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.
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. Fiscal years 1995 and
1994 each consist of 52 weeks; fiscal 1993 consists of 53 weeks.
21
<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 primarily over 40 years.
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 1, 1995 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.
NOTE D -- INVENTORIES
As reported previously, the Company considers its level of branded apparel
inventories excessive. At July 1, 1995, the Company estimates that $30 to $50
million of this inventory is in excess of its current requirement. Management
has developed a program to reduce these inventories over the next three years
through its retail outlet stores and has reduced production to reflect the
current sales demand. Although the Company feels that it has adequate reserves
to cover any future price markdowns of these inventories, no estimate can be
made of the range of amounts of loss that are reasonably possible should the
program not be successful.
As of July 1, 1995 and July 2, 1994, cost for certain inventories of the apparel
segment are determined under the LIFO method representing 40% and 35%,
respectively, of the cost of consolidated inventories. The balance of the cost
of consolidated inventories is determined under the 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.
22
<PAGE>
NOTE E -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND LEASES
Long-term debt consists of:
<TABLE>
<CAPTION>
July 1, 1995 July 2, 1994
<S> <C> <C>
Revolving Credit Facility (6.8% at July 1, 1995), with interest payable monthly........... $217,775,000 $150,005,000
Short-term note payable -- refinanced..................................................... 10,347,000
Industrial Revenue Bond payable monthly, through 2001 at 80% of a bank's base rate........ 1,296,000 1,535,000
Notes, payable in varying annual amounts, through 1996 at rates varying from
6% to 10%............................................................................... 130,000 148,000
Other..................................................................................... 194,000 777,000
219,395,000 162,812,000
Less current portion...................................................................... 276,000 864,000
$219,119,000 $161,948,000
</TABLE>
Certain property, plant and equipment with a net book value of approximately
$14,310,000 is collateral for the Industrial Revenue Bond payable of $1,296,000
at July 1, 1995.
In September 1994, the Company obtained an unsecured Revolving Credit Facility
of $275 million. The Credit Facility was reduced to $263.5 million upon
settlement of the Alabama litigation in June 1995. The Credit Facility has a
limit of $25 million for the purpose of issuing letters of credit. The
Revolving Credit Facility will be reduced by $15 million each on June 29, 1996
and June 28, 1997 and will mature on September 30, 1997, with a provision for
one-year extensions. At July 1, 1995, the Company's interest rate is LIBOR plus
.75%. The Credit Facility contains provisions that may decrease the spread over
LIBOR depending upon certain financial ratios achieved by the Company. At July
1, 1995 outstanding letters of credit of $5,882,000 issued to certain suppliers
and not included in the accompanying financial statements reduced the unused
portion of the facility to $39,844,000.
The 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 1, 1995 the minimum tangible net worth requirement
under the new Credit Facility would have limited available dividends to $10.5
million.
Total interest expense incurred by the Company was $13,947,000, $8,639,000 and
$8,005,000 in the 1995, 1994 and 1993 fiscal years, respectively, of which
approximately $301,000 and $230,000 was capitalized in fiscal 1995 and 1993,
respectively. Total interest paid during the 1995, 1994 and 1993 fiscal years
was $12,940,000, $8,275,000 and $9,012,000, respectively.
Rent expense relating to operating leases was approximately $6,081,000 (1995),
$5,617,000 (1994) and $5,235,000 (1993). Aggregate principal maturities of all
long-term debt and minimum payments under operating leases are as follows:
<TABLE>
<CAPTION>
Long-term Operating
Fiscal Year Debt Leases
<S> <C> <C>
1996..................... $ 276,000 $ 3,907,000
1997..................... 393,000 3,042,000
1998..................... 218,048,000 2,116,000
1999..................... 268,000 887,000
2000..................... 264,000 712,000
Later Years.............. 146,000 2,434,000
$219,395,000 $13,098,000
</TABLE>
23
<PAGE>
NOTE F -- SHAREHOLDERS' EQUITY
During the first six months of fiscal 1994, the Company repurchased 2,296,000
shares of Common Stock at an average price of $11.02 for a total of $25.3
million.
The Stock Option Plan was approved by the shareholders in fiscal 1991. The Plan
gives the Company the right to grant awards or options for up to 300,000 shares
of Common Stock to employees. Transactions under the Stock Option Plan are as
follows:
<TABLE>
<CAPTION>
Prices Outstanding Exercisable
<S> <C> <C> <C>
June 27, 1992..... $ 4.00-9.94 199,376 29,751
Granted......... 7.00-7.68 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)
July 3, 1993...... 4.00-9.94 176,688 49,355
Granted......... 5.44 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)
July 2, 1994...... 4.00-9.94 139,126 97,126
Granted......... 5.13-5.88 61,000
Became
exercisable... 4.00-9.94 26,749
Exercised....... 4.00-7.00 (59,000) (59,000)
Cancelled....... 4.00-9.94 (11,876) (1,750)
July 1, 1995...... 4.00-9.94 129,250 63,125
</TABLE>
The average exercise price for all options outstanding was $5.70 per share at
July 1, 1995. These options expire on various dates beginning November 1995 and
ending on November 1999. 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 $161,000, $232,000 and
$186,000 during fiscal 1995, 1994 and 1993, respectively. The Board of Directors
intends to seek authorization to grant options for additional shares in the
annual shareholders' meeting in the Fall of 1995. Options available for grant at
July 1, 1995, July 2, 1994 and July 3, 1993 were 38,500, 87,624 and 72,250,
respectively.
The Incentive Stock Award Plan was approved by the shareholders during fiscal
1991. The Plan gives the Company the right to grant awards for up to 300,000
shares of Common Stock to employees. The Board of Directors intends to seek
authorization to award additional shares in the annual shareholders' meeting in
the Fall of 1995.
Under the Incentive Stock Award Plan, awards for the right to purchase for $.01
per share up to 19,723 shares, 260,581 shares and 4,164 shares were granted to
certain management and key employees during fiscal 1995, 1994 and 1993,
respectively. The shares granted 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 $939,000, $1,111,000 and
$561,000 for the fiscal years 1995, 1994 and 1993, respectively. The shares
granted in fiscal 1994 and 1995 in excess of shares available are contingent
upon shareholder approval. Shares available for grant at July 3, 1993 were
113,813.
During November 1991, the shareholders authorized the Board of Directors to
issue up to 10 million shares of preferred stock with a maximum aggregate par
value of $250 million. 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>
NOTE G -- INCOME TAXES
For fiscal 1995, the Company has an alternative minimum tax ("AMT") liability of
approximately $1.6 million since its AMT liability is greater than its regular
tax liability. To the extent that the Company pays AMT, it can apply such AMT as
a credit against regular tax liabilities in future years. The Company expects to
utilize future AMT credits as taxable income increases and current temporary
differences reverse.
At July 1, 1995, the Company has net operating loss carryforwards of $11 million
for income tax purposes that expire in years 1996 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 totaled $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. If realized, the tax benefits for a portion of those items
will be applied to reduce goodwill related to business acquisitions.
Although the Tax Reform Act of 1986 placed annual limitations on utilizing NOLs
and tax credits for companies which have changed ownership, this should not
impact the Company's ability to ultimately utilize its 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.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement amounts and amounts used for income tax
purposes. At the end of fiscal 1995, the Company's gross deferred tax assets are
approximately $26 million. The deferred tax assets have been reduced by a
valuation allowance of approximately $5.6 million. The valuation allowance will
be adjusted from time to time as the tax benefits are realized. During fiscal
1995, the valuation allowance increased by $1.7 million, primarily for the tax
effect of certain current year state net operating losses.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Assets
Litigation accrual............... $ 1,219,000 $10,316,000
Net operating loss
carryforward................... 6,665,000 4,971,000
Inventory........................ 5,183,000 4,147,000
Tax credit carryforward.......... 4,370,000 2,560,000
Deferred compensation............ 2,111,000 2,010,000
Stock compensation accruals...... 837,000 810,000
Accrued vacation................. 696,000 551,000
Workers' compensation............ 311,000 320,000
Health claims.................... 1,310,000 374,000
Allowance for doubtful
accounts....................... 1,527,000 235,000
Other............................ 2,080,000 1,694,000
Subtotal......................... 26,309,000 27,988,000
Valuation allowance.............. (5,631,000) (3,925,000)
Deferred tax assets.............. 20,678,000 24,063,000
Liabilities
Depreciation..................... 27,053,000 22,838,000
Inventory --
LIFO basis difference.......... 3,511,000 3,509,000
Intangibles...................... 2,128,000 2,364,000
Other............................ 508,000 2,132,000
Deferred tax liabilities......... 33,200,000 30,843,000
Net deferred
tax liabilities............ $12,522,000 $ 6,780,000
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal income taxes........................................................... $ 883,000 $ 2,029,000 $11,980,000
State income taxes............................................................. 726,000 148,000 2,590,000
Total current................................................................ 1,609,000 2,177,000 14,570,000
Deferred:
Federal income taxes (benefits)................................................ 5,190,000 (9,593,000) 1,901,000
State income taxes (benefits).................................................. 873,000 (1,217,000) 497,000
Total deferred............................................................... 6,063,000 (10,810,000) 2,398,000
Total provision.................................................................. $7,672,000 $ (8,633,000) $16,968,000
</TABLE>
25
<PAGE>
NOTE G -- INCOME TAXES (CONTINUED)
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rates................................... $6,220,000 $(9,076,000) $15,358,000
State taxes (benefits), net of federal benefit.................................... 1,039,000 (695,000) 1,951,000
Life insurance proceeds........................................................... (760,000)
Amortization of excess of cost over assigned value of net assets acquired......... 280,000 865,000 303,000
Foreign subsidiary loss (income).................................................. 336,000 101,000 (218,000)
State NOL benefits................................................................ (940,000) (736,000)
Valuation allowance adjustments................................................... 1,706,000 372,000
Other............................................................................. (209,000) 536,000 (426,000)
$7,672,000 $(8,633,000) $16,968,000
</TABLE>
The Company made income tax payments of approximately $5,377,000, $2,350,000 and
$20,171,000 during the 1995, 1994 and 1993 fiscal years, respectively.
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.
NOTE H -- OPERATIONS BY INDUSTRY SEGMENT
Industry segment information for the Company presented on pages 11 and 12 of
this Annual Report is an integral part of these financial statements.
NOTE I -- 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 1995, 1994 and 1993 contributions allocated to participants were
$358,000, $363,000 and $1,581,000, respectively. The contributions were made in
cash.
The Company maintains a 401(k) employee savings and investment plan for
employees meeting certain eligibility requirements. During fiscal 1995, the
Company contributed $196,000 to the plan. The Company made no contributions to
the plan during fiscal 1994 and 1993.
The Company also maintains 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 1, 1995 and July 2, 1994, the
total liability amounted to $5,273,000 and $4,428,000, 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 J -- 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 $254,000, $292,000 and $226,000 for the 1995, 1994 and 1993 fiscal
years, respectively.
26
<PAGE>
NOTE K -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's carrying value of long-term debt approximates fair value since the
rates are tied to floating rates. There are no other material finan-
cial instruments which require fair value disclosure.
NOTE L -- COMMITMENTS AND CONTINGENCIES
During fiscal 1996, the Company plans to spend approximately $58 million for
capital improvements and new equipment, primarily in continuation of the
modernization program for the woven fabrics division of the Company's textile
segment. The remainder of the fiscal 1996 capital expenditures include
completion of construction of 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.
At July 2, 1994, the Company had accrued $25,594,000 in connection with an
Alabama jury award. During fiscal 1995, the award was reduced by approximately
$9.7 million following appeals by the Company, and was finally settled with the
plaintiffs in June 1995.
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.
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 certain costs 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.
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>
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended July 1, 1995 and July 2, 1994:
<TABLE>
<CAPTION>
Quarter Ended
October 2 January 1 April 2 July 2
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1995
Net sales.......................................................... $141,275 $ 142,520 $150,894 $162,852
Gross profit....................................................... 25,449 21,611 23,756 27,632
Net income (loss).................................................. 4,164 371 943 4,620
Earnings (loss) per share of Common Stock.......................... .17 .02 .04 .19
</TABLE>
<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>
During the first quarter of fiscal 1995, the Company recognized certain life
insurance proceeds of $2.2 million. During the fourth quarter of fiscal 1995,
the Company recognized a pretax credit of $7 million upon settlement of the
Alabama lawsuit.
During the second quarter of fiscal 1994, the Company recorded charges of $33
million for the Alabama 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.
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 $2.4 million.
28
<PAGE>
CORPORATE DIRECTORY
OPERATING COMPANIES OF
DELTA WOODSIDE INDUSTRIES, INC.
DELTA MILLS MARKETING COMPANY
P.O. Box 6126, Station B
100 Augusta Street
Greenville, SC 29606
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
INTERNATIONAL APPAREL MARKETING CORPORATION
80 West 40th Street, Suite 42
New York, New York 10018
NAUTILUS INTERNATIONAL
709 Powerhouse Road
Independence, Virginia 24348-0708
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**
Retired businessman
* DR. JAMES F. KANE**
Dean Emeritus, College of Business
University of South Carolina
* DR. MAX LENNON**
President and
Chief Executive Officer
Eastern Foods, Inc.
(Manufacturer and distributor of food products)
E. ERWIN MADDREY, II
President and
Chief Executive Officer
Delta Woodside Industries, Inc.
BUCK A. MICKEL**
Vice President and Director
Micco Corporation
(Real estate and business investments)
BUCK MICKEL**
Chairman of the Board and
Chief Executive Officer
RSI Holdings, Inc.
(Sold prior business; seeking business opportunities)
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 1, 1995 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 9, 1995, at
10:30 a.m., at the Hyatt Regency Hotel, 220
North Main Street, Greenville,
South Carolina.
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
233 N. Main Street
Hammond Square, Suite 200
Greenville, SC 29601
(803) 232-8301
Delta Woodside Industries, Inc.
233 N. Main Street
Suite 200
Greenville, S.C. 29601
