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1996 ANNUAL REPORT
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(Delta Woodside logo)
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.........................................................15-27
Corporate Directory.....................................................28
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Common Stock of the Company is listed on the New York Stock Exchange
under the symbol DLW. The stock transfer agent for Delta Woodside
Industries, Inc. is First Union National Bank of North Carolina,
Shareholder Services Group, Two First Union Center, Charlotte, North
Carolina 28288-1154.
The following table presents a two-year history of the high and low stock
sales prices for the Common Stock, as reported by the New York Stock
Exchange composite tape, and cash dividends declared per share:
<TABLE>
<CAPTION>
FISCAL QUARTERS: High 1996 Low High 1995 Low
<S> <C> <C> <C> <C>
First Quarter $ 9 3/4 $ 7 1/2 $ 12 $ 10 5/8
Second Quarter 7 5/8 6 1/8 11 1/2 9 1/8
Third Quarter 8 4 7/8 11 8 3/8
Fourth Quarter 7 5/8 4 3/8 9 3/8 7 5/8
<CAPTION>
Cash
Dividends Declared
<S> <C> <C>
First Quarter $.10 $.10
Second Quarter .10 .10
Third Quarter .10 .10
Fourth Quarter .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 20, 1996 there were approximately 2,080 holders of record of
the Company's Common Stock.
Following the dividend declared in the third quarter of fiscal 1996, the
Board of Directors suspended the quarterly dividend until the Company's
financial results improve. Any future dividend payments will 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 D, requires a certain minimum tangible
net worth.
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SELECTED FINANCIAL DATA
In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share
Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS (1) 1996 1995 1994 1993 1992 1991 1990 1989 1988
Net Sales $600,172 $597,541 $613,776 $686,239 $705,037 $590,019 $500,894 $569,052 $488,568
Cost of Goods Sold 575,211 499,093 514,840 564,352 563,827 480,396 427,788 470,265 409,231
Gross Profit 24,961 98,448 98,936 121,887 141,210 109,623 73,106 98,787 79,337
Operating Profit (Loss) excluding
Litigation, Restructuring Charges (54,058) 21,610 18,282 52,585 76,826 59,234 35,342 66,236 52,347
Litigation (Credit) Charge (9,000) (7,000) 27,096
Restructuring (Credit) Charges 19,994 (553) 9,199 2,265
Operating Profit (Loss) (65,052) 29,163 (18,013) 52,585 76,826 59,234 33,077 66,236 52,347
Earnings (Loss) Before Interest and
Taxes (65,052) 31,367 (18,013) 52,585 76,826 59,234 33,077 66,513 54,209
Interest Expense 18,993 13,646 8,639 7,775 11,479 22,115 25,768 20,929 12,685
Income (Loss) Before Income Taxes (83,597) 17,770 (25,930) 45,172 65,801 37,543 8,029 45,940 41,705
Income Tax Expense (Benefit) (20,958) 7,672 (8,633) 16,968 25,786 13,600 2,020 15,643 13,850
Net Income (Loss) (62,639) 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) (17,724) 34,690 9,596 46,148 54,843 39,041 19,263 40,025 32,421
Capital Expenditures/Capital Leases 63,743 41,834 29,856 49,575 42,916 15,793 19,250 46,048 32,141
Depreciation and Amortization (8) 44,915 24,592 26,893 18,819 14,828 15,098 13,254 9,728 4,566
Working Capital (32,648) 286,887 241,950 262,111 266,356 105,498 71,967 78,726 60,811
Long-Term Debt and Capital Leases 283 219,119 161,948 130,464 110,414 71,189 85,704 88,791 35,254
Funded Debt (2)(5) 242,644 219,395 162,812 132,200 112,133 188,352 227,097 223,397 118,528
Shareholders' Equity (3) 217,335 286,499 284,877 336,249 318,781 172,647 127,575 127,169 86,462
Capital Employed (4) 459,979 505,894 447,689 468,449 430,914 360,999 354,672 350,566 204,990
Total Assets (5) 537,716 610,296 567,003 573,946 524,756 434,424 414,497 331,066 177,300
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 4.3 2.6 3.0 3.5 4.0 4.3 3.5 4.4 6.3
Net Sales divided by Accounts Receivable 4.9 4.9 5.2 4.9 4.3 4.2 4.5 4.6 4.9
Net Sales divided by Capital Employed 1.3 1.2 1.4 1.5 1.6 1.6 1.4 1.6 2.4
Operating Income (Loss) as % of Capital
Employed (14.0) 6.2 (3.9) 11.3 17.9 16.5 9.5 19.1 26.5
Current Ratio .9 4.8 3.5 4.1 4.4 1.6 1.4 1.7 2.2
Interest Coverage (3.4) 2.3 (2.1) 6.8 6.7 2.7 1.3 3.2 4.3
Gross Profit as % of Sales 4.2 16.5 16.1 17.8 20.0 18.6 14.6 17.4 16.2
Pretax Income (Loss) as % of Sales (13.9) 3.0 (4.2) 6.6 9.3 6.4 1.6 8.1 8.5
Net Income (Loss) as % of Sales (10.4) 1.7 (2.8) 4.0 5.7 4.1 1.2 5.3 5.7
Net Income (Loss) as % of Beginning
Equity (21.9) 3.5 (5.1) 8.6 23.2 18.8 4.7 35 47
COMMON STOCK DATA (PER SHARE) (1)(6)
Net Income (Loss) (2.56) .42 (.70) 1.03 1.62 1.27 .32 1.65 1.60
Dividends .30 .40 .40 .40 .35 .30 .30 .20 .05
Book Value 8.89 11.76 11.75 12.72 12.07 8.17 6.76 6.82 4.97
Price Range (7) -- High 9 3/4 12 12 1/2 18 3/8 25 1/4 141/8 17 7/8 16 1/2 14 1/4
-- Low 4 3/8 7 5/8 9 3/4 11 1/8 13 1/2 35/8 6 1/2 8 3/4 5 1/4
Weighted Average Shares Outstanding 24,443 24,317 24,550 26,421 24,670 18,879 18,733 18,338 17,385
Approximate Number of Shareholders 2,081 2,154 2,221 2,340 2,255 2,062 2,575 1,475 1,250
<CAPTION>
OPERATIONS (1) 1987
Net Sales $ 417,461
Cost of Goods Sold 343,623
Gross Profit 73,838
Operating Profit (Loss) excluding
Litigation, Restructuring Charges 47,935
Litigation (Credit) Charge
Restructuring (Credit) Charges
Operating Profit (Loss) 47,935
Earnings (Loss) Before Interest and
Taxes 46,993
Interest Expense 12,939
Income (Loss) Before Income Taxes 34,238
Income Tax Expense (Benefit) 12,667
Net Income (Loss) 21,571
FINANCIAL DATA (1)
Cash Flow (Net Income (Loss) plus
Depreciation and Amortization) (8) 24,908
Capital Expenditures/Capital Leases 7,924
Depreciation and Amortization (8) 3,337
Working Capital 63,602
Long-Term Debt and Capital Leases 38,832
Funded Debt (2)(5) 115,732
Shareholders' Equity (3) 59,015
Capital Employed (4) 174,747
Total Assets (5) 149,116
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 5.8
Net Sales divided by Accounts Receivable 4.5
Net Sales divided by Capital Employed 2.4
Operating Income (Loss) as % of Capital
Employed 27.0
Current Ratio 2.2
Interest Coverage 3.6
Gross Profit as % of Sales 17.7
Pretax Income (Loss) as % of Sales 8.2
Net Income (Loss) as % of Sales 5.2
Net Income (Loss) as % of Beginning
Equity 245
COMMON STOCK DATA (PER SHARE) (1)(6)
Net Income (Loss) 1.36
Dividends --
Book Value 3.41
Price Range (7) -- High 16 1/2
-- Low 9 7/8
Weighted Average Shares Outstanding 15,840
Approximate Number of Shareholders 1,300
</TABLE>
(1) Financial data reflect the following major business additions from their
respective dates of acquisition: (i) a portion of the knit apparel
operation and a portion of the woven apparel operation acquired on
September 7, 1988; (ii) a portion of the woven apparel operation (including
the "Duck Head" label) acquired on February 1, 1989; and (iii) 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 5.
(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 and 1987 fiscal years would have each been increased by
approximately $79.4 million, $73.6 million and $64.7 million, respectively.
(6) Per share data and weighted average common shares outstanding for fiscal
1987 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.
(7) The Company's Common Stock began trading publicly in February 1987.
(8) Depreciation and amortization include certain write-downs of property and
equipment of $15 million and $2 million in fiscal years 1996 and 1994,
respectively.
1
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TO OUR FELLOW SHAREHOLDERS
(Photo of E. Erwin Maddrey, II appears here)
E. ERWIN MADDREY, II
To Our Fellow Shareholders:
The 1996 fiscal year was a particularly difficult one for us. Sales of apparel
at retail throughout the whole country were relatively weak during most of the
fiscal year. Volume and prices in our Stevcoknit fabrics knitted textile
division were especially weak through most of the year, and extraordinarily high
fiber costs pushed gross margins in that division into the loss column. Sales
volume at our Duck Head branded apparel business was lower than in fiscal 1995,
and costs of disposing of excess inventories in this operation were
significantly higher than we had planned. On the other hand, results at our
Delta Apparel T-shirt business continued to improve, and operating profits in
the Delta Mills woven fabrics operation were only down slightly, despite record
high cotton costs.
In the fourth quarter of fiscal 1996, we took substantial write-offs to our
excess branded apparel inventories and also wrote down the value of our textile
knitting and knit finishing plants. We also charged income to set up various
restructuring reserves related principally to plant closings.
Last year we told you that we planned to open several Duck Head Clearance
Stores to sell the excess inventory that we held in this operation. We now have
seven of these stores in operation, and, during the fiscal year, we sold the
quantities of excess inventory that we had planned. However, we found that the
cost of disposing of the excess inventories in this manner was significantly
higher than we had expected. In addition, to turn this excess inventory into
cash through direct sales of large quantities, we made some direct sales at
prices lower than we had anticipated. We feel that the reserves we have now
established will cover all future losses as we continue to reduce this excess
stock.
During the fourth quarter, we looked carefully at all of our fixed assets and
determined that we should write down the book value of our textile knitting and
knit finishing plants. Over the past several years, sales of knitted garments in
the U.S. have continued to increase. However, during this same period, imports
of knitted apparel have risen much faster than retail sales. Consequently,
domestic production of knitted garments has fallen significantly. During fiscal
1996, we established a new Private Label Division with the intent of marketing
finished garments utilizing fabrics made in our Stevcoknit division and
assembled outside of the U.S.
We spent $64 million on new plant and equipment during the year just closed.
The majority of these expenditures was made in order to convert our Beattie
plant (Fountain Inn, S.C.) from spinning and weaving light weight, unfinished
fabric using old technology into spinning and weaving a heavier weight fabric to
be finished at our Delta 3 finishing plant near Cheraw, S.C. The Beattie plant
will soon be a state of the art spinning and weaving facility. The first half of
this project was completed near the end of fiscal 1996, and the second half will
be completed around the end of calendar 1996. Our weaving plant in Greer, S.C.
was closed in April as production in the Beattie weaving plant began to build
due to the modernization project there.
During fiscal 1996, our Duck Head operation began to turn back in the right
direction. The new Duck Head distribution center opened early in calendar 1996,
and we have consolidated goods from several warehouses into this new facility.
The most recent reports from our retail customers indicate that the brand is
selling well.
Sales in our Delta Apparel division, a vertical producer of T-shirts and
fleece garments rose 21% from those of fiscal 1995. During fiscal 1996 we
started up a large sewing plant in Honduras. This facility now employs over 800
people and is building production as we had planned. Our Honduras plant is
helping us preserve our gross margins in this division as T-shirt prices
continue to fall in the face of vigorous competition.
2
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In view of the generally poor markets in which we operated during last fiscal
year, we put a lot of attention on getting our assets in better shape. We put
great pressure on our various divisions to reduce inventories during fiscal
1996. By year end, they had brought inventories down about $55 million from the
end of fiscal 1995. After taking year end inventory reserve adjustments into
account, we began fiscal 1997 with $85 million less inventory on the books that
we had a year earlier.
While it is too early to project a recovery to the levels of profitability
that we experienced in our 1991, 1992 and 1993 fiscal years, we do believe that
we have put many of our problems behind us, and are cautiously optimistic that
fiscal 1997 will show much improved performance.
(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
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CONSOLIDATED COMPANY RESULTS
FISCAL 1996 VERSUS FISCAL 1995
Consolidated net sales for the year ended June 29, 1996 were $600 million as
compared to $598 million in the fiscal year ended July 1, 1995. Net sales in
fiscal 1996 declined in the textile segment and increased in the apparel segment
as compared with net sales in fiscal 1995.
Consolidated gross profit margin for fiscal 1996 was 4%, as compared to the
gross profit margin of 16% in the prior fiscal year. Gross margins declined in
all of the Company's segments, primarily due to charges to increase the reserve
for excess inventories, and reduced plant running schedules. These charges are
described later.
Consolidated selling, general, and administrative expense for fiscal 1996
totaled $79 million, or 13% of net sales, compared to $77 million, or 13% of net
sales in fiscal 1995.
NET SALES
FISCAL YEARS ENDED JUNE OR JULY
(In Thousands of Dollars)
1991 1992 1993 1994 1995 1996
590,019 705,037 686,239 613,776 597,541 600,172
Net interest expense totaled $18.5 million for fiscal 1996 as compared to
$13.6 million incurred in fiscal 1995, due to the combination of higher interest
rates and higher average debt levels. Because the Company's operating earnings
to interest ratios have declined, the rate of interest paid by the Company has
increased. At June 29, 1996 the Company's interest rate is LIBOR plus 2.5% as
compared to LIBOR plus .75% at July 1, 1995. The Company's outstanding debt
increased by $23 million during fiscal 1996, primarily a result of the plant
modernization program in the woven textile division.
The effective income tax rates for the 1996 and 1995 fiscal years were 25% and
43%, respectively. The lower tax rate for fiscal 1996 was primarily due to the
$9.6 million increase in valuation allowances recognized in part to offset the
portion of the fiscal 1996 tax loss which could not be carried back to prior
years, and also to the different effects that permanent nondeductible tax items
had on the pretax losses in fiscal 1996, as compared to the effect on pretax
income in fiscal 1995.
During fiscal 1996, the Company recognized significant charges including $25
million to increase market reserves associated with excess inventories in the
apparel segment, $12 million to reduce to appraised value the knitting and knit
finishing assets of the knitted textile division, and $8 million of other
restructuring charges in the woven textile division and the apparel segment.
During fiscal 1996 the Company recognized tax benefits of only $21 million.
Remaining tax benefits of $9.6 million cannot be recognized until the Company
has sufficient taxable income to utilize the benefits.
The net loss for fiscal 1996 was $63 million as compared to net income of $10
million for fiscal 1995. Net loss or income for fiscal 1996 and 1995 includes
pretax credits to income of $9 million and $7 million, respectively, related to
certain litigation charges recognized in fiscal 1994, and settled during fiscal
1996 and 1995. Net income for fiscal 1995 also includes life insurance proceeds
of $2.2 million.
Consolidated inventories totaled $141 million at June 29, 1996 as compared to
$226 million at July 1, 1995, a decline of 38% or $85 million. The reduction in
inventory is primarily attributable to decreases in inventory production, while
$25 million of the decline is attributable to charges to write down inventory,
as previously described. The reduction in plant running schedules resulted in
increased costs per unit in fiscal 1996 because the fixed costs at the plants
were spread over fewer units produced. The Company does not expect further
decreases in the dollar value of its inventory, but does expect the units of
inventory to decline as excess branded apparel inventories are sold.
The Company's order backlog at June 29, 1996 stood at $168 million as compared
to $140 million at July 1, 1995, an increase of $28 million or 20%. Order
backlogs were down slightly in the textile segments but higher in the apparel
segment. The Company believes that order backlogs are generally indicative of
future sales.
4
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The Company believes that its profit margins will remain under pressure due to
the continued weak demand for textiles generally and especially for knit
textiles prepared for printing.
FISCAL 1995 VERSUS FISCAL 1994
Consolidated net sales for fiscal 1995 were $598 million as compared to $614
million in fiscal year 1994, a decrease of 3%. Sales in fiscal 1994 included $17
million from the Company's Harper Brothers operation which was sold in June of
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.
NET INCOME (LOSS)
FISCAL YEARS ENDED JUNE OR JULY
(In Thousands of Dollars)
1991 1992 1993 1994 1995 1996
23,943 40,015 27,329 (-17,297) 10,098 (-62,639)
Consolidated selling, general, and administrative expense for fiscal 1995
totaled $77 million, or 13% of net sales, compared to $82 million, or 13% of net
sales in fiscal 1994.
Net interest expense totaled $13.6 million in fiscal 1995 as compared to $7.9
million incurred in fiscal 1994, due to the combination of higher interest rates
and higher average debt levels. 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 fiscal 1995.
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 in fiscal year 1995 was $10 million as compared to a net loss of
$17 million in fiscal year 1994. Net income for fiscal 1995 included pretax
credits to income of $7 million from the reversal of certain litigation reserves
established in fiscal 1994, and then reduced after settlement in fiscal 1995. In
fiscal 1994, the Company had charged pretax income for $27.1 million to
establish the reserve for a judgment entered by an Alabama court on November 24,
1993, to three former independent sales representatives of a subsidiary of the
Company. 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. Net income for fiscal 1995 includes life insurance proceeds of
$2.2 million.
The Company's order backlog at July 1, 1995 was $140 million as compared to
$152 million at July 2, 1994, a decrease of $12 million. 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.
DIVISION RESULTS
TEXTILE SEGMENT
FISCAL 1996 VERSUS FISCAL 1995
The Company's textile segment consists of finished woven and knitted textile
fabrics sold principally to manufacturers of apparel products. The segment also
sells unfinished fabrics to converters for various end uses, and produces yarn
for the apparel segment.
Net sales in the textile segment decreased $17 million to $377 million in
fiscal 1996 from $394 million in fiscal 1995. All of the decrease came in the
knitted textiles division while the woven textile division was slightly higher.
Within the woven division, lower unit sales were more than offset by higher
prices on a different mix of goods sold in fiscal 1996 as compared to fiscal
1995. In the knitted fabrics division, unit volume and average selling prices
were both lower in all product categories.
Sales of woven textiles accounted for approximately 49% of the Company's
consolidated net sales for fiscal years 1996 and 1995. Sales of knitted textiles
accounted for approximately 14% and 17% of consolidated net sales for fiscal
years 1996 and 1995, respectively.
5
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NET INCOME AS A
% OF SALES
FISCAL YEARS ENDED JUNE OR JULY
1991 1992 1993 1994 1995 1996
4.1 5.7 4.0 -2.8 1.7 -10.4
Gross profit margins in the textile segment declined from 11% in fiscal 1995
to 3% in fiscal 1996. The decrease is nearly all attributable to the knitted
textile division where lower sales prices, lower units sold, and reduced running
schedules in conjunction with higher raw material prices adversely affected
margins in fiscal 1996 as compared to fiscal 1995. Gross margins for woven
textiles declined slightly in fiscal 1996 as compared to fiscal 1995, being
adversely impacted by historically high raw material costs, and by continuing
disruptions caused by the Company's plant modernization program. The Company
expects the disruptions to end in the third quarter of fiscal 1997. 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
fiscal year 1996 totaled $23 million as compared with $24 million in fiscal
1995. As a percent of net sales, these expenses were 6.1% in fiscal 1996 as
compared to 6.2% in fiscal 1995.
SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE OR JULY
(In Thousands of Dollars)
1991(1) 1992(2) 1993 1994 1995 1996
172,647 318,781 336,249 284,877 286,499 217,335
(1) 1991 Common Stock Offering Proceeds: $25,497
(2) 1992 Common Stock Offering Proceeds: $113,291
Operating profits in the textile segment were down $45 million in fiscal 1996
from fiscal 1995. Profits were down slightly in the woven division, but were
down significantly in the knitted textile division as a result of the $12
million impairment charge described below, historically high raw material costs,
lower sales prices and reduced plant running schedules, which resulted in
increased fixed costs per unit of production. The reduced running schedules
increased unit costs, but helped the textile segment reduce inventories to $75
million at June 29, 1996 as compared to $96 million at July 1, 1995.
The history of operating losses at the knitting and knit finishing operation's
two plants caused the Company to recognize a charge to reduce the book value of
the fixed assets in this business to appraised value. While the Company has
recognized an impairment charge relating to these plants, the Company is hopeful
that reduced raw material prices, from the historically high levels of fiscal
1996, will help these plants operate at a profit in fiscal 1997. The Company
will monitor closely the performance of these plants during the coming year.
During fiscal 1996, the textile segment contributed 63% of the Company's
consolidated net sales and 51% of the Company's consolidated gross profit, as
compared to 66% and 45%, respectively, in fiscal 1995.
The textile segment's capital expenditures totaled approximately $42 million
for fiscal 1996. The major portion of these expenditures was related to the
woven textile long-term modernization project.
Although the Company expects greater utilization of textile capacity in fiscal
1997 than in fiscal 1996, the Company expects both the woven and knit operations
to run at less than full capacity in fiscal 1997.
Cotton prices reached a record high during the last months of fiscal 1995, and
remained high during most of fiscal 1996. 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 woven 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.
FISCAL 1995 VERSUS FISCAL 1994
Net sales in the Company's textile segment increased to $394 million in fiscal
year 1995 from $391 million in fiscal year 1994. Sales of both woven and knitted
textiles were slightly higher in
6
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fiscal 1995 than in the prior fiscal year. In the woven textile sector, lower
sales of unfinished fabrics were more than offset by higher sales of finished
cotton and blended fiber fabrics. Sales of woven textiles accounted for
approximately 49% and 47% of the Company's consolidated net sales for fiscal
years 1995 and 1994, respectively. Sales of knit textiles accounted for
approximately 17% in fiscal years 1995 and 1994.
EARNINGS (LOSS) PER SHARE
FISCAL YEARS ENDED JUNE OR JULY
(Dollars Per Share)
1991 1992 1993 1994 1995 1996
1.27 1.62 1.03 .70 .42 -2.56
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
1996 Weighted Average Shares Outstanding--24,443,000
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.
Selling, general, and administrative expenses in the textile segment for the
year ended July 1, 1995 totaled $24 million as compared with $26 million in the
fiscal year ended July 2, 1994. As a percent of net sales, these costs were 6.2%
in fiscal 1995 as compared to 6.6% in fiscal 1994.
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 was related to the
woven textile long-term modernization project.
APPAREL SEGMENT
FISCAL 1996 VERSUS FISCAL 1995
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 the apparel segment increased by $17 million to $193 million in
fiscal 1996 as compared to $176 million in fiscal 1995. Increased sales of knit
apparel for printing were offset somewhat by decreased sales of branded apparel.
Increased sales of knit apparel for printing were due to increased units, but at
lower average prices. Lower sales of branded apparel were due to fewer units
being sold as well as lower average prices related to the excess inventories.
Sales of knit apparel for printing accounted for approximately 21% and 17% of
the Company's consolidated net sales for fiscal years 1996 and 1995,
respectively. Sales of branded apparel accounted for approximately 11% and 12%
of the Company's consolidated net sales for fiscal years 1996 and 1995,
respectively.
During fiscal 1996, the Company established a new sewing operation for knit
apparel items in Honduras. The plant began producing garments in September 1995.
In June 1996 the plant was running at 55% of capacity with full capacity
expected by February 1997.
Construction of the Company's branded apparel distribution center in Winder,
Georgia was completed during fiscal 1996, and began operations in January of
1996.
Since June 1996 this facility has served as the headquarters for the Duck Head
Apparel operations. The Company believes that this facility will lower its
branded apparel distribution costs and contribute to more efficient
administrative operations. The Company believes that its systems for planning
inventory acquisitions and for distribution of its branded apparel are now
operating satisfactorily.
During fiscal 1996, the Company established a new Private Label Division with
the intent of marketing finished garments utilizing fabrics made in our
Stevcoknit division and assembled outside the U.S.
Gross profit margins for the apparel segment decreased to 1% in fiscal 1996 as
compared to 25%
7
<PAGE>
in fiscal 1995. Gross margins declined in the knit apparel division, but fell
negative in the branded apparel division, due to the charges in fiscal 1996 for
increased inventory reserves associated with excess inventories. While in fiscal
1996 the Company met its goal of unit sales of the excess branded inventory, it
found that the costs of such sales were higher than expected.
The apparel segment represented 32% of the Company's fiscal 1996 consolidated
net sales and 9% of the consolidated gross profit, as compared to 29% and 44%,
respectively, in fiscal 1995.
Selling, general, and administrative expenses in the apparel segment totaled
$41 million in fiscal 1996, an increase of 11% from fiscal 1995. These expenses
remained nearly level as a percent of sales in fiscal 1996 compared to fiscal
1995.
Fiscal 1996 operating losses in the apparel segment totaled $36 million as
compared to operating profit of $14 million in fiscal 1995. Fiscal 1996 results
include restructuring charges of $7 million and credits to litigation expense of
$9 million, while fiscal 1995 includes credits to litigation expense of $7
million.
Inventories in the apparel segment at June 29, 1996 totaled $62 million,
compared to $125 million at July 1, 1995. The large decrease is attributable to
reduced plant running schedules and the $25 million increase in reserves for
excess inventory.
During fiscal 1996, excess branded apparel inventory was sold through retail
clearance stores. The cost of disposing of these inventories through these
stores was higher than expected, prompting the Company to increase reserves for
the remaining inventories, as described elsewhere. As the Company realized lower
returns on the sale of excess inventories through the retail clearance stores,
direct sales in large quantities at lower prices became more attractive. Towards
the end of fiscal 1996, additional quantities of excess inventories were sold in
large quantities, and at lower margins. Management is continuing with its plan
to reduce these inventories over the next two years through retail clearance
stores and direct sales in large quantities.
Capital expenditures in the apparel segment were $21 million during fiscal
1996, primarily to complete the new distribution center in the branded apparel
division and the new sewing facility in Honduras.
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 knit apparel facilities at or near full
capacity during fiscal 1997. However, it does not believe that its branded
apparel facilities will be fully utilized during any part of fiscal 1997.
FISCAL 1995 VERSUS FISCAL 1994
Net sales in the apparel segment decreased by $2.8 million, or 2%, from fiscal
1994 to fiscal 1995. Increased sales of knit apparel for printing were more than
offset by decreases in sales of branded apparel. Increased sales of knit apparel
for printing were due to both increased units and average prices. Lower sales of
branded apparel were due to fewer units being sold. Sales of knit apparel for
printing accounted for approximately 14% and 17% of the Company's consolidated
net sales for fiscal years 1994 and 1995, respectively. Sales of branded apparel
accounted for approximately 15% and 12% of consolidated net sales for fiscal
years 1994 and 1995, respectively.
Gross profit margins in the apparel segment increased to 25% in fiscal 1995
from 20% in fiscal 1994. Gross margins improved in the apparel segment,
primarily due to better average prices for knit apparel for printing 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
$37 million in fiscal 1995, a 3% reduction from fiscal 1994. These expenses were
21% of net sales in fiscal 1995 and 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 million,
compared to $110 million at July 2, 1994. Inventories of knit apparel for
printing 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.
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.
8
<PAGE>
FUNDED DEBT
TO EQUITY RATIO
FISCAL YEARS ENDED JUNE OR JULY
1991 1992 1993 1994 1995 1996
1.1 to 1 0.4 to 1 0.4 to 1 0.6 to 1 0.8 to 1 1.1 to 1
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1996, the Company financed its operations and capital
expenditures primarily through cash generated from operations, especially
reductions in inventory. The Company also increased its debt to assist in
financing the ongoing capital expenditure projects.
The Company generated operating cash flows of $51 and $33 million for the 1996
and 1994 fiscal years, respectively, but used $15 million in cash to fund its
operations during fiscal 1995. Cash generated from operations and borrowings has
been used primarily to finance capital expenditures, including equipment
purchases.
As of June 29, 1996, the Company had reduced current assets by $83 million
from the end of fiscal 1995 as a result of its inventory reduction plan.
On March 15, 1996, the Company amended and restated its Credit Agreement with
certain banks to secure the debt. At June 29, 1996, $118 million in receivables,
$104 million in inventory and $158 million in equipment serve as collateral for
the agreement. The amended agreement retains certain overall borrowing limits,
but further limits borrowing to percentages of assets pledged as collateral. The
agreement increased restrictions on the payment of dividends. Based on certain
financial ratios, interest rates under the agreement increased by approximately
150 basis points.
At June 29, 1996, borrowings under the Company's Credit Facility totaled $242
million at a weighted average interest rate of 8.1% per annum as compared to
6.8% at July 1, 1995.
Certain conditions apply to the Company's ability to borrow under its Credit
Facility, including compliance with financial covenants. See Note D 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; however the Company is
negotiating with certain lenders to replace its existing Credit Facility with
one which has greater availability. The existing Credit Facility requires
certain financial ratios which the Company has not achieved. Because the Company
is in default under the terms of the agreement, the Credit Facility has been
reported as current in the accompanying financial statements. Although there can
be no assurance, the Company believes that it will be able to replace the
existing Credit Facility prior to maturity. The Company expects such a new
facility to have a similar or slightly higher rate of interest.
At a meeting of the Company's Board of Directors on May 9, 1996, the decision
was made to suspend the quarterly dividend until the Company's financial results
improve. Future dividend policy will depend upon the Company's ability to
produce adequate cash flows in future quarters.
During fiscal 1996, the Company had approximately $64 million in expenditures
for property, plant, and equipment. Of this amount, approximately $42 million
was spent in the textile segment with most of the expenditures relating to the
long-term capital project for modernizing the Company's woven textile production
facilities. Approximately $21 million was spent in the apparel segment.
During fiscal 1997, the Company plans to spend approximately $33 million for
capital improvements and new equipment. The majority of this amount is expected
to be spent to complete the woven fabrics modernization program. The Company
believes that its equipment and facilities are generally adequate to allow it to
remain competitive with its principal competitors.
The net losses for fiscal 1996 resulted in an income tax loss carryback for
which the Company expects to receive a refund of approximately $8.5 million in
the early part of fiscal year 1997.
The Company believes that, with replacement of the existing Credit Facility,
cash flow generated by its operations and funds available under the future
Credit Facility will be sufficient to service its bank debt, to satisfy its
day-to-day working capital needs and to fund its planned capital expenditures.
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
9
<PAGE>
("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.
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.
At the Mississippi site, the PRP group has completed a surface removal action.
Soil and groundwater contamination, both at the site and in the surrounding area
is now being investigated. 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,
the 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>
June 29, 1996 July 1, 1995 July 2, 1994
<S> <C> <C> <C>
Net Sales:
Textiles
Unaffiliated customers....................................................... $376,861,000 $393,736,000 $391,401,000
Intersegment................................................................. 25,600,000 20,192,000 15,660,000
402,461,000 413,928,000 407,061,000
Apparel, including retail stores
Unaffiliated customers....................................................... 192,866,000 175,866,000 178,681,000
192,866,000 175,866,000 178,681,000
Fitness equipment and other
Unaffiliated customers....................................................... 30,445,000 27,939,000 43,694,000
Intersegment................................................................. 871,000 866,000 1,474,000
31,316,000 28,805,000 45,168,000
Intersegment Eliminations...................................................... (26,471,000 ) (21,058,000) (17,134,000)
Total...................................................................... $600,172,000 $597,541,000 $613,776,000
Gross Profit:
Textiles....................................................................... $ 12,630,000 $ 44,321,000 $ 45,355,000
Apparel, including retail stores............................................... 2,337,000 43,514,000 35,846,000
Fitness equipment and other.................................................... 9,994,000 10,613,000 17,735,000
Total...................................................................... $ 24,961,000 $ 98,448,000 $ 98,936,000
Operating Profit (Loss):
Textiles....................................................................... $(24,714,000 ) $ 20,000,000 $ 17,502,000
Apparel, including retail stores............................................... (36,104,000 ) 13,648,000 (32,288,000)
Fitness equipment and other.................................................... (4,234,000 ) (4,485,000) (3,227,000)
Total Operating Profit (Loss).............................................. (65,052,000 ) 29,163,000 (18,013,000)
Interest expense............................................................... (18,993,000 ) (13,646,000) (8,639,000)
Insurance proceeds............................................................. 2,204,000
Interest income................................................................ 448,000 49,000 722,000
Income (Loss) Before Income Taxes.......................................... $(83,597,000 ) $ 17,770,000 $(25,930,000)
Identifiable Assets:
Textiles....................................................................... $323,244,000 $326,926,000 $314,378,000
Apparel, including retail stores............................................... 172,095,000 234,811,000 195,370,000
Fitness equipment and other.................................................... 40,307,000 46,342,000 55,811,000
Corporate...................................................................... 2,070,000 2,217,000 1,444,000
Total...................................................................... $537,716,000 $610,296,000 $567,003,000
Depreciation and Amortization:
Textiles....................................................................... $ 31,515,000 $ 16,867,000 $ 16,552,000
Apparel, including retail stores............................................... 10,697,000 5,824,000 6,210,000
Fitness equipment and other.................................................... 2,085,000 1,423,000 3,669,000
Corporate...................................................................... 618,000 478,000 462,000
Total...................................................................... $ 44,915,000 $ 24,592,000 $ 26,893,000
Capital Expenditures:
Textiles....................................................................... $ 42,128,000 $ 35,182,000 $ 18,334,000
Apparel, including retail stores............................................... 20,655,000 4,812,000 3,844,000
Fitness equipment and other.................................................... 909,000 1,810,000 7,659,000
Corporate...................................................................... 51,000 30,000 19,000
Total...................................................................... $ 63,743,000 $ 41,834,000 $ 29,856,000
</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
customer sales. Intersegment operating profit related to the intersegment sales
is not significant. Operating profit is total revenue less operating expenses,
excluding interest expense and interest income.
During the fourth quarter of fiscal 1996 the Company recognized $12 million in
impairment charges in the dye and finishing portion of the knitted fabric
business of the textile segment. The Company also took restructuring charges of
$6.7 million and $1.7 million related to plant closings in the textile and
apparel segments, respectively, and increased inventory reserves by $25 million
for excess inventory in the branded apparel division. During the first quarter
of fiscal 1996 the Company recognized $9 million in credits related to
litigation reserves first recognized in fiscal 1994.
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 $5,518,000, $9,178,000 and $1,010,000 for the 1996, 1995 and
1994 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,
Dresses, Suit Linings, Men's, Women's Public Sector,
Government & Athletic Wear, YMCAs & Similar
Uniform Trade Fleece, Jersey Institutions,
Interlock, Medical,
OTHER: Rib Fabrics Amenity Facilities,
Surgical Tapes Corporate Fitness Centers,
<TABLE>
<CAPTION>
APPAREL
PACKAGED LICENSED
APPAREL PRODUCTS PRODUCTS
DUCK HEAD DELTA
APPAREL CO. APPAREL CO. PRIVATE LABEL INTERNATIONAL
DIVISION APPAREL MARKETING
CORP.
MARKETS SERVED: MARKETS SERVED: MARKETS SERVED: MARKETS SERVED:
<S> <C> <C> <C>
Through Licensees:
Department Stores & Screen Printers, Department Stores, Department Stores,
Specialty Retailers Distributors Discounters, Sporting Goods Stores,
Factory Direct Other Apparel Specialty Stores,
Outlet Stores Branded & Private-Label Manufacturers 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
sheets of Delta Woodside Industries, Inc. as of June 29,
1996 and July 1, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash
flows for the years 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. for the year ended July 2, 1994,
were audited by other auditors whose report thereon dated
August 17, 1994, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of Delta Woodside
Industries, Inc. at June 29, 1996 and July 1, 1995, and the
results of their operations and their cash flows for the
years then ended in conformity with generally accepted
accounting principles.
As discussed in notes A and K to the consolidated financial
statements, in 1996 the Company adopted the method of
assessing impairment of long-lived assets as prescribed by
Statement of Financial Accounting Standards No. 121.
(Signature of KPMG Peat Marwick LLP)
Greenville, South Carolina
August 13, 1996
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
JUNE 29, 1996 July 1, 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................ $ 6,271,000 $ 719,000
Accounts receivable:
Factor........................................................................ 63,194,000 63,085,000
Customers..................................................................... 65,230,000 64,143,000
128,424,000 127,228,000
Less allowances for doubtful accounts and returns............................. 6,258,000 5,634,000
122,166,000 121,594,000
Inventories
Finished goods................................................................ 64,122,000 137,675,000
Work in process............................................................... 60,739,000 58,806,000
Raw materials and supplies.................................................... 16,197,000 29,553,000
141,058,000 226,034,000
Deferred income taxes............................................................ 8,951,000
Prepaid expenses and other current assets........................................ 10,258,000 5,826,000
TOTAL CURRENT ASSETS 279,753,000 363,124,000
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements.................................................... 6,134,000 5,783,000
Buildings..................................................................... 81,077,000 66,928,000
Machinery and equipment....................................................... 248,193,000 210,200,000
Furniture and fixtures........................................................ 8,509,000 8,112,000
Leasehold improvements........................................................ 3,564,000 2,778,000
Construction in progress...................................................... 10,136,000 18,651,000
357,613,000 312,452,000
Less accumulated depreciation................................................. 136,879,000 104,393,000
220,734,000 208,059,000
EXCESS OF COST OVER ASSIGNED VALUE OF NET ASSETS ACQUIRED, less accumulated
amortization of $5,665,000 (1996) and $4,819,000 (1995).......................... 26,464,000 27,310,000
OTHER ASSETS....................................................................... 10,765,000 11,803,000
$537,716,000 $610,296,000
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
JUNE 29, 1996 July 1, 1995
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable........................................................... $ 41,779,000 $ 50,593,000
Accrued employee compensation.................................................... 5,220,000 5,758,000
Accrued and sundry liabilities................................................... 23,041,000 19,610,000
Current portion of long-term debt................................................ 242,361,000 276,000
TOTAL CURRENT LIABILITIES 312,401,000 76,237,000
LONG-TERM DEBT..................................................................... 283,000 219,119,000
DEFERRED INCOME TAXES.............................................................. 21,473,000
OTHER LIABILITIES AND DEFERRED CREDITS............................................. 7,697,000 6,968,000
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued
and outstanding 24,460,000 shares (1996) and 24,357,000 shares (1995)......... 245,000 244,000
Additional paid-in capital....................................................... 164,170,000 163,364,000
Retained earnings................................................................ 52,920,000 122,891,000
217,335,000 286,499,000
COMMITMENTS AND CONTINGENCIES
$537,716,000 $610,296,000
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JUNE 29, 1996 July 1, 1995 July 2, 1994
<S> <C> <C> <C>
Net sales........................................................ $600,172,000 $597,541,000 $613,776,000
Cost of goods sold............................................... 575,211,000 499,093,000 514,840,000
Gross profit..................................................... 24,961,000 98,448,000 98,936,000
Selling, general and administrative expenses..................... 78,874,000 77,037,000 82,223,000
Litigation (credit) charge....................................... (9,000,000 ) (7,000,000) 27,096,000
Restructuring and impairment charge (credit)..................... 19,994,000 (553,000) 9,199,000
(64,907,000 ) 28,964,000 (19,582,000)
Other (expense) income:
Interest expense............................................... (18,993,000 ) (13,646,000) (8,639,000)
Interest income................................................ 448,000 49,000 722,000
Other.......................................................... (145,000 ) 2,403,000 1,569,000
(18,690,000 ) (11,194,000) (6,348,000)
INCOME (LOSS) BEFORE INCOME TAXES (83,597,000 ) 17,770,000 (25,930,000)
Income tax expense (benefit)..................................... (20,958,000 ) 7,672,000 (8,633,000)
NET INCOME (LOSS) $(62,639,000 ) $ 10,098,000 $(17,297,000)
Earnings (loss) per share of Common Stock........................ $ (2.56 ) $ 0.42 $ (0.70)
Weighted average number of shares outstanding.................... 24,443,000 24,317,000 24,550,000
</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 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.............................................. (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............................................ 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
INCENTIVE STOCK AWARD PLAN, SHARES ISSUED............. 53,448 1,000 594,000 595,000
STOCK OPTION PLAN, SHARES ISSUED...................... 49,125 375,000 375,000
TAX EXPENSE OF STOCK PLANS............................ (163,000) (163,000 )
NET LOSS.............................................. (62,639,000) (62,639,000 )
CASH DIVIDENDS PAID -- $.30 A SHARE................... (7,332,000) (7,332,000 )
BALANCE AT JUNE 29, 1996 24,459,651 $245,000 $164,170,000 $ 52,920,000 $217,335,000
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JUNE 29, 1996 July 1, 1995 July 2, 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................. $(62,639,000 ) $ 10,098,000 $(17,297,000)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................................... 27,335,000 22,532,000 21,344,000
Amortization............................................... 2,203,000 2,060,000 1,859,000
Reduction in excess of cost over assigned value of net
assets acquired......................................... 1,549,000
Writedown of property and equipment........................ 15,377,000 2,141,000
Provision for losses on accounts receivable................ 2,577,000 3,311,000 3,886,000
Provision for deferred income taxes........................ (12,522,000 ) 6,063,000 (10,810,000)
Losses (gains) on disposition of property
and equipment........................................... 507,000 507,000 113,000
Compensation under stock plans............................. 807,000 1,096,000 1,005,000
Deferred compensation...................................... 808,000 738,000 928,000
Other...................................................... (70,000 ) (70,000) 708,000
Changes in operating assets and liabilities
net of effects from business acquisitions:
Accounts receivable..................................... (2,069,000 ) (7,819,000) 17,635,000
Inventories............................................. 84,976,000 (22,231,000) (6,265,000)
Other current assets.................................... (4,432,000 ) (3,884,000) 1,610,000
Litigation accrual...................................... (25,594,000) 25,594,000
Accounts payable and accrued expenses................... (2,261,000 ) (2,304,000) (11,183,000)
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 50,597,000 (15,497,000) 32,817,000
INVESTING ACTIVITIES
Acquisitions of businesses, net of
cash acquired.............................................. (1,565,000)
Property, plant and equipment:
Purchases.................................................. (67,403,000 ) (32,224,000) (30,525,000)
Proceeds of dispositions................................... 6,769,000 734,000 698,000
Sale of business.............................................. 2,102,000
Other......................................................... 27,000 (457,000) (697,000)
NET CASH (USED) BY
INVESTING ACTIVITIES (60,607,000 ) (31,947,000) (29,987,000)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended
JUNE 29, 1996 July 1, 1995 July 2, 1994
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit....................... $268,826,000 $ 348,849,000 $ 33,000,000
Repayments on revolving lines of credit....................... (245,660,000 ) (291,395,000) (11,000,000)
Net borrowings on short-term line of credit................... 10,347,000
Scheduled principal payments of long-term
debt....................................................... (272,000 ) (871,000) (1,781,000)
Repurchase and retirement of shares of Common Stock........... (25,294,000)
Dividends paid................................................ (7,332,000 ) (9,728,000) (9,786,000)
Other......................................................... (769,000) 31,000
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 15,562,000 46,086,000 (4,483,000)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,552,000 (1,358,000) (1,653,000)
Cash and cash equivalents at beginning of year.................. 719,000 2,077,000 3,730,000
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,271,000 $ 719,000 $ 2,077,000
</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. Certain amounts for fiscal 1995 and prior
years have been reclassified to conform to the 1996 presentation.
CASH EQUIVALENTS: The Company considers all highly liquid investments of three
months or less when purchased to be cash equivalents.
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. When required by circumstances, the Company writes down
assets to their estimated market value.
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.
IMPAIRMENT OF LONG-LIVED ASSETS: When required by circumstances, the Company
evaluates the recoverability of its long-lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write-down to market value or discounted cash flow is required. This policy
was formally adopted by the Company in fiscal 1996.
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.
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. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS PER COMMON SHARE: Per share data are computed based on the weighted
average number of shares of Common Stock outstanding during each period.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 1996, 1995
and 1994 each consist of 52 weeks.
NOTE B -- 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 June 29, 1996 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 C -- INVENTORIES
As of June 29, 1996 and July 1, 1995, cost for certain inventories of the
apparel segment are determined under the LIFO method representing 45% and 40%,
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. During fiscal
1996 the Company increased inventory reserves for excess branded apparel
inventories by approximately $25 million.
21
<PAGE>
NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND LEASES
Long-term debt consists of:
<TABLE>
<CAPTION>
June 29, 1996 July 1, 1995
<S> <C> <C>
Revolving Credit Facility
(8.1% at June 29, 1996),
with interest payable
monthly................. $241,296,000 $217,775,000
Industrial Revenue Bond
payable monthly, through
2001 at 80% of a bank's
base rate............... 1,057,000 1,296,000
Other..................... 291,000 324,000
242,644,000 219,395,000
Less current portion...... 242,361,000 276,000
$ 283,000 $219,119,000
</TABLE>
At June 29, 1996, the Company's revolving Credit Facility was reduced to $249
million from $264 million. On June 28, 1997 it will be reduced by another $15
million, and then will mature on September 30, 1997, with a provision for
one-year extensions. At June 29, 1996, the Company's interest rate is LIBOR plus
2.5%. The Credit Facility contains provisions that may decrease the spread over
LIBOR depending upon certain financial ratios achieved by the Company. The
Credit Facility has a limit of $25 million for the purpose of issuing letters of
credit. At June 29, 1996 the Company had used $7.2 million for letters of credit
and borrowed the remaining amount available under the facility. In April 1996
the Company amended the Credit Facility to secure it with accounts receivable,
inventory and equipment as collateral. The collateral has a value of $380
million at June 29, 1996.
The 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. As a
result of the losses incurred in fiscal 1996, the Company did not achieve
certain required financial ratios, and therefore has reported the Credit
Facility as current debt. The Company is negotiating with certain other lenders
to refinance the debt.
Total interest expense incurred by the Company was $19,703,000, $13,947,000 and
$8,639,000 in the 1996, 1995 and 1994 fiscal years, respectively, of which
$710,000 and $301,000 was capitalized in fiscal 1996 and 1995, respectively.
Total interest paid during the 1996, 1995 and 1994 fiscal years was $18,088,000,
$12,940,000 and $8,275,000, respectively.
Rent expense relating to operating leases was approximately $6,276,000 (1996),
$6,081,000 (1995), and $5,617,000 (1994). 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>
1997....................... $242,361,000 $ 4,443,000
1998....................... 154,000 3,186,000
1999....................... 42,000 3,165,000
2000....................... 43,000 1,612,000
2001....................... 44,000 1,016,000
Later Years................ 2,156,000
$242,644,000 $15,578,000
</TABLE>
22
<PAGE>
NOTE E -- SHAREHOLDERS' EQUITY
The Stock Option Plan was approved by the shareholders in fiscal 1991, and
amended in fiscal 1996. The Plan gives the Company the right to grant options
for up to 600,000 shares of Common Stock to employees. Prior to the amendment,
the Company could grant options for up to 300,000 shares. Transactions under the
Stock Option Plan are as follows:
<TABLE>
<CAPTION>
Prices Outstanding Exercisable
<S> <C> <C> <C>
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
Granted........ 3.06-4.38 254,675
Became
exercisable.. 3.38-9.94 27,875
Exercised...... 4.00-5.13 (49,125) (49,125)
Cancelled...... 5.88-5.88 (7,500)
June 29, 1996.... 3.06-9.94 327,300 41,875
</TABLE>
The weighted average exercise price for all options outstanding was $6.32 per
share at June 29, 1996. These options expire on various dates beginning November
1996 and ending on February 2001. 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 $152,000, $161,000 and
$232,000 during fiscal 1996, 1995 and 1994, respectively. Options available for
grant at June 29, 1996, July 1, 1995 and July 2, 1994 were 91,325, 38,500 and
87,624, respectively.
The Incentive Stock Award Plan was approved by the shareholders in fiscal 1991,
and amended in fiscal 1996. The Plan gives the Company the right to grant awards
for up to 800,000 shares of Common Stock to employees. Prior to the amendment,
the Company could grant awards for up to 300,000 shares.
Under the Incentive Stock Award Plan awards are granted for the right to
purchase shares for $.01. During fiscal 1996 rights to purchase 22,206 shares
were cancelled. During fiscal 1995 and 1994 awards were granted for the right to
purchase up to 19,723 shares and 260,581 shares, respectively. 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 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 $615,000,
$939,000 and $1,111,000 for the fiscal years 1996, 1995 and 1994, respectively.
Shares available for grant at June 29, 1996 were 380,121.
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 shareholders have authorized the Board of Directors to issue up to 10
million shares of preferred stock with a maximum aggregate par value of $250
million, and to establish the particular terms including dividend rates,
conversion prices, voting rights, redemption prices and similar matters.
23
<PAGE>
NOTE F -- INCOME TAXES
For fiscal 1996, the Company had a tax loss of $36 million. The Company expects
to carry a portion of this loss back to fiscal 1993 to obtain a tax refund of
approximately $8.5 million. After this carryback, the Company will have a
federal net operating loss (NOL) carryforward of $5 million. In addition, the
Company has state NOL carryovers of $78 million which expire in years 1999
through 2011. The Company has also recognized valuation allowances for all
outstanding deferred tax assets (net of deferred tax liabilities) including the
NOL carryforwards for fiscal 1996. The increase in valuation allowances for
fiscal 1996 was $9.6 million.
At June 29, 1996, in addition to the NOL carryforward discussed above, the
Company had other federal net operating loss carryforwards of $9.2 million for
income tax purposes that expire in fiscal years 2002 and 2003. Those
carryforwards resulted from the Company's 1988 acquisition of Stanwood
Corporation. In addition to net operating loss carryforwards from Stanwood
Corporation the Company has unused general business credit carryforwards of
$610,000 which will expire in fiscal years ending 1999 through 2003. 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 1996, the Company's gross deferred tax assets are
approximately $49 million. The deferred tax assets have been reduced by a
valuation allowance of approximately $15 million. The valuation allowance is
adjusted from time to time as tax benefits are realized.
Significant components of the Company's deferred tax assets and liabilities are
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Inventory........................ $17,197,000 $ 5,183,000
Net operating loss
carryforwards.................. 9,508,000 6,665,000
Restructuring reserves........... 6,180,000
Tax credit carryforward.......... 5,590,000 4,370,000
Deferred compensation............ 2,606,000 2,111,000
Health claims.................... 2,374,000 1,310,000
Allowance for doubtful
accounts....................... 1,870,000 1,527,000
Litigation accrual............... 1,219,000
Accrued vacation................. 636,000 696,000
Stock compensation accruals...... 444,000 837,000
Workers' compensation............ 193,000 311,000
Other............................ 2,809,000 2,080,000
Subtotal......................... 49,407,000 26,309,000
Valuation allowance.............. (15,181,000) (5,631,000)
Deferred tax assets.............. 34,226,000 20,678,000
Liabilities
Depreciation..................... 27,149,000 27,053,000
Inventory -- LIFO basis
difference..................... 3,575,000 3,511,000
Intangibles...................... 2,145,000 2,128,000
Other............................ 1,357,000 508,000
Deferred tax liabilities......... 34,226,000 33,200,000
Net deferred tax
liabilities................ $ 0 $12,522,000
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal income taxes.......................................................... $ (8,962,000) $ 883,000 $ 2,029,000
State income taxes............................................................ 526,000 726,000 148,000
Total current............................................................... (8,436,000) 1,609,000 2,177,000
Deferred:
Federal income taxes (benefits)............................................... (10,506,000) 5,190,000 (9,593,000)
State income taxes (benefits)................................................. (2,016,000) 873,000 (1,217,000)
Total deferred.............................................................. (12,522,000) 6,063,000 (10,810,000)
Total provision................................................................. $(20,958,000) $7,672,000 $ (8,633,000)
</TABLE>
24
<PAGE>
NOTE F -- INCOME TAXES (CONTINUED)
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rates................................... $(29,259,000) $6,220,000 $(9,076,000)
State taxes (benefits) net of federal benefit..................................... (969,000) 1,039,000 (695,000)
Life insurance proceeds........................................................... (760,000)
Amortization of excess of cost over assigned value of net assets acquired......... 293,000 280,000 865,000
Foreign subsidiary loss (income).................................................. 285,000 336,000 101,000
State NOL benefits................................................................ (940,000) (736,000)
Valuation allowance adjustments................................................... 9,550,000 1,706,000 372,000
Other............................................................................. (858,000) (209,000) 536,000
$(20,958,000) $7,672,000 $(8,633,000)
</TABLE>
The Company made income tax payments of approximately $1,628,000, $5,377,000 and
$2,350,000 during the 1996, 1995 and 1994 fiscal years, respectively.
NOTE G -- 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 H -- EMPLOYEE BENEFIT PLANS
Under the terms of the Delta Woodside Industries Employee Retirement Plan, the
Board of Directors has the discretion to authorize contributions from time to
time to the Retirement Plan of cash or a maximum of 504,790 shares of the
Company's Common Stock. A trustee holds the assets of the Retirement Plan for
the benefit of the participants who may withdraw amounts or shares only upon
retirement, death, disability or other termination of employment. All employees
of the Company who are at least 21 years of age with one year of service
participate in the Retirement Plan. Amounts allocated to participant accounts
generally vest over a five-year period. Each participant has the right to direct
the trustee as to the manner in which shares held are to be voted. The
Retirement Plan qualifies as an Employee Stock Ownership Plan ("ESOP") under the
Internal Revenue Code as a defined contribution plan. Contributions of $400,000,
$358,000 and $363,000 were allocated to participants for fiscal 1996, 1995 and
1994, respectively.
The Company maintains a 401(k) Employee Savings and Investment Plan for
employees meeting certain eligibility requirements. During fiscal 1996 and 1995,
the Company contributed $543,000 and $196,000, respectively, to the Plan. The
Company made no contributions to the Plan during fiscal 1994.
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 June 29, 1996 and July 1, 1995, the
total liability amounted to $6,138,000 and $5,273,000, respectively. The Company
insured the lives of certain management employees to assist in funding of the
deferred compensation liability. The Company is the owner and beneficiary of the
insurance policies.
NOTE I -- AFFILIATED PARTY TRANSACTIONS
The Company leases its corporate and other office space from a corporation whose
stock is owned one-half each by the president and a vice president of the
Company. Additional office space and retail store space is leased from the
executive vice president. Certain of these leases are on a monthly basis with
others expiring in 1997. Under the leases, the Company made payments of
approximately $216,000, $254,000 and $292,000 for the 1996, 1995 and 1994 fiscal
years, respectively.
25
<PAGE>
NOTE J -- 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 financial
instruments which require fair value disclosure.
NOTE K -- RESTRUCTURING AND IMPAIRMENT CHARGES
The history of operating losses at the knitting and knit finishing operations at
two plants in the knitted fabrics division of the textile segment caused the
Company to recognize a charge of $12 million during fiscal 1996 to reduce the
book value of the fixed assets in this business to the appraised value.
The Company also recognized restructuring charges of $8 million for plant
closings in the woven textile division and in the apparel segment. Of the $8
million, $4 million is for the write-down of property, plant and equipment, and
$4 million is for expenses which will be incurred in connection with the plant
closings.
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.
NOTE L -- COMMITMENTS AND CONTINGENCIES
During fiscal 1997, the Company plans to spend approximately $33 million for
capital improvements and new equipment, primarily to complete the modernization
program for the woven fabrics division of the Company's textile segment.
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.
26
<PAGE>
NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended June 29, 1996 and July 1, 1995:
<TABLE>
<CAPTION>
Quarter Ended
September 30 December 30 March 30 June 29
<S> <C> <C> <C> <C>
(In thousands, except per share data)
1996
Net sales.......................................................... $141,043 $ 150,558 $143,269 $165,302
Gross profit....................................................... 20,764 15,614 12,152 (23,569)
Net income (loss).................................................. 1,327 367 (8,659 ) (55,674)
Earnings (loss) per share of Common Stock.......................... 0.05 0.02 (0.35 ) (2.28)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
October 1 December 31 April 1 July 1
<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 per share of Common Stock................................. 0.17 0.02 0.04 0.19
</TABLE>
During the fourth quarter of fiscal 1996, the Company recognized impairment and
restructuring charges of $20 million, and wrote down the value of excess
inventories in the branded apparel division by $25 million. Also, cost of goods
sold in the fourth quarter includes a charge of $1,061,000 attributable to
cotton purchase commitments at prices in excess of market value and in
quantities in excess of orders from customers.
During the second quarter of fiscal 1996 the Company recognized $9 million in
credits related to litigation charges first recognized in fiscal 1994.
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.
27
<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
1020 Barrow Industrial Parkway
Winder, GA 30680-0688
DELTA APPAREL COMPANY
3355 Breckinridge Boulevard
Suite 100
Duluth, GA 30136
INTERNATIONAL APPAREL MARKETING CORPORATION
80 West 40th Street, Suite 42
New York, New York 10018
PRIVATE LABEL DIVISION
P.O. Box 688
1020 Barrow Industrial Parkway
Winder, GA 30680-0688
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
Mars Hill College
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 June 29, 1996 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 7, 1996, at 10:30 a.m., at the Dorothy Gunter Theater
of the Peace Center, 101 West Broad Street, Greenville, South Carolina.
28
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
233 N. Main Street
Hammond Square, Suite 200
Greenville, SC 29601
(864) 232-8301
<PAGE>
To the Shareholders of Delta Woodside
Industries, Inc.:
We want to keep you informed about Delta Woodside's performance, but we
believe that the most timely and cost-effective approach is to mail updates only
to those who request the information.
We have made this decision for two reasons. One is the rising cost of
producing and mailing quarterly reports. The other is the recognition that many
investors now have access to the news wires and computerized data bases that
report Delta Woodside's results on the same day that we release them to the
media.
If you wish to be mailed a copy of Delta Woodside's three quarterly news
releases during 1997, simply complete and return the attached postcard.
Please send me a copy of Delta Woodside's 1997 quarterly news releases.
Name
Address
City State Zip
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Place
Stamp
Here
Delta Woodside Industries, Inc.
233 N. Main Street
Suite 200
Greenville, S.C. 29601
