UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0535180
(State of Incorporation) (I.R.S. Employer
Identification No.)
233 N. Main Street, Hammond Square, Suite 200
Greenville, South Carolina 29601
(Address of principal executive offices) (Zip code)
864/232-8301
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to be best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of September 23, 1997 was :
Common Stock, $.01 par value - $89,579,852
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of September 23, 1997 was:
Common Stock, par value $.01 24,572,742
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's
Annual Report to shareholders for the fiscal year ended June 28,
1997 are incorporated by reference into Parts I and II.
Portions of the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the annual shareholders' meeting
to be held on November 6, 1997 are incorporated by reference into
Part III.
Item 1 BUSINESS
General
Delta Woodside Industries, Inc. ("Delta Woodside" or the
"Company") is a South Carolina corporation with its principal
executive offices located at 233 North Main Street, Suite 200,
Greenville, South Carolina 29601 (telephone number: 864-232-
8301). All references herein to Delta Woodside or the Company
refer to Delta Woodside Industries, Inc. and its subsidiaries.
The Company manufactures and markets woven and knitted
fabrics and apparel. The Company's textile segment produces a
range of cotton, synthetic and blended finished and unfinished
fabrics, woven and knit, which are sold for the ultimate
production of apparel, home furnishings and other products. The
Company's apparel segment produces woven and knit apparel,
including the "Duck Head" (Reg. trademark) line of casualwear
marketed primarily in the Southeastern United States to
department stores and specialty apparel retailers. The Company
also operates 31 retail apparel outlet stores that sell primarily
closeout and irregular "Duck Head" products and other woven and
knit casualwear produced by the "Duck Head" division and other
manufacturers. The Company also manufactures and distributes
physical fitness equipment under the "Nautilus" (Reg. trademark)
name. The Company has operations in 13 states, Costa Rica and
Honduras, and employs approximately 7,400 employees.
Delta Woodside Industries, Inc. is the successor by merger
to Delta Woodside Industries, Inc., a Delaware corporation that
was incorporated in 1986 and whose subsidiaries' businesses were
acquired beginning in 1984. The corporation that is now Delta
Woodside Industries, Inc. was incorporated in 1972.
Products, Marketing and Manufacturing
The Company conducts its textile fabrics operations through
the Delta Mills Marketing (woven fabrics) and Stevcoknit (knitted
fabrics) divisions. It conducts its branded and non-branded
apparel operations through the "Duck Head" and "Delta Apparel"
(Reg. trademarks) divisions, respectively. The Company also
manufactures and sells fitness equipment through the "Nautilus"
(Reg. trademark) division, and licenses the use of both the "Duck
Head" and "Nautilus" trademarks through International Apparel
Marketing Corporation (70% owned). Each division has its own
management and employees and operates independently of the other
divisions under the overall direction of the Company's executive
officers. Intersegment sales accounted for no more than
approximately 4% of total sales for fiscal 1997, 1996 and 1995.
Fabrics produced by the Company are either woven or knitted
and are manufactured from cotton, wool or synthetic fibers or
from synthetic filament yarns. Cotton and wool are purchased from
numerous suppliers. Synthetic fibers and synthetic filament yarns
are purchased from a smaller number of competitive suppliers. The
Company spins the major portion of the yarns used in its weaving
and knitting operations. In manufacturing these yarns, the cotton
and synthetic fiber, either separately or in blends, are carded
(fibers straightened and oriented) and then spun into yarn. The
Company combs (removing short fibers) some cotton fiber to make
higher quality
Item 1 (Continued)
yarns. In other fabrics, filament yarns are used. The spun or
filament yarn is then woven into fabric on looms or knitted into
fabric on knitting machines. The unfinished fabric at this stage
is referred to as greige goods. Finished fabric refers to fabric
that has been treated by washing, bleaching, dyeing and applying
certain chemical finishes. Finished fabrics generally have
significantly higher margins than greige goods.
The Company sells its woven fabrics primarily to numerous
apparel manufacturers and apparel resellers. The Company's
knitted fabrics are sold for production of apparel to other
branded and private label manufacturers. Apparel products are
sold primarily to department and specialty retailers under the
Company's "Duck Head" label, to private label apparel resellers,
to distributors and to screen printers.
Textile Segment
The Company sells a broad range of fabrics primarily to
branded apparel manufacturers and resellers, including Levi
Strauss, Haggar Corp., the Wrangler(R) and Lee(R) divisions of
V.F. Corporation, Farah Incorporated, Kellwood Company and Liz
Claiborne, Inc., and private label apparel manufacturers for J.C.
Penney Company, Inc., Sears, Roebuck & Co. and other retailers.
The Company believes that it is a leading producer of cotton
pants-weight woven fabric used in the manufacture of casual
slacks such as Levi Strauss' Dockers(R) and Haggar Corp.'s
Wrinkle-Free(R). Other apparel items manufactured with the
Company's woven fabrics include women's chinos pants, women's
blazers, career apparel (uniforms) and battle dress camouflage
military uniforms. Apparel items manufactured with the Company's
knitted fabrics include polo-type or golf shirts, career apparel,
children's apparel, specialty athletic wear and ladies' tops.
Net sales of woven fabrics were $336 million, $294 million
and $291 million and net sales of knitted fabrics were $98
million, $83 million and $103 million, during fiscal 1997, 1996
and 1995, respectively.
The woven fabrics division began a capital improvement
program during fiscal year 1992 that was designed to modernize
certain fiber opening, carding, spinning, weaving and fabric
finishing processes to focus on the production of heavier-weight,
higher-margin goods. By the end of fiscal year 1997, expenditures
for this six-year program totaled $112.8 million. As a result,
the division has reduced its manufacturing square footage by
approximately 18% and the number of employees by 26%. In the
modernization program, the woven fabrics division reduced its
capacity to produce lower price greige goods but increased its
capacity to finish fabrics. As a consequence, the woven fabrics
division has increased its outside purchases of greige goods. The
Company believes that these changes provide it with the
opportunity to increase its overall sales levels and to expand
its operating margins.
The knitted fabrics division began a consolidation and
modernization project in fiscal year 1992 to consolidate the
number of its manufacturing facilities from four spinning, two
knitting and two finishing plants to two spinning, one knitting
and one finishing plant. During the past
Item 1 (Continued)
five fiscal years, capital expenditures for the program totaled
$42.1 million. Simultaneously, certain knitting, dyeing and
finishing processes were modernized. With the successful
completion of this project, manufacturing square footage was
reduced by 37% and the number of employees was reduced by 26%,
with no material change in total knitted fabric capacity.
These initiatives have resulted in a significant reduction
in the costs in the textile segment.
Delta Mills Marketing Company (Woven Fabrics).
The woven fabrics division produces finished and unfinished
woven fabrics used in the production of apparel, home furnishings
and other products. Finished apparel fabric is ready to be cut
and sewn into garments. Greige goods are typically sold to
converters who enhance the fabric through finishing techniques
and sell it to manufacturers of apparel, home furnishings and
other products.
Finished woven fabrics produced by the division are
primarily sold directly to major apparel manufacturers. The
woven fabrics division has focused its marketing efforts on
building close relationships with major apparel companies that
have broad distribution channels and that the Company believes
have positioned themselves for long-term growth. The division's
marketing efforts focus on four primary apparel manufacturing
groups: women's apparel, including fashion apparel; men's
apparel; career apparel and uniforms; and military and other
government uniforms and apparel. The woven fabrics division sells
and distributes its fabrics through a marketing office based in
New York City (which serves the United States, Canadian and
Mexican markets), with sales agents also operating from Atlanta,
Chicago, Dallas, Los Angeles and San Francisco. The division also
has international sales agents in the United Kingdom and Hong
Kong.
Approximately 70% of the division's finished woven fabric
sales are of fabrics made from cotton or cotton/synthetic blends,
while approximately 30% of such sales are of fabrics made from
spun synthetics and other natural fibers, including various
blends of rayon, polyester and wool. During fiscal year 1997, the
woven fabrics division sold finished fabrics at a cost of $239.6
million and unfinished fabrics at a cost of $31.6 million. Woven
fabrics are generally produced and shipped pursuant to specific
purchase orders, which minimizes the Company's uncommitted
inventory levels. The division's production of cotton and
cotton/synthetic blend finished woven fabrics is largely
vertically integrated, with the division performing most of its
own spinning, weaving and finishing. The production of spun
synthetic finished woven fabrics is fully vertically integrated,
with various plants in the division performing spinning, weaving
and finishing operations. In the production of military fabrics,
the Company purchases a portion of its greige goods needs and
finishes this fabric to specifications. The woven fabrics
division is currently operating its manufacturing facilities at
near full capacity.
Item 1 (Continued)
The division also produces a variety of unfinished
light-weight woven fabrics that are ultimately used in the
manufacture of apparel (including blouses, dresses and suit
linings), home furnishings (including shower curtains) and
medical tape. Fabrics include filament acetate, textured
polyester and other "semi-fancy" fabrics of more complicated
construction.
Stevcoknit (Knitted Fabrics).
The knitted fabrics division spins yarn and knits and
finishes a wide range of circular knit fabrics for use in the
manufacture of knit apparel. The division also provides yarn to
the Company's apparel segment.
The knitted fabric division's marketing resources are
focused on the following segments: (i) major apparel companies
that market casual wear such as knit polo-type shirts, (ii)
children's wear manufacturers and (iii) career apparel. The
knitted fabric division's products are marketed to numerous
apparel manufacturers through marketing staffs employed by the
Company in New York City and Los Angeles, with sales personnel
also located in North Carolina, Georgia and Texas. To promote
further the sales of the knitted fabrics division's fabrics to
apparel manufacturers, the marketing staff of the division also
contacts major retailers of products manufactured from the
division's knitted fabrics. Discussions with these retailers
provide information relating to fabric quality and trends in
style and color. In addition to its sales to apparel
manufacturers, the division also sells prepared for print fabrics
to converters and printers principally through a single broker.
The Company believes that, because of the competitive brokerage
environment, the loss of this broker would not have a material
adverse effect on the Company. There can be no assurance,
however, that this would be the case.
The operations within the knitted fabrics division are
largely vertically integrated. Various plants are equipped to
perform all stages of the manufacturing process, from carding and
spinning the raw fiber stock to knitting, dyeing and finishing
the final fabric product. The fabrics produced by this division
are manufactured primarily by using 100% cotton and
polyester/cotton blends. Knitting and finishing of the fabrics
are performed to specific customer orders in the case of orders
representing the majority of the dollar volume of this division.
The knitted fabrics division is currently operating its
manufacturing facilities at near full capacity.
Raw Materials
The textile segment's principal raw material is cotton,
although it also spins polyester, wool, linen fiber, acrylic,
nylon and rayon fibers and weaves filament acetate and textured
polyester. Polyester is obtained primarily from three major
suppliers, all of whom provide competitive prices. Polyester and
rayon are currently at the lowest prices the Company has paid
since fiscal year 1993. There can be no assurance, however, that
this trend will continue. During fiscal year 1997, the Company's
average delivered price per pound of cotton purchased and
consumed (including freight, carrying costs and costs for the
relatively high amount of premium
Item 1 (Continued)
cotton that the Company uses) was $.833, as compared to $.944 in
fiscal year 1996 and $.817 in fiscal year 1995. In fiscal year
1998, the Company expects to use approximately 92 million pounds
of cotton (including approximately 17 million pounds of premium
cotton) and 23 million pounds of polyester in its manufacture of
yarn for woven and knitted textiles. The Company has contracted
to purchase, at average delivered prices lower than in the
preceding fiscal year, about 71% of its expected cotton
requirements for fiscal year 1998 and 14% of its expected cotton
requirements for fiscal year 1999. The percentage of the
Company's cotton requirements that the Company fixes each year
varies depending upon the Company's forecast of future cotton
prices. The Company believes that recent cotton prices have
enabled it to contract for cotton at prices that will permit it
to be competitive with other companies in the United States
textile industry when the cotton purchased for future use is put
into production. To the extent that cotton prices decrease before
the Company uses these future purchases, the Company could be
materially and adversely affected. In addition, to the extent
that cotton prices increase, the Company may be materially and
adversely affected as there can be no assurance that it would be
able to pass along these increased costs to its customers.
Apparel Segment
The apparel segment produces and markets both woven apparel
and knitted apparel. The segment's products include branded
apparel marketed under the "Duck Head" line of men's and boys'
casualwear, which includes pants, shorts and shirts. Knitted
apparel for printing includes T-shirts, polo-type shirts and
sweatshirts which are sold under the labels of "Duck Head",
"Delta Apparel", and various private labels.
"Duck Head" Apparel. The division produces collections of
men's and boys' casual apparel, sold under the "Duck Head" label,
including pants, shorts, shirts and accessories. This division
also sells a relatively small amount of men's and boys' woven
uniform, sportswear and casualwear under the private labels of
its customers. The division also licenses various other
categories of apparel and accessories, through an affiliated
company.
"Duck Head" labeled products are primarily marketed by
employed sales staff to regional and national retailers. The
"Duck Head" trademark has been associated with apparel since 1865
and has been historically distributed in the Southeastern United
States. The company acquired the brand in February 1989. The
company has recently capitalized on the rise in popularity of the
brand and expanded its marketing efforts in department stores
nationwide. The division opened its first in-store Duck Head Shop
in April 1997 and now has installed over 200 men's and 150 boys'
shops in major department stores. The "shop" display format of
the entire Duck Head line utilizes dedicated retail floorspace in
the sportswear department positioned with other prominent
national brands. Gross sales of "Duck Head" labeled products were
approximately $90 million, $79 million and $81 million during
fiscal 1997, 1996, and 1995, respectively.
Item 1 (Continued)
"Duck Head" Apparel operates a total of 5 facilities located
in Georgia and Costa Rica. The division purchases the fabrics
used in its products from a number of producers. "Duck Head"
currently acquires less than one-half of its finished products
from other companies throughout the
world. This outside production takes the form of sewing fabric
parts cut at "Duck Head" facilities, cutting and sewing with
fabric and patterns supplied by "Duck Head", or providing
finished garments made to "Duck Head" specifications. The
division maintains a staff of quality specialists who
consistently monitor work in process at outside companies. The
Company believes that there is ample capacity among outside
contractors worldwide to meet its future production requirements.
All of the products are warehoused in the division's facilities.
"Duck Head" labeled apparel items are generally required to
be inventoried to permit quick shipment and to level production
schedules. Customer private label apparel items are generally
made only to order. The division's products are manufactured
primarily from 100% cotton. The division's marketing office is
based in Winder, Georgia with regional sales managers and sales
personnel located throughout the country.
The "Duck Head" division has 31 outlet stores in 10 states
that sell principally closeout and irregular "Duck Head"
products. These stores also sell a small amount of apparel items
manufactured by Duck Head licensees.
"Delta Apparel". "Delta Apparel", which is headquartered in
Duluth, Georgia, operates a total of 5 facilities and produces
knitted T-shirts, polo-type shirts and sweatshirts. The division
markets its products primarily to companies that screen print
shirts for resale and to distributors. Net sales in this
division were $112 million, $123 million and $102 million during
fiscal 1997, 1996, and 1995, respectively.
The division's knit apparel marketing is performed by
employed sales personnel located throughout the country. Sales
personnel call directly on the retail trade, contacting
department stores, distributors, screen printing companies and
the mass marketers such as discount houses. This operation also
utilizes independent sales representatives to sell to
distributors and screen printing companies. Most knit apparel
items are inventoried to permit quick shipment and to level
production schedules. Special fashion knit apparel items and
customer private label knit apparel styles generally are made
only to order.
Of the yarn used by the Company's knit apparel
operation, approximately one-half is produced by Stevcoknit with
the remainder purchased from outside vendors; the knit apparel
operation is otherwise largely vertically integrated. The
business manufactures its own knitted fabrics, utilizing
knitting, dyeing and finishing processes, and cuts and sews its
finished knitted fabrics into apparel. The fabrics used by the
division are either polyester/cotton blends or 100% cotton.
Item 1 (Continued)
Fitness Equipment
"Nautilus" Fitness Equipment. Nautilus manufactures
strength-training and aerobic exercise equipment for commercial
club, institutional facility and home-use fitness markets. The
newest strength product line is called "2ST" and consists of
machines intended for the commercial club market. The previous
model "Next Generation" product line is currently still
available. Nautilus also produces a line of weight resistance
machines for women called "Nautilus for Women", and the Power
Plus and Free Weight line of equipment. As a supplement to the
weight resistance line, Nautilus produces multi-station machines
that serve those markets that have space and budget limitations.
Nautilus also produces aerobic machines for the institutional
market, including recumbent bikes, stairclimbers, treadmills
and a skate machine. Home products include a multi-station
"Personal Circuit" and lower priced bike and stepper machines.
Nautilus' historical strength has been in the
commercial/institutional market where it targets health clubs,
YMCAs, medical rehabilitation, and corporate facilities. The
manufacturing operations at Nautilus are vertically integrated,
including metal fabrication, metal preparation/painting
facilities, fabrication, and plastic vacuum forming operations.
Fabrication is predominately made-to-stock with customer orders
painted and filled on an assembly-to-order basis. The Company
believes that the manufacturing operation is currently operating
at approximately 75% of capacity.
Competition
The cyclical nature of the textile and apparel industries,
characterized by rapid shifts in fashion, consumer demand and
competitive pressures, results in both price and demand
volatility.
The demand for any particular product varies from time to time
based largely upon changes in consumer preferences and general
economic conditions affecting the textile and apparel industries,
such as consumer expenditures for nondurables. The textile and
apparel industries are also cyclical because the supply of
particular products changes as competitors enter or leave the
market.
The Company sells textiles primarily to domestic apparel
manufacturers, many of which operate offshore sewing operations
and it sells to apparel customers in the domestic market. The
Company competes with numerous domestic and foreign
manufacturers, including companies larger in size and having
greater financial resources than the Company. The principal
competitive factors are price, service, delivery time, quality
and flexibility, with the relative importance of each factor
depending upon the needs of particular customers and the specific
product offering
The woven fabrics division's competitive position varies by
product line. There are several major domestic competitors in the
finished cotton and cotton/polyester blend woven fabrics
Item 1 (Continued)
business, none of which dominates the market. The Company
believes, however, that it has a strong competitive position in
the all cotton pants-weight fabrics business, as well as the spun
synthetic slack-weight and skirt-weight woven fabrics businesses.
In addition, the Company is one of several major domestic
suppliers of acetate unfinished fabric used in apparel linings
and surgical tapes. Additional competitive strengths of the woven
fabrics division include: knowledge of its customers' business
needs; its ability to produce special fabrics such as textured
blends; state-of-the-art spinning, weaving and fabric finishing
equipment at most of its facilities; substantial vertical
integration; and its ability to communicate electronically with
its customers.
The United States knitted fabrics industry is highly
decentralized and is characterized by fierce competition among
many companies. Recently, however, Dyersburg Corporation and West
Point-Stevens, Inc. announced the proposed acquisition by
Dyersburg Corporation of the Alamac (knitted fabrics) division of
West Point-Stevens, Inc. If this acquisition were consummated,
the Company believes that the combined entity would be the
largest circular knitted fabrics manufacturer in the United
States with substantially greater resources than the Company's
knitted fabrics division. This may have a material adverse effect
upon the Company. There can be no assurance that there will not
be further consolidation in this industry. The significant
vertical integration of the knitted fabrics division's
manufacturing operations, its modern production facilities and
its experience in performing the more complicated manufacturing
techniques required in the production of 100% cotton fabrics
enable the Company to compete in the knitted fabric market.
Foreign competition is a significant factor in the United
States fabric market. The Company believes that its relatively
small manual labor component, highly-automated manufacturing
processes and domestic manufacturing base allow the Company to
compete on a price basis and to respond more quickly than foreign
producers to changing fashion trends and to its domestic
customers' delivery schedules. In addition, the Company benefits
from protections afforded to apparel manufacturers based in
certain Latin American and Caribbean countries that ship finished
garments into the United States. NAFTA has effectively eliminated
or substantially reduced tariffs on goods imported from Mexico if
such goods are made from fabric originating in Canada, Mexico or
the United States. Section 807 provides for the duty-free
treatment of United States origin components used in the assembly
of imported articles. The result is that duty is assessed only on
the value of any foreign components that may be present and the
labor costs incurred offshore in the assembly of apparel using
United States origin fabric components. Because Section 807
creates an incentive to use fabric manufactured in the United
States, it is beneficial to the Company and other domestic
producers of apparel fabrics. In addition, pursuant to Section
807A, apparel articles assembled in a Caribbean country, in which
all fabric components have been wholly formed and cut in the
United States, are subject to preferential quotas with respect to
access into the United States for such qualifying apparel, in
addition to the significant tariff reduction pursuant to Section
807. A similar program, enacted as a result of NAFTA and referred
to as the Special Regime Program, provides even greater benefits
(complete duty-free, quota-free treatment) for apparel assembled
in Mexico from fabric components formed and cut in the United
States. In contrast, apparel not meeting the criteria of Section
807, Section
Item 1 (Continued)
807A, or the Special Regime Program, is subject to quotas and/or
relatively higher tariffs. If Section 807, Section 807A or the
Special Regime Program were repealed or altered in whole or in
part, the Company believes that it could be at a serious
competitive disadvantage relative to textile manufacturers in
other parts of the world seeking to enter the United States
market, which would have a material and adverse effect on the
Company. Moreover, there can be no assurance that the current
favorable regulatory environment will continue or that other
geographic areas will not be afforded similar regulatory
advantages.
The apparel segment competes with numerous domestic and
foreign manufacturers of branded and private label apparel.
Foreign competition has been an increasingly significant factor
in the apparel manufacturing industry, particularly with respect
to items that require labor-
intensive production, such as shirts and jackets, and high cost
luxury items. Although domestic apparel companies must compete
to some extent on a price basis with foreign competition, the
Company's management believes that domestic apparel companies can
best compete by selling branded products, by manufacturing off-
shore, by offering product flexibility, by responding quickly to
changes in consumer demand and by providing more timely
deliveries. The latter characteristics permit retailers to
reduce their inventory costs and lower the risk that product
availability will not match consumer demand. The Company's
operations are oriented toward providing its apparel segment and
the customers of its textile segment with all or some of these
competitive advantages. The Company believes that it and its
domestic customers can address quality control problems more
easily than can manufacturers and distributors of foreign
products.
Furthermore, the customers of foreign suppliers generally face
letter of credit fees, and occasionally face delivery delays and
claims resolution difficulties.
The Company believes that several aspects of its operations
may mitigate some of the problems posed by competition within the
domestic textile and apparel industries. The variety of the
Company's products offers some degree of protection against the
cyclical nature of the business of individual products.
Management of the Company believes that the percentage of its
production cost attributable to labor is comparable to that of
its domestic competitors. Other competitive strengths include:
the modern equipment in several of its plants; and the Company's
achievement of substantial vertical integration in its various
divisions.
Nautilus competes in the institutional fitness market which
is fragmented and highly competitive. The fitness equipment
industry generally competes for business on price, quality,
specifications and service. Management of the Company believes
that Nautilus has a strong
competitive position because of its high name recognition in
markets and its reputation for high quality and durable
equipment.
Item 1 (Continued)
Employees
The Company has approximately 7,400 employees. The
Company's employees are not represented by unions. The Company
believes that its relations with its employees are good.
Environmental and Regulatory Matters
Delta Woodside is subject to various federal, state and
local environmental laws and regulations concerning, among other
things, wastewater discharges, storm water flows, air emissions,
ozone depletion and solid waste disposal. Delta Woodside's
plants generate very small quantities of hazardous waste which
are either recycled or disposed of off-site. Most of its plants
are required to possess one or more discharge permits.
The information contained under the subheading
"Environmental Matters" under the heading "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" incorporated into item 7 of this form 10-K is
incorporated herein for reference.
Generally, the environmental rules applicable to the Company
are becoming increasingly stringent. The Company incurs capital
and other expenditures in each year that are aimed at achieving
compliance with current and future environmental standards.
The Company does not expect that the amount of such
expenditures in the future will have a material adverse effect on
its operations or financial condition. There can be no
assurance, however, that future changes in federal, state or
local regulations, interpretations of existing regulations or the
discovery of currently unknown problems or conditions will not
require substantial additional expenditures. Similarly, the
extent of Delta Woodside's liability, if any, for past failures
to comply with laws, regulations and permits applicable to its
operations cannot be determined.
Industry Segment Information
Segment information made part of Note G of the Company's
consolidated financial statements for the fiscal year ended June
28, 1997 is incorporated herein by reference.
Other
Information concerning order backlogs in "Management's
Discussion and Analysis of Results of Operations and Financial
Condition, Consolidated Company Results, Fiscal 1997 Versus
Fiscal 1996" incorporated into Item 7 of this Form 10-K is
incorporated herein by reference.
Item 2. PROPERTIES
The following table provides a description of Delta
Woodside's principal production and warehouse facilities.
Approximate
Square Approximate
Location Utilization Footage Acreage
Greenville, SC Admin. Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC knit/dye/finish/cut 390,000 (2)
Furman Plant, Fountain Inn, SC weave 136,000 (2)
Estes Plant, Piedmont, SC spin/weave 332,000 (2)
Delta 3 Plant, Wallace, SC dye/finish 555,000 (2)
Cypress Plant, Pamplico, SC spin 144,000 (2)
Pamplico Plant, Pamplico, SC spin/weave 275,000 (2)
Delta 2 Plant, Wallace, SC dye/finish 347,000 (2)
Catawba Plant, Maiden, NC spin 115,000 Owned
Greer, SC Admin. Offices 12,000 Owned
Carter Plant, Wallace, NC dye/finish 485,000 Owned
Holly Plant, Wallace, NC knit/finish 224,000 Owned
Rainsford Plant, Edgefield, SC spin 296,000 Owned
Mickel Plant, Spartanburg, SC spin 207,000 Owned
Apparel Segment
Duluth, GA Admin. Offices 40,244 Leased
Maiden Plant, Maiden, NC knit/dye/finish/cut 305,000 Owned
Washington Plant, Washington, GA sew 129,800 Owned
Distribution Center, Knoxville, TN distribution 550,000 Owned
Decatur Plant, Decatur, TN sew 75,000 Owned(4)
Honduras Plant, San Pedro Sula,
Honduras sew 70,000 Leased(3)
Monroe #3, Monroe, GA cut 52,000 Owned
Monroe #2, Monroe, GA pressing 93,000 Owned
Harmony Plant, San Jose, Costa Rica sew 14,000 Owned
San Jose Plant, San Jose, Costa Rica sew 60,000 Leased(3)
316 Distribution Center, Winder, GA warehouse 200,000 Owned
Various (5) stores
Fitness Equipment Division
Independence, VA manufacturing 251,000 Owned
Item 2. PROPERTIES
(1) Lease expires in 1998 with the right to renew for two
additional five year periods.
(2) Titles to these facilities and substantially all of the
equipment located in such facilities are held by three South
Carolina counties under a fee-in-lieu-of-taxes arrangement,
which has the effect of substantially reducing the Company's
property taxes in South Carolina. Although the Company can
reacquire such property at a nominal price, this would
currently cause a significant increase in the amount of
property taxes paid by the Company.
(3) The Honduras plant has a lease that expires in November
2000. The San Jose plant is leased on a month-to-month
basis.
(4) The "Duck Head " Outlet Stores lease a portion of the
facility for retail sales.
(5) The "Duck head" Outlet Stores Operation leases 31
facilities in 10 states, which leased
space is approximately 173,000 square feet. These leases
expire at various dates through 2005.
Except as noted above all of the above facilities are owned
by Delta Woodside or one of its subsidiaries, subject in certain
cases to various outstanding mortgages and security interests.
Delta Woodside leases corporate offices in Greenville, South
Carolina. The lease on the corporate offices expires December
1997. Sales offices are leased in or near Charlotte, New York,
Chicago, Newport Beach, San Francisco, Dallas and Los Angeles
with leases expiring through December 2004.
At the date of execution of this Form 10-K, the Company
believes that its weaving and knitting plants are operating near
full production capacity. Various factors affect the relative use
by the Company's apparel segment of its own facilities and
outside contractors in the various apparel production phases.
This segment is currently using the majority of its internal
production capacity. The fitness equipment operation is
operating at approximately 75% of its production capacity.
The Company believes that its equipment and facilities are
generally adequate to allow it to remain competitive with its
principal competitors.
The Company's accounts receivable and inventory, and certain
other intangible property (including the capital stock of the
Company's major united states subsidiaries), secure the company's
credit facility or the credit facility of the company's indirect
wholly owned subsidiary, Delta Mills, Inc.
Item 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries are
defendants in legal actions involving claims arising in the
normal course of its business, including product liability
claims. The Company believes that, as a result of its legal
defenses, insurance arrangements and indemnification provisions
with financially capable parties, none of these actions is
reasonably likely to have a material adverse effect on its
results of operations or financial condition taken as a whole.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's 1997 fiscal year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The material under the heading "Common Stock Market Prices
and Dividends" on the inside front cover of the Company's annual
shareholders' report for the year ended June 28, 1997 is
incorporated herein by reference.
The following table shows the issuances by the Company
during fiscal 1997 of its shares of common stock that were not
registered under the Securities Act of 1933, as amended, and were
not previously reported by the Company in a Form 10-Q.
Amount of Class of Nature of
Date of Issuance Common Stock Persons Transaction
August 27, 1996 350 Employees Service Awards
September 16,1996 50 Employees Service Awards
March 26, 1996 50 Employees Service Awards
January 9,1997 100 Employees Service Awards
January 10, 1997 100 Employees Service Awards
January 14, 1997 200 Employees Service Awards
January 28, 1997 700 Employees Service Awards
February 11, 1997 200 Employees Service Awards
February 19,1997 100 Employees Service Awards
February 20, 1997 100 Employees Service Awards
February 24, 1997 100 Employees Service Awards
February 28, 1997 200 Employees Service Awards
June 17, 1997 550 Employees Service Awards
The Company believes these issuances are exempt from
registration under the Securities Act of 1933 by reason of
Section 4(2) of the Securities Act of 1933 and as not
constituting a "sale".
Item 6. SELECTED FINANCIAL DATA
The material under the heading "Selected Financial Data" on
page 1 of the Company's annual shareholders' report for the year
ended June 28, 1997 is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The material under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on
pages 4 through 9 (exclusive of graphs) of the Company's annual
shareholders' report for the year ended June 28, 1997 is
incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 14
through 20 of the Company's annual shareholders' report for the
year ended June 28, 1997 are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein
by reference from the portions of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the headings "Election of Directors" and "Executive
Officers".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference from the portions of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the headings "Management Compensation" and "Compensation
Committee Interlocks and Insider Participation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein
by reference from the portion of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the heading "Stock Ownership of Principal Shareholders and
Management".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference from the portion of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the heading "Related Party Transactions".
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) and (2) Financial Statements and Financial Statement
Schedules
The response to this portion of Item 14 is set
forth on page F-2 included herein, which response is
incorporated herein by reference.
(3) Listing of Exhibits:*
3.1 Articles of Incorporation of the
Company, as amended through February 5, 1989:
Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 of RSI
Corporation and Porter Brothers, Inc., File No. 33-
30247 (the "Form S-4").
3.1.1 Articles of Amendment to Articles of
Incorporation of the Company: Incorporated by
reference to Exhibit 3.1.2 to the Form S-4.
3.1.2 Articles of Merger of Harper Brothers,
Inc. into RSI Corporation: Incorporated by
reference to Exhibit 4.1.1 to the Registration
Statement of the Company on Form S-8, File No. 33-
33116 (the "1990 Form S-8").
3.1.3 Articles of Merger of Delta Woodside
Industries, Inc., a Delaware corporation, into RSI
Corporation: Incorporated by reference to Exhibit
4.1.2 to the 1990 Form S-8.
3.1.4 Articles of Merger of Duncan Office
Supplies, Inc., into Delta Woodside Industries,
Inc.: Incorporated by reference to Exhibit 3.1 to
the Company's Form 10-Q for the quarterly period
ended December 29, 1990 (the "December 1990 10-
Q").
3.1.5 Articles of Amendment to the Articles of
Incorporation of Delta Woodside Industries, Inc.,
filed with the South Carolina Secretary of State
on November 15, 1991: Incorporated by reference
to Exhibit 4.6 to the Form 10-Q of the Company for
the quarterly period ended December 28, 1991.
3.2 By-laws of the Company, as amended:
Incorporated by reference to Exhibit 3.1.1 to the
Form S-4.
Item 14 (Continued)
3.2.1 Amendments to By-laws of the Company:
Incorporated by reference to Exhibit 3.2 to the
December 1990 10-Q.
3.2.2 Amendment to By-laws of the Company,
adopted as of June 29, 1992: Incorporated by
reference to Exhibit 3.2.2 to the Company's Form
10-K for the fiscal year ended June 27, 1992 (the
"1992 10-K").
4.1 See Exhibits 3.1, 3.1.1, 3.1.2, 3.1.3,
3.1.4, 3.1.5, 3.2, 3.2.1. and 3.2.2.
4.1.1 Specimen of Certificate for the
Company's Common Stock: Incorporated by reference
to Exhibit 4.7 to the Company's Registration
Statement on Form S-3, File No. 33-42710 (the
"Form S-3").
4.2 Amended and Restated Credit Agreement
dated as of March 15, 1996 among Delta Woodside
Industries, Inc., the Lenders named therein, and
NationsBank, N.A. as Agent (with exhibits and
schedules omitted) together with forms of
Promissory Notes,
Subsidiary Guaranty, Borrower Security
Agreement, Subsidiaries Security Agreement and
certain other documents: Incorporated by
reference to Exhibit 4.4 to the Form 10-Q of the
Company for the quarterly period ended March 30,
1996. The Company agrees to furnish
supplementally to the Securities and Exchange
Commission a copy of any omitted schedules or
exhibits to such agreement upon request of the
Commission.
4.2.1 Amendment and Waiver Agreement dated as
of May 20, 1996, by and among Delta Woodside
Industries, Inc., the guarantors identified on the
signature pages attached thereto and the lenders
and agents thereto: Incorporated by reference to
Exhibit 4.4.1 to the Form 8-K of the Company with
date of May 28, 1996 (the "May 1996 8-K"). The
Company agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any
omitted schedules or exhibits to such agreement
upon request of the Commission.
4.2.2 Pledge Agreement dated as of May 20,
1996 by and among Delta Woodside Industries, Inc.,
the guarantors from time to time party thereto and
NationsBank, N.A., in its capacity as agent for
the lenders from time to time party to the Credit
Agreement described therein: Incorporated by
reference to Exhibit 4.4.2 to the May 1996 8-K.
The Company agrees to furnish supplementally to
the Securities and Exchange Commission a copy of
any omitted schedules or exhibits to such
agreement upon request of the Commission.
Item 14 (Continued)
4.2.3 Second Amendment and Waiver Agreement dated
as of December 20, 1996, among Delta Woodside
Industries, Inc., the guarantors identified as such on
the signature pages attached, the lenders and agents,
together with forms of certain real estate lien documents:
Incorporated by reference to Exhibit to the Form 10-Q
of the Company for the quarterly period ended
December 28, 1996. The Company agrees to furnish
supplementally to the securities and Exchange Commission a
copy of any omitted schedules or exhibits to such agreement upon
request of the Commission.
4.2.4 Credit Agreement dated as of August 25, 1997
among Delta Mills,Inc., as Borrower, certain
subsidiaries of the Borrower from time to time party
thereto, as guarantors, the several lenders from time to time
party thereto, NationsBank, N.A., as Administrative Agent, and
BNY Financial Corporation, as Collateral Agent,
together with forms of certain related instruments,
agreements and documents (excluding schedules):
Incorporated by reference to Exhibit 4.2.4 to Form 8-K/A of the
Company with date of September 25, 1997. The Company
agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any
omitted schedules to such agreement upon request of the
Commission.
4.2.5 Credit Agreement dated as of
August 25, 1997 among Delta Woodside Industries,
Inc., as Borrower, certain subsidiaries of the Borrower from
time to time party thereto, as guarantors, the several Lenders
from time to time party thereto and NationsBank,
N. A. as Agent , together with forms of certain
related instruments, agreements and documents (excluding
schedules): Incorporated by reference to Exhibit 4.2.5 to Form 8-
K/A of the Company with date of September 25, 1997.
The Company agrees to furnish supplementally to
the Securities and Exchange Commission a copy of any
omitted schedules to such agreement upon request of the
Commission.
4.2.6 Indenture, dated as of August 25, 1997 with
respect to Delta Mills, Inc. $150,000,000 Series
A and Series B 9 5/8% Senior Notes due 2007, with
The Bank of New York, as Trustee, together with forms of certain
related instruments, agreements and documents:
Incorporated by reference to Exhibit 4.2.6 to
Form 8-K/A of the Company with date of September 25,
1997.
Item 14 (Continued)
4.3 The Company hereby agrees to furnish to
the Commission upon request of the Commission a
copy of any instrument with respect to long-term
debt not being registered in a principal amount
less than 10% of the total assets of the Company
and its subsidiaries on a consolidated basis.
10.1 Lease, dated December 27, 1987 by and
between Hammond Square, Ltd. and the Company:
Incorporated by reference to Exhibit 10.10 to
Registration Statement No. 33-22563 on Form S-4 of
Delta Woodside Industries, Inc., a Delaware
corporation ("Registration Statement No. 33-
22563").
10.2** Delta Woodside Deferred Compensation
Plan for Key Employees: Incorporated by reference
to Exhibit 10.6 to the Form 10-Q of the Company
for the quarterly period ended December 30, 1989.
10.3** Incentive Stock Award Plan effective
July 1, 1990: Incorporated by reference to
Exhibit 10.1 to the Form 10-Q of the Company for
the fiscal quarter ended March 31, 1990.
10.3.1** 1995 Amendment to the Incentive Stock Award
Plan effective as of November 9, 1995:
Incorporated by reference to Exhibit 10.3.1 to the
Form 10-Q of the Company for the quarterly period
ended December 30, 1995 (the "December 1995 10-
Q").
10.4.1** Stock Option Plan effective as of July 1,
1990: Incorporated by reference to Exhibit 10.11
to the Company's Form 10-K for the fiscal year
ended June 30, 1990.
10.4.2** Amendment No. 1 to Stock Option Plan:
Incorporated by reference to Exhibit 10.1 to the
December 1990 10-Q.
10.4.3** Amendment to Stock Option Plan: Incorporated
by reference to Exhibit 10.9.2 to the Company's
Form 10-K for the fiscal year ended June 29, 1991
(the "1991 10-K").
10.4.4** 1995 Amendment to the Stock Option Plan
effective as of November 9, 1995: Incorporated by
reference to Exhibit 10.4.4 to the December 1995
10-Q.
10.5 Stock Transfer Restrictions and Right of
First Refusal Agreement between the Company and E.
Erwin Maddrey, II: Incorporated by reference to
Exhibit 10.2 to the December 1990 10-Q.
Item 14 (Continued)
10.6 Stock Transfer Restrictions and Right of
First Refusal Agreement between the Company and
Bettis C. Rainsford: Incorporated by reference to
Exhibit 10.3 to the December 1990 10-Q.
10.7** Summary of Delta Woodside Industries,
Inc., Director Charitable Giving Program:
Incorporated by reference to Exhibit 10.11 to the
1992 10-K.
10.7.1** Resolution to amend Directors' Charitable
Giving Program dated February 2, 1995:
Incorporated by reference to Exhibit 10.7.1 to the
March 1995 10-Q.
10.8.1** Directors Stock Acquisition Plan:
Incorporated by reference to Exhibit 10.14 to the
1991 10-K.
10.8.2** Amendment of Director Stock Acquisition Plan,
dated April 30, 1992: Incorporated by reference
to Exhibit 10.12.2 to the 1992 10-K.
10.9 See Exhibits 4.2, 4.2.1, 4.2.2, 4.2.3,
4.2.4, 4.2.5, and 4.2.6.
13 Annual Report to Shareholders of the
Company for the fiscal year ended June 28, 1997.
21 Subsidiaries of the Company.
23.1 Report on Schedule and Independent
Auditors' Consent for the years ended June 28,
1997, June 29, 1996 and July 1, 1995.
27 Financial Data Schedule (electronic
filing only).
* All reports previously filed by the Company
with the Commission pursuant to the Exchange Act,
and the rules and regulations promulgated
thereunder, exhibits of which are incorporated to this
Report by reference thereto, were filed under
Commission File Number 1-10095.
** This is a management contract or
compensatory plan or arrangement.
Item 14 (Continued)
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter
ended June 28, 1997.
(c) Exhibits
The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is
submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DELTA WOODSIDE INDUSTRIES,INC.
9/26/97 /s/ E. ErwinMaddrey, II
Date E. Erwin Maddrey, II
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ C. C. Guy 9/26/97 /s/ E. Erwin Maddrey 9/26/97
C. C. Guy Date E.Erwin Maddrey, II Date
Director President, Chief Executive Officer
and Director
/s/ James F. Kane 9/26/97 /s/ Bettis C.Rainsford 9/26/97
James F. Kane Date Bettis C. Rainsford Date
Director Executive Vice President,
Chief Financial Officer, Treasurer
and Director
/s/ Max Lennon 9/24/97 /s/ Douglas J. Stevens 9/26/97
Max Lennon Date Douglas J.Stevens Date
Director Controller and Assistant
Secretary
/s/ Buck A. Mickel 9/26/97
Buck A. Mickel Date
Director
/s/ Buck Mickel 9/26/97
Buck Mickel Date
Director
EXHIBIT INDEX
13 Annual Report to Shareholders of the Company for the fiscal
year ended June 28, 1997.
21 Subsidiaries of the Company.
23.1 Report on Schedule and Independent Auditor's Consent for
the years ended June 28, 1997, June 29, 1996 and July 1, 1995.
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JUNE 28, 1997
DELTA WOODSIDE INDUSTRIES, INC.
GREENVILLE, SOUTH CAROLINA
F-1
FORM 10-K--ITEM 14(a)(1) AND (2)
DELTA WOODSIDE INDUSTRIES, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Delta Woodside
Industries, Inc. and subsidiaries included in the Annual Report of the
Registrant to its shareholders for the Year ended June 28, 1997 are
incorporated by reference in Item 8:
Consolidated balance sheets_June 28, 1997 and June 29, 1996.
Consolidated statements of operations--Years ended June 28, 1997,
June 29, 1996, and July 1, 1995.
Consolidated statements of shareholders' equity--Years ended June
28, 1997, June 29, 1996, and July 1, 1995.
Consolidated statements of cash flows--Years ended June 28, 1997
June 29, 1996, and July 1, 1995.
Notes to consolidated financial statements.
The following consolidated financial statement schedule of Delta
Woodside Industries, Inc. is included in Item 14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted. Columns omitted from schedules filed
have been omitted because the information is not applicable.
F-2
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA WOODSIDE INDUSTRIES, INC.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Balance at
DESCRIPTION Beginning (1) (2) Deductions Balance at End
of Period Charged to Costs Charged to Other Describe of Period
and Expenses Accounts-Describe
<S> <C> <C> <C> <C> <C>
Deducted from asset accounts
Allowance for doubtful accounts:
Year ended June 28, 1997 $ 6,258,000 $ 1,215,000 $ (171,000)(2) $ 1,944,000(1) $5,358,000
Year ended June 29, 1996 $ 5,634,000 $ 2,577,000 $ 695,000(2) $ 2,648,000(1) $6,258,000
Year ended July 1, 1995 $ 3,275,000 $ 3,311,000 $ 36,000(2) $ 988,000(1) $5,634,000
Inventory reserves:
Year Ended June 28, 1997 $40,879,000 $16,415,000(3) $24,464,000
Year ended June 29, 1996 $14,052,000 $26,827,000 $40,879,000
</TABLE>
NOTES:
(1) Uncollectible accounts written off.
(2) Net change in sales allowances charged to income as a reduction of sales.
(3) Deducted from costs and expenses.
<PAGE>
1997 ANNUAL REPORT
<PAGE>
(logo)
CONTENTS
Common Stock Market Prices and
Dividends.............................................Inside Front Cover
Selected Financial Data..................................................1
Letter to Shareholders...................................................2
Management's Discussion and
Analysis.............................................................3-8
Operations by Industry
Segment.............................................................9-10
Report of KPMG Peat
Marwick LLP...........................................................11
Consolidated Financial
Statements.........................................................12-20
Corporate
Directory..............................................Inside Back Cover
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Common Stock of the Company is listed on the New York Stock Exchange
under the symbol DLW. The stock transfer agent for Delta Woodside
Industries, Inc. is First Union National Bank, Customer Information Center,
Corporate Trust Client Services NC-1153, 1525 West W.T. Harris Blvd. 3C3,
Charlotte, North Carolina 28288-1153.
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.
FISCAL QUARTERS:
1997 1996
High Low High Low
First Quarter $ 5 1/2 $ 4 5/8 $ 9 3/4 $ 7 1/2
Second Quarter 6 5/8 4 3/4 7 5/8 6 1/8
Third Quarter 8 5 1/2 8 4 7/8
Fourth Quarter 7 5 1/4 7 5/8 4 3/8
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, 1997 there were approximately 1,954 holders of record of
the Company's Common Stock.
The Company declared and paid dividends of $.10 per share in each of the
first three quarters of fiscal 1996. The Company then stopped paying
dividends until the first quarter of fiscal 1998. Dividend payments depend
upon the Company's earnings, financial condition, capital requirements and
other relevant factors. At June 28, 1997, the company's loan facility did
not permit the payment of dividends. On August 25, 1997, the Company
entered into a new credit facility that permits the payment of dividends up
to certain limits. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition". On August 28, 1997, the Board declared
a quarterly dividend of $.025 per share payable to holders of record on
September 12, 1997.
<PAGE>
SELECTED FINANCIAL DATA
In Thousands, Except Ratios, Percentages,
Number of Shareholders and Per Share Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS (1) 1997 1996 1995 1994 1993 1992 1991 1990
Net Sales $651,818 $600,172 $597,541 $613,776 $686,239 $705,037 $590,019 $500,894
Cost of Goods Sold 547,682 575,211 499,093 514,840 564,352 563,827 480,396 427,788
Gross Profit 104,136 24,961 98,448 98,936 121,887 141,210 109,623 73,106
Operating Profit (Loss) excluding Litigation and
Restructuring Charges 31,963 (54,058) 21,610 18,282 52,585 76,826 59,234 35,342
Litigation (Credit) Charge (9,000) (7,000) 27,096
Restructuring (Credit) Charges 19,994 (553) 9,199 2,265
Operating Profit (Loss) 31,963 (65,052) 29,163 (18,013) 52,585 76,826 59,234 33,077
Earnings (Loss) Before Interest and Taxes 31,963 (65,052) 31,367 (18,013) 52,585 76,826 59,234 33,077
Interest Expense 23,354 18,993 13,646 8,639 7,775 11,479 22,115 25,768
Income (Loss) Before Income Taxes 9,361 (83,597) 17,770 (25,930) 45,172 65,801 37,543 8,029
Income Tax Expense (Benefit) 1,970 (20,958) 7,672 (8,633) 16,968 25,786 13,600 2,020
Net Income (Loss) 7,391 (62,639) 10,098 (17,297) 27,329 40,015 23,943 6,009
FINANCIAL DATA (1)
Cash Flow (Net Income (Loss) plus Depreciation
and Amortization) (6) 37,709 (17,724) 34,690 9,596 46,148 54,843 39,041 19,263
Capital Expenditures/Capital Leases 19,331 63,743 41,834 29,856 49,575 42,916 15,793 19,250
Depreciation and Amortization (6) 30,318 44,915 24,592 26,893 18,819 14,828 15,098 13,254
Working Capital 229,568 (32,648) 286,887 241,950 262,111 266,356 105,498 71,967
Long-Term Debt and Capital Leases 227,516 283 219,119 161,948 130,464 110,414 71,189 85,704
Funded Debt (2)(5) 233,597 242,644 219,395 162,812 132,200 112,133 188,352 227,097
Shareholders' Equity (3) 225,367 217,335 286,499 284,877 336,249 318,781 172,647 127,575
Capital Employed (4) 458,964 459,979 505,894 447,689 468,449 430,914 360,999 354,672
Total Assets (5) 557,940 537,716 610,296 567,003 573,946 524,756 434,424 414,497
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 4.1 4.3 2.6 3.0 3.5 4.0 4.3 3.5
Net Sales divided by Accounts Receivable 4.8 4.9 4.9 5.2 4.9 4.3 4.2 4.5
Net Sales divided by Capital Employed 1.4 1.3 1.2 1.4 1.5 1.6 1.6 1.4
Operating Income (Loss) as % of Capital Employed 7.0 (14.1) 5.8 (4.0) 11.2 17.8 16.4 9.3
Current Ratio 3.8 .9 4.8 3.5 4.1 4.4 1.6 1.4
Interest Coverage 1.4 (3.4) 2.3 (2.1) 6.8 6.7 2.7 1.3
Gross Profit as % of Sales 16.0 4.2 16.5 16.1 17.8 20.0 18.6 14.6
Pretax Income (Loss) as % of Sales 1.4 (13.9) 3.0 (4.2) 6.6 9.3 6.4 1.6
Net Income (Loss) as % of Sales 1.1 (10.4) 1.7 (2.8) 4.0 5.7 4.1 1.2
Net Income (Loss) as % of Beginning Equity 3.4 (21.9) 3.5 (5.1) 8.6 23.2 18.8 4.7
COMMON STOCK DATA (PER SHARE) (1)
Net Income (Loss) 0.30 (2.56) .42 (.70) 1.03 1.62 1.27 .32
Dividends .30 .40 .40 .40 .35 .30 .30
Book Value 9.19 8.89 11.76 11.75 12.72 12.07 8.17 6.76
Price Range -- High 8 9 3/4 12 12 1/2 18 3/8 25 1/4 14 1/8 17 7/8
-- Low 4 5/8 4 3/8 7 5/8 9 3/4 11 1/8 13 1/2 3 5/8 6 1/2
Weighted Average Shares Outstanding 24,513 24,443 24,317 24,550 26,421 24,670 18,879 18,733
Approximate Number of Shareholders 1,939 2,081 2,154 2,221 2,340 2,255 2,062 2,575
<CAPTION>
OPERATIONS (1) 1989 1988
<S> <C> <C>
Net Sales $569,052 $ 488,568
Cost of Goods Sold 470,265 409,231
Gross Profit 98,787 79,337
Operating Profit (Loss) excluding Litigation and
Restructuring Charges 66,236 52,347
Litigation (Credit) Charge
Restructuring (Credit) Charges
Operating Profit (Loss) 66,236 52,347
Earnings (Loss) Before Interest and Taxes 66,513 54,209
Interest Expense 20,929 12,685
Income (Loss) Before Income Taxes 45,940 41,705
Income Tax Expense (Benefit) 15,643 13,850
Net Income (Loss) 30,297 27,855
FINANCIAL DATA (1)
Cash Flow (Net Income (Loss) plus Depreciation
and Amortization) (6) 40,025 32,421
Capital Expenditures/Capital Leases 46,048 32,141
Depreciation and Amortization (6) 9,728 4,566
Working Capital 78,726 60,811
Long-Term Debt and Capital Leases 88,791 35,254
Funded Debt (2)(5) 223,397 118,528
Shareholders' Equity (3) 127,169 86,462
Capital Employed (4) 350,566 204,990
Total Assets (5) 331,066 177,300
FINANCIAL RATIOS (1)
Net Sales divided by Inventory 4.4 6.3
Net Sales divided by Accounts Receivable 4.6 4.9
Net Sales divided by Capital Employed 1.6 2.4
Operating Income (Loss) as % of Capital Employed 18.9 25.5
Current Ratio 1.7 2.2
Interest Coverage 3.2 4.3
Gross Profit as % of Sales 17.4 16.2
Pretax Income (Loss) as % of Sales 8.1 8.5
Net Income (Loss) as % of Sales 5.3 5.7
Net Income (Loss) as % of Beginning Equity 35 47
COMMON STOCK DATA (PER SHARE) (1)
Net Income (Loss) 1.65 1.60
Dividends .20 .05
Book Value 6.82 4.97
Price Range -- High 16 1/2 14 1/4
-- Low 8 3/4 5 1/4
Weighted Average Shares Outstanding 18,338 17,385
Approximate Number of Shareholders 1,475 1,250
</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 on 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 and 1988 fiscal years would have each been increased by
approximately $79.4 million and $73.6 million respectively.
(6) 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
<PAGE>
TO OUR FELLOW SHAREHOLDERS
(Photo of E. Erwin Maddrey, II) (Photo of Bettis C. Rainsford)
E. ERWIN MADDREY, II BETTIS C. RAINSFORD
To Our Fellow Shareholders:
Results improved in fiscal 1997 as compared to fiscal 1996. Sales in our
latest fiscal year were the highest since fiscal 1993, and earnings have begun
to return following the losses experienced in fiscal 1996.
The major portion of the increase in sales came from our largest division,
Delta Mills Marketing Company. Delta Mills Marketing spins, weaves and finishes
fabrics for apparel. The large capital expenditures that we have made over the
last few years in this operation helped it produce record high operating
earnings in the latest fiscal year. Our knitted fabrics division, Stevcoknit
Fabrics Company, also showed higher sales and greatly improved operating
results, although it continued to operate at a loss.
Our knit apparel division, Delta Apparel, had a difficult year. Sales were
down from those of the prior fiscal year as there was severe price deterioration
in the T-shirt market. In addition, the unseasonably cool spring season held
retail sales of T-shirts down in what is normally their best months. This latter
occurrence caused us to run our Delta Apparel facilities on curtailed production
schedules during the June quarter. This was the principal factor in our
disappointing earnings in the last fiscal quarter of fiscal 1997. Our apparel
sewing plant in Honduras developed very well during fiscal 1997, and production
from this facility has replaced the production from two U.S. plants which were
closed during fiscal 1997. This operation is helping us to preserve gross
margins despite severe price competition in the T-shirt segment.
We are very pleased with the progress made in our branded apparel division,
Duck Head Apparel. Sales increased 17% over sales in fiscal 1996 and operating
earnings turned from negative to positive. During fiscal 1997, with emphasis on
the Duck Head collection, many of our major retail customers moved Duck Head
from the boys' department to their main floor, men's collection area. In
addition, Duck Head began filling requests for in-store Duck Head shops from
major department stores. These shops attractively present not only the Company's
Duck Head products, but also those manufactured by some of our Duck Head
licensees. Licensed products include luggage, outerwear, caps, shoes, leather
accessories, and eyeglasses. Duck Head childrens' apparel is also produced by a
licensee, but not displayed in the in-store Duck Head shops.
Results from our Nautilus fitness equipment division were very disappointing
in fiscal 1997. Sales decreased 23% from fiscal 1996. We have installed a new
president at Nautilus who has deep experience in the fitness industry.
We are pleased with the results of our capital program over the past several
years in our Delta Mills Marketing division. Capital spending within this
division has now been reduced to more normal levels. We have switched production
from low priced, competitive commodity unfinished fabrics to higher priced
finished fabrics for distribution to our well established customers who have
brand equity in the U.S. market for apparel. Our costs and quality are meeting
our expectations for this large modernization project, and virtually all heavy
cash expenditures for this project are behind us.
On August 25, 1997, we completed a large refinancing project for the Company.
Our Delta Mills, Inc. subsidiary issued $150 million in private placement senior
notes, and simultaneously put in place a $100 million revolving bank line of
credit. This long term debt was put into the textile operations, which have the
major portion of our long term plant and equipment assets. On the same date, a
$20 million revolving line of credit was put in place for Delta Woodside
Industries, Inc., applying to the divisions not included in Delta Mills, Inc.
Currently, apparel retail sales appear to be holding at satisfactory levels.
We expect our T-shirt business to remain under pressure through September, after
which we expect some price improvement. We feel that our Duck Head division is
now operating from a solid platform, with experienced management in all key
positions.
Our Stevcoknit knit textile business is not yet back to break-even operating
results. We are tightly focused on this business. Our Delta Mills Marketing
woven fabric business is performing extremely well. This is our major core
business, and the current outlook for it is excellent.
/s/ E. Erwin Maddrey, II
E. Erwin Maddrey, II
President and
Chief Executive Officer
/s/ Bettis C. Rainsford
Bettis C. Rainsford
Executive Vice President, Treasurer
and Chief Financial Officer
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CONSOLIDATED COMPANY RESULTS
FISCAL 1997 VERSUS FISCAL 1996
Consolidated net sales for the year ended June 28, 1997 were $652 million as
compared to $600 million in the fiscal year ended June 29, 1996. Net sales in
fiscal 1997 increased in both the textile segment and the apparel segment as
compared with net sales in fiscal 1996.
Consolidated gross profit margin for fiscal 1997 was 16%, as compared to the
gross profit margin of 4% in the prior fiscal year. Gross margins increased in
both the textile and apparel segments. The lower margins in fiscal 1996 were
primarily due to restructuring and impairment charges, and charges to increase
the reserve for excess inventories.
Consolidated selling, general, and administrative expense for fiscal 1997
totaled $74 million, or 11% of net sales, compared to $79 million, or 13% of net
sales in fiscal 1996.
NET SALES
FISCAL YEARS ENDED JUNE OR JULY
(In Thousands of Dollars)
(Bar graph appears here with the following plot points.)
1993 1994 1995 1996 1997
686,239 613,776 597,541 600,172 651,818
The Company reported operating earnings for fiscal 1997 of $32 million as
compared to an operating loss of $65 million in fiscal 1996. Losses in fiscal
1996 are attributed to the high cost of cotton in that year, a $25 million
charge 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 various divisions, primarily related to plant closings.
Net interest expense totaled $23 million in fiscal 1997 as compared to $19
million in fiscal 1996, primarily due to higher average interest rates and
higher loan fees. At June 28, 1997, the Company's interest rate was prime.
The effective income tax rates for the 1997 and 1996 fiscal years were 21% and
25%, respectively. The lower tax rate for fiscal 1997 was primarily due to a
decrease in the valuation allowance for deferred tax assets.
Net income for fiscal 1997 was $7 million as compared to a net loss of $63
million for fiscal 1996. Net income for fiscal 1996 includes pretax credits to
income of $9 million related to recovery of certain litigation charges
recognized in fiscal 1994, and settled during fiscal 1995. The improvement in
net income for fiscal 1997 is attributable to the factors described above.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." The implementation of this standard is not expected to have a an impact
on earnings per share reported by the Company.
Consolidated inventories totaled $160 million at June 28, 1997 as compared to
$141 million at June 29, 1996, an increase of 14% or $19 million. The increase
in inventory occurred primarily in the apparel division.
The Company's order backlog at June 28, 1997 stood at $187 million as compared
to $168 million at June 29, 1996, an increase of $19 million, or 11%. Order
backlogs were down in the apparel segment, and up in the textile segment.
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 the restructuring and impairment
charges, and charges to increase the reserve for excess inventories.
NET INCOME (LOSS)
FISCAL YEARS ENDED JUNE OR JULY
(In Thousands of Dollars)
(Bar graph appears here with the following plot points.)
1993 1994 1995 1996 1997
27,329 (-17,297) 10,098 (-62,639) 7,391
Consolidated selling, general, and administrative expense totaled $79 million
and $77 million, respectively, for fiscal 1996 and 1995. As a percent of sales,
selling, general and administrative expenses were 13% for both fiscal years.
3
<PAGE>
Net interest expense totaled $18.5 million in 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 earnings to interest
ratios declined, the rate of interest paid by the Company increased. At June 29,
1996 the Company's interest rate was 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
valuation allowances recognized to reduce net deferred tax assets to zero, 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 additional 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 various divisions primarily related to
plant closings.
The net loss for fiscal 1996 was $63 million as compared to net income of $10
million for fiscal 1995. Net (loss) income for fiscal 1996 and 1995 include
pretax credits to income of $9 million and $7 million, respectively, related to
certain litigation charges recognized in fiscal 1994, and settled during fiscal
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 inventory increasing
market reserves as previously described. The reduction in plant running
schedules resulted in increased costs in fiscal 1996 because the fixed costs at
the plants were spread over fewer units produced.
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.
SEGMENT RESULTS
TEXTILE SEGMENT
FISCAL 1997 VERSUS FISCAL 1996
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. The textile segment operates as Delta Mills, Inc.
Net sales including intersegment sales for fiscal year 1997 totaled $464.5
million, as compared to $402.5 million for fiscal year 1996, an increase of
15.4%. Sales of the woven fabrics division were $336.2 million in fiscal year
1997 as compared to $294.1 million in fiscal year 1996, an increase of 14.3%,
resulting from an increase in unit sales and unit prices. Sales of woven fabrics
to commercial accounts increased due both to increased demand and to additional
finishing capacity resulting from recent capital expenditures. This increase
more than offset a decrease in sales of woven government fabrics due to a
slowdown in procurement activity. Sales of the knitted fabrics division were
$128.4 million in fiscal year 1997, up from $108.4 million in fiscal year 1996,
an increase of 18.4%. Sales of the knitted fabrics division increased
principally as a result of an increase in units sold due to improved demand for
knitted products generally.
NET INCOME AS A
% OF SALES
Fiscal Years Ended June Or July
(Bar graph appears here with the following plot points)
1993 1994 1995 1996 1997
4.0 -2.8 1.7 -10.4 1.1
Combined gross profit margin in fiscal year 1997 was 14.0%, as compared to
3.1% in fiscal year 1996, an increase of 351.6%. During fiscal year 1997, woven
fabrics division gross profit totaled $65.1 million, as compared to $33.7
million in fiscal year 1996, an increase of 93.2%. This gross profit improvement
was due principally to higher sales, lower raw material costs and improved
efficiencies resulting from the modernization project at the Beattie spinning
and weaving plant. Knitted fabrics division gross profit increased from a loss
of $21.2 million in fiscal year 1996 to a gross profit of $0.1 million in fiscal
year 1997. Increased margins on sales of knitted fabrics were due principally to
lower raw material costs and improved absorption of fixed costs resulting from
higher manufacturing production levels.
During fiscal 1997, selling, general and administrative expenses were $25.4
million as compared to $22.8 million during fiscal year 1996, an increase of
11.5%. Over the past several years the textile segment has been able to
effectively control its selling, general and administrative expenses as a
percentage of net sales. Although expenses in this category increased on an
absolute basis, selling, general and administrative expenses for fiscal year
1997 decreased to 5.5% of net sales as compared to 5.7% of net sales for fiscal
year 1996.
4
<PAGE>
SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE OR JULY
(IN THOUSANDS OF DOLLARS)
(Bar graph appears here with the following plot points)
1993 1994(1) 1995 1996 1997
336,249 284,877 285,499 217,335 225,367
(1) 1994 STOCK REPURCHASED: $25,294
1994 STOCK REPURCHASED: $25,294
Operating earnings for fiscal year 1997 were $41.4 million, as compared to an
operating loss of $24.5 million in fiscal year 1996. Operating earnings in the
woven fabrics division were $50.6 million in fiscal year 1997, an improvement of
$32.9 million as compared to the division's operating earnings in fiscal year
1996. The knitted fabrics division showed an operating loss in fiscal year 1997
of $9.2 million; however, this operating loss was a $33.0 million improvement
over fiscal year 1996.
FISCAL 1996 VERSUS FISCAL 1995
The segment's net sales for fiscal year 1996 were $402.5 million, as compared
to $413.9 million in fiscal year 1995, a decrease of 2.8%. All of the decrease
came in the knitted fabrics division, while net sales of the woven fabrics
division increased slightly. Sales of woven fabrics in fiscal year 1996 were
$294.1 million, up from $290.8 million in fiscal year 1995, an increase of 1.1%.
Within the woven fabrics division, lower unit sales were more than offset by
higher prices in fiscal year 1996 as compared to fiscal year 1995, due
principally to higher sales of military fabrics and proportionally lower greige
goods sales in fiscal year 1996. Sales of the knitted fabrics division in fiscal
year 1996 were $108.4 million, down from $123.1 million in fiscal year 1995, a
decrease of 12.0%. In the knitted fabrics division, unit volume and average
selling prices were lower in all product categories, due principally to a
general decline in demand for knitted fabrics during fiscal year 1996.
The segment's gross profit margins in fiscal year 1996 were 3.1%, as compared
to 10.7% in fiscal year 1995, a decline of 71.0%. The decrease was nearly all
attributable to the knitted fabrics division where lower sales prices, lower
number of units sold and reduced running schedules, in conjunction with higher
raw material prices, adversely affected margins in fiscal year 1996 as compared
to fiscal year 1995. During fiscal year 1996, the knitted fabrics division gross
loss was $21.2 million as compared to gross profits of $8.0 million in fiscal
year 1995. During fiscal year 1996, the woven fabrics division gross profits
were $33.7 million as compared to $36.1 million in fiscal 1995, a decrease of
6.8%. Gross margins for woven fabrics declined from 12.4% in fiscal year 1995 to
11.4% in fiscal year 1996, being adversely impacted by historically high raw
material costs and by continuing disruptions caused by the Company's plant
modernization program.
Selling, general and administrative expenses for fiscal year 1996 totaled
$22.8 million, as compared with $23.7 million in fiscal year 1995, a decrease of
4.0%. As a percentage of net sales, these expenses were 5.7% in fiscal years
1996 and 1995.
In fiscal year 1996, the segment incurred a restructuring charge of $13.3
million. The history of operating losses at the two plants that perform knitting
and knit finishing operations caused the Company to recognize a charge of $11.7
million to reduce the book value of the fixed assets in this business to
appraised orderly liquidation value. The remaining $1.6 million charge related
to the closure of two weaving plants in the woven fabrics division.
Operating losses in fiscal year 1996 were $24.5 million, as compared to
operating earnings of $20.4 million in fiscal year 1995. Operating earnings in
the woven fabrics division in fiscal year 1996 were $17.7 million, down from
$21.7 million in fiscal year 1995, a decrease of 18.6%. In the knitted fabrics
division, the operating loss in fiscal year 1996 was $42.2 million, 32.8 times
that of the loss of $1.3 million in fiscal year 1995 as a result of the factors
discussed above, as well as the $11.7 million restructuring charge.
EARNINGS (LOSS) PER SHARE
FISCAL YEARS ENDED JUNE OR JULY
(DOLLARS PER SHARE)
(Bar graph appears here as following plot points)
1993 1994 1995 1996 1997
1.03 -.70 .42 -2.56 .30
APPAREL SEGMENT
FISCAL 1997 VERSUS FISCAL 1996
The Company's apparel segment consists of woven and knit branded apparel sold
primarily to retailers under the Duck Head label and knit apparel sold to screen
printers, distributors, and private label accounts.
5
<PAGE>
Net sales in the apparel segment were approximately the same for fiscal 1997
and 1996. Sales of branded apparel increased while sales of non-branded knit
apparel for printing decreased. The decrease in sales of non-branded knit
apparel for printing was due to a reduction in average unit prices, while unit
sales rose slightly. Sales of non-branded knit apparel accounted for
approximately 17% and 21% of the Company's consolidated net sales for fiscal
years 1997 and 1996, respectively. Sales of branded apparel accounted for
approximately 13% and 11% in fiscal years 1997 and 1996, 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 reached 55% of capacity, and full capacity in January
1997.
Gross profit margins in the apparel segment increased to 17% in fiscal 1997
from 1% in fiscal 1996. Gross margins declined in the knit apparel division, and
increased in the branded apparel division.
In fiscal 1997, the apparel segment represented 30% of the Company's
consolidated net sales and 31% of the consolidated gross profit, as compared to
32% and 9%, respectively, in fiscal 1996.
Selling, general, and administrative expenses in the apparel segment totaled
$36 million in fiscal 1997, a decrease of 11% from fiscal 1996, in part
attributable to the lower distribution costs at the branded apparel distribution
center in Winder, Georgia.
Fiscal 1997 operating losses in the apparel segment totaled $4 million as
compared to $36 million in fiscal 1996. Fiscal 1996 includes restructuring
charges of $7 million and credits to litigation expense of $9 million.
Inventories in the apparel segment at June 28, 1997 totaled $78 million,
compared to $62 million at June 29, 1996. The increase in inventories reflects
higher costs in the knitted apparel for printing division. The higher costs per
unit of inventory resulted from fixed costs being spread over fewer units
produced. The Company expects the new knit apparel sewing operation in Honduras
to help reduce inventory costs during fiscal 1998.
During fiscal 1997, the branded apparel division began reducing the number of
retail outlet stores. The cost of closing these stores was charged against
reserves which were set up previously. Management is continuing with its plan to
reduce excess branded apparel inventories over the next year through retail
clearance stores and direct sales in large quantities.
The Company's branded apparel lines are traditionally styled, suggesting that
it is best to reduce excess inventory in an orderly manner over a period of time
rather than to sell these inventories in large quantities quickly at lower
prices.
Capital expenditures in the apparel segment were $5 million and $21 million
for fiscal years 1997 and 1996, respectively. The expenditures in fiscal 1996
were primarily for the completion of 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 non-branded knit apparel facilities at or near
full capacity during fiscal 1998. However, it does not believe that its branded
apparel facilities will be fully utilized during fiscal 1998.
FISCAL 1996 VERSUS FISCAL 1995
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 non-
branded knit apparel were offset somewhat by decreased sales of branded apparel.
Increased sales of non-branded knit apparel were due to increased units 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
non-branded knit apparel 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% for fiscal
years 1996 and 1995, respectively.
Gross profit margins in the apparel segment decreased to 1% in fiscal 1996 as
compared to 25% 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.
In fiscal 1996, the apparel segment represented 32% of the Company's
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.
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
these 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.
Fiscal 1996 operating losses in the apparel segment totaled $36 million as
compared to operating profit of $14 million in fiscal 1995. Fiscal 1996 includes
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 a $25 million charge to write down the value
of certain excess branded apparel inventories.
6
<PAGE>
FUNDED DEBT
TO EQUITY RATIO *
FISCAL YEARS ENDED JUNE OR JULY
(Bar graph appears here as following plot points)
1993 1994 1995 1996 1997
0.4 to 1 0.6 to 1 0.8 to 1 1.1 to 1 1.0 to 1
*For purposes of this chart only, funded debt includes long - and short-term
debt and capital leases.
LIQUIDITY AND SOURCES OF CAPITAL
The Company generated operating cash flows of $29 million and $51 million for
the 1997 and 1996 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.
During fiscal 1997, increases in accounts receivable and inventory were offset
somewhat by reductions in other operating assets and increases in certain
operating liabilities.
At June 28, 1997, approximately $220 million of the Revolving Credit Facility
due in September 1997 was classified as noncurrent because it was subsequently
refinanced with the long term debt described in the following paragraphs.
On August 25, 1997, an indirect and wholly-owned subsidiary of the Company
that conducts the Company's textile segment operations, Delta Mills, Inc.
("DMI"), issued $150 million of unsecured ten-year senior notes at an interest
rate of 9.625%, and obtained a secured five-year $100 million revolving line of
credit. At the same time, the Company obtained a separate $20 million line of
credit, due October 31, 1998. Aggregate net proceeds of $220 million from the
senior notes and borrowings under the revolving lines of credit were used to
repay the Revolving Credit Facility due in September 1997. At August 25, 1997,
interest on the $100 million and the $20 million revolving lines of credit is
7.1% and 7.6%, respectively, which rates are linked to LIBOR. At August 25,
1997, accounts receivable and inventory with net book values, of $192 million
and $109 million, respectively, serve as collateral for the $100 million and $20
million revolving lines of credit. Immediately after the borrowings described
above, the Company had $4 million available under the revolving lines of
credit, and an additional $38 million available to DMI under the DMI revolving
line of credit.
Loan covenants in the senior notes and the DMI revolving credit facility,
among other matters, limit the Company's ability to use cash generated by DMI to
fund operations in the rest of the Company and to engage in other transactions
with DMI. The new credit facilities and the senior notes also contain other
restrictive covenants, which include restrictions on additional indebtedness and
the payment of dividends, and in the case of the credit agreements requirements
as to minimum tangible net worth, certain other minimum financial ratios and
maximum capital expenditures. Under the Company's credit facility, the Company
may pay dividends after August 25, 1997, subject to compliance with certain
financial covenants, of up to an aggregate of $12.5 million plus one-half of the
net income of the Company (excluding DMI and its subsidiary) after fiscal 1997
plus the aggregate distributions received by the Company from DMI after August
25, 1997. At August 25, 1997, the net assets of the Company include the net
assets of the wholly owned subsidiary DMI of approximately $58 million which are
subject to the DMI restrictions described above.
As a result of the losses in fiscal 1996, the Company did not achieve certain
required financial ratios under the pre-existing credit facility, and therefore
reported amounts outstanding under that facility as current debt as of June 29,
1996.
During fiscal 1997, the Company had capital expenditures of approximately $19
million primarily to complete the modernization project in the textile segment.
During fiscal 1998, the Company plans to spend approximately $20 million for
capital improvements and new equipment. The Company believes that its equipment
and facilities are generally adequate to allow it to remain competitive with its
principal competitors.
The carryback of the net income tax losses for fiscal 1996 resulted in a
refund of approximately $8.5 million in the early part of fiscal year 1997. The
Company expects to receive an additional $2.2 million during fiscal 1998 from
the carryback of an alternative minimum net tax loss for fiscal 1997.
The Company believes that cash flow generated by its operations and funds
available under its new credit lines, including funds that can be transferred
from DMI to the Company's other operations, should be sufficient to service its
debt, to satisfy its day-to-day working capital needs, to fund its planned
capital expenditures and to pay dividends.
ENVIRONMENTAL MATTERS
Some of the Company's plants have been unable to comply with the acute
toxicity and other permit-related limits contained in the National Pollutant
Discharge Elimination System ("NPDES") permits held by the Company. With respect
to certain such plants in North Carolina, the Company signed a Special Order by
Consent with the North Carolina Department of Environmental Health and Natural
Resources ("DEHNR") which required the plants to achieve compliance with the
acute toxicity limits (the "Special Order by Consent"). The Special Order by
Consent has been amended to require the plants to achieve compliance by October
1, 1997. The Company is actively investigating several alternative courses of
action, including a discharge pipe
7
<PAGE>
one-half mile to a larger stream, in an effort to achieve compliance with the
Special Order by Consent. The estimated cost of extending the discharge pipe is
$800,000. It is likely that the Company will incur penalties for violations of
the Special Order by Consent until such time as the extended pipe or other
acceptable alternative is in operation.
The Company is currently also investigating certain wastewater treatment
system basins to improve their condition and thus eliminate a likely source of
groundwater contamination. With respect to certain South Carolina plants, the
Company is working with the appropriate state agency in developing a corrective
action plan for addressing the toxicity and other permit-related issues. The
Company has implemented, or plans to implement, several sources of action in an
effort to achieve compliance with its NPDES permits, including upgrades at the
textile segment's Delta 2 and 3 finishing plants ranging from $1.1 million to
$2.5 million in cost. Until these upgrades are completed, it is likely that the
Company will incur penalties for violations of its permits. Although there is no
assurance that the Company will be successful in this regard, it does not
currently believe that the matter will have a material adverse impact on the
Company.
The Company's Nautilus business has been named as a "potentially responsible
party" ("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") with respect to three sites in North Carolina, South
Carolina, and Mississippi. To the Company's knowledge, all of the transactions
with these sites were conducted by a corporation (the "Selling Corporation")
whose assets were sold in 1990 pursuant to the terms of an order of the United
States Bankruptcy Court to another corporation, the stock of which was
subsequently acquired by the Company in January 1993.
At the North Carolina site, the Selling Corporation is listed as a "de
Minimis" party, and at the South Carolina site, the Selling Corporation has been
listed as an "insolvent" party and would appear to qualify as a "de Minimis"
party. The Company believes that the Selling Corporation's share of liabilities
at either of these sites will be immaterial.
At the Mississippi site, the PRP group has completed the surface removal
action and is investigating soil and groundwater contamination, both at the site
and in the surrounding area. The Company's latest information is that the
Selling Corporation is ranked eleventh out of a total of over 300 PRPs in
contributions of material to the site, and, based on volume, the Selling
Corporation contributed approximately 3% of the site's material. To the
Company's knowledge, latest estimates of costs to clean up the site range up to
$4 million. Trichloroethane, one of the substances delivered by the Selling
Corporation to the site, has been found in the site's groundwater and at nearby
residential drinking water wells.
Although no assurance can be provided, the Company believes that it is
shielded from liability at these three sites by the order of the United States
Bankruptcy Court pursuant to which the Selling Corporation sold its assets to
the corporation subsequently acquired by the Company. The Company has denied any
responsibility at these three sites, has declined to participate as a member of
the respective PRP groups, and has not provided for any reserves for costs or
liabilities attributable to the Selling Corporation.
8
<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 28, 1997 June 29, 1996
<S> <C> <C>
Net Sales:
Textiles
Unaffiliated customers.................................................................. $434,678,000 $376,861,000
Intersegment............................................................................ 29,870,000 25,600,000
464,548,000 402,461,000
Apparel
Unaffiliated customers.................................................................. 193,624,000 192,866,000
Intersegment............................................................................
193,624,000 192,866,000
Fitness equipment and other
Unaffiliated customers.................................................................. 23,516,000 30,445,000
Intersegment............................................................................ 1,010,000 871,000
24,526,000 31,316,000
Intersegment Eliminations................................................................. (30,880,000 ) (26,471,000 )
Total................................................................................. $651,818,000 $600,172,000
Gross Profit:
Textiles.................................................................................. $ 65,170,000 $ 12,484,000
Apparel................................................................................... 32,517,000 2,337,000
Fitness equipment and other............................................................... 6,449,000 10,140,000
Total................................................................................. $104,136,000 $ 24,961,000
Operating Profit (Loss):
Textiles.................................................................................. $ 41,420,000 $(24,495,000 )
Apparel................................................................................... (3,960,000 ) (36,104,000 )
Fitness equipment and other............................................................... (5,497,000 ) (4,453,000 )
Total Operating Profit (Loss)......................................................... 31,963,000 (65,052,000 )
Interest expense.......................................................................... (23,354,000 ) (18,993,000 )
Insurance proceeds........................................................................
Interest income........................................................................... 752,000 448,000
Income (Loss) Before Income Taxes..................................................... $ 9,361,000 $(83,597,000 )
Identifiable Assets:
Textiles.................................................................................. $342,055,000 $323,483,000
Apparel................................................................................... 177,835,000 172,095,000
Fitness equipment and other............................................................... 38,050,000 42,138,000
Total................................................................................. $557,940,000 $537,716,000
Depreciation and Amortization:
Textiles.................................................................................. $ 19,323,000 $ 31,506,000
Apparel................................................................................... 7,709,000 10,697,000
Fitness equipment and other............................................................... 3,286,000 2,712,000
Total................................................................................. $ 30,318,000 $ 44,915,000
Capital Expenditures:
Textiles.................................................................................. $ 13,720,000 $ 42,128,000
Apparel................................................................................... 4,825,000 20,655,000
Fitness equipment and other............................................................... 786,000 960,000
Total................................................................................. $ 19,331,000 $ 63,743,000
<CAPTION>
July 1, 1995
<S> <C>
Net Sales:
Textiles
Unaffiliated customers.................................................................. $393,736,000
Intersegment............................................................................ 20,192,000
413,928,000
Apparel
Unaffiliated customers.................................................................. 175,866,000
Intersegment............................................................................
175,866,000
Fitness equipment and other
Unaffiliated customers.................................................................. 27,939,000
Intersegment............................................................................ 866,000
28,805,000
Intersegment Eliminations................................................................. (21,058,000)
Total................................................................................. $597,541,000
Gross Profit:
Textiles.................................................................................. $ 44,142,000
Apparel................................................................................... 43,514,000
Fitness equipment and other............................................................... 10,792,000
Total................................................................................. $ 98,448,000
Operating Profit (Loss):
Textiles.................................................................................. $ 20,443,000
Apparel................................................................................... 13,648,000
Fitness equipment and other............................................................... (4,928,000)
Total Operating Profit (Loss)......................................................... 29,163,000
Interest expense.......................................................................... (13,646,000)
Insurance proceeds........................................................................ 2,204,000
Interest income........................................................................... 49,000
Income (Loss) Before Income Taxes..................................................... $ 17,770,000
Identifiable Assets:
Textiles.................................................................................. $327,203,000
Apparel................................................................................... 234,811,000
Fitness equipment and other............................................................... 48,282,000
Total................................................................................. $610,296,000
Depreciation and Amortization:
Textiles.................................................................................. $ 16,997,000
Apparel................................................................................... 5,824,000
Fitness equipment and other............................................................... 1,771,000
Total................................................................................. $ 24,592,000
Capital Expenditures:
Textiles.................................................................................. $ 35,182,000
Apparel................................................................................... 4,812,000
Fitness equipment and other............................................................... 1,840,000
Total................................................................................. $ 41,834,000
</TABLE>
Effective March 30, 1997, the textile segment began selling to the apparel
segment at prices which approximate market. Prior to that time, the textile
segment sold to the apparel segment at a rate approximately 1% over cost. All
other intersegment sales are at prices comparable to unaffiliated customers
sales. Intersegment operating profit related to the intersegment sales is not
significant. Operating profit is total revenue less operating expenses,
excluding interest expense 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 fourth quarter of fiscal 1995, the apparel segment settled a
lawsuit and reduced related litigation reserves by $7 million, and then by an
additional $9 million in the first quarter of fiscal 1996. Depreciation and
amortization include certain write-downs of property and equipment.
Identifiable assets are those assets that are used in the operations of each
segment. Capital expenditures include related accounts payable of $1,431,000,
$5,518,000, $9,178,000 at June 28, 1997, June 29, 1996 and July 1, 1995,
respectively.
9
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
MARKETING STRUCTURE
(structured graph appears here)
TEXTILES OTHER
DELTA MILL STEVCOKNIT FITNESS
MARKETING CO. FABRICS CO. EQUIPMENT
NAUTILUS
INTERNATIONAL
MARKETS SERVED: MARKETS SERVED: MARKETS SERVED:
APPAREL: APPAREL:
BOTTOMWEIGHT FABRICS, CHILDREN'S HEALTH CLUBS,
DRESSES,SUIT LINING, MEN'S, WOMEN'S, PUBLC SECTOR,
GOVERMENT & ATHLETIC WEAR YMCAs & SIMILAR,
UNIFORM TRADE FLEECE, JERSEY, INSTITUTIONS,
INTERLOCK, MEDICAL,
OTHER: RIB FABRICS AMENITY FACILITIES,
SUGICAL TAPES CORPORATE FITNESS CENTERS
APPAREL
DUCK HEAD DELTA LICENSED
APPAREL CO. APPAREL CO. PRODUCTS
INTERNATIONAL
APPAREL MARKETING
CORP.
MARKETS SERVED: MARKETS SERVED: MARKETS SERVED:
THROUGH LICENSEES:
DEPARTMENT STORES & SCREEN PRINTERS, DEPARMENT STORES,
SPECIALTY RETAILERS, DISTRIBUTORS SPORTING GOODS STORES,
FACTORY DIRECT SPECIALTY STOES,
OUTLET STORES BRANDED & PRIVATE LABEL DIRECT MAIL,
PREMIUM,
CLUBS,
MILITARY
10
<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 28, 1997 and June 29, 1996 and the related
consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the
three-year period ended June 28, 1997. 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.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audits to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of Delta
Woodside Industries, Inc. at June 28, 1997 and June
29, 1996, and the results of their operations and
their cash flows for each of the years in the
three-year period ended June 28, 1997, in conformity
with generally accepted accounting principles.
As discussed in notes A and J 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 15, 1997, except for Note D,
as to which the date is
August 25, 1997.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
JUNE 28, 1997 June 29, 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................................................ $ 2,696,000 $ 6,271,000
Accounts receivable:
Factor........................................................................................ 83,676,000 63,194,000
Customers..................................................................................... 58,717,000 65,230,000
142,393,000 128,424,000
Less allowances for doubtful accounts and returns............................................. 5,358,000 6,258,000
137,035,000 122,166,000
Inventories
Finished goods................................................................................ 70,343,000 64,122,000
Work in process............................................................................... 71,274,000 60,739,000
Raw materials and supplies.................................................................... 18,580,000 16,197,000
160,197,000 141,058,000
Deferred income taxes............................................................................ 9,627,000
Prepaid expenses and other current assets........................................................ 2,386,000 10,258,000
TOTAL CURRENT ASSETS................................................................ 311,941,000 279,753,000
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements.................................................................... 6,131,000 6,134,000
Buildings..................................................................................... 85,098,000 81,077,000
Machinery and equipment....................................................................... 263,895,000 248,193,000
Furniture and fixtures........................................................................ 9,704,000 8,509,000
Leasehold improvements........................................................................ 3,123,000 3,564,000
Construction in progress...................................................................... 2,477,000 10,136,000
370,428,000 357,613,000
Less accumulated depreciation................................................................. 160,017,000 136,879,000
210,411,000 220,734,000
EXCESS OF COST OVER ASSIGNED VALUE OF NET ASSETS ACQUIRED, less accumulated amortization of
$6,820,000 (1997) and $5,665,000 (1996).......................................................... 25,309,000 26,464,000
OTHER ASSETS....................................................................................... 10,279,000 10,765,000
$557,940,000 $537,716,000
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable........................................................................... $ 46,834,000 $ 41,779,000
Accrued employee compensation.................................................................... 8,309,000 5,220,000
Accrued and sundry liabilities................................................................... 21,149,000 23,041,000
Current portion of long-term debt................................................................ 6,081,000 242,361,000
TOTAL CURRENT LIABILITIES........................................................... 82,373,000 312,401,000
LONG-TERM DEBT..................................................................................... 227,516,000 283,000
DEFERRED INCOME TAXES.............................................................................. 14,324,000
OTHER LIABILITIES AND DEFERRED CREDITS............................................................. 8,360,000 7,697,000
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued and outstanding
24,518,000 shares (1997) and 24,460,000 shares (1996)......................................... 245,000 245,000
Additional paid-in capital....................................................................... 164,811,000 164,170,000
Retained earnings................................................................................ 60,311,000 52,920,000
225,367,000 217,335,000
COMMITMENTS AND CONTINGENCIES
$557,940,000 $537,716,000
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JUNE 28, 1997 June 29, 1996
<S> <C> <C>
Net sales.............................................................................. $651,818,000 $600,172,000
Cost of goods sold..................................................................... 547,682,000 575,211,000
Gross profit........................................................................... 104,136,000 24,961,000
Selling, general and administrative expenses........................................... 74,127,000 78,874,000
Litigation (credit).................................................................... (9,000,000 )
Restructuring and impairment charge (credit)........................................... 19,994,000
Other income (expense)................................................................. 1,954,000 (145,000 )
OPERATING PROFIT (LOSS).......................................................... 31,963,000 (65,052,000 )
Other (expense) income:
Interest expense..................................................................... (23,354,000 ) (18,993,000 )
Interest income...................................................................... 752,000 448,000
Insurance proceeds...................................................................
(22,602,000 ) (18,545,000 )
INCOME (LOSS) BEFORE INCOME TAXES...................................................... 9,361,000 (83,597,000 )
Income tax expense (benefit)........................................................... 1,970,000 (20,958,000 )
NET INCOME (LOSS)...................................................................... $ 7,391,000 $(62,639,000 )
Earnings (loss) per share of Common Stock.............................................. $ 0.30 $ (2.56 )
Weighted average number of shares outstanding.......................................... 24,513,000 24,443,000
<CAPTION>
July 1, 1995
<S> <C>
Net sales.............................................................................. $597,541,000
Cost of goods sold..................................................................... 499,093,000
Gross profit........................................................................... 98,448,000
Selling, general and administrative expenses........................................... 77,037,000
Litigation (credit).................................................................... (7,000,000)
Restructuring and impairment charge (credit)........................................... (553,000)
Other income (expense)................................................................. 199,000
OPERATING PROFIT (LOSS).......................................................... 29,163,000
Other (expense) income:
Interest expense..................................................................... (13,646,000)
Interest income...................................................................... 49,000
Insurance proceeds................................................................... 2,204,000
(11,393,000)
INCOME (LOSS) BEFORE INCOME TAXES...................................................... 17,770,000
Income tax expense (benefit)........................................................... 7,672,000
NET INCOME (LOSS)...................................................................... $ 10,098,000
Earnings (loss) per share of Common Stock.............................................. $ 0.42
Weighted average number of shares outstanding.......................................... 24,317,000
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
<S> <C> <C> <C> <C>
Balance at July 2, 1994................................................ 24,245,733 $242,000 $162,114,000 $122,521,000
Incentive Stock Award Plan, shares issued............................ 52,820 1,000 605,000
Stock Option Plan, shares issued..................................... 59,000 1,000 465,000
Tax benefits of stock plans.......................................... 24,000
Net income........................................................... 10,098,000
Cash dividends paid -- $.40 a share.................................. (9,728,000)
Other................................................................ (475) 156,000
Balance at July 1, 1995................................................ 24,357,078 244,000 163,364,000 122,891,000
Incentive Stock Award Plan, shares issued............................ 53,448 1,000 594,000
Stock Option Plan, shares issued..................................... 49,125 375,000
Tax benefits of stock plans.......................................... (163,000)
Net loss............................................................. (62,639,000)
Cash dividends paid -- $.30 a share.................................. (7,332,000)
Balance at June 29, 1996............................................... 24,459,651 245,000 164,170,000 52,920,000
Incentive Stock Award Plan, shares issued............................ 54,348 608,000
Stock Option Plan, shares issued..................................... 4,669 35,000
Net income........................................................... 7,391,000
Other................................................................ (263) (2,000)
BALANCE AT JUNE 28, 1997............................................... 24,518,405 $245,000 $164,811,000 $ 60,311,000
<CAPTION>
Total
Shareholders'
Equity
<S> <C>
Balance at July 2, 1994................................................ $284,877,000
Incentive Stock Award Plan, shares issued............................ 606,000
Stock Option Plan, shares issued..................................... 466,000
Tax benefits of stock plans.......................................... 24,000
Net income........................................................... 10,098,000
Cash dividends paid -- $.40 a share.................................. (9,728,000 )
Other................................................................ 156,000
Balance at July 1, 1995................................................ 286,499,000
Incentive Stock Award Plan, shares issued............................ 595,000
Stock Option Plan, shares issued..................................... 375,000
Tax benefits of stock plans.......................................... (163,000 )
Net loss............................................................. (62,639,000 )
Cash dividends paid -- $.30 a share.................................. (7,332,000 )
Balance at June 29, 1996............................................... 217,335,000
Incentive Stock Award Plan, shares issued............................ 608,000
Stock Option Plan, shares issued..................................... 35,000
Net income........................................................... 7,391,000
Other................................................................ (2,000 )
BALANCE AT JUNE 28, 1997............................................... $225,367,000
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
JUNE 28, 1997 June 29, 1996 July 1, 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................... $ 7,391,000 $(62,639,000) $ 10,098,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation................................................................. 27,720,000 27,335,000 22,532,000
Amortization................................................................. 2,598,000 2,203,000 2,060,000
Writedown of property and equipment.......................................... 15,377,000
Provision for losses on accounts receivable.................................. 447,000 2,577,000 3,311,000
Provision for deferred income taxes.......................................... 4,697,000 (12,522,000) 6,063,000
Losses on disposition of property
and equipment.............................................................. 1,504,000 507,000 507,000
Compensation under stock plans............................................... 643,000 807,000 1,096,000
Deferred compensation........................................................ 730,000 808,000 738,000
Other........................................................................ (351,000) (70,000) (70,000)
Changes in operating assets and liabilities:
Accounts receivable........................................................ (15,316,000) (2,069,000) (7,819,000)
Inventories................................................................ (19,139,000) 84,976,000 (22,231,000)
Other current assets....................................................... 7,872,000 (4,432,000) (3,884,000)
Litigation accrual......................................................... (25,594,000)
Accounts payable and accrued expenses...................................... 10,339,000 (2,261,000) (2,304,000)
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 29,135,000 50,597,000 (15,497,000)
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases.................................................................... (23,226,000 ) (67,403,000 ) (32,224,000)
Proceeds of dispositions..................................................... 747,000 6,769,000 734,000
Other........................................................................... (509,000 ) 27,000 (457,000)
NET CASH (USED) BY
INVESTING ACTIVITIES (22,988,000 ) (60,607,000 ) (31,947,000)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit......................................... 68,904,000 268,826,000 348,849,000
Repayments on revolving lines of credit......................................... (85,134,000 ) (245,660,000 ) (291,395,000)
Scheduled principal payments of long-term
debt......................................................................... (405,000 ) (272,000 ) (871,000)
Proceeds from issuance of long-term debt........................................ 6,915,000
Dividends paid.................................................................. (7,332,000 ) (9,728,000)
Other........................................................................... (2,000 ) (769,000)
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (9,722,000 ) 15,562,000 46,086,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,575,000 ) 5,552,000 (1,358,000)
Cash and cash equivalents at beginning of year.................................... 6,271,000 719,000 2,077,000
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,696,000 $ 6,271,000 $ 719,000
</TABLE>
See notes to consolidated financial statements.
14
<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 the 1996 and 1995 fiscal
years have been reclassified to conform to the 1997 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.
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. Other intangible assets
are being amortized over periods of 3 to 40 years, but averaging approximately
10 years.
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.
ENVIRONMENTAL COSTS: Environmental compliance costs including ongoing
maintenance, monitoring and similar costs, are expensed as incurred.
Environmental remediation costs are accrued, except to the extent costs can be
capitalized, when remedial efforts are probable, and the cost can be reasonably
estimated.
COTTON PROCUREMENT: The Company contracts to buy cotton with future delivery
dates at fixed prices in order to reduce the effects of fluctuations in the
prices of cotton used in the manufacture of its products. These contracts permit
settlement by delivery and are not used for trading purposes. The Company
commits to fixed prices on a percentage of its cotton requirements up to
eighteen months in the future. If market prices for cotton fall below the
Company's committed fixed costs and are not recoverable, the differential is
charged to income at that time.
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 1997, 1996
and 1995 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.
The Company's accounts receivable are due from many companies that market and
produce apparel, home furnishings and other products, and from department stores
and specialty apparel retailers located throughout the United States. The many
companies represented in the Company's accounts receivable limits to a certain
extent the concentration of credit risk. The Company generally does not require
collateral for its accounts receivable.
NOTE C -- INVENTORIES
As of June 28, 1997 and June 29, 1996, cost for certain inventories of the
apparel segment are determined under the LIFO method representing 47% and 45%,
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 wrote down the value of certain excess branded apparel
inventories by approximately $25 million.
15
<PAGE>
NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND LEASES
Long-term debt consists of:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
<S> <C> <C>
Revolving Credit Facility
(7.85% at June 28, 1997),
with interest payable monthly
or semiannually.............. $225,500,000 $241,296,000
Industrial Revenue Bond payable
monthly, through 2001 at 80%
of a bank's base rate........ 818,000 1,057,000
Note to a bank payable monthly
with interest at prime plus
1%........................... 6,953,000
Other.......................... 326,000 291,000
233,597,000 242,644,000
Less current portion........... 6,081,000 242,361,000
$227,516,000 $ 283,000
</TABLE>
At June 28, 1997, approximately $220 million of the Revolving Credit Facility
due in September 1997 was classified as noncurrent because it was subsequently
refinanced with the long term debt described in the following paragraphs.
On August 25, 1997, an indirect and wholly-owned subsidiary of the Company that
conducts the Company's textile segment operations, Delta Mills, Inc. ("DMI"),
issued $150 million of unsecured ten-year senior notes at an interest rate of
9.625%, and obtained a secured five-year $100 million revolving line of credit.
At the same time, the Company obtained a separate $20 million line of credit,
due October 31, 1998. Aggregate net proceeds of $220 million from the senior
notes and borrowings under the revolving lines of credit were used to repay the
Revolving Credit Facility due in September 1997. At August 25, 1997, interest on
the $100 million and the $20 million revolving lines of credit is 7.1% and 7.6%,
respectively, based on LIBOR. At August 25, 1997, accounts receivable and
inventory with net book values, of $192 million and $109 million, respectively,
serve as collateral for the $100 million and $20 million revolving lines of
credit. Immediately after the borrowings described above, the Company had $4
million available under the revolving lines of credit, and an additional $38
million available to DMI under the DMI revolving line of credit.
Loan covenants in the senior notes and the DMI revolving credit facility, among
other matters, limit the Company's ability to use cash generated by DMI to fund
operations in the rest of the Company and to engage in other transactions with
DMI. The new credit facilities and the senior notes also contain other
restrictive covenants, which include restrictions on additional indebtedness and
the payment of dividends, and in the case of the credit agreements requirements
as to minimum tangible net worth, certain other minimum financial ratios and
maximum capital expenditures. Under the Company's credit facility, the Company
may pay dividends after August 25, 1997, subject to compliance with certain
financial covenants, of up to an aggregate of $12.5 million plus one-half of the
net income of the Company (excluding DMI and its subsidiary) after fiscal 1997
plus the aggregate distributions received by the Company from DMI after August
25, 1997. At August 25, 1997, the net assets of the Company include net assets
of the wholly owned subsidiary DMI of approximately $58 million which are
subject to the restrictions described above. As a result of the losses in fiscal
1996, the Company did not achieve certain required financial ratios under the
pre-existing credit facility, and therefore reported amounts outstanding under
that facility as current debt as of June 29, 1996.
The Company's carrying value of long-term debt at June 28, 1997 approximates
fair value since the rates are tied to floating rates. There are no other
material financial instruments which require fair value disclosure.
Total interest expense incurred by the Company was $23,656,000, $19,703,000 and
$13,947,000 in the 1997, 1996 and 1995 fiscal years, respectively, of which
$302,000, $710,000, and $301,000 was capitalized in fiscal 1997, 1996 and 1995,
respectively. Total interest paid during the 1997, 1996 and 1995 fiscal years
was $17,546,000, $19,357,000 and $12,940,000, respectively.
During fiscal 1997, the Company acquired certain machinery and equipment under
noncancelable operating leases in connection with the modernization project in
the woven fabrics division. The terms provide for total lease payments of
$14,243,000 over a period of five years.
Rent expense relating to all operating leases of the company was approximately
$7,179,000, $6,276,000, and $6,081,000 for fiscal 1997, 1996 and 1995,
respectively.
Aggregate principal maturities of all long-term debt, as refinanced on August
25, 1997, and minimum payments under operating leases are as follows:
<TABLE>
<CAPTION>
Long-term Operating
Fiscal Year Debt Leases
<S> <C> <C>
1998.............................. $ 6,081,000 $ 7,800,000
1999.............................. 18,641,000 6,586,000
2000.............................. 6,782,000 6,725,000
2001.............................. 4,210,000
2002.............................. 2,374,000
Later Years....................... 202,093,000 1,505,000
$233,597,000 $29,200,000
</TABLE>
16
<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 awards or
options for up to 600,000 shares of Common Stock to employees. Prior to the
amendment, the Company could grant awards or 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 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
Granted................. 2.50- 3.56 49,000
Became
exercisable........... 3.38- 7.68 25,750
Exercised............... 3.38- 5.88 (4,669) (4,669)
Cancelled............... 3.38- 9.94 (30,125)
June 28, 1997............. 2.50- 7.68 341,506 62,956
</TABLE>
The weighted average exercise price for all options outstanding was $3.83 per
share at June 28, 1997. These options expire on various dates beginning December
1997 and ending in April 2002. 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 of the stock 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 $223,000, $152,000
and $161,000 during fiscal 1997, 1996 and 1995, respectively. Options available
for grant at June 28, 1997, June 29, 1996 and July 1, 1995 were 72,450, 91,325
and 38,500, 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 or options for up to 300,000 shares.
Under the Incentive Stock Award Plan awards are granted for the right to
purchase shares for $.01. Awards were granted to purchase up to 282,481 and
19,723 shares during fiscal 1997 and 1995, respectively. During fiscal 1996,
rights to purchase 22,206 shares were cancelled. Generally, each award vests
based in part on service and in part on achievement of certain performance goals
over a three-year period. Compensation expense for the service portion is based
on the market price of the stock on the date of award. Compensation expense for
the performance portion is based on the prevailing market price of the stock.
Tax benefits arising from the difference in market value between the date of
grant and the date of issuance of Common Stock are recorded as an adjustment to
additional paid-in capital. Compensation expense for the Company's incentive
stock award plan including related tax assistance was $612,000, $615,000 and
$939,000 for the fiscal years 1997, 1996 and 1995, respectively. Shares
available for grant at June 29, 1997 were 194,910.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." If
compensation cost for the Company's two stock plans, described above, had been
determined based on the provisions of SFAS No. 123, net income would have been
approximately the same as that reported by the Company.
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. No
shares of preferred stock have been issued.
17
<PAGE>
NOTE F -- INCOME TAXES
For fiscal 1997, the Company had a regular tax loss of $15 million and an
alternative minimum tax (AMT) tax loss of $11 million. The Company expects to
carry the AMT loss back to fiscal 1994 and 1995 to obtain an AMT refund of
approximately $2.2 million. At June 30, 1997, the Company had regular tax loss
carryforwards of $27 million for federal purposes and $87 million for state
purposes. $9.2 million of the federal loss carryforward resulted from the 1988
acquisition of Stanwood Corporation and will expire in years 2002 and 2003. The
maximum annual usage of the Stanwood loss carryforward is limited by applicable
provisions of the Internal Revenue Code to approximately $1 million per year.
The Company's gross deferred tax assets are reduced by a valuation allowance to
net deferred tax assets considered by management to be more likely than not
realizable. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The valuation allowance decreased
$1,268,000 during fiscal 1997.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets
Net operating loss carryforward....... $14,567,000 $ 9,508,000
Inventory............................. 11,070,000 17,197,000
Impairment and restructuring
reserves............................ 4,522,000 6,180,000
Tax credit carryforward............... 3,375,000 5,590,000
Deferred compensation................. 2,912,000 2,606,000
Health claims......................... 2,218,000 2,374,000
Allowance for doubtful accounts....... 1,873,000 1,870,000
Accrued vacation...................... 671,000 636,000
Stock compensation accruals........... 491,000 444,000
Workers' compensation................. 293,000 193,000
Other................................. 1,130,000 2,809,000
Subtotal.............................. 43,122,000 49,407,000
Valuation allowance................... (13,913,000) (15,181,000)
Deferred tax assets................... 29,209,000 34,226,000
Liabilities
Depreciation.......................... 28,278,000 27,149,000
Inventory -- LIFO basis difference.... 3,410,000 3,575,000
Intangibles........................... 1,819,000 2,145,000
Other................................. 399,000 1,357,000
Deferred tax liabilities.............. 33,906,000 34,226,000
Net deferred tax liabilities...... $ 4,697,000 $ 0
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal income taxes.... $(3,068,000) $ (8,962,000) $ 883,000
State income taxes...... 341,000 526,000 726,000
Total current......... (2,727,000) (8,436,000) 1,609,000
Deferred:
Federal income taxes
(benefits)............ 4,030,000 (10,506,000) 5,190,000
State income taxes
(benefits)............ 667,000 (2,016,000) 873,000
Total deferred........ 4,697,000 (12,522,000) 6,063,000
Total provision........... $ 1,970,000 $(20,958,000) $7,672,000
</TABLE>
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income tax expense
(benefit) at statutory
rates................... $ 3,276,000 $(29,259,000) $6,220,000
State taxes (benefits),
net of federal
benefit................. 655,000 (969,000) 1,039,000
Life insurance
proceeds................ (760,000)
Amortization of excess of
cost over assigned value
of net assets
acquired................ 291,000 293,000 280,000
Foreign subsidiary loss
(income)................ 341,000 285,000 336,000
State NOL benefits........ (940,000)
Valuation allowance
adjustments............. (1,268,000) 9,550,000 1,706,000
Other..................... (1,325,000) (858,000) (209,000)
$ 1,970,000 $(20,958,000) $7,672,000
</TABLE>
The Company made no income tax payments for fiscal 1997 and approximately
$1,628,000 and $5,377,000 during fiscal 1996 and 1995, respectively. The
carryback of the net operating loss for fiscal 1996 resulted in a tax refund of
$8.5 million in fiscal 1997.
NOTE G -- OPERATIONS BY INDUSTRY SEGMENT
Industry segment information for the Company presented on page 9 of this Annual
Report is an integral part of these financial statements.
18
<PAGE>
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 $328,000,
$400,000 and $358,000 were allocated to participants for fiscal 1997, 1996 and
1995, respectively.
The Company maintains a 401(k) Employee Savings and Investment Plan for
employees meeting certain eligibility requirements. During fiscal 1997, 1996 and
1995, the Company contributed $648,000, $543,000 and $196,000, respectively, to
the plan.
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 28, 1997 and June 29, 1996, the
total liability amounted to $6,966,000 and $6,138,000, 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. Under the leases, the Company made payments of
approximately $254,000, $216,000 and $254,000 for the 1997, 1996 and 1995 fiscal
years, respectively.
NOTE J -- RESTRUCTURING AND IMPAIRMENT CHARGES
During fiscal 1996, the Company recognized restructuring and impairment charges
of approximately $20 million. As a result of the history of operating losses at
the knitting and knit finishing plants in the textile segment, the Company
recognized 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 was
for the write-down of property, plant and equipment, and $4 million was for
expenses to be incurred in connection with the plant closings.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 28, 1997 minimum
payments under these contracts with noncancellable contract terms were $59
million in fiscal 1998 and $12 million in fiscal 1999. These commitments were at
prices which approximate current market value.
During fiscal 1998, the Company plans to spend approximately $20 million for
capital improvements to maintain its existing facilities.
Some of the Company's textile plants have been unable to comply with certain
environmental standards including acute toxicity and other permit-related
limits. The Company is investigating several alternative courses of action which
would result in capital expenditures ranging from $1.9 million to $3.3 million.
Until these capital improvements are made, it is likely that the Company will
incur certain penalties for violations of its permits; however the Company does
not believe that they will have a material adverse impact on the Company.
The Company's Nautilus business has been named as a "potentially responsible
party" under the Comprehensive Environmental Response, Compensation and
Liability Act at a hazardous waste site in Mississippi. The business is ranked
eleventh out of a total of over 300 potentially responsible parties based on the
business' volume of contribution of about 3%. Latest estimates of certain costs
to clean up the site range up to $4 million. There is uncertainty as to several
legal issues; however, the Company does not believe that the potential
liabilities arising from this site will have a material 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.
19
<PAGE>
NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended June 28, 1997 and June 29, 1996.
<TABLE>
<CAPTION>
Quarter Ended
September 28 December 28 March 29
<S> <C> <C> <C>
(In thousands, except per share data)
1997
Net sales...................................................................... $144,521 $ 162,671 $163,873
Gross profit................................................................... 25,228 26,067 27,310
Net income..................................................................... 2,003 2,158 2,608
Earnings per share of Common Stock............................................. 0.08 0.09 0.11
<CAPTION>
Quarter ended
June 28
<S> <C>
(In thousands, except per share data)
1997
Net sales...................................................................... $180,753
Gross profit................................................................... 25,531
Net income..................................................................... 622
Earnings per share of Common Stock............................................. 0.03
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
September 30 December 30 March 30
<S> <C> <C> <C>
(In thousands, except per share data)
1996
Net sales...................................................................... $141,043 $ 150,558 $143,269
Gross profit................................................................... 20,764 15,614 12,152
Net income (loss).............................................................. 1,327 367 (8,659 )
Earnings (loss) per share of Common Stock...................................... 0.05 0.02 (0.35 )
<CAPTION>
Quarter ended
June 29
<S> <C>
(In thousands, except per share data)
1996
Net sales...................................................................... $165,302
Gross profit................................................................... (23,569)
Net income (loss).............................................................. (55,674)
Earnings (loss) per share of Common Stock...................................... (2.28)
</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 fiscal 1996 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.
20
<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
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.
(Consumer finance business)
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 28, 1997 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, Suite 200, Greenville, South Carolina 29601.
ANNUAL MEETING
The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be
held on Thursday, November 6, 1997, at 10:30 a.m., at the Delta Mills Marketing
Company's Beattie Plant, 700 North Woods Drive, Fountain Inn, South Carolina.
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
233 N. Main Street
Suite 200
Greenville, SC 29601
(864) 232-8301
SUBSIDIARIES OF REGISTRANT
Jurisdiction % Of
of Stock Owned Other Names Under
Name of Subsidiary Incorporation By Parent Which Do Business
Alchem Capital
Corporation DE 100% owned
by Delta Woodside
Industries, Inc.
Delta Mills, Inc. DE 100% owned by Delta Mills Marketing
by Alchem Capital Company; Stevcoknit
Corporation Fabrics Company;
Woodside Mills
Delta Merchandising, SC 100% owned by Duck Head Outlet Stores
Inc. Alchem Capital Duck Head Clearance
Corporation Stores
Duck Head Apparel TN 100% owned by Delta Apparel
Company, Inc. Alchem Capital Maiden Properties
Corporation
Delta Consolidated NY 100% owned by Delta Apparel Marketing Co
Corporation Alchem Capital Duck Head Marketing
Cargud, Sociedad Costa Rica 100% owned by
Anonima Duck Head Apparel
Company, Inc.
Armonia Textil, S.A. Costa Rica 100% owned by
Cargud, Sociedad
Anonima
Delta Apparel Honduras, Honduras 96% owned by Duck Head
S. A. Apparel Company, Inc.,
and 1% each owned by
Alchem Capital
Corporation, Delta
Woodside Industries,
Inc., Delta Consolidated
Corporation and Cargud, S.A.
Nautilus VA 100% owned by
International, Inc. Alchem Capital
Corporation
International Apparel NY 70% owned by Alchem Capital
Marketing Corporation. Corporation
Delta Mills Marketing, Inc. 100% owned by Delta Mills Sales Co.
Delta Mills, Inc. Stevcoknit Marketing Co.
REPORT ON SCHEDULE
The Board of Directors
Delta Woodside Industries, Inc.
Under date of August 5, 1997, except for Note D, as to which the date is
August 25, 1997, we reported on the consolidated balance sheets of Delta
Woodside Industries, Inc. as of June 28, 1997 and June 29, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended June 28, 1997, as
contained in the 1997 annual report to stockholders. These
consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K. In
connection with our audit of the aforementioned consolidated
financial statements, we also audited the related consolidated
financial statement schedule for each of the years in the three-
year period ended June 28, 1997, as listed on Page F-2 of Form 10-
K. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina KPMG Peat Marwick LLP
August 15, 1997, except for Note D,
as to which the date is
August 25, 1997
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Delta Woodside Industries, Inc.
We consent to the incorporation by reference in the registration
statements (Delta Woodside Industries, Inc. Stock Option Plan -
Nos. 33-38930 and 333-01381; Delta Woodside Industries, Inc.
Incentive Stock Award Plan - Nos. 33-38931 and 333-01383) on Form
S-8 of Delta Woodside industries, Inc., of our reports dated
August 5, 1997, relating to the consolidated balance sheets of
Delta Woodside Industries, Inc. as of June 28, 1997 and June 29,
1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended June 28, 1997, and related schedule,
which reports are incorporated by reference of appear in the 1997
annual report on Form 10-K of Delta Woodside Industries, Inc.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina KPMG Peat Marwick LLP
September 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summay financial information extracted from the
registrant's condensed consolidated financial statements for the fiscal year
ended June 28, 1997 and is qualifed in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> JUN-28-1997
<CASH> 2,696
<SECURITIES> 0
<RECEIVABLES> 142,393
<ALLOWANCES> 5,358
<INVENTORY> 160,197
<CURRENT-ASSETS> 311,941
<PP&E> 370,428
<DEPRECIATION> 160,017
<TOTAL-ASSETS> 557,940
<CURRENT-LIABILITIES> 82,373
<BONDS> (1,954)
0
0
<COMMON> 245
<OTHER-SE> 225,122
<TOTAL-LIABILITY-AND-EQUITY> 557,940
<SALES> 651,818
<TOTAL-REVENUES> 651,018
<CGS> 547,682
<TOTAL-COSTS> 547,682
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<INCOME-TAX> 1,970
<INCOME-CONTINUING> 7,391
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 7,391
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
