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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 1, 1997
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DELTA WOODSIDE INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
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South Carolina 0-10095 57-0535180
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
233 North Main Street
Hammond Square, Suite 200
Greenville, SC 29601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864)232-8301
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(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
The information set forth on the following pages is included in the
preliminary offering memorandum dated August 1, 1997 of Delta Mills, Inc., a
Delaware corporation, with respect to its proposed issuance of an aggregate of
$150,000,000 principal amounts of senior notes. Delta Mills, Inc., is an
indirectly wholly-owned subsidiary of Delta Woodside Industries, Inc., a South
Carolina corporation (the "Company").
The Company expects that it will issue a press release with respect to
the earnings of the Company's consolidated operations during the week ending
August 9, 1997. Overall, the Company believes that unseasonably cold weather and
slow spring retail sales have hurt replenishment business in the Company's
apparel businesses. Because of these shipping shortfalls, plant operating
schedules were adjusted downward during the fourth fiscal quarter. The Company
expects reduced operating schedules in some apparel segment plants to continue
through the first quarter of fiscal 1998. On the other hand, fiscal 1997 fourth
quarter earnings in the textile segments are expected to balance the fourth
quarter losses of the apparel and other segments.
This Report on Form 8-K contains statements that are forward-looking
within the meaning of applicable securities laws. Those statements include
projections of earnings results and are based on the Company's current
expectations and assumptions, which are subject to a number of risks and
uncertainties. Factors that could cause actual results to differ are discussed
in the Company's most recently filed Report on Form 10-K and in the exhibit
hereto.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
20.1 Information with respect to Delta Mills, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DELTA WOODSIDE INDUSTRIES, INC.
(Registrant)
By: /s/ Bettis C. Rainsford
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Name: Bettis C. Rainsford
Title: Exec. Vice President and
Chief Financial Officer
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Date: August 4, 1997
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Exhibit 20.1
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table presents summary historical and pro forma combined
financial information of the Company for each of the six years in the period
ended June 28, 1997. The historical combined financial information for the
fiscal years ended July 2, 1994, July 1, 1995 and June 29, 1996 has been derived
from the combined financial statements of the Company for such periods, which
have been audited by KPMG Peat Marwick LLP. The information for the fiscal years
ended June 27, 1992 and July 3, 1993 is unaudited and is derived from unaudited
combined financial statements not included in this Offering Memorandum. The
information for the fiscal year ended June 28, 1997 is derived from the
unaudited combined financial statements included elsewhere in this Offering
Memorandum. The unaudited combined financial statements of the Company for the
fiscal year ended June 28, 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. The summary
historical combined financial information should be read in conjunction with,
and is qualified in its entirety by reference to, the information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited combined financial statements of the
Company as of July 1, 1995 and June 29, 1996, and for each of the three years in
the period ended June 29, 1996, and the notes thereto, and the unaudited
combined financial statements of the Company as of and for the fiscal year ended
June 28, 1997, which appear elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
FISCAL YEAR(1)
------------------------------------------------------------------------
1992(3) 1993(3) 1994 1995 1996 1997
----------- ----------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(2):
Net sales................................. $485,200 $457,249 $407,037 $413,927 $402,461 $464,548
Cost of goods sold........................ 409,256 400,187 361,531 369,785 389,977 399,378
-------- -------- -------- -------- -------- --------
Gross profit.............................. 75,944 57,062 45,506 44,142 12,484 65,170
Selling, general and administrative
expenses(4)............................. 25,211 24,863 25,734 23,717 22,767 25,382
Impairment and restructuring
charges (credits)(5).................... -- -- 3,066 (290) 13,291 --
Other (income) expense.................... (60) (638) 122 272 921 (1,632)
-------- -------- -------- -------- -------- --------
Earnings (loss) from operations........... 50,793 32,837 16,584 20,443 (24,495) 41,420
Interest expense.......................... 9,569 4,918 10,795 12,251 14,099 14,285
Interest (income)......................... (147) (259) (131) (39) (92) (73)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes......... 41,371 28,178 5,920 8,231 (38,502) 27,208
Income taxes (benefit).................... 15,800 6,009 2,500 3,180 (13,703) 10,655
-------- -------- -------- -------- -------- --------
Net income (loss)......................... $ 25,571 $ 22,169 $ 3,420 $ 5,051 $(24,799) $ 16,553
======== ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and amortization............. $ 10,414 $ 13,087 $ 16,712 $ 16,997 $ 18,952 $ 19,323
Capital expenditures...................... 37,753 34,446 18,334 35,182 42,128 13,719
EBITDA(6)................................. 61,354 46,183 36,493 37,189 7,840 60,816
Ratio of earnings to fixed charges(7)..... 4.6x 4.7x 1.5x 1.6x --(8) 2.3x
Ratio of EBITDA to interest expense(6).... 6.4x 9.4x 3.4x 3.0x --(8) 4.3x
PRO FORMA FINANCIAL DATA(9):
Ratio of earnings to fixed charges(7)..... 2.3x
Cash interest expense(10)................. $ 19,260
Ratio of EBITDA to cash interest
expense(6).............................. 3.2x
Ratio of total debt to EBITDA(6).......... 3.7x
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA(9)
FISCAL YEAR ------------
----------------------- FISCAL YEAR
1996 1997 1997
-------- ----------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Working capital (deficit)............................... $ 16,010 $ (7,525) $141,133
Total assets............................................ 333,577 345,010 351,010
Total debt and other long-term obligations(11).......... 289,587 268,658 225,000
Shareholder's equity (deficit).......................... (8,709) 7,844 57,502
</TABLE>
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(1) The Company's operations are based on a fifty-two or fifty-three week
fiscal year ending on the Saturday nearest June 30. Fiscal year 1993 was
fifty-three weeks.
(2) The statements of operations data and balance sheet data include the
accounts of Delta Mills, Inc. and certain marketing divisions of Delta
Consolidated Corporation. These divisions of Delta Consolidated Corporation
were transferred in August 1997 to Delta Mills Marketing, Inc., a
wholly-owned subsidiary of the Company.
(3) During fiscal year 1993, two indirect subsidiaries of Delta Woodside merged
into Delta Holding, Inc. which was then renamed Delta Mills, Inc. Amounts
presented for fiscal years 1992 and 1993 reflect the effect of this merger
as if the merger had occurred at the beginning of fiscal year 1992.
(4) Delta Woodside provides various corporate services to the Company,
including payroll, accounting, internal audit, employee benefits and
corporate services. These services have been charged to the Company on the
basis of Delta Woodside's costs and allocated to the Company based on
employee head count, computer time, projected sales and other criteria.
During fiscal years 1992, 1993, 1994, 1995, 1996 and 1997, Delta Woodside
charged the Company $3,906, $3,280, $3,083, $2,950, $3,123 and $3,302,
respectively, for these services. See Note F to the Combined Financial
Statements.
(5) Impairment and restructuring charges (credits) include principally
writedowns of property, plant and equipment. Also included are expenses
incurred in connection with plant closings.
(6) "EBITDA" is defined herein as income (loss) before income taxes, plus
depreciation and amortization expense and interest expense, plus impairment
and restructuring charges (credits). While EBITDA should not be construed
as an alternative to operating earnings (loss) or net income (loss), or as
an indicator of operating performance or liquidity, the Company believes
that the ratio of EBITDA to interest expense is a measure that is commonly
used to evaluate a company's ability to service debt.
(7) Earnings used in computing the ratio of earnings to fixed charges consist
of income (loss) before provision for income taxes plus fixed charges.
Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred debt issuance costs) plus capitalized interest,
plus interest expense on the indebtedness of Delta Woodside guaranteed by
the Company (less interest paid by the Company with respect to intercompany
indebtedness).
(8) Fixed charges exceeded earnings in fiscal year 1996 by $38,502. Interest
expense exceeded EBITDA in fiscal year 1996 by $6,258.
(9) The pro forma financial data give effect to the Refinancing as if it
occurred on June 30, 1996. The pro forma balance sheet data give effect to
the Refinancing as if it occurred on June 28, 1997.
(10) Pro forma cash interest expense excludes amortization of deferred debt
issuance costs.
(11) Total debt and other long-term obligations, on an historical basis, consist
of the long-term debt due to affiliate, the current loan payable to
affiliate and the noninterest-bearing payable to affiliates. See Notes C
and F to the Combined Financial Statements.
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RISK FACTORS
THIS OFFERING MEMORANDUM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT
AS WELL AS ON ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE
COMPANY AT THE TIME SUCH STATEMENTS WERE MADE. WHEN USED IN THIS OFFERING
MEMORANDUM, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY, ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THESE STATEMENTS
ARE REASONABLE, PROSPECTIVE PURCHASERS OF THE NOTES SHOULD BE AWARE THAT ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW OR OTHER FACTORS.
PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, AS WELL AS THE OTHER INFORMATION AND DATA INCLUDED IN THIS OFFERING
MEMORANDUM, IN EVALUATING AN INVESTMENT IN THE NOTES. THE COMPANY CAUTIONS THE
READER, HOWEVER, THAT THIS LIST OF FACTORS MAY NOT BE EXHAUSTIVE AND THAT THESE
OR OTHER FACTORS, MANY OF WHICH ARE OUTSIDE OF THE COMPANY'S CONTROL, COULD HAVE
A MATERIAL ADVERSE EFFECT ON THE COMPANY AND ITS ABILITY TO SERVICE ITS
INDEBTEDNESS, INCLUDING PRINCIPAL AND INTEREST PAYMENTS ON AND LIQUIDATED
DAMAGES, IF ANY, WITH RESPECT TO THE NOTES. ALL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS SET FORTH BELOW.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company is, and upon consummation of the Refinancing the Company will
continue to be, highly leveraged. At June 28, 1997, on a pro forma basis after
giving effect to the Refinancing, including the application of the net proceeds
from this Offering in the manner described in "Use of Proceeds," the Company
would have had shareholder's equity of approximately $57.5 million and total
outstanding long term-debt of approximately $225.0 million, of which
approximately $75.0 million would have been secured by the Company's accounts
receivable and inventory, as well as all of the outstanding capital stock of the
Company and its subsidiaries (and, accordingly, would have been effectively
senior to the Notes with respect to such assets). Also, after giving pro forma
effect to the Refinancing, the Company's earnings before taxes and interest
expense would have been insufficient to cover its fixed charges by approximately
$38.5 million for the 1996 fiscal year. In addition, as of June 28, 1997, after
giving pro forma effect to the Refinancing, approximately $24.0 million would
have been available for additional borrowing under the New Credit Facility and
the Company would have been contingently liable with respect to approximately
$1.0 million under letters of credit issued under the New Credit Facility. The
Indenture will permit the incurrence of substantial additional secured and other
indebtedness by the Company and its subsidiaries. See "Description of Other
Indebtedness" and "Use of Proceeds." The Company also has substantial
additional obligations under operating leases. See Notes A and C to the
Combined Financial Statements.
Additionally, all of the indebtedness under the New Credit Facility will
mature prior to the Notes and indebtedness under the New Credit Facility will be
secured by a lien on accounts receivable and inventory, as well as all of the
outstanding capital stock of the Company and its subsidiaries, while the Notes
represent unsecured obligations of the Company. Accordingly, the lenders under
the New Credit Facility (and any other indebtedness secured by assets of the
Company) will have a claim ranking effectively prior to that of the holders of
the Notes with respect to the proceeds of assets securing such indebtedness. In
the event of bankruptcy, liquidation or reorganization of the Company, holders
of the Notes will participate ratably in the remaining assets of the Company
with all holders of unsecured indebtedness of the Company and with all other
general creditors of the Company based upon the respective amounts owed to each
holder or creditor. See "Description of Notes." In any of the foregoing events,
there can be no assurance that there would be sufficient assets to pay amounts
due on the Notes.
The Company's ability to make scheduled payments of principal of and to pay
interest or Liquidated Damages, if any, on the Notes, to satisfy its other debt
obligations and to fund planned capital expenditures
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will depend upon its future operating performance, which will be affected by,
among other factors, prevailing international and domestic economic conditions
and financial, business, regulatory, political and other factors, including
without limitation fluctuations in the rate of exchange of currency and the
continuation of favorable tariffs, quotas and other trade regulations, certain
of which are beyond its control, as well as the availability of borrowings under
the New Credit Facility or any successor credit facilities. The Company will
require substantial amounts of cash to fund scheduled payments of principal and
interest on its outstanding indebtedness as well as future capital expenditures
and any increased working capital requirements. If the Company is unable to meet
its cash requirements out of cash flow from operations and its available
borrowings, there can be no assurance that it will be able to obtain alternative
financing or that it will be permitted to do so under the terms of the Indenture
or the New Credit Facility. In the absence of such financing, the Company's
ability to respond to changing business, political and economic conditions, to
absorb adverse operating results, to fund capital expenditures or to make future
acquisitions may be adversely affected. In addition, actions taken by the
lending banks under the New Credit Facility are not subject to approval by the
holders of the Notes. Finally, it is anticipated that, in order to pay the
principal balance of the Notes due at maturity, the Company will be required to
obtain alternative financing. There can be no assurance, however, that the
Company will be able to refinance the Notes at maturity at commercially
reasonable terms, or at all, and the inability to refinance the Notes would
likely have a material adverse effect on the Company and on the market value and
marketability of the Notes.
The degree to which the Company will be leveraged following the Refinancing
could have important consequences to holders of the Notes, including, but not
limited to: (i) making it more difficult for the Company to satisfy its
obligations with respect to the Notes and its other indebtedness and contingent
liabilities, (ii) increasing the Company's vulnerability to general adverse
economic and industry conditions, (iii) limiting the Company's ability to obtain
additional financing to fund future working capital needs, capital expenditures,
research and development and other general corporate purpose requirements, (iv)
requiring the dedication of a substantial portion of the Company's cash flow
from operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital needs, capital expenditures, research and development or other
general corporate purposes, (v) limiting the Company's flexibility in planning
for, or reacting to, changes in its business and the industry, and (vi) placing
the Company at a competitive disadvantage vis-a-vis less leveraged competitors.
In addition, the Indenture and the New Credit Facility will contain financial
and other restrictive covenants that will limit the ability of the Company to,
among other things, borrow additional funds. Failure by the Company to comply
with such covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company. In addition, the
degree to which the Company is leveraged could prevent it from repurchasing all
of the Notes tendered to it upon the occurrence of a Change of Control. See
"Description of Other Indebtedness -- New Credit Facility."
Borrowings under the New Credit Facility will bear interest at floating
rates. Increases in interest rates on such borrowings could adversely affect the
Company. While interest rates are currently at relatively low levels, increases
in interest rates could negatively impact the ability of the Company to meet its
debt service obligations, including its obligations under the Notes.
COMPETITION; RISKS ASSOCIATED WITH CHANGING INDUSTRY AND REGULATION
The domestic textile and apparel industries are highly competitive. The
United States apparel market is served by a variety of producers, many of which
are located in rapidly growing, low-wage countries and use fabrics produced in
those regions. Many of these fabric producers have substantially greater
financial resources and lower cost of funds than the Company. Historically, the
Company has significantly benefitted from quotas and tariffs imposed by the
United States on the importation of textiles and apparel, which have reduced
competition from foreign manufacturers. GATT, which became effective on January
1, 1995, requires a complete phase-out of existing quotas over a ten-year period
for World Trade Organization members, a group which includes most countries in
the world with a few exceptions, the most notable of which is China (although
there can be no assurance that China will continue to be excluded). The
phase-out of such quotas is
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scheduled to take place in four stages as follows (expressed in a percentage of
total imports for 1994): 16% in 1995; 17% in 1998; 18% in 2002; and 49% in 2005.
To date, no products manufactured by the Company, and, to its knowledge, no
apparel products manufactured by its United States customers for the United
States market, have been subject to quota eliminations under GATT. The products
that will be subject to quota eliminations in 1998 include babywear made from
natural and synthetic fibers and in 2002 include dressing gowns, bathrobes, wool
products and woven two-piece track suits. Most of the Company's products and the
end-uses for such products are subject to quota elimination in 2005. In addition
to the phasing-out of quotas, GATT also requires that the United States reduce
tariffs on fabric and apparel imports over the same ten-year period. To date,
the United States has not lowered such tariffs significantly. The elimination of
quotas or reduction of tariffs as contemplated by GATT, or other changes in
trade regulation that result in the lowering of barriers to entry of foreign
goods, may have a material adverse effect on the Company.
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, the loss of which protections would
have a material and adverse effect on the Company. 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 a related
section referred to as "Section 807A" or the Special Access Program, 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 provided under 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 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.
See "Business -- Industry Trends" and "Business -- Competition."
Future technological advances in the textile industry may result in the
availability of new products or increase the efficiency of existing
manufacturing and distribution systems. If a new technology becomes available
that is more cost-effective or creates a competing product, the Company may be
unable to access such technology or its use may involve substantial capital
expenditure that the Company may be unable to finance. There can be no assurance
that existing, proposed or yet undeveloped technologies will not render the
Company's technology less profitable or less viable, or that the Company will
have available the financial and other resources to compete effectively against
companies possessing such technologies. The Company is unable to predict which
of the many possible future products and services will meet the evolving
industry standards and consumer demands. There can be no assurance that the
Company will be able to adapt to such technological changes or offer such
products on a timely basis or establish or maintain competitive positions.
RAW MATERIALS
The principal raw materials used by the Company in the manufacture of its
products are cotton of various grades, synthetic fiber and synthetic filament
yarns. Any shortage in the world cotton supply by reason of weather, crop
disease or other factors, or a significant increase in the price of cotton or
synthetic fiber, could adversely affect the Company.
The Company has contracted to purchase 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
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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. For example, this factor contributed significantly to the Company's
operating losses during fiscal year 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -- Raw
Materials."
ENVIRONMENTAL LAWS AND REGULATIONS
The Company is subject to various federal, state and local environmental
laws and regulations governing the discharge, emission, storage, handling and
disposal of a variety of substances and wastes used in or resulting from the
Company's operations. The Company continues to incur capital and other
expenditures in order to comply with applicable regulatory standards and certain
consent decrees that have been entered into by the Company. There can be no
assurance that environmental regulations (or the interpretation of existing
regulations) will not become more stringent in the future, that the Company will
not incur substantial costs in the future to comply with such requirements or
that the Company will not discover currently unknown environmental problems or
conditions. Any such event could have a material adverse effect on the Company.
See "Business -- Environmental and Regulatory Matters."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of certain members of
senior management, including, among others, its Chief Executive Officer and
Chief Financial Officer. The Company believes that the loss of the services of
key members of senior management could have a material adverse effect on the
Company. In addition, the Company believes that its future success will depend
in large part upon its continued ability to attract, retain and motivate skilled
managers and other personnel. There can be no assurance that the Company will be
able to attract and retain sufficient qualified personnel to meet its business
needs.
RISK OF LOSS OF MATERIAL CUSTOMERS OR BROKER
For fiscal year 1997, sales to Levi Strauss and sales to the Company's top
five non-affiliated customers accounted for 17.1% and 37.8%, respectively, of
total sales. In fiscal year 1996, sales to Levi Strauss and sales to the
Company's top five non-affiliated customers accounted for 12.9% and 30.7%,
respectively, of the Company's total sales. Consistent with industry practice,
the Company does not operate under a supply contract with Levi Strauss or any of
its other major customers. In addition, during fiscal years 1997, 1996 and 1995,
sales of camouflage military fabrics accounted for 8.4%, 12.8% and 3.1%,
respectively, of the Company's total sales. The loss of Levi Strauss or other
major customers could have a material adverse effect upon the Company. See
"Business -- Products and Marketing."
The knitted fabrics division sells its prepared for print fabrics to
converters and printers principally through a broker. During fiscal year 1997,
sales through this broker were approximately $44.0 million, approximately 9.5%
of the Company's total sales. 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. See "Business -- Products and Marketing."
RETAIL INDUSTRY AND CYCLICALITY
The textile and retail apparel industries are highly cyclical and
characterized by rapid shifts in fashion, consumer demand and competitive
pressures, and price and demand volatility. The demand for the Company's
products is principally dependent upon the level of United States demand for
retail apparel. The demand for retail apparel is in turn dependent on United
States consumer spending, which may be adversely affected by an economic
downturn, changing retailer and consumer demands, a decline in consumer
confidence or
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spending, and other factors beyond the Company's control. A reduction in the
level of demand for retail apparel could have a material adverse effect on the
Company.
The Company's success depends in part upon its ability to anticipate and
respond to changing consumer preferences and fashion trends in a timely manner.
Although the Company attempts to stay abreast of emerging lifestyle and consumer
preferences affecting its products, any sustained failure by the Company to
identify and be able to respond to such trends could have a material adverse
effect on the Company.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase and Liquidated Damages, if
any. There can be no assurance, however, that sufficient funds would be
available at the time of any Change of Control to make any required repurchases
of Notes tendered or that restrictions in the New Credit Facility or other
agreements governing outstanding indebtedness would allow the Company to make
such required purchases. Notwithstanding these provisions, the Company could
enter into certain transactions, including certain recapitalizations, that would
not constitute a Change of Control but would increase the amount of debt
outstanding at such time.
FRAUDULENT CONVEYANCE STATUTES
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court of competent jurisdiction to
subordinate or avoid the Notes or any Subsidiary Guarantee in favor of existing
or future creditors of the Company or a Guarantor.
The proceeds from the sale of the Notes are being used to refinance
outstanding intercompany indebtedness in order to allow the Company's ultimate
parent, Delta Woodside, to refinance outstanding indebtedness owed to third
parties. If a court in a lawsuit on behalf of an unpaid creditor of the Company
or a representative of the Company's creditors, such as a trustee in bankruptcy
of the Company as a debtor-in-possession, were to conclude that, at the time the
Company paid the net proceeds of the Notes to the Company's direct or indirect
parent, the Company (x) intended to hinder, delay or defraud any present or
future creditor or contemplated insolvency with a design to prefer one or more
creditors to the exclusion in whole or in part of others or (y) did not receive
fair consideration or reasonably equivalent value for issuing the Notes (for
example, because the stockholders of the Company and not the Company received
the benefits of the issuance of the Notes) and the Company (i) was insolvent,
(ii) was rendered insolvent by reason of such distribution, (iii) was engaged or
about to engage in a business or transaction for which its remaining assets
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court could void the Notes. Alternatively, in such
event, claims of the holders of the Notes could be subordinated to claims of the
other creditors of the Company. Because the existing indebtedness to be
refinanced is guaranteed by the Company, the benefit to the Company of the
issuance of the Notes may depend upon whether the Company's guarantee of the
existing indebtedness was itself a fraudulent conveyance or was otherwise
unenforceable.
The Company's obligations under the Notes will be guaranteed by the
Guarantors. To the extent that a court were to conclude that (x) a Subsidiary
Guarantee was incurred by a Guarantor with intent to hinder, delay or defraud
any present or future creditor or the Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (y) such Guarantor did not receive fair consideration or reasonably
equivalent value for issuing its Subsidiary Guarantee and such Guarantor (i) was
insolvent, (ii) was rendered insolvent by reason of the issuance of such
Subsidiary Guarantee, (iii) was engaged or about to engage in a business or
transaction for which the remaining assets of such Guarantor constituted
unreasonably small capital to carry on its business or (iv) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could avoid or subordinate such Subsidiary Guarantee in
favor of the Guarantor's creditors. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits,
if any,
14
<PAGE> 9
realized by the Guarantor as a result of the issuance by the Company of the
Notes. The Guarantors will not receive any direct benefit from the issuance of
the Notes. To the extent any Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason, the holders of the Notes
would cease to have any claim in respect of such Guarantor and would be
creditors solely of the Company and any Guarantor whose Subsidiary Guarantee was
not avoided or held unenforceable. In such event, the claims of the holders of
the Notes against the issuer of an invalid Subsidiary Guarantee would be subject
to the prior payment of all liabilities of such Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portions of any of the Subsidiary Guarantees.
Based upon financial and other information currently available to it,
management of the Company and the Guarantor believe that the Notes and the
Subsidiary Guarantee are being incurred for proper purposes and in good faith
and that the Company and each Subsidiary Guarantor are solvent and will continue
to be solvent after issuing the Notes, or its Subsidiary Guarantee, as the case
may be, will have sufficient capital for carrying on its business after such
issuance and will be able to pay its debts as they mature.
In rendering their opinion on the validity of the Notes and the Subsidiary
Guarantees, counsel for the Company will express no opinion as to federal or
state laws relating to fraudulent transfers.
LACK OF PUBLIC MARKET; RESTRICTIONS ON RESALE
The Notes are a new issue of securities for which there is currently no
trading market. Because the Notes are being sold pursuant to an exemption from
registration under the applicable securities laws and, therefore, may not be
publicly offered, sold or otherwise transferred in any jurisdiction where such
registration may be required, no public market for the Notes will develop. It is
expected that the Notes will be eligible for trading in the PORTAL market. The
Company has been advised by the Initial Purchaser that it intends to make a
market in the Notes following the completion of the Offering. However, it is not
obligated to do so and any market-making activities with respect to the Notes
may be discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act, and may be limited during the Exchange Offer and the pendency of
any Shelf Registration Statement. Although under the Registration Rights
Agreement the Company is required to consummate an offer to exchange the Notes
for equivalent registered securities, or to register the Notes under the
Securities Act, there can be no assurance that an active trading market for the
Notes or the Exchange Notes will develop. If a market were to exist, the Notes
could trade at prices that may be lower than the initial offering price thereof
depending on many factors, including prevailing interest rates and the market
for similar securities, general economic conditions and the financial condition
and performance of, and prospects for, the Company. The Company does not intend
to apply for listing or quotation of the Notes or, if issued, the Exchange
Notes, on any securities exchange or automated quotation system. The Notes have
not been registered under the Securities Act or any state securities laws and,
unless so registered, may not be offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws.
15
<PAGE> 10
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
are estimated to be approximately $ million after deducting the estimated
underwriting discounts and offering expenses. The net proceeds from the sale of
the Notes, together with approximately $74.0 million of net proceeds from the
New Credit Facility, will be paid to Delta Woodside in satisfaction of certain
intercompany indebtedness.
The following table sets forth the estimated sources and uses of funds on a
pro forma basis, assuming the Refinancing had been consummated on June 28, 1997
(in thousands):
<TABLE>
<S> <C>
Sources of Funds:
Notes offered hereby...................................... $150,000
New Credit Facility....................................... 75,000
--------
Total Sources.......................................... $225,000
========
Uses of Funds:
Repayment of indebtedness(1).............................. $219,000
Estimated transaction fees and expenses................... 6,000
--------
Total Uses............................................. $225,000
========
</TABLE>
- ---------------
(1) $50.0 million of the net proceeds of this Offering and the New Credit
Facility will be applied to the repayment in full of a term note dated
November 11, 1993 in the principal amount of $50.0 million, which is due at
the end of fiscal year 1998 and bears interest at the rate of 6% per annum.
This term note evidences amounts that had been advanced by Delta Woodside to
the Company for working capital and capital expenditures. The remaining
$169.0 million of the net proceeds of this Offering and the New Credit
Facility will be applied to the repayment of all advances from Delta
Woodside to the Company that bear interest ($40.2 million outstanding at
June 28, 1997, bearing interest at 8.5%) and all advances from Delta
Woodside to the Company that do not bear interest ($58.5 million outstanding
at June 28, 1997), which amounts were advanced for working capital and
capital expenditures, and the repayment of a portion of a term note dated
August 27, 1993 in the aggregate principal amount of $120.0 million, which
is due on July 6, 1998 and bears interest at the rate of 6% per annum. This
$120.0 million note was issued by the Company as a dividend that was
declared effective August 27, 1993. See "Risk Factors -- Fraudulent
Conveyance Statutes." Simultaneously with the closing of the Refinancing,
Delta Woodside will cause to be contributed to the capital of the Company
the principal amount of this term note that remains outstanding after the
application of the net proceeds of this Offering and the New Credit
Facility.
Delta Woodside will use the amounts paid to it by the Company from the net
proceeds from the issuance of the Notes, together with approximately $74.0
million of net proceeds from the New Credit Facility, to repay approximately
$219.0 million in aggregate principal amount of indebtedness outstanding under
an Amended and Restated Credit Agreement between Delta Woodside, as the
borrower, and certain lenders as of March 15, 1996, as amended (the "Existing
Credit Agreement"). For further information regarding the New Credit Facility
and the Existing Credit Agreement, see "Description of Other Indebtedness."
16
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
28, 1997 (i) on an actual basis and (ii) on a pro forma basis after giving
effect to the Refinancing and the application of the net proceeds therefrom as
described under "Use of Proceeds." The information in this table should be read
in conjunction with the Combined Financial Statements and the accompanying notes
thereto included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
JUNE 28, 1997
-----------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total debt and payable to affiliates:
Long-term debt due to affiliate(1)........................ $170,000 $ --
New Credit Facility(2).................................... -- 75,000
Notes offered hereby...................................... -- 150,000
Loan payable to affiliate(1).............................. 40,189 --
Payable to affiliates(1).................................. 58,469 --
-------- --------
Total debt and payable to affiliates................... $268,658 $225,000
-------- --------
Shareholder's equity:
Common stock and additional paid-in capital............... 2,134 51,792
Retained earnings......................................... 5,710 5,710
-------- --------
Total shareholder's equity................................ 7,844 57,502
-------- --------
Total capitalization................................... $276,502 $282,502
======== ========
</TABLE>
- ---------------
(1) The net proceeds to be received by the Company from the Offering, together
with approximately $74.0 million of net proceeds from the New Credit
Facility, will be used to repay certain existing intercompany indebtedness
and all intercompany amounts payable owed by the Company. Simultaneously
with the closing of the Refinancing, Delta Woodside will cause to be
contributed to the capital of the Company the portion of the intercompany
indebtedness that remains outstanding after application of the net proceeds
of this Offering and approximately $74.0 million of net proceeds from the
New Credit Facility. Accordingly, all intercompany indebtedness and amounts
payable will be repaid or canceled simultaneously with the consummation of
this Offering. See "Use of Proceeds."
(2) In addition, at closing there will be letters of credit in the stated amount
of approximately $1.0 million issued under the New Credit Facility.
17
<PAGE> 12
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table presents selected historical and pro forma combined
financial information of the Company for each of the six years in the period
ended June 28, 1997. The historical combined financial information for the
fiscal years ended July 2, 1994, July 1, 1995 and June 29, 1996 has been derived
from the combined financial statements of the Company for such periods, which
have been audited by KPMG Peat Marwick LLP. The information for the fiscal years
ended June 27, 1992 and July 3, 1993 is unaudited and is derived from unaudited
combined financial statements not included in this Offering Memorandum. The
information for the fiscal year ended June 28, 1997 is derived from the
unaudited combined financial statements included elsewhere in this Offering
Memorandum. The unaudited combined financial statements of the Company for the
fiscal year ended June 28, 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. The selected
historical combined financial information should be read in conjunction with,
and is qualified in its entirety by reference to, the information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operation", and the audited combined financial statements of the
Company as of July 1, 1995 and June 29, 1996, and for each of the three years in
the period ended June 29, 1996, and the notes thereto, and the unaudited
combined financial statements of the Company as of and for the fiscal year ended
June 28, 1997, which appear elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
FISCAL YEAR(1)
------------------------------------------------------------------------
1992(3) 1993(3) 1994 1995 1996 1997
----------- ----------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS)
STATEMENTS OF OPERATIONS DATA(2):
Net sales............................................. $485,200 $457,249 $407,037 $413,927 $402,461 $464,548
Cost of goods sold.................................... 409,256 400,187 361,531 369,785 389,977 399,378
-------- -------- -------- -------- -------- --------
Gross profit.......................................... 75,944 57,062 45,506 44,142 12,484 65,170
Selling, general and administrative expenses(4)....... 25,211 24,863 25,734 23,717 22,767 25,382
Impairment and restructuring charges (credits)(5)..... -- -- 3,066 (290) 13,291 --
Other (income) expense................................ (60) (638) 122 272 921 (1,632)
-------- -------- -------- -------- -------- --------
Earnings (loss) from operations....................... 50,793 32,837 16,584 20,443 (24,495) 41,420
Interest expense...................................... 9,569 4,918 10,795 12,251 14,099 14,285
Interest (income)..................................... (147) (259) (131) (39) (92) (73)
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes..................... 41,371 28,178 5,920 8,231 (38,502) 27,208
Income taxes (benefit)................................ 15,800 6,009 2,500 3,180 (13,703) 10,655
-------- -------- -------- -------- -------- --------
Net income (loss)..................................... $ 25,571 $ 22,169 $ 3,420 $ 5,051 $(24,799) $ 16,553
======== ======== ======== ======== ======== ========
OTHER DATA:
Depreciation and amortization......................... $ 10,414 $ 13,087 $ 16,712 $ 16,997 $ 18,952 $ 19,323
Capital expenditures.................................. 37,753 34,446 18,334 35,182 42,128 13,719
EBITDA(6)............................................. 61,354 46,183 36,493 37,189 7,840 60,816
Ratio of earnings to fixed charges(7)................. 4.6x 4.7x 1.5x 1.6x --(8) 2.3x
Ratio of EBITDA to interest expense(6)................ 6.4x 9.4x 3.4x 3.0x --(8) 4.3x
PRO FORMA FINANCIAL DATA(9):
Ratio of earnings to fixed charges(7)................. 2.3x
Cash interest expense(10)............................. $ 19,260
Ratio of EBITDA to cash interest expense(6)........... 3.2x
Ratio of total debt to EBITDA(6)...................... 3.7x
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
---------------------- PRO FORMA(9)
FISCAL YEAR ------------
---------------------- FISCAL YEAR
1992(3) 1993(3) 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(2):
Working capital (deficit)..................... $ 42,164 $ 1,841 $ 59,320 $ 50,421 $ 16,010 $ (7,525) $141,133
Total assets.................................. 320,649 328,155 318,468 336,672 333,577 345,010 351,010
Total debt and other long-term
obligations(11)............................. 109,675 130,344 249,530 252,750 289,587 268,658 225,000
Shareholder's equity (deficit)................ 145,819 127,552 11,122 16,090 (8,709) 7,844 57,502
</TABLE>
18
<PAGE> 13
- ---------------
(1) The Company's operations are based on a fifty-two or fifty-three week
fiscal year ending on the Saturday nearest June 30. Fiscal year 1993 was
fifty-three weeks.
(2) The statements of operations data and balance sheet data include the
accounts of Delta Mills, Inc. and certain marketing divisions of Delta
Consolidated Corporation. These divisions of Delta Consolidated
Corporation were transferred in August 1997 to Delta Mills Marketing,
Inc., a wholly-owned subsidiary of the Company.
(3) During fiscal year 1993, two indirect subsidiaries of Delta Woodside
merged into Delta Holding, Inc. which was then renamed Delta Mills, Inc.
Amounts presented for fiscal years 1992 and 1993 reflect the effect of
this merger as if the merger had occurred at the beginning of fiscal year
1992.
(4) Delta Woodside provides various corporate services to the Company,
including payroll, accounting, internal audit, employee benefits and
corporate services. These services have been charged to the Company on the
basis of Delta Woodside's costs and allocated to the Company based on
employee head count, computer time, projected sales and other criteria.
During fiscal years 1992, 1993, 1994, 1995, 1996 and 1997, Delta Woodside
charged the Company $3,906, $3,280, $3,083, $2,950, $3,123 and $3,302,
respectively, for these services. See Note F to the Combined Financial
Statements.
(5) Impairment and restructuring charges (credits) include principally
writedowns of property, plant and equipment. Also included are expenses
incurred in connection with plant closings.
(6) "EBITDA" is defined herein as income (loss) before income taxes, plus
depreciation and amortization expense and interest expense, plus
impairment and restructuring charges (credits). While EBITDA should not be
construed as an alternative to operating earnings (loss) or net income
(loss), or as an indicator of operating performance or liquidity, the
Company believes that the ratio of EBITDA to interest expense is a measure
that is commonly used to evaluate a company's ability to service debt.
(7) Earnings used in computing the ratio of earnings to fixed charges consist
of income (loss) before provision for income taxes plus fixed charges.
Fixed charges consist of interest expense on all indebtedness (including
amortization of deferred debt issuance costs) plus capitalized interest,
plus interest expense on the indebtedness of Delta Woodside guaranteed by
the Company (less interest paid by the Company with respect to
intercompany indebtedness).
(8) Fixed charges exceeded earnings in fiscal year 1996 by $38,502. Interest
expense exceeded EBITDA in fiscal year 1996 by $6,258.
(9) The pro forma financial data give effect to the Refinancing as if it
occurred on June 30, 1996. The pro forma balance sheet data give effect to
the Refinancing as if it occurred on June 28, 1997.
(10) Pro forma cash interest expense excludes amortization of deferred debt
issuance costs.
(11) Total debt and other long-term obligations, on an historical basis,
consist of the long-term debt due to affiliate, and the current loan
payable to affiliate and the noninterest-bearing payable to affiliates.
See Notes C and F to the Combined Financial Statements.
19
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW OF RESULTS OF OPERATIONS
The following table presents the Company's combined statements of
operations as a percentage of net sales for the periods shown. See "Selected
Historical and Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------
JULY 2, JULY 1, JUNE 29, JUNE 28,
1994 1995 1996 1997
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................................ 88.8 89.3 96.9 86.0
----- ----- ----- -----
Gross profit...................................... 11.2 10.7 3.1 14.0
Selling, general and administrative expenses...... 6.3 5.7 5.7 5.5
Impairment and restructuring charges (credits).... 0.8 (0.0) 3.3 --
Other (income) expense............................ 0.0 0.1 0.2 (0.4)
----- ----- ----- -----
Earnings (loss) from operations................... 4.1 4.9 (6.1) 8.9
Interest expense.................................. 2.6 2.9 3.5 3.0
----- ----- ----- -----
Income (loss) before income taxes (benefit)....... 1.5 2.0 (9.6) 5.9
----- ----- ----- -----
Income taxes (benefit)............................ 0.7 0.8 (3.4) 2.3
Net income (loss)................................. 0.8% 1.2% (6.2)% 3.6%
===== ===== ===== =====
</TABLE>
YEAR ENDED JUNE 28, 1997 COMPARED TO YEAR ENDED JUNE 29, 1996
Net Sales. Net 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.
Gross Profit. 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.
Selling, General and Administrative Expenses. During fiscal year 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 Company has been able to effectively control its selling,
general and administrative expenses as a percentage of net sales as indicated in
the table above. 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.
Operating Earnings. 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
20
<PAGE> 15
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. Expenses for fiscal year 1997 include
certain unexpected costs associated with interruption of knitted fabrics
operations in Wallace, North Carolina, from Hurricane Fran in September 1996.
Net Interest Expense. During fiscal year 1997, net interest expense was
$14.2 million, as compared to $14.0 million in fiscal year 1996, due principally
to higher rates of interest.
Taxes. The estimated effective tax rate for fiscal year 1997 is 39.2%, as
compared to an effective tax benefit rate of 35.6% for fiscal year 1996. The
lower tax rate in fiscal year 1996 is primarily the result of the effect of
nondeductible permanent differences on pretax losses in fiscal year 1996
compared to pretax earnings in fiscal year 1997.
Net Income (Loss). During fiscal year 1997, net income was $16.6 million,
as compared to a net loss in fiscal year 1996 of $24.8 million. This significant
improvement is due to the factors described above.
YEAR ENDED JUNE 29, 1996 COMPARED TO YEAR ENDED JULY 1, 1995
Net Sales. The Company'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.
Gross Profit. The Company'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. 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 each of fiscal year 1996 and fiscal year
1995.
Restructuring Charges. In fiscal year 1996, the Company 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 Earnings (Loss). 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.
21
<PAGE> 16
Net Interest Expense. Net interest expense totaled $14.0 million for
fiscal year 1996, as compared to $12.2 million in fiscal year 1995, an increase
of 14.7%, due to the combination of higher interest rates and higher average
debt levels. Because Delta Woodside's consolidated operating earnings to
interest ratios declined, Delta Woodside's cost of borrowings increased and the
rate of interest paid by the Company on its borrowings from Delta Woodside
increased. At June 29, 1996 the Company's interest rate on certain indebtedness
was LIBOR plus 2.5%, as compared to LIBOR plus .75% at July 1, 1995. The
Company's outstanding debt, including the loan payable to affiliate and current
amounts payable to affiliates, increased by $36.8 million during fiscal year
1996, primarily as a result of the plant modernization program in the woven
fabrics division.
Taxes. The effective income tax rates for fiscal years 1996 and 1995 were
35.6% and 38.6%, respectively. The lower tax rate for fiscal year 1996 was
primarily due to the effect of permanent nondeductible differences on the pretax
losses in fiscal year 1996, as compared to the pretax income in fiscal year
1995.
Net Income (Loss). During fiscal year 1996, net loss was $24.8 million as
compared to a net income in fiscal year 1995 of $5.1 million, due to the factors
described above.
YEAR ENDED JULY 1, 1995 COMPARED TO YEAR ENDED JULY 2, 1994
Net Sales. Net sales in fiscal year 1995 were $413.9 million, as compared
to $407.0 million in fiscal year 1994, an increase of 1.7%. Sales by the woven
fabrics division in fiscal year 1995 were $290.8 million, up from $288.7 million
in fiscal year 1994, an increase of 0.7%. Sales by the knitted fabrics division
were $123.1 million in fiscal year 1995, up from $118.4 million in fiscal year
1994, an increase of 4.0%, due principally to higher sales of yarn to an
affiliated company and to higher prevailing market prices than in fiscal year
1995. In the woven fabrics division, lower sales of unfinished fabrics were
offset by higher sales of finished cotton and blended fiber fabrics.
Gross Profit. Gross profit margins were 10.7% in fiscal year 1995, as
compared to 11.2% in fiscal year 1994, a decrease of 0.5%. Gross margins for
knitted fabrics improved from a loss of 0.8% in fiscal year 1994 to 6.5% in
fiscal year 1995, despite a dramatic slowdown beginning in March 1995 in demand
for fabrics knitted and prepared for printing. Gross margins for woven fabrics
declined from 16.1% in fiscal year 1994 to 12.4% in fiscal year 1995, being
adversely impacted by poor prices obtained in sales of unfinished fabrics,
higher raw material costs and certain manufacturing disruptions caused by the
Company's plant modernization program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal year 1995 totaled $23.7 million, as compared
with $25.7 million in fiscal year 1994, a decrease of 7.8%. As a percentage of
net sales, these costs were 5.7% in fiscal year 1995 as compared to 6.3% in
fiscal year 1994. The decrease was principally attributable to a decrease in the
provision for bad debts accrued with respect to fiscal year 1995 in the knitted
fabrics division as compared to fiscal year 1994.
Restructuring Charges. In fiscal year 1994 the Company charged pretax
income $3.1 million for expenses related to restructuring decisions made during
that year. The restructuring charge consisted principally of expenses related to
the closure of a ring spinning plant in the knitted fabrics division.
Operating Earnings. Operating profits in fiscal year 1995 were $20.4
million, as compared to $16.6 million in fiscal year 1994, an increase of 23.3%.
Operating earnings in the woven fabrics division were $21.7 million in fiscal
year 1995, a decrease of 33.2% from operating earnings of $32.5 million in
fiscal year 1994. The knitted fabrics division's operating loss was $1.3 million
in fiscal year 1995, a $14.7 million improvement from an operating loss of $15.9
million incurred in fiscal year 1994. Operating profits in fiscal year 1994
included a $3.1 million charge for restructuring, related principally to a knit
yarn spinning plant that was closed. From fiscal year 1994 to fiscal year 1995,
gross profit margins declined slightly as noted above, and this decline was more
than offset by reduced selling, general and administrative costs.
Net Interest Expense. Net interest expense totaled $12.2 million in fiscal
year 1995, as compared to $10.7 million in fiscal year 1994, due to the
combination of higher interest rates and higher average debt levels. Higher
inventories and capital expenditures accounted for the major part of the
Company's need for additional borrowed funds during fiscal year 1995.
22
<PAGE> 17
Taxes. The effective income tax rates for fiscal years 1995 and 1994 were
38.6% and 42.2%, respectively. The higher tax rate for fiscal year 1994 was
primarily due to the different effects that permanent nondeductible tax items
had on the smaller pretax income in fiscal year 1994, as compared to the effect
on the higher pretax income in fiscal year 1995.
Net Income. Net income in fiscal year 1995 was $5.1 million, as compared
to a net income of $3.4 million in fiscal year 1994, an increase of 47.7%, due
principally to the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal years 1997 and 1996, the Company financed its operations and
capital expenditures primarily through cash generated from operations,
especially reductions in inventory. During the past three fiscal years, the
Company also significantly increased its debt to assist in financing the ongoing
capital expenditure projects. During fiscal years 1997 and 1996, the Company
increased its accounts receivable by $25.7 million and reduced its inventories
by $19.4 million from levels at the end of fiscal year 1995. As of June 28,
1997, current assets were $187.5 million as compared to $169.6 million at the
end of fiscal year 1996, an increase of 10.5%. The increase in current assets
during fiscal year 1997 is primarily due to the increase of accounts receivable
in the woven fabrics division. As of June 29, 1996, the Company had reduced
current assets by $10.9 million from the end of fiscal year 1995 as a result of
its reduction of inventory. The Company generated operating cash flows of $34.8
million, $24.3 million, $19.2 million and $21.3 million for fiscal years 1997,
1996, 1995 and 1994, respectively.
During fiscal year 1997 the Company decreased its borrowings by $20.9
million and in fiscal year 1996 increased its borrowings by $36.8 million from
levels at the end of the previous fiscal year. Historically, the Company
borrowed primarily from Delta Woodside pursuant to intercompany loans and
advances. The terms of these borrowings are described under "Use of Proceeds."
All of these intercompany loans and advances will be repaid or cancelled in
connection with the Refinancing. See "Use of Proceeds." Funds advanced to the
Company by Delta Woodside were primarily borrowed by Delta Woodside under the
Existing Credit Agreement or predecessor credit facilities. For a description of
the Existing Credit Agreement, see "Description of Other Indebtedness." The
Company currently has a factoring arrangement with a financial institution
pursuant to which a substantial portion of the accounts receivable of the woven
fabrics division is assigned without recourse. During fiscal year 1997 $338.9
million of accounts receivable were assigned pursuant to this arrangement. See
Note B to the Combined Financial Statements.
In connection with the Refinancing, the Company will enter into the New
Credit Facility. The New Credit Facility will provide for revolving credit
borrowings in an aggregate principal amount of up to $100.0 million of which
approximately $75.0 million will be advanced and approximately $1.0 million will
be used for standby letters of credit at the time the Notes are issued and up to
approximately $24.0 million will be available for future borrowings. The New
Credit Facility will terminate and all amounts borrowed thereunder will be due
five years from the date of initial funding. Loans under the New Credit Facility
will bear interest at rates based upon federal or Eurodollar rates plus an
applicable margin. Loans under the New Credit Facility will be guaranteed by all
subsidiaries of the Company (other than a Receivables Subsidiary) and will be
secured by liens on the accounts receivable and inventory of the Company and its
subsidiaries and the outstanding capital stock of the Company and its
subsidiaries. For a more complete description of the New Credit Facility, see
"Description of Other Indebtedness -- New Credit Facility."
The Company has recently completed a substantial modernization program,
spending over $277.1 million to modernize and maintain its plants and equipment
during the last decade. See "Business -- Business Strategy." During fiscal year
1996, the Company spent approximately $42.1 million for capital improvements,
with most of the expenditures relating to the long-term capital project for
modernizing the Company's woven fabrics production facilities. During fiscal
year 1997, the Company spent $13.7 million for capital improvements with most of
the expenditures relating to completion of the modernization project in the
woven fabrics division. As a result of its modernization program, the Company
believes that its equipment and facilities are generally adequate to allow it to
remain competitive with its principal competitors. The Company currently
estimates that it will spend approximately $15.0 million for capital
improvements in fiscal year 1998.
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<PAGE> 18
The Company attempts to diminish its exposure to fluctuations in the price
of cotton by entering into contracts fixing the price of a portion of its
anticipated needs. The Company has contracted to purchase about 71% of its
expected cotton requirements for fiscal year 1998 and about 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. See "Risk Factors -- Raw Materials" and
"Business -- Raw Materials."
The Company believes that, upon consummation of the Refinancing, cash flow
generated by its operations and funds available from the New Credit Facility
will be sufficient to service the Notes and its bank debt, to satisfy its
day-to-day working capital needs and to fund its planned capital expenditures.
The Company's ability to make scheduled payments of principal of and to pay
interest or Liquidated Damages, if any, on the Notes, and to satisfy its other
debt obligations and fund planned capital expenditures will depend upon its
future operating performance, which will be affected by, among other factors,
prevailing economic conditions and financial, business, regulatory, political
and other factors, certain of which are beyond its control, as well as the
availability of borrowings under the New Credit Facility or any successor credit
facilities. The Company will require substantial amounts of cash to fund
scheduled payments of principal and interest on its outstanding indebtedness as
well as future capital expenditures and any increased working capital
requirements. If the Company is unable to meet its cash requirements out of cash
flow from operations and its available borrowings, there can be no assurance
that it will be able to obtain alternative financing or that it will be
permitted to do so under the terms of the Indenture or the New Credit Facility.
In the absence of such financing, the Company's ability to respond to changing
business and economic conditions, to absorb adverse operating results, to fund
capital expenditures or to make future acquisitions may be adversely affected.
It is anticipated that in order to pay the principal balance of the Notes due at
maturity, the Company will be required to obtain alternative financing. There
can be no assurance, however, that the Company will be able to refinance the
Notes at maturity at commercially reasonable terms, or at all, and the inability
to refinance the Notes would likely have a material adverse effect on the
Company. See "Risk Factors -- Significant Leverage and Debt Service."
24
<PAGE> 19
BUSINESS
GENERAL
The Company is a leading manufacturer and marketer of woven and knitted
finished and unfinished (or greige) cotton, synthetic and blended fabrics, which
are sold for the ultimate production of apparel, home furnishings and other
products. 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. For the 1997 fiscal year, the Company generated net sales
and EBITDA of $464.5 million and $60.8 million, respectively.
The following table sets forth for the periods indicated the dollar amount
and percentage of total net sales of the Company attributable to external sales
of woven fabrics, external sales of knitted fabrics and sales to other divisions
of the Delta Woodside Group:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------
1994 1995 1996 1997
------------- ------------- ------------- -------------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- -----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External sales of woven fabrics......... 288.6 70.9 290.8 70.3 294.1 73.1 336.2 72.4
External sales of knitted fabrics....... 102.8 25.3 102.9 24.9 82.8 20.6 98.5 21.2
Sales to other divisions of the Delta
Woodside Group(1)..................... 15.6 3.8 20.2 4.8 25.6 6.3 29.8 6.4
----- ----- ----- ----- ----- ----- ----- -----
Total......................... 407.0 100.0 413.9 100.0 402.5 100.0 464.5 100.0
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Substantially all of these amounts consist of sales of yarn from the knitted
fabrics division.
The Company believes that its woven fabrics division is a leading worldwide
producer of cotton, cotton blend and spun synthetic pants-weight fabric, and
that it has a reputation for reliability and high quality in the pants industry.
The Company's relationship with its customers has been strengthened by its
ability to develop new products that meet customer requirements, including the
following product innovations: (i) a successful manufacturing process for
"wrinkle-free" cotton fabrics, (ii) "baby gabardine" fabric (an all-spun
polyester-rayon blend fabric that is a core product for certain pants, skirts
and jackets for women), (iii) "Suncatcher linen" (a synthetic fabric made of
polyester and rayon fibers spun to resemble a natural linen product), and (iv)
Operation Desert Storm camouflage fabric. In addition, the division has
repeatedly responded to customer needs in a timely manner, such as in its
support of the growth of Levi Strauss' Dockers(R) pants line and helping to
launch Haggar Corp.'s Wrinkle-Free(R) pants, for each of whom the Company
continues to be a significant supplier. In 1991, Operation Desert Storm provided
the Company with an opportunity to demonstrate its product innovation
capabilities and quick turnaround time. Within a period of less than ten weeks,
the woven fabrics division, in cooperation with the United States government,
helped to develop, tested and put into production a sand camouflage pattern that
provided superior protection to United States troops. The woven fabric division
ultimately supplied approximately 80% of the camouflage fabric used in United
States uniforms in Operation Desert Storm and continues to be a significant
supplier of a variety of camouflage fabric to military uniform contractors.
Following Delta Woodside's acquisition of the Company in 1986, the Company
has upgraded its facilities through an extensive series of capital expenditure
programs that have modernized and consolidated certain
25
<PAGE> 20
fabric manufacturing processes. In addition to making significant improvements
in the Company's already high standards of quality, these modernization programs
have resulted in significant increases in operating efficiencies as measured by
sales per square foot of manufacturing space and sales per employee and have, in
many cases, resulted in substantial reductions in the cost per unit of
production. The Company is substantially vertically integrated and currently
operates eight production facilities in the woven fabrics division and four
production facilities in the knitted fabrics division. Each division has its own
management and employees and operates independently of the other division under
the overall direction of the Company's executive officers.
INDUSTRY TRENDS
The Company competes with other producers of woven and knitted fabrics to
supply the United States apparel market. In recent years, the fabric/apparel
industry has been undergoing significant changes both in the geographic
locations of production and in the type of garments produced. Specifically, two
trends have significantly impacted the industry: (i) the growth of a western
hemisphere fabric/apparel production chain, and (ii) the increased casualization
of the workplace. The Company believes that it is well-positioned to capitalize
on both of these trends.
Growth of a Western Hemisphere Fabric/Apparel Chain
In recent years, the fabric/apparel industry has been marked by fundamental
changes in the sources of supply for apparel products. Specifically, the Company
believes that a western hemisphere fabric/apparel production chain has been
rapidly developing to compete with the Far Eastern supply chain, with fabric
manufacturing remaining in the United States and apparel manufacturing moving to
MCACI countries. The shift to this configuration, which began several decades
ago, has accelerated significantly in the past several years with the passage of
NAFTA and GATT. The western hemisphere fabric/apparel production chain has also
been strengthened by the requirements of United States retailers for shorter
delivery times and faster turnaround times, which can be more easily met by
suppliers in the western hemisphere.
Due to the relatively higher proportion of labor costs in apparel
manufacturing, much of the apparel production in the United States is shifting
to MCACI countries where labor costs are competitive on a world-wide basis. By
contrast, fabric production for apparel manufactured in MCACI countries has
largely remained in the United States for a number of reasons. First, because
the modern fabric manufacturing process includes relatively little manual labor,
United States wage rates no longer put domestic fabric manufacturers at a
competitive disadvantage. In addition, as fabric manufacturing today requires
substantial capital investment, the United States is a more attractive venue
than MCACI countries due to its political and economic stability and developed
infrastructure, including an abundant water supply and reliable, low-cost
electric power.
In addition, tariffs, quotas and other existing trade regulations provide
western hemisphere fabric/apparel production with a significant competitive
advantage in the United States market. Recent changes in trade regulation,
including NAFTA, have not only spurred growth among United States fabric
manufacturers and MCACI apparel manufacturers, but also have encouraged the
further development of a western hemisphere fabric/apparel production chain. In
the 1960s, Section 807 created a platform for this growth. Section 807 provides
for 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. In
addition, under 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. A similar program, enacted as a result of NAFTA and referred to
as the Special Regime Program, provides even greater benefits for such apparel
assembled in Mexico from fabric components formed and cut in the United States.
In contrast, apparel not meeting the criteria of such programs is subject to
quotas and/or relatively higher tariffs. See "-- Competition" and "Risk
Factors -- Competition; Risks Associated with Changing Industry and Regulation."
The shift to this western hemisphere fabric/apparel production chain has
occurred largely at the expense of the growth of Far Eastern fabric and apparel
production. Apparel retailers, many of which have in the past
26
<PAGE> 21
relied on Hong Kong, China and other Far Eastern countries as their principal
sources of completed apparel products, are increasingly looking to the western
hemisphere fabric/apparel production chain. This is due in part to demands of
United States apparel retailers for shorter delivery times and quicker
turnaround times. Today, the working relationships between the fabric mills of
the United States and the apparel factories of MCACI countries are becoming more
efficient and well-developed, making western hemisphere fabric/apparel products
competitive with those imported from the Far East. From 1995 to 1996, apparel
imports from MCACI countries to the United States grew 18.7% from $8.3 billion
to $9.8 billion, versus imports from all other countries of $28.5 billion in
1995 and $28.8 billion in 1996, an increase of only 1.1%. In the first quarter
of 1997, imports from MCACI countries were $2.6 billion, an increase of 33.8%
from $2.0 billion imported during the first quarter of 1996, while imports from
all other countries increased by 7.2% during the same period. The Company
believes that the majority of garments imported to the United States from MCACI
countries contain fabric from United States producers such as Delta Mills.
The Company believes that its relationship with United States apparel
marketers, its modern manufacturing facilities and its reputation for quality
position it to compete effectively in this evolving western hemisphere
fabric/apparel production chain.
Increased Casual Workplace Environment
Trends in consumer preferences are also creating growth opportunities for
the Company. With the advent of "casual Fridays" and increasingly casual dress
workplaces in recent years, the demand for casual wear has increased. The
Company's principal product lines are made into garments of the type being worn
in this more casual workplace environment such as all cotton pants and knit
polo-type shirts. The Company's recently completed modernization program has
increased its capacity for all-cotton finished fabrics used in casual wear. As a
result, the Company believes that it is in a position to benefit from this
casualization trend.
BUSINESS STRATEGY
Within the framework of an evolving fabric/apparel industry, the Company
has developed and is implementing the following business strategy aimed at
growing revenues and EBITDA:
- - LEVERAGE WOVEN FABRICS DIVISION RELATIONSHIPS WITH KEY APPAREL MARKETERS.
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 has fostered relationships
for over 30 years with, and has become an integral part of the supply chain
for certain product lines of, several strong United States branded apparel
merchandisers, including Levi Strauss, Haggar Corp., the Wrangler(R) and
Lee(R) divisions of V.F. Corporation and Farah Incorporated. In addition,
the division is a significant supplier to certain product lines of Liz
Claiborne, Inc. and Kellwood Company, with each of whom it has had a
relationship for more than five years. Sales to these six core customers
grew 46.6% from fiscal year 1996 to fiscal year 1997.
In building these relationships, the Company seeks to be a significant
supplier for the major product lines of its customers which the Company
expects to provide a steady base of recurring revenues. To manufacture
goods for the United States apparel market, these apparel producers create
preferred supplier relationships with a limited number of fabric
manufacturers, like the division, that satisfy on-time delivery,
reliability, lead time consistency, cost and quality criteria. The woven
fabrics division also maintains strong working relationships with major
retailers, such as J.C. Penney Company, Inc., Kmart Corporation, Sears,
Roebuck & Co. and Wal-Mart Stores, Inc., that specify or recommend the
purchase of fabric to contract manufacturers that produce their apparel
product lines.
These efforts have produced a substantial order backlog in the woven
fabrics division, which at June 28, 1997 stood at $119.9 million, a 60.0%
increase over the prior fiscal year end.
- - FOCUS ON THE GROWTH SEGMENTS OF THE KNITTED FABRICS INDUSTRY. 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.
27
<PAGE> 22
As a result of the growth in knit polo-type shirts, many major branded
apparel companies, such as Levi Strauss, NIKE, Inc. and the Lee(R) and
Wrangler(R) divisions of V.F. Corporation, as well as private label
companies, are expected to increase their demand for knit fabrics. The
knitted fabrics division also plans to expand its children's wear business
by targeting large manufacturers of children's wear, such as Garan,
Incorporated and Gerber Products Company, that have successfully maintained
and expanded their market share in a segment which the Company believes has
experienced significant concentration in recent years.
In addition, although the career apparel segment has traditionally
been a blue collar, woven fabrics business where durability of the garment
was the chief criterion, delivery, fast food and other service companies
such as United Parcel Service of America, Inc., Taco Bell North America and
Kinko's, Inc. are requiring uniforms that are not only durable, but are
fashionable and comfortable as well. The Company believes that this trend
is providing a rapidly growing career apparel market for knit polo-type
shirts. This market is attractive to the Company because demand in this
market is generally more consistent and less price-sensitive than the
retail market generally, and the customer relationships tend to be
service-oriented and longstanding. The market for knit career apparel
shirts in 1995 was approximately 25 million pounds, up from approximately
18 million pounds in 1990.
- - CAPITALIZE ON IMPROVED OPERATING EFFICIENCIES AND REDUCED COST STRUCTURE.
The Company has recognized that a critical element of being competitive in
the global textile industry is the ability to minimize manufacturing costs.
In an effort to become a low-cost, world competitive producer, the Company
has invested approximately $277.1 million during the last decade to
modernize and maintain its plants and equipment, including more than $143.8
million over the past five fiscal years. As a result of its extensive
capital expenditure campaign in recent years, the Company believes that it
is in a position to return to substantially reduced levels of capital
expenditures, with an average of approximately $15.0 million per year
expected to be required for the next three fiscal years.
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 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
Company's manufacturing costs. Comparing the most recent fiscal year with
fiscal year 1992, sales generated per square foot of manufacturing space
have increased approximately 29.3%, and sales generated per employee have
increased approximately 29.4%.
- - CONTINUE TO FOCUS ON QUALITY. Coupled with the modernization projects
described above, the Company's pursuit of quality improvements has resulted
in its reputation as a high quality producer of textile fabrics. For
example, the Company's Beattie plant (spinning and weaving of pants-weight
twill, located in Fountain Inn, South Carolina) recently won the 1997 South
Carolina Governor's Quality Achiever Award which is modeled upon criteria
used for the Malcolm Baldridge Quality Award. Both divisions have been
qualified by the J.C. Penney Company, Inc. quality laboratory with
"outstanding" quality
28
<PAGE> 23
ratings. In addition, the woven fabrics division is a certified supplier to
Levi Strauss and Liz Claiborne because of its consistently meeting their
high quality and delivery standards. Other apparel manufacturers are
following this trend toward certifying key suppliers. As a consequence of
the high quality of the woven fabrics produced by the Company, some of the
Company's largest customers such as Levi Strauss do not find it necessary
to inspect all of the Company's goods upon receipt. As a result of the
modernization program in the woven fabrics division, including the Beattie
plant project completed earlier in fiscal year 1997, fabric defect points
per 100 square yards in finished cotton woven fabrics shipped to customers
declined from an average of 13.6 points in fiscal year 1992 to an average
of 4.2 points in fiscal year 1997, significantly better than the industry
standard for "first quality." The Company believes that its product quality
is a significant competitive advantage in the sale of its higher margin
woven products.
MANUFACTURING
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 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.
Woven Fabrics
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 produced, at cost, $239.6 million of finished fabrics
and $31.6 million of unfinished fabric. 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.
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.
Knitted Fabrics
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 segment 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.
29
<PAGE> 24
PRODUCTS AND MARKETING
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 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.
For fiscal year 1997, sales to Levi Strauss and sales to the Company's top
five non-affiliated customers accounted for 17.1% and 37.8%, respectively, of
total sales. In fiscal year 1996, sales to Levi Strauss and sales to the
Company's top five non-affiliated customers accounted for 12.9% and 30.7%,
respectively, of the Company's total sales. Consistent with industry practice,
the Company does not operate under a supply contract with Levi Strauss or any of
its other major customers. In addition, during fiscal years 1997, 1996 and 1995,
sales of camouflage military fabrics accounted for 8.4%, 12.8% and 3.1%,
respectively, of the Company's total sales. The loss of Levi Strauss or other
major customers could have a material adverse effect upon the Company. See "Risk
Factors -- Risk of Loss of Material Customers or Broker."
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 Delta Woodside Group's apparel segment. See
"Certain Transactions."
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. During fiscal year 1997, sales
through this broker were approximately $44.0 million, approximately 9.5% of the
Company's total sales. 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. See "Risk Factors -- Risk of Loss of Material Customers or Broker."
RAW MATERIALS
The Company'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 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
30
<PAGE> 25
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. For
example, this factor contributed significantly to the Company's operating losses
during fiscal year 1996. See "Risk Factors -- Raw Materials" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION
The Company sells primarily to domestic apparel manufacturers, many of
which operate offshore sewing operations. The Company competes with numerous
domestic and foreign fabric manufacturers, including companies larger in size
and having greater financial resources than the Company. The principal
competitive factors in both the woven and knitted fabrics markets 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. Management believes that the Company maintains its ability to
compete effectively by providing its customers with a broad array of
high-quality fabrics at competitive prices on a timely basis.
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 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. However, Dyersburg
Corporation and West Point-Stevens, Inc. recently 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. See "-- Industry Trends -- Growth of a Western Hemisphere
Fabric/Apparel Production Chain." 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
31
<PAGE> 26
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 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. See "Risk Factors -- Competition; Risks
Associated with Changing Industry and Regulation."
ENVIRONMENTAL AND REGULATORY MATTERS
The Company 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. The
Company's plants generate very small quantities of hazardous waste that are
either recycled or disposed of off-site. Most of its plants are required to
possess one or more discharge permits.
The Company is subject to a consent order that it entered into with the
South Carolina Department of Health and Environmental Control on September 26,
1985 (the "Consent Order"), prior to Delta Woodside's acquisition of the
business. The Consent Order arose from a determination that several private
drinking wells in the area of two of the Company's plants had been contaminated.
Pursuant to the Consent Order, the Company has discontinued the operation of a
large spray field near these plants into which waste water sludge had been
disposed and has placed into operation for such purpose a new and larger
adjacent spray field. The Company expects that any continuing expenditures to
comply with the Consent Order will be immaterial.
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 extending a discharge pipe 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. 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 courses of action in an effort to
achieve compliance with its NPDES permits, including upgrades at the Delta 2 and
3 plants ranging from $1.1 million to $2.5 million in cost. 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.
Environmental regulation applicable to the Company's operations is becoming
increasingly stringent. The Company continues to incur capital and other
expenditures each year in order to comply with current and future regulatory
standards. The Company does not expect, however, that the amount of such
expenditures in the future will have a material adverse effect on its financial
condition, results of operations or competitive position. 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
32
<PAGE> 27
require substantial additional expenditures. Similarly, the extent of the
Company's liability, if any, for past failures to comply with laws, regulations
and permits applicable to its operations cannot be determined. See "Risk
Factors -- Environmental Laws and Regulations."
ORDER BACKLOGS
The Company's order backlog at June 28, 1997 was $143.1 million, a 60.2%
increase over the $89.3 million order backlog at June 28, 1996. Most of this
increase was attributable to the woven fabrics division. The Company believes
that backlog orders are generally indicative of future sales.
PROPERTIES
The following table provides a description of the Company's principal
administrative, sales, production and warehouse facilities.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PRINCIPAL USE SQUARE FOOTAGE OWNED/LEASED
- -------- ------------- --------------- ------------
<S> <C> <C> <C>
WOVEN FABRICS DIVISION
Greenville, SC................................. Administrative offices 17,400 Leased(1)
New York, NY................................... Sales offices 12,500 Leased(2)
Dallas, TX vicinity (4)........................ Sales offices 350 Leased(2)
Los Angeles, CA vicinity....................... Sales offices 2,200 Leased(2)
Beattie Plant, Fountain Inn, SC................ Spin/Weave 390,000 (3)
Furman Plant, Fountain Inn, SC................. Weave 116,000 (3)
Estes Plant, Piedmont, SC...................... Spin/Weave 332,000 (3)
Delta 3 Plant, Wallace, SC..................... Dye/Finish 555,000 (3)
Cypress Plant, Pamplico, SC.................... Spin 144,000 (3)
Pamplico Plant, Pamplico, SC................... Spin/Weave 275,000 (3)
Delta 2 Plant, Wallace, SC..................... Dye/Finish 347,000 (3)
Catawba Plant, Maiden, NC...................... Spin 115,000 Owned
KNITTED FABRICS DIVISION
Greer, SC...................................... Administrative offices 12,000 Owned
New York, NY................................... Sales offices 6,300 Leased(2)
Dallas, TX vicinity (4)........................ Sales offices 350 Leased(2)
Carter Plant, Wallace, NC...................... Dye/Finish 485,000 Owned
Holly Plant, Wallace, NC....................... Knit 224,000 Owned
Rainsford Plant, Edgefield, SC................. Spin 296,000 Owned
Mickel Plant, Spartanburg, SC.................. Spin 207,000 Owned
</TABLE>
- ---------------
(1) Lease expires in 1998 with the right to renew for two additional five-year
periods.
(2) Leases expire on varying dates from September 1997 through December 2004.
(3) 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.
(4) This facility is shared by the woven fabrics and knitted fabrics divisions
and the approximate square footage shown represents each division's
approximate usage.
EMPLOYEES
As of June 28, 1997, the Company had approximately 3,750 employees, of
which 85.1% were paid on an hourly basis. The Company's employees are not
represented by unions. The Company believes that its relations with its
employees are good.
LEGAL PROCEEDINGS
From time to time the Company is a defendant 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
the financial condition or results of operations of the Company.
33
<PAGE> 28
CERTAIN TRANSACTIONS
The knitted fabrics division of the Company sells yarn and fabric to the
subsidiary of Delta Woodside that manufactures and sells apparel. During fiscal
years 1994, 1995, 1996 and 1997, these sales of yarn aggregated $14,568,000,
$17,699,000, $23,363,000 and $22,015,000, respectively, and these sales of
fabric aggregated $1,066,000, $2,493,000, $2,237,000 and $7,855,000,
respectively. During these periods until the end of March 1997, all such yarn
sales were at a price equal to cost plus $0.01 per pound. All such fabric sales,
and all yarn sales made since March 1997, were and have been made at prices
deemed by the Company and Delta Woodside to approximate market value. In
connection with the foregoing pricing policies on the yarn sales, through March
1997 the apparel manufacturing subsidiary of Delta Woodside also maintained with
the knitted fabrics division a non-interest bearing deposit, which aggregated
$7.5 million and $11.2 million at June 29, 1996 and July 1, 1995, respectively.
Effective May 7, 1997, Delta Woodside adopted a written policy statement
governing the pricing of intercompany transactions. Among other things, such
policy statement provides that all intercompany sales and purchases will be
settled at market value and terms.
Delta Woodside provides various services to the Company, including payroll,
accounting, internal audit, employee benefits and corporate services. These
services have been charged on the basis of Delta Woodside's costs and allocated
to the Company based on employee head count, computer time, projected sales and
other criteria. During fiscal years 1994, 1995, 1996 and 1997, Delta Woodside
charged the Company $3,083,000, $2,950,000, $3,123,000 and $3,302,000,
respectively, for these services. Effective as of August 1, 1997, the Company
and Delta Woodside entered into a management services agreement that governs the
use by the Company of and the method of charging the Company for the services to
be provided by Delta Woodside to the Company on an ongoing basis. Such
management services agreement provides, among other things, that the Company may
request that Delta Woodside provide such executive, administrative, accounting
and similar services as may be necessary and appropriate for the operation of
the Company. The management services agreement further provides that Delta
Woodside shall provide such services for a fee no greater than the lesser of:
(a) the cost to the Company of obtaining such services from an unaffiliated
third party in an arm's length transaction or (b) the Company's pro rata share
of Delta Woodside's actual cost or expense incurred in connection with providing
such services (including a reasonable allocation of overhead and other
unallocated corporate costs) with such pro rata share to be determined
reasonably and in good faith by Delta Woodside in accordance with the following
formulas: in the case of benefits, administration and payroll costs and expenses
based upon the average number of employees of the Company during the immediately
preceding four full fiscal quarters for which internal statements are available
(the "Statement Period") as compared to the average number of employees of the
Delta Woodside Group during the Statement Period; in the case of computer
services based upon the number of computer processing units attributable to the
Company during the Statement Period as compared to the total number of computer
processing units of the Delta Woodside Group during the Statement Period; in the
case of purchasing costs and expenses based upon the number of purchase orders
attributable to the Company during the Statement Period as compared to the total
number of purchase orders of the Delta Woodside Group during the Statement
Period; in the case of expenses related to cotton buying services based upon the
number of cotton orders entered into by or on behalf of the Company for the
Statement Period as compared to the total number of cotton orders of the Delta
Woodside Group for the Statement Period; in the case of accounting, tax and
internal audit costs and expenses based upon the amount of the bill of Delta
Woodside's external auditors during the Statement Period attributable to work
related to the Company, as compared to the total bill of Delta Woodside's
external auditors during the Statement Period; and in the case of all other
costs and expenses based upon the total of the Company's revenues for the
Statement Period as compared to revenues of the consolidated Delta Woodside
Group for the Statement Period. Such management services agreement may be
terminated at any time by any party thereto without liability, except that the
Company shall pay for all services provided up to and including the date such
agreement is terminated.
Effective as of August 1, 1997 the Company and Delta Woodside entered into
an income tax sharing agreement. Such income tax sharing agreement provides that
Delta Woodside will file consolidated federal, and may file consolidated state
and local, income tax returns covering the Company and the other members of the
Delta Woodside Group. Such income tax sharing agreement further provides that
the Company will pay to
41
<PAGE> 29
Delta Woodside an amount on each tax due date equal to the lesser of (a) the
Company's income tax liability had the Company filed a separate tax return for
the affiliate group (the "Subsidiary Group") consisting of the Company and the
Company's subsidiaries or (b) the Subsidiary Group's pro rata share of the Delta
Woodside Group's aggregate income tax liability, calculating such pro rata share
as if the members of the Delta Woodside Group had filed separate tax returns.
However, any reduction in amount payable by the Company resulting from net
operating losses ("NOL") generated by another subsidiary of Delta Woodside shall
be paid to Delta Woodside when such other subsidiary would have otherwise
benefitted from such NOL if it were filing separate tax returns. The income tax
sharing agreement also provides that Delta Woodside will credit the Company for
any net loss, tax credit or refund of the Subsidiary Group that reduces the tax
liability of the Delta Woodside Group.
For a description of indebtedness owed by the Company to the Delta Woodside
Group, see "Use of Proceeds."
Any transaction to be entered into between the Company, on the one hand,
and Delta Woodside or any of Delta Woodside's other subsidiaries, on the other
hand, will be on terms that the Company then believes comparable to those that
would be available to the Company at such time from non-affiliated persons. In
addition, pursuant to the terms of the Indenture, certain affiliate transactions
(excluding sales of goods and manufacturing services in the ordinary course of
business) in excess of $1.0 million will be subject to the approval at the time
of the Company's Board of Directors and certain affiliate transactions
(excluding sales of goods and manufacturing services in the ordinary course of
business) in excess of $5.0 million will be subject to a fairness opinion by an
investment banking firm of national standing.
42
<PAGE> 30
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
The New Credit Facility will be provided by a group of banks and other
financial institutions syndicated by NationsBanc Capital Markets, Inc., as
arranger and syndication agent. The New Credit Facility will provide for $100.0
million in revolving credit loans ("Revolving Credit Loans") and commercial
letters of credit. Availability of borrowings will be subject to a borrowing
base equal to 85% of the Company's and its subsidiaries' eligible accounts
receivables and 60% of their eligible inventory. Borrowings under the New Credit
Facility will be secured by a first priority lien on the outstanding capital
stock of the Company and its subsidiaries and all present and future accounts
receivable and inventory of the Company and its domestic subsidiaries. The New
Credit Facility will terminate five years after the date of initial funding.
All Revolving Credit Loans will bear interest, at the Company's option
(subject to a performance based pricing grid), at either: (i) the London
Interbank Offered Rate ("LIBOR") plus 1.50% or (ii) a base rate (the higher of
the NationsBank prime rate or the Federal Funds rate plus 0.50%) plus 0.75%.
The Company will pay a commitment fee of 0.375% per annum of the unused
commitment under the New Credit Facility. Such fee will be payable quarterly in
arrears.
The Company will pay a letter of credit fee equal to the interest rate
spread on LIBOR loans on the outstanding amount of all letters of credit and a
fronting fee of 0.125% per annum of the outstanding amount of each letter of
credit. Such fees will be payable quarterly in arrears. In addition, the Company
will pay customary transaction charges in connection with any letters of credit.
The New Credit Facility will contain customary covenants and restrictions
on the Company's ability to engage in certain activities. In addition, the New
Credit Facility will provide that the Company must meet certain financial
conditions including (i) a minimum consolidated tangible net worth, (ii) a
maximum leverage ratio, (iii) a minimum consolidated current ratio and (iv) a
minimum interest coverage ratio.
The New Credit Facility will include customary events of default.
DESCRIPTION OF DELTA WOODSIDE INDEBTEDNESS
Existing Credit Facility. Delta Woodside will use the amounts paid to it
by the Company from the net proceeds from the issuance of the Notes, together
with approximately $74.0 million of net proceeds from the New Credit Facility,
to repay approximately $219.0 million in aggregate principal amount of
indebtedness outstanding under the Existing Credit Agreement. The Existing
Credit Agreement terminates September 30, 1997. Borrowings outstanding under the
Existing Credit Agreement are guaranteed by the Company and various other
subsidiaries of Delta Woodside, and bear interest at a variable rate which, for
any day, is equal to the higher of (i) the rate of interest announced from time
to time by NationsBank, N.A. as its "prime" rate as in effect at such time or
(ii) the weighted average of the rates on overnight Federal Funds transactions,
as published by the Federal Reserve Bank of New York. Amounts borrowed under the
Existing Credit Agreement, and its predecessor credit facilities, have been used
to acquire businesses, to make capital expenditures and for general working
capital purposes. Borrowings under the Existing Credit Facility are fully
secured by liens on substantially all of the assets of the Delta Woodside Group
and are guaranteed by the Company and most of the other subsidiaries of Delta
Woodside.
Parent Credit Facility. Concurrently with the closing of the Offering,
Delta Woodside will enter into the Parent Credit Facility which will provide
Delta Woodside with available borrowings of up to $20.0 million (subject to
borrowing base limitations). All borrowings under the Parent Credit Facility
will be secured by the current assets of the Delta Woodside Group (other than
the Company and its subsidiaries) and guaranteed by all subsidiaries of Delta
Woodside (other than the Company and its subsidiaries). All borrowings under the
Parent Credit Facility will be due one year after the closing of the
Refinancing.
66
<PAGE> 31
DELTA MILLS, INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP............................. F-2
Combined Balance Sheets as of July 1, 1995, June 29, 1996
and June 28, 1997 (unaudited)............................. F-3
Combined Statements of Operations for the fiscal years ended
July 2, 1994, July 1, 1995, June 29, 1996 and June 28,
1997 (unaudited).......................................... F-4
Combined Statements of Shareholder's Equity (Deficit) for
the fiscal years ended July 2, 1994, July 1, 1995, June
29, 1996 and June 28, 1997 (unaudited).................... F-5
Combined Statements of Cash Flows for the fiscal years ended
July 2, 1994, July 1, 1995, June 29, 1996 and June 28,
1997 (unaudited).......................................... F-6
Notes to Combined Financial Statements...................... F-7
</TABLE>
F-1
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Delta Mills, Inc.
We have audited the accompanying combined balance sheets of Delta Mills,
Inc. and certain divisions of Delta Consolidated Corporation as of July 1, 1995
and June 29, 1996, and the related combined statements of operations,
shareholder's equity (deficit), and cash flows for each of the three years in
the period ended June 29, 1996. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Delta Mills, Inc.
and certain divisions of Delta Consolidated Corporation at July 1, 1995 and June
29, 1996, and the results of their operations and their cash flows for each of
the three years in the period ended June 29, 1996 in conformity with generally
accepted accounting principles.
As discussed in notes A and H to the combined 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.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
July 14, 1997
F-2
<PAGE> 33
DELTA MILLS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
-------- -------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 45 $ 44 $ 1,095
Accounts receivable:
Factor................................................ 63,085 63,194 83,676
Customers............................................. 17,087 20,759 19,989
Affiliates............................................ 1,065 8,589 2,953
-------- -------- --------
81,237 92,542 106,618
Less allowances for doubtful accounts and returns..... 1,312 1,064 1,003
-------- -------- --------
Accounts receivable, net......................... 79,925 91,478 105,615
Inventories
Finished goods........................................ 33,249 19,313 13,160
Work in process....................................... 49,794 46,044 52,283
Raw materials and supplies............................ 13,542 9,276 11,752
-------- -------- --------
Total inventories................................ 96,585 74,633 77,195
-------- -------- --------
Deferred income taxes and other current assets.......... 3,889 3,426 3,553
-------- -------- --------
TOTAL CURRENT ASSETS............................. 180,444 169,581 187,458
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements.............................. 3,537 3,656 3,647
Buildings............................................... 44,867 53,896 58,374
Machinery and equipment................................. 165,190 194,366 207,548
Furniture and fixtures.................................. 3,751 4,020 3,944
Leasehold improvements.................................. 693 700 700
Construction in progress................................ 17,088 9,655 1,980
-------- -------- --------
235,126 266,293 276,193
Less accumulated depreciation........................... 78,898 102,297 118,641
-------- -------- --------
Property, plant and equipment, net............... 156,228 163,996 157,552
-------- -------- --------
$336,672 $333,577 $345,010
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable.................................. $ 35,713 $ 22,022 $ 31,597
Accrued employee compensation........................... 3,851 2,934 5,932
Accrued and sundry liabilities.......................... 7,709 9,028 8,796
Payable to affiliates................................... 51,681 59,129 58,469
Loan payable to affiliate............................... 31,069 60,458 40,189
Current portion of long-term debt....................... -- -- 50,000
-------- -------- --------
TOTAL CURRENT LIABILITIES........................ 130,023 153,571 194,983
LONG-TERM DEBT DUE TO AFFILIATE, less current portion..... 170,000 170,000 120,000
DEFERRED INCOME TAXES..................................... 15,875 13,614 16,547
OTHER LIABILITIES AND DEFERRED CREDITS.................... 4,684 5,101 5,636
SHAREHOLDER'S EQUITY (DEFICIT)
Common Stock -- par value $.01 a share -- authorized
3,000 shares, issued and outstanding 100 shares....... -- -- --
Additional paid-in capital.............................. 2,134 2,134 2,134
Retained earnings (accumulated deficit)................. 13,956 (10,843) 5,710
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY (DEFICIT)............. 16,090 (8,709) 7,844
COMMITMENTS AND CONTINGENCIES.............................
-------- -------- --------
$336,672 $333,577 $345,010
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 34
DELTA MILLS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 2, JULY 1, JUNE 29, JUNE 28,
1994 1995 1996 1997
-------- -------- --------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales to non-affiliates........................ $391,403 $393,735 $ 376,861 $434,678
Net sales to affiliated parties.................... 15,634 20,192 25,600 29,870
-------- -------- --------- --------
Total net sales.................................. 407,037 413,927 402,461 464,548
Cost of goods sold................................. 361,531 369,785 389,977 399,378
-------- -------- --------- --------
Gross profit....................................... 45,506 44,142 12,484 65,170
Selling, general and administrative expenses....... 25,734 23,717 22,767 25,382
Impairment and restructuring charges (credit)...... 3,066 (290) 13,291 --
-------- -------- --------- --------
16,706 20,715 (23,574) 39,788
Other expense (income):
Interest expense................................. 10,795 12,251 14,099 14,285
Interest (income)................................ (131) (39) (92) (73)
Other expense (income)........................... 122 272 921 (1,632)
-------- -------- --------- --------
10,786 12,484 14,928 12,580
-------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................. 5,920 8,231 (38,502) 27,208
Income tax expense (benefit)....................... 2,500 3,180 (13,703) 10,655
-------- -------- --------- --------
NET INCOME (LOSS).................................. $ 3,420 $ 5,051 $ (24,799) $ 16,553
======== ======== ========= ========
Earnings (loss) per share of Common Stock.......... $ 34,200 $ 50,510 $(247,990) $165,530
======== ======== ========= ========
Number of shares outstanding....................... 100 100 100 100
======== ======== ========= ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 35
DELTA MILLS, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS SHAREHOLDER'S
---------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
------ ------- ---------- ------------ -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balances at July 3, 1993.................... 100 -- $2,217 $ 125,485 $ 127,702
Net income.................................. -- 3,420 3,420
Dividends declared -- $1.2 million per
share..................................... -- (120,000) (120,000)
--- ------- ------ --------- ---------
Balances at July 2, 1994.................... 100 -- 2,217 8,905 11,122
Net income.................................. -- 5,051 5,051
Other....................................... (83) -- (83)
--- ------- ------ --------- ---------
Balances at July 1, 1995.................... 100 -- 2,134 13,956 16,090
Net (loss).................................. -- (24,799) (24,799)
--- ------- ------ --------- ---------
Balances at June 29, 1996................... 100 -- 2,134 (10,843) (8,709)
Net income (unaudited)...................... -- 16,553 16,553
--- ------- ------ --------- ---------
BALANCES AT JUNE 28, 1997 (UNAUDITED)....... 100 $ -- $2,134 $ 5,710 $ 7,844
=== ======= ====== ========= =========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 36
DELTA MILLS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
JULY 2, JULY 1, JULY 29, JUNE 28,
1994 1995 1996 1997
-------- -------- -------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 3,420 $ 5,051 $(24,799) $ 16,553
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation................................... 15,807 17,007 18,963 19,393
Amortization................................... 905 (10) (11) (70)
Writedown of property and equipment............ 1,230 -- 12,554 --
Provision for losses on accounts receivable.... 490 746 490 388
Provision for deferred income taxes............ 3,641 1,119 (2,201) 3,152
Losses (gains) on disposition of property and
equipment.................................... 145 335 1,016 (1,504)
Deferred compensation.......................... 630 676 428 605
Changes in operating assets and liabilities:
Accounts receivable.......................... 17,404 3,502 (4,519) (14,525)
Inventories.................................. (8,208) (3,130) 21,952 (2,562)
Other current assets......................... 23 2 403 (346)
Accounts payable and accrued expenses........ (14,201) (6,117) (22) 13,680
-------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........... 21,286 19,181 24,254 34,764
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases...................................... (18,834) (27,195) (47,946) (15,718)
Proceeds from dispositions..................... 517 -- 1,826 2,274
-------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............... (18,317) (27,195) (46,120) (13,444)
FINANCING ACTIVITIES
Scheduled principal payments of long-term debt.... (988) (548) -- --
Net proceeds from(repayments of) loan from parent
company........................................ (1,241) 7,660 21,865 (20,269)
-------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ (2,229) 7,112 21,865 (20,269)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 740 (902) (1) 1,051
-------- -------- -------- --------
Cash and cash equivalents at beginning of year...... 207 947 45 44
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 947 $ 45 $ 44 $ 1,095
======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE> 37
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business. The Company manufactures woven and knitted
textile fabrics which are sold through separate sales divisions. The Company's
operations, all within the textile industry, are considered a single business
segment.
Basis of Presentation. The combined financial statements include the
accounts of Delta Mills, Inc. and certain divisions of Delta Consolidated
Corporation (collectively, the "Company".) All significant intercompany balances
and transactions have been eliminated. Delta Mills, Inc. and Delta Consolidated
Corporation are wholly-owned subsidiaries of Alchem Capital Corporation, which
is a wholly-owned subsidiary of Delta Woodside Industries, Inc. ("Delta
Woodside").
The accompanying unaudited combined financial statements of the Company for
the year ended June 28, 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
Significant transactions that occurred during the fiscal year ended June
28, 1997 and resulted in commitments of the Company not otherwise disclosed
herein include the following:
(1) As of December 31, 1996, the Company entered into operating leases for
machinery and equipment that expire in 2002. Future minimum lease payments under
these noncancellable operating leases are $2.8 million per year for 5 years.
Therefore, aggregate future minimum lease payments will approximate $3.5 million
per fiscal year for 1998 through 2002.
(2) The Company entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 28, 1997, payments under
these contracts with noncancellable contract terms are approximately $59.5
million and approximately $11.9 million in fiscal years 1998 and 1999,
respectively.
(3) As of December 20, 1996, the loan facility of Delta Woodside was
amended to secure it with mortgage liens on substantially all of the real
property of the Company, Delta Woodside, and the other subsidiaries of Delta
Woodside.
Cash Equivalents. The Company considers all highly liquid investments
having maturities of three months or less when purchased to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market
determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment. Property, plant and equipment is stated on
the basis of cost. Depreciation is computed by the straight-line method for
financial reporting based on estimated useful lives of three to thirty-two
years, but predominantly over seven to ten years, and by accelerated methods for
income tax reporting. When required by circumstances, the Company writes down
assets to their estimated market value.
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.
F-7
<PAGE> 38
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 of Delta Mills, Inc.
outstanding during each period.
Environmental. 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 or
fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal
years 1994, 1995, 1996 and 1997 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 operates within the textile industry, and its operations are
affected by the relative strength or weakness of the textile markets. The
Company has a major customer who accounted for 12%, 15% and 13% of total net
sales for fiscal years 1994, 1995, and 1996, respectively.
The Company's accounts receivable are due from many companies that produce
apparel, home furnishings and other products 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 -- LONG-TERM DEBT AND LEASES
Long-term debt consists of two 6% notes payable of $120,000,000 and
$50,000,000 to Alchem Capital Corporation, which are due July 6, 1998 and June
27, 1998, respectively. The debt is unsecured.
Total interest expense incurred and paid by the Company was $10,795,000,
$12,523,000 and $14,622,000 for fiscal years 1994, 1995 and 1996, respectively,
of which $272,000 and $523,000 was capitalized during fiscal years 1995 and
1996, respectively.
F-8
<PAGE> 39
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense relating to operating leases was approximately $1,689,000
$1,593,000 and $1,309,000 for fiscal years 1994, 1995 and 1996, respectively.
Aggregate principal maturities of all long-term debt and minimum payments under
operating leases are as follows:
<TABLE>
<CAPTION>
LONG-TERM OPERATING
FISCAL YEAR DEBT LEASES
- ----------- ------------ ----------
<S> <C> <C>
1997.................................................... $ -- $ 698,000
1998.................................................... 50,000,000 525,000
1999.................................................... 120,000,000 509,000
2000.................................................... -- 499,000
2001.................................................... -- 499,000
Later Years............................................. -- 1,530,000
------------ ----------
$170,000,000 $4,260,000
============ ==========
</TABLE>
Financial instruments with off balance sheet risk to the Company include a
loan guarantee whereby the Company is contingently liable as guarantor of a loan
facility for $249 million for Delta Woodside as of June 29, 1996. In April 1996,
the loan facility was amended to secure it with accounts receivable, inventory
and equipment. At June 29, 1996 the Company's accounts receivable, inventory and
equipment pledged as collateral had a book value of $267 million.
See Note A for information with respect to fiscal year 1997.
NOTE D -- INCOME TAXES
The Company reports federal income taxes in the consolidated return of
Delta Woodside and had a tax loss in 1996 of $28 million which was reported in
the consolidated Federal income tax return of its parent, Delta Woodside
Industries, Inc. The combined group had a 1996 tax loss of $34 million, of which
$32 million was carried back three years. The combined group received a tax
refund of $8.5 million. The Federal income tax obligation or refund that is
allocated to the Company is determined as if the Company were filing a separate
Federal income tax return. The Company's Federal tax liability or receivable is
paid to or receivable from Delta Woodside.
The Company had a Federal net operating loss carryforward of $1.9 million
which expired unused at the end of fiscal 1996. The Company has state NOL
carryovers of approximately $18 million which expire in years 1999 through 2011.
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 change in the valuation
allowance from 1995 to 1996 is $.3 million.
F-9
<PAGE> 40
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Restructuring reserves................................ $ 459,000 $ 4,517,000
Deferred compensation................................. 1,561,000 1,725,000
Net operating loss carryforwards...................... 872,000 1,096,000
Accrued and sundry liabilities........................ 2,133,000 2,360,000
Inventory............................................. 943,000 1,468,000
Allowances for doubtful accounts and returns.......... 442,000 308,000
Other................................................. 176,000 169,000
----------- -----------
Gross deferred tax assets............................. $ 6,586,000 $11,643,000
Valuation allowance................................... (676,000) (1,022,000)
----------- -----------
Net deferred tax assets............................ $ 5,910,000 $10,621,000
=========== ===========
Deferred tax liabilities:
Depreciation.......................................... $18,072,000 $19,970,000
Other................................................. 380,000 992,000
----------- -----------
Deferred tax liabilities.............................. $18,452,000 $20,962,000
----------- -----------
Net deferred tax liabilities....................... $12,542,000 $10,341,000
=========== ===========
</TABLE>
Significant components of the provision for income taxes (benefits) are as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal income taxes (benefits)........... $(1,208,000) $1,628,000 $(11,583,000)
State income taxes........................ 67,000 433,000 81,000
----------- ---------- ------------
Total current............................. $(1,141,000) $2,061,000 $(11,502,000)
=========== ========== ============
Deferred:
Federal income taxes (benefits)........... $ 3,191,000 $1,099,000 $ (1,886,000)
State income taxes (benefits)............. 450,000 20,000 (315,000)
----------- ---------- ------------
Total deferred............................ $ 3,641,000 $1,119,000 $ (2,201,000)
----------- ---------- ------------
Total provision (benefit)......... $ 2,500,000 $3,180,000 $(13,703,000)
=========== ========== ============
</TABLE>
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rate to the actual income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
rates...................................... $2,072,000 $2,881,000 $(13,476,000)
State taxes (benefits) net of federal
effect..................................... 336,000 294,000 (152,000)
Permanent difference......................... 381,000 23,000 6,000
Other........................................ (289,000) (18,000) (81,000)
---------- ---------- ------------
Income tax expense (benefit)................. $2,500,000 $3,180,000 $(13,703,000)
========== ========== ============
</TABLE>
The Company received tax refunds of $3,472,000 and $1,852,000 in fiscal
years 1995 and 1996, respectively. During fiscal year 1994, the company made tax
payments of $6,178,000.
F-10
<PAGE> 41
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries Employee
Retirement Plan. The Retirement Plan qualifies as an Employee Stock Ownership
Plan ("ESOP") under the Internal Revenue Code as a defined contribution plan.
All employees of the Company who are at least 21 years of age with one year of
service are eligible to 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. Contributions of $248,000, $247,000 and $270,000 were allocated to
participants for fiscal 1994, 1995, and 1996, respectively.
The Company participates in the Delta Woodside Industries 401(k) Employee
Savings and Investment Plan. Employees meeting certain eligibility requirements
may join the plan. During fiscal 1995 and 1996, the Company contributed $141,000
and $398,000, respectively, to the Plan. The Company made no contributions to
the Plan during fiscal 1994.
The Company also participates in 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 participates in a Deferred Compensation Plan, managed by Delta
Woodside, which permits certain management employees to defer a portion of their
compensation. Deferred compensation accounts are credited with interest and are
distributable after retirement, disability or employment termination. As of July
1, 1995 and June 29, 1996, the Company's total liability amounted to $4,053,000
and $4,481,000, respectively.
The Company also participates in the Delta Woodside Industries, Inc.
Incentive Stock Award Plan and Stock Option Plan. Including associated tax
assistance, under the Incentive Stock Award Plan, the Company recognized expense
of $488,000, $404,000 and $325,000 for fiscal 1994, 1995, and 1996,
respectively. Under the Stock Option Plan, the Company recognized expense of
$115,000, $63,000 and $61,000 for fiscal 1994, 1995, and 1996, respectively.
NOTE F -- AFFILIATED PARTY TRANSACTIONS
The Company participates in a cash management system maintained by Delta
Woodside Industries, Inc. Under this system excess cash is forwarded to Delta
Woodside each day, reducing current loan payable to affiliate. Likewise, cash
requirements are funded daily by Delta Woodside, increasing loan payable to
affiliate. Interest is charged on loan payable to affiliate balances based on
the weighted average cost of Delta Woodside's borrowings. The rate charged on
these borrowings was approximately 7.7% at June 29, 1996.
Accounts receivable due from affiliates include $.6 million and $8.4
million at July 1, 1995 and June 29, 1996, respectively, for anticipated refunds
of income taxes from Delta Woodside Industries, Inc. Receivables from affiliates
also include $.4 and $.1 million at July 1, 1995, and June 29, 1996,
respectively, resulting from sales to Duck Head Apparel Company, Inc. an
affiliate.
Current payable to affiliates bears no interest and includes (1) $40.5
million at July 1, 1995 and June 29, 1996, payable to Delta Woodside resulting
from previous mergers, (2) an advance from Duck Head Apparel Company, Inc. of
$11.2 million and $7.5 million and July 1, 1995 and June 29, 1996, in connection
with certain affiliate sales programs (see below), (3) interest payable of $10.2
million owed Alchem Capital Corporation at June 29, 1996, and (4) other amounts
payable to Delta Woodside for current activity as described in the following
paragraphs.
F-11
<PAGE> 42
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Affiliated party transactions included in the statements of operations
result from a variety of services provided and goods transferred as shown in the
following table:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Textile and yarn sales...................... $15,634,000 $20,192,000 $25,600,000
Corporate services expense.................. 3,083,000 2,950,000 3,123,000
Income tax payments (refunds)............... 6,178,000 (3,864,000) (1,852,000)
Payroll taxes, insurance and
employee-related expenses................. 15,084,000 14,941,000 25,548,000
Printing services expense................... 432,000 460,000 407,000
Interest expense............................ 10,119,000 11,760,000 13,627,000
Rental income............................... 155,000 153,000 141,000
</TABLE>
The Company sells textiles and yarn to an affiliate at prices which
approximate cost. In connection with this pricing arrangement, the affiliate
maintains a noninterest bearing deposit with the Company. The amount of deposit
is based on the volume of purchases. Corporate services include management,
treasury, computer, purchasing, benefits, payroll, auditing, accounting and tax
services. For these services, Delta Woodside charges actual cost based on
relative usage and other factors. Actual cost is charged for payroll taxes,
insurance and employee related expenses which are managed by Delta Woodside as a
corporate service. Printing services are charged at market prices. Interest is
charged based on fixed rates for long-term debt. Interest on loan payable to
affiliate is charged based on Delta Woodside's weighted average interest rate.
The Company charges affiliates for rent based on estimated cost and space
utilized.
NOTE G -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's carrying value of long-term debt is approximately $8.5
million higher than fair value. Fair value was determined using market rates for
debt of a similar maturity. For other material financial instruments, carrying
value approximates fair value.
NOTE H -- RESTRUCTURING AND IMPAIRMENT CHARGES
The history of operating losses at the knitting and knit finishing
operations at two plants in the knitted fabrics division caused the Company to
recognize a charge of $11.7 million during fiscal year 1996 to reduce the book
value of the fixed assets in this business to the appraised orderly liquidation
value.
The Company also recognized restructuring charges of $1.6 million in 1996
for plant closings in the woven textile division. Of the $1.6 million, $1.0
million is for the write-down of property, plant and equipment, and the
remainder is for expenses incurred in connection with the plant closings.
During fiscal year 1994, the Company wrote down to fair market value
property, plant and equipment and its related intangibles in the knitted fabrics
division resulting in a charge of $2.1 million. Other restructuring charges of
$0.9 million resulted from plant closings in that year. During fiscal year 1995,
the Company recovered $0.3 million from prior write-offs.
NOTE I -- COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 29, 1996 minimum
payments under these contracts with noncancellable contract terms were
$51,497,000 in fiscal 1997 and $5,235,000 in fiscal 1998. These commitments were
at prices which approximate current market value.
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
F-12
<PAGE> 43
DELTA MILLS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
result of legal defenses, insurance arrangements and indemnification provisions
with parties believed to be financially capable, none of these actions should
have a material adverse effect on its results of operations or financial
condition.
NOTE J -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended July 1, 1995 and June 29, 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
OCTOBER 1 DECEMBER 31 APRIL 1 JULY 1
------------ ----------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Net sales.............................. $98,232 $105,983 $100,578 $ 109,134
Gross profit........................... 12,231 12,042 9,615 10,254
Net income (loss)...................... 1,909 2,099 602 441
Earnings per share of Common Stock..... 19,090 20,990 6,020 4,410
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
SEPTEMBER 30 DECEMBER 30 MARCH 30 JUNE 29
------------ ----------- -------- ---------
<S> <C> <C> <C> <C>
1996
Net sales.............................. $97,424 $106,254 $ 91,659 $ 107,124
Gross profit........................... 8,285 4,943 987 (1,731)
Net income (loss)...................... (829) (2,945) (5,453) (15,572)
Earnings (loss) per share of Common
Stock............................... (8,290) (29,450) (54,530) (155,720)
</TABLE>
During the fourth quarter of fiscal 1996, the Company recognized impairment
and restructuring charges of $13.3 million, and also charged cost of goods sold
for $1.1 million attributable to cotton purchase commitments at prices in excess
of market value and in quantities in excess of orders from customers.
F-13
