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Delta Woodside Industries
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1999 Annual Report
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Contents
Common Stock Market Prices and
Dividends.............................Inside Front Cover
Selected Financial Data.................................1
Letter to Shareholders..................................2
Management's Discussion and
Analysis.............................................3-7
Operations by Industry Segment..........................8
Report of KPMG LLP......................................9
Consolidated Financial
Statements.........................................10-20
Corporate
Directory..............................Inside Back Cover
Common Stock Market Prices and Dividends
The Common Stock of the Company is listed on the New York Stock Exchange
under the symbol DLW. The stock transfer agent for Delta Woodside Industries,
Inc. is First Union National Bank of North Carolina, Shareholder Services Group,
Two First Union Center, Charlotte, North Carolina 28288-1154.
The following table presents a two-year history of the high and low stock
sales prices for the Common Stock, as reported by the New York Stock Exchange
composite tape.
FISCAL QUARTERS:
1999 1998
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High Low High Low
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First Quarter $5 13/16 $3 3/8 $6 3/4 $5 5/16
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Second Quarter 6 1/4 3 15/16 6 5/16 4 3/4
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Third Quarter 7 1/4 4 9/16 5 9/16 4 5/16
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Fourth Quarter 7 1/4 4 13/16 6 3/8 4 7/8
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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. The
fiscal year 1999 was a fifty-three week year. The fiscal 1998 and 1997 years
were fifty-two week years.
As of September 17, 1999 there were approximately 2,523 holders of record
of the Company's Common Stock.
During fiscal 1999 and 1998, the Company paid quarterly dividends of $.025
per share. Dividend payments depend upon the Company's earnings, financial
condition, capital requirements, compliance with loan covenants and other
relevant factors. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Sources of Capital." During
the first quarter of fiscal 2000, the Company suspended payments of dividends.
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Selected Financial Data
In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share
Data
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<TABLE>
<S> <C> <C>
Operations 1999 1998
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Net sales $ 493,027 $ 535,460
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Cost of goods sold 420,763 439,300
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Gross profit 72,264 96,160
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Operating profit (loss) excluding litigation, restructuring and plant closing charges 1,794 35,233
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Litigation (Credit)
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Restructuring and Plant Closing Charges (Credits) 13,996 8,895
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Operating profit (loss) (12,202) 26,338
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Earnings (loss) before interest & taxes (12,202) 26,338
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Interest expense 19,929 23,395
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Income (loss) from continuing operations before income taxes (31,664) 3,500
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Income tax expense (benefit) 825 884
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Income (loss) from continuing operations (32,489) 2,616
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Income (loss) from discontinued operations (6,906) (46,367)
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Net income (loss) (39,395) (43,751)
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Financial data
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Cash flow (Net income (loss) from continuing operations plus depreciation and
amortization) 9,699 33,173
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Capital expenditures 14,766 16,789
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Depreciation and amortization 42,188 30,557
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Working capital 144,200 170,761
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Long term debt & leases 150,158 183,535
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Funded debt 158,546 195,253
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Shareholder's Equity 133,980 179,567
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Capital employed 292,526 374,820
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Total assets 365,203 474,042
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Financial ratios
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Net sales divided by inventory 5.1 4.7
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Net sales divided by accounts receivable 5.0 4.5
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Net sales divided by capital employed 1.7 1.4
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Operating profit (loss) as % of capital employed ( 4.2) 7.0
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Current ratio 3.1 2.8
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Interest coverage ratio ( 0.6) 1.1
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Gross profit as % of sales 14.7 18.0
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Income (loss) from continuing operations before income taxes as % of sales ( 6.4) 0.7
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Income (loss) from continuing operations as % of sales ( 6.6) 0.5
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Income (loss) from continuing operations as % of beginning equity (18.1) 1.2
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Common Stock Data (Per Share)
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Net income (loss) from continuing operations ( 1.35) 0.11
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Net income (loss) ( 1.63) (1.78)
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Dividends 0.10 0.10
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Book value 5.55 7.29
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Price range -- High 7 1/4 6 3/4
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-- Low 3 3/8 4 5/16
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Weighted average shares outstanding 24,149 24,575
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Approximate number of shareholders 2,523 1,857
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<S> <C> <C> <C>
Operations 1997 1996 1995
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Net sales $530,278 $ 487,450 $467,202
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Cost of goods sold 432,567 451,216 387,215
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Gross profit 97,711 36,234 79,987
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Operating profit (loss) excluding litigation, restructuring and plant closing charges 46,644 (20,018) 25,272
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Litigation (Credit) (9,000) (7,000)
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Restructuring and Plant Closing Charges (Credits) 8,259 (263)
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Operating profit (loss) 46,644 (19,277) 32,535
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Earnings (loss) before interest & taxes 46,644 (19,277) 34,739
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Interest expense 23,354 18,993 13,646
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Income (loss) from continuing operations before income taxes 24,042 (37,822) 21,142
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Income tax expense (benefit) 9,256 (14,561) 12,791
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Income (loss) from continuing operations 14,786 (23,261) 8,351
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Income (loss) from discontinued operations (7,395) (39,378) 1,747
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Net income (loss) 7,391 (62,639) 10,098
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Financial data
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Cash flow (Net income (loss) from continuing operations plus depreciation and
amortization) 37,404 1,337 25,484
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Capital expenditures 17,059 59,512 40,559
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Depreciation and amortization 22,618 24,598 17,133
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Working capital 229,568 (32,648) 286,887
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Long term debt & leases 227,516 283 219,119
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Funded debt 233,597 242,644 219,395
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Shareholder's Equity 225,367 217,335 286,499
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Capital employed 458,964 459,979 505,894
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Total assets 557,940 537,716 610,296
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Financial ratios
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Net sales divided by inventory 4.0 4.0 2.4
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Net sales divided by accounts receivable 4.7 5.1 4.9
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Net sales divided by capital employed 1.2 1.1 0.9
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Operating profit (loss) as % of capital employed 10.2 (4.2) 6.4
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Current ratio 3.8 0.9 4.8
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Interest coverage ratio 2.0 (1.0) 2.5
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Gross profit as % of sales 18.4 7.4 17.1
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Income (loss) from continuing operations before income taxes as % of sales 4.5 (7.8) 4.5
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Income (loss) from continuing operations as % of sales 2.8 (4.8) 1.8
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Income (loss) from continuing operations as % of beginning equity 6.8 (8.1) 2.9
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Common Stock Data (Per Share)
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Net income (loss) from continuing operations 0.60 (0.95) 0.34
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Net income (loss) 0.30 (2.56) 0.42
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Dividends 0.30 0.40
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Book value 9.19 8.89 11.76
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Price range -- High 8 9 3/4 12
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-- Low 4 5/8 4 3/8 7 5/8
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Weighted average shares outstanding 24,513 24,443 24,317
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Approximate number of shareholders 1,939 2,081 2,154
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(1) The amounts presented for periods prior to fiscal 1998 have been restated to
conform to the fiscal 1998 and fiscal 1999 presentation of discontinued
operations. The Stevcoknit knitted fabrics business and the Nautilus
International fitness equipment business are presented above as part of
discontinued operations.
(2) Capital Employed includes shareholders' equity and funded debt.
(3) Depreciation and amortization include certain write-downs of property and
equipment and reductions of excess of cost over assigned value of net assets
acquired of $14 million, $7 million and $15 million in fiscal years 1999,
1998 and 1997, respectively.
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To Our Fellow Shareholders
To Our Shareholders:
Fiscal 1999 was a difficult year for the Company. Sales volume was down 8%
to $493 million and the Company reported a pre-tax loss from continuing
operations of $31.7 million as compared to a pre-tax profit of $3.5 million in
fiscal 1998.
Sales volume at Duck Head Apparel, our branded apparel division, was down
16% from fiscal 1998, and operating losses in this division increased by $38
million from fiscal 1998. The decrease in sales at Duck Head was primarily due
to the loss of a key account due to its acquisition by another retailer. The
increase in operating losses was due primarily to a write-off of goodwill,
increased advertising expenses, increased inventory reserves necessitated by the
reduced volume, and changes in the estimated useful lives of certain asset
categories. During the year, the Company announced plans to seek a buyer for the
Duck Head division. The efforts to market this business resulted in no offers
reflecting the value of this business, so the decision was made to retain Duck
Head. Subsequent to the decision to retain the business, we hired Mr. Robert D.
Rockey as President of Duck Head. Mr. Rockey has extensive experience in the
branded apparel industry, primarily with Levi Strauss. We believe that Mr.
Rockey's experience and expertise will enable Duck Head to return to
profitability.
Delta Mills Marketing Company, our woven textile division, had sales of
$314 million, down from a record $342 million in fiscal 1998. Operating profits
also fell to $40 million from $46 million in fiscal 1998. The reduction in both
sales and operating profits was due primarily to a reduction in volume in the
synthetics portion of this business. Volume also continued to fall in the sales
of unfinished fabrics. We are in the process of converting certain assets used
in the production of unfinished fabrics to the production of finished cotton
fabrics, where demand remains good. We expect the results of the conversion of
these assets to begin favorably impacting results in the second fiscal quarter
of 2000. We have also reduced overhead costs associated with the synthetics
business to more closely reflect our ongoing reduced volume in that product
category.
Delta Apparel, our knit activewear division, had sales of $106 million,
which was unchanged from fiscal 1998. Operating losses in fiscal 1999 narrowed
to $10 million from $18 million in fiscal 1998. While these results are far from
satisfactory, we are encouraged by the improvements in this business. During the
year, Mr. Robert W. Humphreys was named President of Delta Apparel. Mr.
Humphreys has been with the Company for over 12 years, most recently as Vice
President of Finance of Delta Woodside Industries. We are confident in Mr.
Humphreys' ability to continue the improvement in this business.
During the year, we completed the previously announced sale of the Nautilus
International business, our fitness equipment division, and we essentially
completed the liquidation of the Stevcoknit Fabrics division. These disposals,
combined with our continued focus on inventory management, allowed the Company
to reduce outstanding debt by nearly $37 million during fiscal 1999.
During the third quarter of fiscal 1999, the Company announced that it was
exploring alternatives to its current structure and capitalization. This process
has led to the elimination of several options, but our review continues. It
remains our belief that the best strategy for the Company and its shareholders
will involve the separation of our three businesses into independent companies.
Accordingly, we are in the process of developing a plan of action to address
this concern. It is our belief that in the coming months, a definitive plan will
be announced and implemented.
Effective October 1, 1999, Mr. Bettis C. Rainsford resigned his position
as Executive Vice President, Treasurer and Chief Financial Officer to pursue
personal business interests. Mr. Rainsford will remain as a Director of the
Company.
Bettis and I founded the Company in 1983. Since that time he has provided
invaluable service in a wide range of areas including the development and
implementation of appropriate capitalization and business structures. The board
and I will miss Bettis' contributions as an officer and we want to thank him for
his years of service with Delta Woodside. We wish him well in his new endeavors.
/s/ E. Erwin Maddrey II
E. Erwin Maddrey, II
President and
Chief Executive Officer
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Management's Discussion and Analysis
of Results of Operations and Financial Condition
The foregoing letter to shareholders and the following discussion contain
certain "forward-looking statements". All statements, other than statements of
historical fact, that address activities, events, or developments that the
Company expects or anticipates will or may occur in the future, including such
matters as future revenues, future cost savings, future capital expenditures,
business strategy, competitive strengths, goals, plans, references to future
success and other such information are forward-looking statements. The words
"estimate", "project", "anticipate", "expect", "intend", "believe", and similar
expressions are intended to identify forward-looking statements.
The forward-looking statements in this Annual Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward looking statements. These risks and
uncertainties include, among others, changes in the retail demand for apparel
products, the cost of raw materials, competitive conditions in the apparel and
textile industries, the relative strength of the United States dollar as against
other currencies, changes in United States trade regulations and the discovery
of unknown conditions (such as with respect to environmental matters, Year 2000
readiness, and similar items). The Company does not undertake publicly to update
or revise the forward-looking statements even if it becomes clear that any
projected results will not be realized.
Consolidated Company Results
Fiscal 1999 Versus Fiscal 1998
During the third quarter of fiscal 1999, the Company announced a plan to
spin-off the Duck Head and Delta Apparel divisions to the Company's shareholders
and to sell for cash the remaining company. Due to a lack of adequate offers for
the remaining company, this plan was subsequently terminated. At the time of the
announcement of the termination of that plan, the Company announced that it was
exploring other alternatives, including a recapitalization of Delta Mills which
would involve a spin-off of the Duck Head and Delta Apparel divisions and a cash
distribution to the Company's shareholders. Due to softness in the bond markets,
particularly for textile and apparel issuers, this plan was also terminated. It
is the Company's belief that the best strategy for the Company and its
shareholders will involve the separation of the Company's three divisions into
independent companies. Accordingly, the Company is in the process of developing
a plan of action to address this concern.
During fiscal 1999 the Company recognized impairment of the excess of cost
over assigned value of net assets acquired in the Duck Head Apparel division and
of certain real property in the Delta Apparel division, resulting in pretax
charges totaling $14 million. Also in fiscal 1999, the Duck Head Apparel
division took pretax charges of $14.7 million resulting from reducing the
estimated useful lives of certain categories of assets to more closely reflect
current industry standards, increasing inventory reserves due to poor sales
levels, writing off store fixtures at former customers' premises, and reducing
production capacity to more closely match reduced sales levels. During fiscal
1999, the Delta Apparel division took pretax charges of $3.1 million to increase
reserves on certain discontinued and slow moving inventory categories, and to
increase accounts receivable reserves and recorded a $2.6 million pretax charge
to adjust the carrying value of certain plant assets.
Consolidated net sales for fiscal year 1999 were $493 million compared to
$535 million from continuing operations for the fiscal year ended June 27, 1998.
Net sales decreased in Delta Mills Marketing and in Duck Head Apparel, while net
sales in Delta Apparel were unchanged.
Consolidated gross profit margin for fiscal 1999 was down from the prior
fiscal year. Margins decreased significantly in Duck Head Apparel, increased in
Delta Apparel, and were down slightly in Delta Mills Marketing.
Consolidated selling, general, and administrative expense for fiscal 1999
totaled $69 million, or 14% of net sales compared to $61 million or 11% of net
sales in the prior fiscal year. These expenses increased at Duck Head Apparel,
decreased at Delta Mills Marketing, and were unchanged at Delta Apparel. In
addition, the Company incurred expenses totaling $3.6 million that were not
allocated to the segments. These expenses include severance costs, professional
fees, and other costs associated with the Company's actions regarding the
previously discussed plans for restructuring of the Company.
For fiscal year 1999, the Company reported an operating loss of $12
million, as compared to an operating profit of $26 million in the prior fiscal
year. Operating results were lower due to lower sales volume, lower margins,
increased selling, general, and administrative expenses, and as a result of
impairment charges at Duck Head Apparel and Delta Apparel.
Interest expense was down 15% in fiscal year 1999 compared to fiscal 1998
due to a decrease in net borrowings.
The effective tax rate on income from continuing operations for fiscal 1999
was a negative 3% as compared to 25% for fiscal 1998. The 1999 tax rate is the
result of valuation allowances offsetting the tax benefit of the pretax losses,
and state franchise and income tax expenses.
Inventories were $96 million at July 3, 1999 compared to $114 million at
June 27, 1998. Inventories decreased at all divisions.
The Company's order backlog at July 3, 1999 was $98 million as compared to
$158 million at June 27, 1998. Order backlogs were down at all divisions, with
the largest decline occurring at the Delta Mills Marketing division, primarily
due to a decline in blanket contracts when specific color requirements are
unknown related to a change in customer practices and a decline in orders as a
result of market conditions, particularly in the synthetics business.
Consolidated Company Results
Fiscal 1998 Versus Fiscal 1997
As a result of the history of operating losses at Stevcoknit Fabrics'
knitting and knit finishing plants, and at the Nautilus fitness equipment
business, the Company made the decision on March 3, 1998 to close its Stevcoknit
Fabrics division and to sell its Nautilus International division (fitness
equipment). Accordingly, operating results for those segments have been
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reported as discontinued operations. Most of the liquidation of the Stevcoknit
Fabrics business was completed in fiscal 1998. The Company sold its Nautilus
International business in January 1999.
Net sales from continuing operations for fiscal year 1998 were $535 million
compared to $530 million for the fiscal year ended June 28, 1997. Net sales
increases in Delta Mills Marketing and in Duck Head Apparel were offset somewhat
by a sales decrease at Delta Apparel.
Gross margin for fiscal 1998 was down slightly, from the prior fiscal year.
All of the Company's businesses experienced a decline in gross margin.
Selling, general, and administrative expense for fiscal 1998 totaled $61
million, or 11% of net sales compared to $53 million or 10% of net sales in the
prior fiscal year. SG&A cost increased at Delta Mills Marketing Company due to
increased spending on data processing systems, at Duck Head Apparel Company due
to higher cost of in store shops and management salaries, and at Delta Apparel
due to several factors including an increase in bad debt expense.
The Company reported operating earnings of $26 million or 5% of net sales
compared to $47 million or 8.8% of sales for the prior fiscal year. During
fiscal 1998, operating profits decreased in all of the Company's segments due to
lower margins, increased selling, general and administrative expenses and
certain restructuring charges at Delta Apparel and Duck Head Apparel.
Interest expense increased slightly in fiscal 1998 compared to fiscal 1997;
net borrowings decreased, but interest rates increased. The interest rate on the
senior notes issued on August 25, 1997 is higher than the interest rate on the
prior revolving credit facility.
The effective tax rate on income from continuing operations for fiscal 1998
was 25% as compared to 38% for fiscal 1997. The lower tax rate was a result of a
reduction in valuation allowances recognized in the prior fiscal year.
Inventories were $114 million at June 27, 1998 compared to $134 million at
June 28, 1997. The decrease in inventory occurred primarily at Duck Head Apparel
and at Delta Apparel.
Segment Results
Delta Mills Marketing Company
Fiscal 1999 Versus Fiscal 1998
Delta Mills Marketing manufactures and sells finished woven fabrics
principally to manufacturers of apparel products. The segment also sells
unfinished fabrics to converters for various end uses. Delta Mills Marketing
operated at less than full capacity during fiscal 1999 primarily due to less
demand for synthetic finished apparel fabrics and unfinished fabrics sold to
converters. These trends are expected to continue at least through the first
half of fiscal year 2000. Consequently, the synthetic operations have been
downsized to more closely match capacity with market demand and the unfinished
fabrics production is being replaced with the more profitable finished cotton
fabrics product lines. These changes are expected to position this segment to
maintain profitability in the future. Generally, profitability of this segment
is enhanced by increases in the use of its manufacturing capacity and is
affected by the relative mix of more or less profitable goods being produced and
the cost and availability of raw materials.
Net sales for fiscal year 1999 totaled $314 million, as compared to $342
million for fiscal 1998 a decrease of 8.2%. Sales of synthetic fabrics declined
30% and accounted for the majority of the decline in sales. Sales of finished
woven cotton fabrics to commercial accounts increased while government accounts
decreased due to decreased demand. Sales of unfinished fabrics sold to
converters continued to decline and will be replaced with more profitable
product lines in fiscal year 2000.
Gross profit in fiscal year 1999 was $57 million, as compared to $63
million in fiscal year 1998 and was approximately the same as a percent of sales
for both fiscal years. The gross profit decline was due principally to the
decline in the finished synthetic fabric business in both volume and capacity
utilization.
Operating earnings for fiscal year 1999 were $40 million as compared to $46
million in fiscal year 1998. The decline in operating earnings is primarily a
result of the decline in gross profit and was somewhat offset by a reduction in
selling, general and administrative expenses.
Inventories at July 3, 1999 totaled $44.4 million, compared to $53.4
million at June 27, 1998.
Capital expenditures in fiscal 1999 were $8.7 million as compared to $5.2
million in fiscal 1998.
Delta Mills Marketing Company
Fiscal 1998 Versus Fiscal 1997
Net sales for fiscal year 1998 totaled $342 million, as compared to $336
million for fiscal year 1997, an increase of 2%. Sales of finished woven fabrics
to commercial accounts and government accounts increased due to increased
demand. These increases were largely offset by a sharp, 32% decline in sales of
unfinished woven fabrics due to decreased demand.
Gross profit in fiscal year 1998 was $63 million, as compared to $65
million in fiscal year 1997. The gross profit decline was due principally to the
decline in the unfinished woven fabrics business in both volume and price.
Operating earnings for fiscal year 1998 were $46 million, as compared to
$51 million in fiscal year 1997. The decline in operating earnings is primarily
a result of the decline in gross margins and due to increased selling, general
and administrative expenses attributable in part to information technology
project expenditures.
Inventories at June 27, 1998 totaled $53.4 million, compared to $53.6
million at June 28, 1997.
Capital expenditures in fiscal 1998 were $5.2 million as compared to $12.0
million in fiscal 1997.
Delta Apparel Company
Fiscal 1999 Versus Fiscal 1998
Delta Apparel manufactures and sells T-shirts, fleece goods and sportswear
to distributors, screen printers and private label accounts. Operating results
are dependent in large part on orders from retailers, distributors, and screen
printers who supply finished garments to retailers. Generally, when retail sales
of apparel are strong, Delta Apparel benefits. Its operating results are also
dependent on the utilization of its manufacturing facilities. Delta Apparel
operated its
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facilities near full capacity during fiscal 1999. The Company believes that
Delta Apparel will operate its facilities at or near full capacity during fiscal
2000.
Net sales for fiscal year 1999 were $106 million, which was consistent with
net sales of $106 million in fiscal year 1998. Fiscal year 1999 net sales were
the result of increased unit sales offset by lower unit prices as compared to
fiscal year 1998.
Gross profit increased from $3.9 million in fiscal year 1998 to $5.7
million in fiscal year 1999 as a result of lower raw material costs and better
manufacturing efficiencies. In fiscal year 1999 a charge of $2.6 million is
included in gross profit to adjust the carrying value of certain plant assets.
Also included in fiscal year 1999 is a charge of $1.7 million to increase
reserves on certain discontinued and slow moving inventory categories.
The fiscal year 1999 operating loss was $10 million, compared to an
operating loss of $18 million in fiscal 1998. Delta Apparel's improved gross
profit contributed to the reduction in operating losses for fiscal year 1999.
The 1999 operating loss includes an impairment charge of $1.4 million to write
down certain real property. The 1999 operating loss also includes a charge of
$1.4 million to selling, general and administrative expenses to increase
accounts receivable reserves. The fiscal 1998 operating loss includes an
impairment charge of $7.5 million that was recorded to write off the excess of
cost over assigned value of net assets acquired.
Inventories at Delta Apparel at July 3, 1999 totaled $27 million, compared
to $32 million at June 27, 1998.
Capital expenditures in fiscal 1999 were $3.6 million as compared to $4.1
million in fiscal 1998.
Delta Apparel Company
Fiscal 1998 Versus Fiscal 1997
Net sales for fiscal year 1998 were $106 million, a decline of 5.4% from
sales of $112 million in fiscal year 1997. The decline in sales was due both to
lower unit prices and to fewer units being shipped as compared to fiscal year
1997.
Gross profit declined from $4.3 million in fiscal year 1997 to $3.9 million
in fiscal year 1998, as a result of increased competition.
During the third quarter of fiscal 1998, Delta Apparel determined that the
excess of cost over assigned value of net assets acquired in a prior
acquisition, was impaired. Accordingly, a charge of $7.5 million was taken to
write-off the excess of cost over assigned value of net assets acquired at Delta
Apparel.
The fiscal year 1998 operating loss, including the impairment of the excess
of cost over assigned value of net assets acquired, was $18 million compared to
an operating loss of $5.4 million in the prior fiscal year. The increased
operating loss was primarily a result of the impairment charge, but was also due
to an increase in selling, general and administrative expenses.
Inventories at Delta Apparel at June 27, 1998 totaled $32 million, compared
to $41 million at June 28, 1997.
Capital expenditures in fiscal 1998 were $4.1 million as compared to $2.4
million in fiscal 1997.
Duck Head Apparel Company
Fiscal 1999 Versus Fiscal 1998
The Company's Duck Head Apparel segment manufactures and sells woven and
knitted apparel under the Duck Head label primarily to retailers and through the
company's own outlet stores. Duck Head's operating results are dependent in a
large part on orders from retailers. Generally, Duck Head benefits when retail
sales of apparel are strong. Operating results are also dependent on the
utilization of its leased manufacturing facility. This facility was not fully
utilized in fiscal 1999 and the Company does not believe that the facility will
be fully utilized during fiscal 2000. Duck Head Apparel closed a manufacturing
facility in fiscal 1999 and in fiscal 1999 two facilities which were closed in
fiscal 1998 were sold. The facility closed in fiscal 1999 is expected to be sold
in fiscal 2000.
Net sales in the Duck Head Apparel segment decreased by $14.1 million to
$72.3 million in fiscal 1999. Sales to retail accounts and sales from the
Company's own stores both decreased. The decrease in sales to retailers was due
primarily to the loss of a key account due to its being acquired by another
retailer. The decrease in sales through the Company's own stores was due
primarily to fewer stores being open in fiscal 1999 versus fiscal 1998.
Gross profit in the Duck Head Apparel segment decreased by $18.9 million to
$9.9 million in fiscal 1999. This change was principally due to $7.7 million of
increased reserve charges taken on excess inventories and the decline in sales
volume from fiscal year 1998. Also included in fiscal 1999 are charges totaling
$1.5 million to reduce production capacity to more closely reflect reduced sales
levels.
Selling, general and administrative expenses in the Duck Head Apparel
segment totaled $35.4 million in fiscal 1999, an increase of 27% from fiscal
1998. The increase was primarily due to increased marketing expenses and $5.6
million in accelerated amortization of in-store shops and computer equipment.
Fiscal 1999 operating losses in Duck Head Apparel totaled $39.3 million as
compared to a $.9 million operating loss in fiscal 1998. Included in the fiscal
1999 operating losses is a $12.6 million charge for the impairment of the excess
of cost over assigned value of net assets acquired. Included in the fiscal 1998
operating losses are $1.4 million of restructuring charges related to the
closing of two of the division's sewing plants in Costa Rica and for closing of
additional retail outlet stores.
Inventories at Duck Head Apparel at July 3, 1999 totaled $24.7 million
compared to $28.3 million at June 26, 1998. The net decrease in inventories
reflects decreases in older obsolete inventory, partially offset by increases in
both recent season closeouts and in the core inventory.
Capital expenditures at Duck Head were $2.4 million and $7.4 million for
fiscal years 1999 and 1998, respectively. The expenditures were primarily for
fixtures for in-store shops and focal areas placed in major retailers and for
hardware and software related to the company's information technology programs.
Duck Head Apparel Company
Fiscal 1998 Versus Fiscal 1997
Net sales in the Duck Head Apparel segment increased by $5.0 million to $86
million in fiscal 1998. Sales to retail accounts increased while sales from the
company's own stores decreased. The increase in sales
5
<PAGE>
- --------------------------------------------------------------------------------
to retailers was due primarily to increases in sales to the same accounts, as
compared to fiscal 1997.
Gross profit margins at Duck Head Apparel decreased slightly in fiscal
1998, due principally to inventory reduction programs.
Fiscal 1998 operating losses at Duck Head Apparel totaled $.9 million as
compared to a $1.4 million operating profit in fiscal 1997. Included in the
fiscal 1998 operating losses are $1.4 million of restructuring charges related
to the closing of two sewing plants in Costa Rica and the closing of certain
retail outlet stores. Selling, general, and administrative expenses increased 9%
from fiscal 1997, primarily due to increased merchandising and marketing
expenses.
Inventories at Duck Head Apparel decreased $8.6 million during fiscal 1998
resulting from a reduction in older obsolete inventory and lower levels of core
and recent season close-outs.
Higher capital expenditures during fiscal 1998 were primarily for in-store
shops and focal areas placed in major retailers.
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1999, the Company financed its capital expenditures through
proceeds from the sale of discontinued operations and cash generated from
operations. In addition, during fiscal 1999, proceeds from the sale of the
assets of Nautilus International and the proceeds from the current assets of
Stevcoknit Fabrics, both discontinued operations, were used to reduce debt.
The Company generated operating cash flows of $54, $51 and $26 million for
the 1999, 1998 and 1997 fiscal years, respectively. Cash generated from
operations has been used primarily to finance capital expenditures and to reduce
debt.
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI"
issued $150 million of unsecured ten-year senior notes, and obtained a secured
five-year $100 million revolving line of credit subject to borrowing base
limitations. At the same time, the Company obtained a separate, $20 million line
of credit due October 31, 1998. The $100 million revolving line of credit is
backed by certain accounts receivable and inventory of DMI with a carrying value
of $129 million at July 3, 1999. At July 3, 1999 interest rates on the senior
notes and the $100 million revolving line of credit were 9.625% and 6.93%
respectively.
In May 1998, the Company replaced the above referenced $20 million line of
credit with a short-term $30 million revolving credit facility (subject to
borrowing base limitations) which was originally due in May of 1999. The term of
this facility has subsequently been extended until December 1999. This credit
facility is backed by certain accounts receivable and inventory of Delta Apparel
and Duck Head Apparel with a carrying value of $79 million at July 3, 1999. This
credit facility carries an interest rate that is two percentage points above the
London Interbank Borrowing Rate.
Loan covenants in the senior notes and the DMI revolving credit facility,
among other matters, limit the Company's ability to use cash generated by DMI to
fund operations in the rest of the Company. At July 3, 1999, the most
restrictive of these covenants required DMI's tangible net worth to be $45
million. At July 3, 1999, pursuant to this covenant, no funds were available for
distribution by DMI to the rest of the Company. At July 3, 1999 approximately
$99 million was available under the DMI revolving credit agreement and
approximately $25 million was available under the Company's separate short-term
$30 million line of credit. The revolving credit facilities and the senior notes
contain other restrictive covenants which include certain other required minimum
financial ratios. The agreements also restrict additional indebtedness,
dividends, and capital expenditures.
On September 15, 1998, the Company announced a plan to repurchase, from
time to time, up to 2.5 million shares of the Company's outstanding stock at
prices and at times in the discretion of the Company's top management. Through
July 3, 1999, the Company had purchased for retirement approximately one million
shares of its common stock at a total cost of about $4.5 million.
During fiscal 2000, the Company plans to spend approximately $12 million
for capital improvements and new equipment. The Company believes that its
equipment and facilities are generally adequate to remain competitive with its
principal competitors.
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 3, 1999 minimum payments
under these contracts with noncancelable contract terms were $42 million in
fiscal 2000.
The Company believes that cash flow generated from its operations, along
with funds available under its credit lines, should be sufficient to service its
debt, to satisfy its day-to-day working capital needs, and to fund its planned
capital expenditures.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
As a part of the Company's business of converting fiber to finished fabric,
the Company makes raw cotton purchase commitments and then fixes prices with
cotton merchants who buy from producers and sell to textile manufacturers. The
Company may seek to fix prices up to 18 months in advance of delivery. Daily
price fluctuations are minimal, yet long-term trends in price movement can
result in unfavorable pricing of cotton for the Company. Before fixing prices,
the Company looks at supply and demand fundamentals, recent price trends and
other factors that affect cotton prices. The Company also reviews the backlog of
orders from customers as well as the level of fixed price cotton commitments in
the industry in general. At July 3, 1999, a 10% decline in the market price of
the cotton covered by the Company's fixed price contracts would have a negative
impact of approximately $4.2 million on the value of the contracts. At the end
of fiscal 1998, a 10% decline in the market price of the Company's fixed price
contracts would have had a negative impact of approximately $5.6 million on the
value of the contracts. The decline in the potential negative impact from 1998
to 1999 is due principally to current cotton commitments being at significantly
lower average prices than in fiscal 1998.
6
<PAGE>
- --------------------------------------------------------------------------------
Interest Rate Sensitivity
The following debt obligations are sensitive to changes in interest rates:
$150 million of unsecured ten year senior notes due 2007 at a fixed rate of
9.625%.
$100 million of secured five year revolving credit facility expiring 2002
with interest of 6.93% at July 3, 1999. Interest is based on LIBOR.
$30 million of short-term secured revolving credit facility expiring December
2000 with interest of 7.22% at July 3, 1999. Interest is based on LIBOR.
An interest rate change would not have an impact on the fixed rate ten year
senior notes totaling $150 million. An interest rate change would have a
negative impact to the extent the Company increases borrowings against the
revolving credit facilities. The impact would be dependent on the level of
borrowings incurred. During fiscal years 1999 and 1998, based on the average
principal balance outstanding, a 1% increase in interest rates would have
resulted in increased interest expense of approximately $533,000 and $879,000,
respectively. In fiscal year 2000, as of this date, the Company has no
outstanding borrowings against the revolving credit facilities.
YEAR 2000 COMPLIANCE
The Company has a variety of computers and systems that are subject to Year
2000 issues. The Year 2000 problem arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these programs do
not differentiate between a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail, or cause
erroneous results. The Company has considered the impact of Year 2000 issues on
the Company's computer information systems and other equipment that use embedded
technology such as micro-controllers, and has developed and implemented a
remediation plan. The Company's Year 2000 plan includes 1) Identification of
year 2000 issues, 2) Assessment and prioritization of issues, 3) Remediation,
and 4) Testing for Year 2000 compliance. Because the Company has a wide variety
of systems and equipment at various locations affected by the Year 2000 issue,
various aspects of the Company's Year 2000 efforts are at different stages of
progress. Most of the work now being done involves testing of Year 2000
solutions, tracking key vendor Year 2000 compliance, and testing contingency
plans. Expenditures in fiscal 1998 for the Year 2000 project amounted to
approximately $150,000. As a part of its plan to achieve Year 2000 compliance,
the Company decided to accelerate the schedule for implementation of certain
data collection systems. The cost of these systems is approximately $1.2
million. The Company spent approximately $1.5 million on software improvements
and remediation work in fiscal year 1999, and expects to spend an additional $.4
million in fiscal year 2000, with completion expected by the first quarter of
fiscal year 2000. Most key vendors and customers have documented assurance of
current or planned readiness for the year 2000. The most likely worst-case
scenario is that certain non-critical business systems might fail. The Company
has developed contingency plans for all systems that had not been remediated as
of July 3, 1999. Contingency plans include the option to disable certain systems
or to use alternate methods of providing the same or similar service. The
Company does not believe that these non-critical systems will have a material
adverse impact on the Company's ability to generate revenue. In the event that
the Company is unable to implement all or a part of its Year 2000 plan, then
some of the Company's computer systems could fail. Any liability or lost revenue
associated with systems failure cannot be reasonably estimated at this time.
ENVIRONMENTAL 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 which are
either recycled or disposed of off site. Most of its plants are required to
possess one or more discharge permits.
The Company believes that it is in compliance in all material respects with
federal, state, and local environmental statutes and requirements.
Two of Delta Mills Marketing Company's South Carolina plants, the Delta 2
and 3 finishing plants, have been unable to comply with certain toxicity and
other permit-related limits contained in a National Pollutant Discharge
Elimination System ("NPDES") permit held by the Company. Additionally, high
nitrate levels have been observed at the spray field for these plants. To
attempt to achieve compliance with the non-toxicity NPDES permit limits, the
Company completed certain upgrades in October 1998 at a cost of approximately
$2.3 million. Since then, the Company has had two non-toxicity permit violations
resulting in the payment of a de minimis penalty. The Company believes that it
will be able to comply with the non-toxicity permit limits. The Company is
working with the appropriate state agency to address the toxicity and nitrate
issues. Although there is no assurance that the Company will be successful, and
it could face additional administrative penalties if it is not, the Company does
not currently believe that these matters will have a material adverse impact on
the Company.
The Company is currently assessing groundwater contamination at its
discontinued Greensboro, North Carolina plant. The Company believes, however,
that the source of the contamination was removed several years ago by the prior
owner and the Company currently has no plans to remediate any groundwater
contamination. Although no assurance can be provided, the Company does not
currently believe that this matter will have a material adverse impact on the
Company.
7
<PAGE>
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Operations by Industry Segment
In the third quarter of fiscal year 1998, the Company adopted the segment
reporting provisions of Financial Accounting Standard 131. This standard
requires the Company to report segment information for divisions which engage in
business activity, whose operating results are regularly reviewed by the chief
operating officer. The Company has three segments in continuing operations:
Delta Mills Marketing Company, Delta Apparel and Duck Head Apparel. Delta Mills
Marketing Company manufactures and sells woven fabrics for apparel and home
furnishing manufacturers. Delta Apparel manufactures and sells T-shirts, fleece
goods, and sportswear. Duck Head Apparel manufactures and sells casual apparel
under the brand name "Duck Head" to department stores and specialty retailers.
Operating profit does not include interest expense or interest income. The
Company had two segments which are presented as discontinued operations:
Stevcoknit Fabrics Company and Nautilus International. Stevcoknit Fabrics
Company manufactured and sold knitted fabrics, and Nautilus International
manufactured and sold fitness equipment.
Intersegment sales and profit are not significant and are not included in
the accompanying segment information. Delta Mills Marketing Company had
intersegment sales of $662,000, $417,000 and $5,000 for fiscal years 1999, 1998
and 1997, respectively. Delta Apparel Company had intersegment sales of
$467,000, $2,192,000 and $403,000 for fiscal years 1999, 1998 and 1997,
respectively.
Operating profit is total revenue less operating expenses, excluding
interest expense and interest income. During the fourth quarter of fiscal 1999,
Duck Head Apparel took a $12.6 million impairment charge to write off the excess
of cost over assigned value of net assets acquired and Delta Apparel took a $1.4
million impairment charge to write down certain real property. Depreciation and
amortization include certain write-downs of property, equipment and excess of
cost over assigned value of net assets acquired. Identifiable assets are those
assets that are used in the operations of each segment. At July 3, 1999, other
identifiable assets include cash and insurance policies of $15.4 million and
deferred loan costs of $4.8 million.
During the third quarter of fiscal 1998, Delta Apparel took a $7.5 million
impairment charge to write-off the excess of cost over assigned value of net
assets acquired. In the same quarter, Duck Head Apparel recognized a charge of
$1.4 million primarily associated with the closing of two of the division's
sewing plants in Costa Rica and the closing of certain retail stores.
Capital expenditures include related accounts payable of $2,154,000,
$2,321,000, and $1,228,000 for the 1999, 1998 and 1997 fiscal years,
respectively.
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998 June 28, 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Net Sales:
Delta Mills Marketing Company ...... $ 314,162,000 $ 342,439,000 $ 336,181,000
Delta Apparel Company .............. 106,313,000 106,298,000 112,311,000
Duck Head Apparel Company .......... 72,259,000 86,332,000 81,313,000
Other .............................. 293,000 391,000 473,000
------------- ------------- -------------
Total ............................. $ 493,027,000 $ 535,460,000 $ 530,278,000
============= ============= =============
Gross Profit:
Delta Mills Marketing Company ...... $ 56,745,000 $ 63,433,000 $ 65,058,000
Delta Apparel Company .............. 5,665,000 3,890,000 4,343,000
Duck Head Apparel Company .......... 9,888,000 28,775,000 28,174,000
Other .............................. (34,000) 62,000 136,000
------------- ------------- -------------
Total ............................. $ 72,264,000 $ 96,160,000 $ 97,711,000
============= ============= =============
Operating Profit (Loss):
Delta Mills Marketing Company ...... $ 40,486,000 $ 46,377,000 $ 50,580,000
Delta Apparel Company .............. (9,829,000) (17,739,000) (5,391,000)
Duck Head Apparel Company .......... (39,269,000) (935,000) 1,431,000
Other .............................. (3,590,000) (1,365,000) 24,000
------------- ------------- -------------
Total Operating Profit (Loss) ..... (12,202,000) 26,338,000 46,644,000
Interest expense ................... (19,929,000) (23,395,000) (23,354,000)
Interest income .................... 467,000 557,000 752,000
------------- ------------- -------------
Income (Loss) From Continuing
Operations Before Income Tax ...... $ (31,664,000) $ 3,500,000 $ 24,042,000
============= ============= =============
Identifiable Assets:
Delta Mills Marketing Company ...... $ 213,874,000 $ 239,974,000 $ 247,915,000
Delta Apparel Company .............. 85,483,000 98,257,000 120,366,000
Duck Head Apparel Company .......... 46,209,000 75,383,000 83,980,000
Other .............................. 18,535,000 12,308,000 8,099,000
------------- ------------- -------------
364,101,000 425,922,000 460,360,000
Discontinued operations ............ 1,102,000 48,120,000 97,580,000
------------- ------------- -------------
Total ............................. $ 365,203,000 $ 474,042,000 $ 557,940,000
============= ============= =============
Depreciation and Amortization:
Delta Mills Marketing Company ...... $ 10,871,000 $ 9,921,000 $ 10,101,000
Delta Apparel Company .............. 9,224,000 15,252,000 7,788,000
Duck Head Apparel Company .......... 21,229,000 4,039,000 3,668,000
Other .............................. 864,000 1,345,000 1,061,000
------------- ------------- -------------
Total ............................. $ 42,188,000 $ 30,557,000 $ 22,618,000
============= ============= =============
Capital Expenditures:
Delta Mills Marketing Company ...... $ 8,699,000 $ 5,181,000 $ 12,042,000
Delta Apparel Company .............. 3,580,000 4,141,000 2,396,000
Duck Head Apparel Company .......... 2,444,000 7,427,000 2,510,000
Other .............................. 43,000 40,000 111,000
------------- ------------- -------------
Total ............................. $ 14,766,000 $ 16,789,000 $ 17,059,000
============= ============= =============
</TABLE>
8
<PAGE>
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-----------------------------------------------------
Independent Auditors' Report
The Board of Directors and Shareholders
Delta Woodside Industries, Inc.
We have audited the accompanying consolidated balance sheets of
Delta Woodside Industries, Inc. as of July 3, 1999 and June 27,
1998 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended July 3, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Delta Woodside Industries, Inc. at July 3, 1999 and
June 27, 1998, and the results of its operations and its cash flows
for each of the years in the three-year period ended July 3, 1999,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Greenville, South Carolina
August 13, 1999
-----------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................................................... $ 14,066,000 $ 2,753,000
Accounts receivable:
Factor ............................................................................ 66,854,000 81,256,000
Customers ......................................................................... 38,112,000 41,253,000
------------- ------------
104,966,000 122,509,000
Less allowances for doubtful accounts and returns ................................. 6,959,000 3,309,000
------------- ------------
98,007,000 119,200,000
Inventories
Finished goods .................................................................... 46,459,000 52,219,000
Work in process ................................................................... 39,570,000 48,814,000
Raw materials and supplies ........................................................ 10,094,000 12,925,000
------------- ------------
96,123,000 113,958,000
Current assets of discontinued operations .......................................... 780,000 25,797,000
Deferred income taxes .............................................................. 2,186,000 861,000
Prepaid expenses and other current assets .......................................... 1,946,000 2,962,000
------------- ------------
TOTAL CURRENT ASSETS ......................................................... 213,108,000 265,531,000
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements ........................................................ 4,824,000 5,062,000
Buildings ......................................................................... 62,146,000 66,995,000
Machinery and equipment ........................................................... 188,930,000 192,295,000
Furniture and fixtures ............................................................ 10,540,000 11,749,000
Leasehold improvements ............................................................ 2,869,000 3,068,000
Construction in progress .......................................................... 4,583,000 9,131,000
------------- ------------
273,892,000 288,300,000
Less accumulated depreciation ..................................................... 129,976,000 123,537,000
------------- ------------
143,916,000 164,763,000
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS ......................................... 322,000 22,323,000
INTANGIBLE ASSETS, less accumulated amortization of $1,859,000 (1999) and
$5,515,000 (1998) .................................................................. 4,900,000 18,290,000
OTHER ASSETS ......................................................................... 2,957,000 3,135,000
------------- ------------
$ 365,203,000 $474,042,000
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank debt ............................................................... $ 1,678,000 $ 11,108,000
Trade accounts payable ............................................................. 25,354,000 41,592,000
Accrued employee compensation ...................................................... 7,772,000 8,278,000
Accrued and sundry liabilities ..................................................... 26,276,000 23,059,000
Accrued restructuring charges ...................................................... 1,118,000 10,123,000
Current portion of long-term debt .................................................. 6,710,000 610,000
------------- ------------
TOTAL CURRENT LIABILITIES .................................................... 68,908,000 94,770,000
LONG-TERM DEBT ....................................................................... 150,158,000 183,535,000
DEFERRED INCOME TAXES ................................................................ 4,295,000 3,716,000
OTHER LIABILITIES AND DEFERRED CREDITS ............................................... 7,862,000 12,454,000
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share--authorized 50,000,000 shares, issued and
outstanding 23,792,000 shares (1999) and 24,644,000 shares (1998) ................. 238,000 246,000
Additional paid-in capital ......................................................... 160,863,000 165,221,000
Retained earnings (deficit) ........................................................ (27,121,000) 14,100,000
------------- ------------
133,980,000 179,567,000
COMMITMENTS AND CONTINGENCIES
$ 365,203,000 $474,042,000
============= ============
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
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Consolidated Statements of Operations
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net sales ................................................................ $ 493,027,000 $ 535,460,000 $ 530,278,000
Cost of goods sold ....................................................... 420,763,000 439,300,000 432,567,000
------------- ------------- -------------
Gross profit ............................................................. 72,264,000 96,160,000 97,711,000
Selling, general and administrative expenses ............................. 69,175,000 60,738,000 52,697,000
Restructuring and impairment charge ...................................... 13,996,000 8,895,000
Other income (expense) ................................................... (1,295,000) (189,000) 1,630,000
------------- ------------- -------------
OPERATING PROFIT (LOSS) .............................................. (12,202,000) 26,338,000 46,644,000
Interest (expense) income:
Interest expense ....................................................... (19,929,000) (23,395,000) (23,354,000)
Interest income ........................................................ 467,000 557,000 752,000
------------- ------------- -------------
(19,462,000) (22,838,000) (22,602,000)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ........................................................... (31,664,000) 3,500,000 24,042,000
Income tax expense ....................................................... 825,000 884,000 9,256,000
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................. (32,489,000) 2,616,000 14,786,000
Discontinued Operations:
(Loss) on disposal of discontinued operations less applicable income
taxes ................................................................. $ (6,906,000) $ (37,042,000)
(Loss) from operations of discontinued businesses less applicable
income taxes .......................................................... (9,325,000) (7,395,000)
------------- -------------
(6,906,000) (46,367,000) (7,395,000)
NET INCOME (LOSS) ........................................................ $ (39,395,000) $ (43,751,000) $ 7,391,000
============= ============= =============
Basic and diluted earnings (loss) per share:
Continuing operations .................................................. $ (1.35) $ 0.11 $ 0.60
Discontinued operations ................................................ (0.28) (1.89) (0.30)
------------- ------------- -------------
Net earnings (loss) .................................................... $ (1.63) $ (1.78) $ 0.30
============= ============= =============
Weighted average number of shares outstanding ............................ 24,149,000 24,575,000 24,513,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
-------------------------- Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
-------------- ----------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at June 29, 1996 ....................... 24,459,651 $245,000 $164,170,000 $ 52,920,000 $ 217,335,000
Incentive stock award plan, shares issued ..... 54,348 608,000 608,000
Stock Option Plan, shares issued .............. 4,669 35,000 35,000
Net income .................................... 7,391,000 7,391,000
Other ......................................... (263) (2,000) (2,000)
---------- ---------- ------------ ------------- -------------
Balance at June 28, 1997 ....................... 24,518,405 245,000 164,811,000 60,311,000 225,367,000
Incentive stock award plan, shares issued ..... 112,403 1,000 575,000 576,000
Stock Option Plan, shares issued .............. 11,255 75,000 75,000
Tax benefits of stock plans ................... (253,000) (253,000)
Net (loss) .................................... (43,751,000) (43,751,000)
Cash dividends paid -- $.10 a share ........... (2,460,000) (2,460,000)
Other ......................................... 2,026 13,000 13,000
---------- ---------- ------------ ------------- -------------
Balance at June 27, 1998 ....................... 24,644,089 246,000 165,221,000 14,100,000 179,567,000
Incentive stock award plan, shares issued ..... 72,435 1,000 344,000 345,000
Stock Option Plan, shares issued .............. 56,751 411,000 411,000
Net (loss) .................................... (39,395,000) (39,395,000)
Cash dividends paid -- $.10 a ................. (593,000) (1,826,000) (2,419,000)
Share repurchases ............................. (978,647) (9,000) (4,511,000) (4,520,000)
Other ......................................... (3,119) (9,000) (9,000)
---------- ---------- ------------ ------------- -------------
BALANCE AT JULY 3, 1999 ........................ 23,791,509 $238,000 $160,863,000 $ (27,121,000) $ 133,980,000
========== ======== ============ ============= =============
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Delta Woodside Industries, Inc.
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................... $ (39,395,000) $ (43,751,000) $ 7,391,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Discontinued operations ............................................ 35,450,000 41,548,000 389,000
Depreciation ....................................................... 26,984,000 22,033,000 20,715,000
Amortization ....................................................... 1,207,000 1,789,000 1,903,000
Write-down of property and equipment ............................... 1,416,000
Reduction in excess of cost over assigned value of net assets
acquired .......................................................... 12,581,000 6,735,000
Provision for losses on accounts receivable ........................ 3,650,000 457,000 (1,148,000)
Provision for deferred income taxes ................................ (1,175,000) 294,000 6,456,000
Losses (gains) on disposition of property and equipment ............ 3,129,000 (46,000) (1,420,000)
Compensation under stock plans ..................................... 748,000 664,000 643,000
Deferred compensation .............................................. 48,000 244,000 730,000
Other .............................................................. (21,000) 30,000 (327,000)
Changes in operating assets and liabilities:
Accounts receivable ............................................... 17,543,000 (7,126,000) (15,557,000)
Inventories ....................................................... 17,836,000 19,843,000 (11,597,000)
Other current assets .............................................. 913,000 (850,000) 7,610,000
Accounts payable and accrued expenses ............................. (26,445,000) 10,037,000 10,339,000
-------------- -------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 54,469,000 51,901,000 26,127,000
INVESTING ACTIVITIES Property, plant and equipment:
Purchases .......................................................... (14,933,000) (15,526,000) (20,510,000)
Proceeds of dispositions ........................................... 3,571,000 528,000 3,653,000
Net (investing) divesting activities of discontinued operations ..... 12,140,000 10,574,000 (2,613,000)
Other ............................................................... 516,000 (296,000) (510,000)
-------------- -------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,294,000 (4,720,000) (19,980,000)
FINANCING ACTIVITIES
Proceeds from revolving credit ...................................... $ 297,434,000 $ 293,262,000 $ 68,904,000
Repayments on revolving credit ...................................... (333,499,000) (481,019,000) (85,134,000)
Scheduled principal payments of long-term debt ...................... (514,000) (682,000) (405,000)
Proceeds from issuance of long-term debt ............................ 145,688,000 6,915,000
Dividends paid ...................................................... (2,419,000) (2,460,000)
Repurchase common stock ............................................. (4,520,000)
Other ............................................................... (932,000) (1,913,000) (2,000)
-------------- -------------- -------------
NET CASH (USED) BY FINANCING
ACTIVITIES ...................................................... (44,450,000) (47,124,000) (9,722,000)
-------------- -------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVILENTS ...................................................... 11,313,000 57,000 (3,575,000)
Cash and cash equivalents at beginning year ........................... 2,753,000 2,696,000 6,271,000
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS ........................................ $ 14,066,000 $ 2,753,000 $ 2,696,000
============== ============== =============
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Delta Woodside Industries, Inc.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Delta Woodside Industries, Inc. (the "Company") and its subsidiaries
(all of which are wholly-owned, except for International Apparel Marketing
Corporation which was 70% owned for the two years ending June 27, 1998, and
wholly owned for the period ended July 3, 1999). All significant intercompany
balances and transactions have been eliminated. Certain amounts for the 1998 and
1997 fiscal years have been reclassified to conform to the 1999 presentation.
Cash Equivalents: The Company considers all highly liquid investments with
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 both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods.
Property, Plant and Equipment: Property, plant and equipment is stated on the
basis of cost. Depreciation is computed by the straight-line method for
financial reporting based on estimated useful lives of two to thirty-two years,
but predominantly over seven to ten years, and by accelerated methods for income
tax reporting.
Intangible Assets: Amortization is computed using the straight-line method. The
excess of cost over assigned value of net assets acquired relating to certain
business combinations has been amortized to expense over 40 years. As of July 3,
1999, all such assets had been either disposed of or written down to zero value
due to impairment. Other intangible assets are being amortized over periods of 5
to 10 years, but primarily over 10 years.
Impairment of Long-Lived Assets: When required by circumstances, the Company
evaluates the recoverability of its long-lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write-down to market value or discounted cash flow is required.
Revenue Recognition: Sales are recorded upon shipment or designation of specific
goods for later shipment at customers' request with related risk of ownership
passing to such customers.
Income Taxes: Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings Per Common Share: Per share data are computed based on the weighted
average number of shares of Common Stock and Common Stock Equivalents
outstanding during each period. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, during fiscal 1998. The statement
requires companies to present basic and diluted earnings per share. Common stock
equivalents are approximately .2% to .3% of weighted average shares outstanding
for the periods presented, and do not affect the calculation of earnings per
share. These common stock equivalents are attributable to the stock option plan
where the options have vested, but have not yet been exercised.
Environmental Costs: Environmental compliance costs, including ongoing
maintenance, monitoring and similar costs, are expensed as incurred.
Environmental remediation costs are accrued, except to the extent costs can be
capitalized, when remedial efforts are probable, and the cost can be reasonably
estimated.
Cotton Procurement: The Company contracts to buy cotton with future delivery
dates at fixed prices in order to reduce the effects of fluctuations in the
prices of cotton used in the manufacture of its products. These contracts permit
settlement by delivery and are not used for trading purposes. The Company
commits to fixed prices on a percentage of its cotton requirements up to
eighteen months in the future. If market prices for cotton fall below the
Company's committed fixed costs and it is estimated that the costs of cotton are
not recoverable in future sales of finished goods, 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 1998
and 1997 each consisted of 52 weeks and 1999 consisted of 53 weeks.
- --------------------------------------------------------------------------------
NOTE B -- ACCOUNTS RECEIVABLE
Delta Mills Marketing assigns a substantial portion of its trade accounts
receivable to a bank under a factor agreement. The assignment of these
receivables is primarily without recourse, provided that customer orders are
approved by the bank prior to shipment of goods, up to a maximum for each
individual account.
The Company's accounts receivable are due from many customers that market and
produce apparel, home furnishings and other products, and from department stores
and specialty apparel retailers located throughout the United States. The many
customers 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. One customer accounted for 15%, 12%, and
15% of sales for fiscal years 1999, 1998 and 1997, respectively.
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE C -- INVENTORIES
As of July 3, 1999 and June 27, 1998, cost for certain inventories at Delta
Apparel and Duck Head Apparel is determined under the LIFO method representing
41% and 44%, respectively, of the cost of consolidated inventories. The balance
of the cost of consolidated inventories is determined under the FIFO method. If
these inventories had been determined by the FIFO method, they would have been
approximately the same as the reported amounts.
- --------------------------------------------------------------------------------
NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND NOTES PAYABLE
Long-term debt consists of:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
-------------- --------------
<S> <C> <C>
Senior notes (9.625%), with
interest payable
semiannually .................... $150,000,000 $150,000,000
Revolving Credit Facility
(6.93% at July 3, 1999),
with interest payable
monthly or semiannually ......... 26,635,000
Industrial Revenue Bond
payable monthly, through
2001 at 80% of a bank's
base rate ....................... 339,000 578,000
Note to a bank payable
monthly with interest at
prime Plus 1% ................... 6,415,000 6,712,000
Other ............................. 114,000 220,000
------------ ------------
156,868,000 184,145,000
Less current portion .............. 6,710,000 610,000
------------ ------------
$150,158,000 $183,535,000
============ ============
</TABLE>
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI" issued
$150 million of unsecured ten-year senior notes, and obtained a secured
five-year $100 million revolving line of credit. The $100 million revolving line
of credit is backed by certain accounts receivable and inventory of DMI with a
carrying value of $129 million at July 3, 1999.
In May 1998, the Company obtained a short-term $30 million revolving credit
facility (subject to borrowing base limitations) which is due in December of
1999. This credit facility is backed by certain accounts receivable and
inventory of Delta Apparel and Duck Head Apparel with a carrying value of $79
million at July 3, 1999. This credit facility carries an interest rate that is
two percentage points above the London Interbank Borrowing Rate.
Loan covenants in the senior notes and the DMI revolving credit facility limit
the Company's ability to use cash generated by DMI to fund operations in the
rest of the Company. On July 3, 1999 approximately $99 million was available
under the DMI revolving credit agreement, and approximately $25 million was
available under the separate short-term $30 million line of credit. The credit
facilities and the senior notes also contain other restrictive covenants which
include required minimum tangible net worth and certain other required minimum
financial ratios. The agreements also restrict additional indebtedness,
dividends and capital expenditures. At July 3, 1999, the net assets of the
Company include net assets of the wholly owned subsidiary DMI of approximately
$50 million which are subject to the restrictions described above.
Total interest expense incurred by the Company was $19,929,000, $23,395,000 and
$23,656,000 in fiscal years 1999, 1998 and 1997, respectively, of which $302,000
was capitalized in fiscal year 1997. Total interest paid during fiscal years
1999, 1998 and 1997 was $18,021,000, $ 21,568,000, and $17,546,000,
respectively.
During fiscal year 1997, the Company acquired certain machinery and equipment
under non-cancelable operating leases in connection with the modernization
project in the woven fabrics division. The terms provide for total lease
payments of $14 million over a period of five years.
Rent expense relating to all operating leases of the Company was approximately
$6,820,000, $7,471,000, $7,179,000 for fiscal 1999, 1998 and 1997, respectively.
The carrying value of the Company's revolving credit agreements approximate fair
value since the rates are tied to floating rates. At July 3, 1999 the carrying
value of the senior notes was $150,000,000 and the fair value, based on quoted
market prices was $142,500,000.
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>
2000 ................ $ 6,710,000 $ 6,092,000
2001 ................ 144,000 4,839,000
2002 ................ 14,000 2,995,000
2003 ................ 722,000
Later years ......... 150,000,000 754,000
------------ -----------
$156,868,000 $15,402,000
============ ===========
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE E -- SHAREHOLDERS' EQUITY
The Stock Option Plan was approved by the shareholders in fiscal 1991, and
amended in fiscal 1996 and fiscal 1998. The Plan gives the Company the right to
grant options for up to 800,000 shares of Common Stock to employees. Prior to
the fiscal 1996 and 1998 amendments, the Company could grant options for up to
300,000 and 600,000 shares, respectively. Transactions under the Stock Option
Plan are as follows:
<TABLE>
<CAPTION>
Prices Outstanding Exercisable
---------------- ------------- ------------
<S> <C> <C> <C>
June 29, 1996 ................. $3.06-$9.94 327,300 41,875
Granted ..................... 2.50- 3.56 49,000
Became exercisable .......... 3.38- 7.68 25,750
Exercised ................... 3.38- 5.88 (4,669) (4,669)
Canceled .................... 3.38- 9.94 (30,125) (12,000)
------- -------
June 28, 1997 ................. 2.50- 7.68 341,506 50,956
Granted ..................... 2.22- 3.38 148,000
Became exercisable .......... 2.50- 5.88 128,340
Exercised ................... 2.50- 3.38 (11,375) (11,375)
Canceled .................... 3.06- 7.68 (20,750) (16,625)
------- -------
June 27, 1998 ................. 2.22- 5.88 457,381 151,296
Granted ..................... 2.47- 2.50 55,500
Became exercisable .......... 2.44- 5.88 117,604
Exercised ................... 2.91- 5.88 (56,751) (56,751)
Canceled .................... 2.22- 5.13 (38,187) (250)
------- -------
July 3, 1999 .................. 2.44- 5.88 417,943 211,899
======= =======
</TABLE>
The weighted average exercise price for all options outstanding was $3.20 per
share at July 3, 1999. These options expire on various dates beginning August
1999 and ending in August 2003. The options generally become exercisable in
equal amounts on the first through fourth anniversaries of the date of grant and
remain exercisable until the fifth anniversary of the date of grant. The excess
of the fair market value of the stock over the exercise price at the date of
grant is recognized as compensation expense over the period during which the
options become exercisable. Related compensation expense was $308,000, $223,000,
and $223,000 during fiscal 1999, 1998 and 1997, respectively. Options available
for grant at July 3, 1999, June 27, 1998 and June 28, 1997 and were 127,887,
221,700, and 72,450, respectively.
The Incentive Stock Award Plan was approved by the shareholders in fiscal 1991,
and amended in fiscal 1996 and fiscal 1998. The Plan gives the Company the right
to grant awards for up to 1,100,000 shares of Common Stock to employees. Prior
to the fiscal 1996 and 1998 amendments, the Company could grant awards for up to
300,000 and 800,000 shares, respectively.
Under the Incentive Stock Award Plan awards are granted for the right to
purchase shares for $.01 per share. Awards were granted to purchase up to 2,950,
36,791, and 282,481 during fiscal 1999, 1998 and 1997, respectively. During
fiscal 1999, rights to purchase 24,833 shares were cancelled. Generally, each
award vests based in part on service and in part on achievement of certain
performance goals over a three-year period. Compensation expense for the service
portion is based on the market price of the stock on the date of award.
Compensation expense for the performance portion is based on the prevailing
market price of the stock. Tax benefits arising from the difference in market
value between the date of grant and the date of issuance of Common Stock are
recorded as an adjustment to additional paid-in capital. Compensation expense
for the Company's incentive stock award plan including related tax assistance
was $977,000, $775,000 and $612,000 for the fiscal years 1999, 1998 and 1997,
respectively. Shares available for grant at July 3, 1999 were 180,002.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." If
compensation cost for the Company's two stock plans, described above, had been
determined based on the provisions of SFAS No. 123, net income would have been
approximately the same as that reported by the
Company.
On September 15, 1998, the Company announced a plan to repurchase, from time to
time, up to 2.5 million shares of the Company's outstanding stock at prices and
at times in the discretion of the Company's top management. Through July 3,
1999, the Company had purchased for retirement approximately one million shares
of its common stock at a total cost of about $4.5 million.
The shareholders have authorized the Board of Directors to issue up to 10
million shares of preferred stock with a maximum aggregate par value of $250
million, and to establish the particular terms including dividend rates,
conversion prices, voting rights, redemption prices and similar matters. No
shares of preferred stock have been issued.
- --------------------------------------------------------------------------------
NOTE F -- INCOME TAXES
For fiscal 1999, the Company had a regular tax loss of $11 million and an
alternative minimum tax (AMT) tax loss of $12 million. At July 3, 1999, the
Company had regular tax loss carry-forwards of $66 million for federal purposes
and $157 million for state purposes. Of the federal loss carry-forward, $9.2
million resulted from the 1988 acquisition of Stanwood Corporation and will
expire in years 2002 and 2003.
The Company's gross deferred tax assets are reduced by a valuation allowance to
net deferred tax assets considered by management to be more likely than not
realizable. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The valuation allowance increased
$8,744,000 during fiscal 1999.
16
<PAGE>
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Assets
Net operating loss
Carry-forward .......................... $32,223,000 $26,478,000
Inventory ................................. 6,625,000 3,907,000
Restructuring reserves .................... 676,000 5,491,000
Tax credit carry-forward .................. 3,738,000 3,738,000
Deferred compensation ..................... 3,027,000 3,009,000
Health claims ............................. 2,521,000 2,388,000
Accrued bonuses & vacation ................ 533,000 535,000
Stock compensation accruals ............... 802,000 743,000
Workers' compensation ..................... 239,000 293,000
Other ..................................... 2,248,000 1,338,000
----------- -----------
Deferred tax assets ....................... 52,632,000 47,920,000
Valuation allowance ....................... (34,640,000) (25,896,000)
----------- -----------
Net deferred tax assets ................... 17,992,000 22,024,000
Liabilities
Depreciation .............................. 17,616,000 20,041,000
Inventory -- LIFO basis
difference ............................. 2,109,000 2,855,000
Intangibles ............................... 857,000
Accounts receivable
write-down ............................. 329,000 1,017,000
Other ..................................... 47,000 109,000
----------- -----------
Deferred tax liabilities .................. 20,101,000 24,879,000
----------- -----------
Net deferred tax liabilities ......... $ 2,109,000 $ 2,855,000
=========== ===========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal income
taxes .................... $ 265,000 $ 120,000 $ 560,000
State income taxes ......... 1,735,000 470,000 2,240,000
---------- ----------- -----------
Total current ............ 2,000,000 590,000 2,800,000
Deferred:
Federal income taxes 730,000 253,000 5,550,000
State income taxes
(benefits) ............... (1,905,000) 41,000 906,000
---------- ----------- -----------
Total deferred ........... (1,175,000) 294,000 6,456,000
Total provision for
continuing
operations ................. $ 825,000 $ 884,000 $ 9,256,000
---------- ----------- -----------
The total provision for
income taxes
related to:
Discontinued
Operations ............... $ (460,000) $(1,557,000) $(7,286,000)
---------- ----------- -----------
Total provision for
income taxes ............... $ 365,000 $ (673,000) $ 1,970,000
========== =========== ===========
</TABLE>
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rates for continuing and discontinued operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
Income tax expense
(benefit) at
statutory rates ......... $(13,664,000) $(15,574,000) $3,276,000
State taxes, net of
federal benefit ......... 374,000 189,000 655,000
Amortization of
excess of cost over
assigned value of
net assets acquired 5,900,000 2,799,000 291,000
Foreign subsidiary
loss .................... 358,000 175,000 341,000
Valuation allowance
adjustments ............. 8,744,000 11,983,000 (1,268,000)
Other ..................... (1,347,000) (245,000) (1,325,000)
------------ ------------ ----------
$ 365,000 $ (673,000) $1,970,000
============ ============ ==========
</TABLE>
The Company made no estimated income tax payments for fiscal 1999, 1998 or 1997.
The carry-back of net operating losses for fiscal 1997 resulted in a tax refund
of $2.2 million in fiscal 1998. A tax refund of $600 thousand was received in
fiscal 1999 as a result of a federal examination of previous tax years.
- --------------------------------------------------------------------------------
NOTE G -- OPERATIONS BY INDUSTRY SEGMENT
Industry segment information for the Company presented on page 8 of this Annual
Report is an integral part of these financial statements.
- --------------------------------------------------------------------------------
NOTE H -- DISCONTINUED OPERATIONS AND RESTRUCTURING AND IMPAIRMENT CHARGES
DISCONTINUED OPERATIONS
As a result of the history of operating losses at Stevcoknit Fabrics' knitting
and knit finishing plants, and at the Nautilus International fitness equipment
business, the Company made the decision on March 3, 1998 to close its Stevcoknit
Fabrics division and to sell its Nautilus International division (fitness
equipment). Accordingly, operating results for those segments have been
reclassified and reported as discontinued operations.
In connection with the decision to discontinue these businesses, the Company, in
fiscal 1998, recognized an estimated loss on disposal of discontinued operations
of $37 million including a provision of $8.0 million for
17
<PAGE>
- --------------------------------------------------------------------------------
losses during the phase-out period and an income tax benefit of $1.2 million. In
fiscal 1999, the Company increased the estimate of the after-tax cost to
discontinue these businesses and recognized after tax charges of $4.4 million
and $3.5 million during the first and second quarters of fiscal year 1999,
respectively, and decreased the estimate by $1.6 million in the third quarter of
fiscal 1999. In the fourth quarter of fiscal 1999, the company adjusted the
estimated tax impact of these disposals, resulting in a $.7 million charge.
Proceeds from the liquidation of these divisions have been used to reduce
indebtedness and to make capital expenditures.
The assets of discontinued businesses at July 3, 1999 and June 27, 1998, are as
follows:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
-------------- --------------
<S> <C> <C>
Accounts Receivable ................ $ 763,000 $19,450,000
Inventory .......................... 6,104,000
Other current assets ............... 17,000 243,000
---------- -----------
Total current assets ............. $ 780,000 $25,797,000
========== ===========
Property, plant and equipment
net of accumulated
depreciation ..................... $11,535,000
Other Assets ....................... 322,000 10,788,000
---------- -----------
Total Non-current Assets ......... 322,000 22,323,000
---------- -----------
Total Assets .................. $1,102,000 $48,120,000
========== ===========
</TABLE>
Summarized results of operations for discontinued businesses are as follows:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998 June 28, 1997
-------------- --------------- ----------------
<S> <C> <C> <C>
Net Sales ............... $11,792,000 $109,452,000 $ 121,540,000
Costs and expenses
net of charges to
reserve .............. 11,792,000 119,090,000 136,221,000
----------- ------------ -------------
(Loss) before
income taxes ......... 0 (9,638,000) (14,681,000)
Income tax expense
(benefit) ............ (313,000) (7,286,000)
----------- ------------ -------------
(Loss) from
operation of
discontinued
businesses ........... $ 0 $(9,325,000) $ (7,395,000)
=========== ============ =============
</TABLE>
RESTRUCTURING AND IMPAIRMENT CHARGES
During fiscal 1999, the Company recognized the impairment of the excess of cost
over assigned value of net assets acquired in the Duck Head Apparel division by
charging pretax income for $12.6 million. The Company also took an impairment
charge to write down certain real property in the Delta Apparel division.
During fiscal 1998, the Company recognized the impairment of the excess of cost
over assigned value of net assets acquired in the Delta Apparel division by
charging pretax income for $7.5 million. The Company also took a restructuring
charge related to the closure of two sewing plants in Costa Rica and certain
retail outlet stores in its Duck Head Apparel division.
- --------------------------------------------------------------------------------
NOTE I -- EMPLOYEE BENEFIT PLANS
On September 27, 1997 the Delta Woodside Industries Employee Retirement Plan
merged into the Delta Woodside Employee Savings and Investment Plan (401(k)).
Future contributions to the 401(k) plan in lieu of a contribution to the
Retirement Plan will be made in cash and not in stock. In the 401(k) plan
employees may elect to convert Delta Woodside Industries stock to other funds,
but may not increase the amount of stock in their account. Each participant has
the right to direct the trustee as to the manner in which shares held are to be
voted. The Retirement Plan qualified as an Employee Stock Ownership Plan
("ESOP") under the Internal Revenue Code as a defined contribution plan.
Contributions of $328,000 and $400,000 were allocated to participants in fiscal
1998 and fiscal 1997, respectively. During fiscal 1999, 1998 and 1997, the
Company contributed $736,000, $615,000 and $648,000, respectively, to the 401(k)
plan to match employee contributions. In addition to the matching contributions,
the Company also made a discretionary contribution of $434,000 to the 401(k)
plan in fiscal 1999.
The Company also maintains a 501(c)(9) trust, the Delta Woodside Employee
Benefit Plan and Trust ("Trust"). The Trust collects both employer and employee
contributions from the Company and makes disbursements for health claims and
other qualified benefits.
The Company has a Deferred Compensation Plan which permits certain management
employees to defer a portion of their compensation. Deferred compensation
accounts are credited with interest and are distributable after retirement,
disability or employment termination. As of July 3, 1999 and June 27, 1998, the
total liability amounted to $7,862,000 and $7,204,000, respectively. The Company
insured the lives of certain management employees to assist in funding of the
deferred compensation liability. The Company is the owner and beneficiary of the
insurance policies.
- --------------------------------------------------------------------------------
NOTE J -- AFFILIATED PARTY TRANSACTIONS
The Company leases its corporate office space from a corporation whose stock is
owned one-half each by the president and a vice president of the Company.
Additional office space and retail store space is leased from the executive vice
president. Under the leases, the Company made payments of approximately
$169,000, $248,000 and $254,000 for the 1999, 1998 and 1997 fiscal years,
respectively.
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 3, 1999 minimum payments
under these contracts with non-cancelable contract terms were $42 million.
During fiscal 2000, the Company plans to spend approximately $12 million for
capital improvements and to maintain its existing facilities.
The Company's previously owned Nautilus business has been named as a
"potentially responsible party" ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") with respect to three
hazardous waste sites in North Carolina, South Carolina and Mississippi. To the
Company's knowledge, all of the transactions with these sites were conducted by
a corporation (the "Selling Corporation") whose assets were sold in 1990
pursuant to the terms of an order of the United States Bankruptcy Court to
another corporation, the stock of which was subsequently acquired by the Company
in January 1993.
At the North Carolina site, the Selling Corporations is listed as a "de Minimis"
party, and at the South Carolina site, the Selling Corporation has been listed
as an "insolvent" party and would appear to qualify as a "de Minimis" party. The
Company believes that the Selling Corporation's share of the liabilities at
either of these sites will be immaterial. At the Mississippi site, the PRP group
has completed the surface removal action and is investigating soil and
groundwater contamination, both at the site and in the surrounding area. The
Company's latest information is that the Selling Corporation is ranked eleventh
out of a total of over 300 PRPs in contributions of material to the site, and,
based on volume, the Selling Corporation contributed approximately 3% of the
site's material. To the Company's knowledge, latest estimates of costs to clean
up the site range up to $4 million. Trichlomethane, one of the substances
delivered by the Selling Corporation to the site, has been found in the site's
groundwater and at nearby residential drinking water wells.
Although no assurance can be provided, the Company believes that it is shielded
from liability at these three sites by the order of the United States Bankruptcy
Court pursuant to which the Selling Corporation sold its assets to the
corporation subsequently acquired by the Company. The Company has denied any
responsibility at these three sites, has declined to participate as a member of
the respective PRP groups, and has not provided for any reserves for costs or
liabilities attributable to the Selling Corporation.
Two of Delta Mills Marketing Company's South Carolina plants, the Delta 2 and 3
finishing plants, have been unable to comply with certain toxicity and other
permit-related limits contained in a National Pollutant Discharge Elimination
System ("NPDES") permit held by the Company. Additionally, high nitrate levels
have been observed at the spray field for these plants. To attempt to achieve
compliance with the non-toxicity NPDES permit limits, the Company completed
certain upgrades in October 1998 at a cost of approximately $2.3 million. Since
then, the Company has had two non-toxicity permit violations resulting in the
payment of a de minimis penalty. The Company believes that it will be able to
comply with the non-toxicity permit limits. The Company is working with the
appropriate state agency to address the toxicity and nitrate issues. Although
there is no assurance that the Company will be successful, and it could face
additional administrative penalties if it is not, the Company does not currently
believe these matters will have a material adverse impact on the Company.
The Company is currently assessing groundwater contamination at its discontinued
Greensboro, North Carolina plant. The Company believes, however, that the source
of the contamination was removed several years ago by the prior owner and the
Company currently has no plans to remediate any groundwater contamination.
Although no assurance can be provided, the Company does not currently believe
that this matter will have a material adverse impact on the Company.
From time to time the Company and its subsidiaries are defendants in legal
actions involving claims arising in the normal course of business, including
product liability claims. The Company believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with parties
believed to be financially capable, none of these actions should have a material
effect on its operations or financial condition.
19
<PAGE>
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NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended July 3, 1999 and June 27, 1998.
<TABLE>
<CAPTION>
1999 Quarter Ended
-----------------------------------------------------
September 26 December 26 March 27 July 3
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales ........................... $ 130,622 $113,760 $109,507 $139,138
Gross profit ........................ 28,351 19,998 15,329 8,586
Income (loss) from continuing
operations ......................... 8,049 629 (4,329) (36,838)
Net income (loss) ................... 3,655 (2,840) (2,711) (37,499)
Earnings (loss) from continuing
operations per share of
Common Stock ....................... 0.33 0.03 (0.18) (1.55)
Earnings (loss) per share of
Common Stock ....................... 0.15 (0.12) (0.11) (1.58)
<CAPTION>
1998 Quarter Ended
-------------------------------------------------------
September 27 December 27 March 28 June 27
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales ........................... $ 139,142 $124,927 $121,516 $ 149,875
Gross profit ........................ 25,217 21,667 23,915 25,361
Income (loss) from continuing
operations ......................... 3,418 1,701 (4,273) 1,770
Net income (loss) ................... 666 (570) (45,617) 1,770
Earnings (loss) from continuing
operations per share of
Common Stock ....................... 0.14 0.07 (0.17) 0.07
Earnings (loss) per share of
Common Stock ....................... 0.03 (0.02) (1.86) 0.07
</TABLE>
During the fourth quarter of fiscal 1999, the Company recognized impairment of
the excess of cost over assigned value of net assets acquired in the Duck Head
Apparel division and of certain real property in the Delta Apparel Division,
resulting in pretax charges totaling $14 million. In the same quarter, the Duck
Head Apparel division also took pretax charges of $14.7 million resulting from
reducing the estimated useful lives of certain categories of assets to more
closely reflect current industry standards, increasing inventory reserves due to
poor sales levels, writing off store fixtures at former customers' premises, and
reducing production capacity to more closely match reduced sales levels. Also in
the fourth quarter, the Delta Apparel division took pretax charges of $3.1
million to increase reserves on certain discontinued and slow moving inventory
categories, and to increase accounts receivable reserves.
During the third quarter of fiscal 1999, the Company recorded a $2.6 million
pre-tax charge to adjust the carrying value of certain plant assets.
The quarterly impact of discontinued operations is discussed in Note H above.
During the fourth quarter of fiscal 1998, the Company made certain adjustments
resulting from changes in estimates of inventory losses that were material to
the results of operations. These changes resulted in a reduction in net income
of $1.7 million for the fourth quarter of fiscal 1998.
During the third quarter of fiscal 1998, the Company recognized restructuring
and impairment charges of $37 million in connection with discontinued operations
described in Note H. In addition, the Company recognized impairment of cost over
assigned value of net assets in the Delta Apparel division by charging pre-tax
income for $7.5 million. In the same quarter, the Company also recognized
pre-tax restructuring charges of $1.6 million primarily related to closure of
certain facilities at Duck Head Apparel.
20
<PAGE>
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Corporate Directory
Operating Companies of
Delta Woodside Industries, Inc.
Delta Mills Marketing Company
P.O. Box 6126, Station B
100 Augusta Street
Greenville, SC 29606
Duck Head Apparel Company
P.O. Box 688
1020 Barrow Industrial Parkway
Winder, GA 30680-0688
Delta Apparel Company
3355 Breckinridge Boulevard
Suite 100
Duluth, GA 30136
Corporate Officers
E. Erwin Maddrey, II
President and Chief Executive Officer
Jane H. Greer
Vice President and Secretary
Robert W. Humphreys
Vice President and Assistant Secretary
Brenda L. Jones
Assistant Secretary
Board of Directors
* C. C. Guy**
Retired businessman
William F. Garrett
President
Delta Mills Marketing Company
* Dr. James F. Kane**
Dean Emeritus, College of Business
University of South Carolina
* Dr. Max Lennon**
President
Mars Hill College
E. Erwin Maddrey, II
President and
Chief Executive Officer
Delta Woodside Industries, Inc.
Buck A. Mickel**
Vice President and Director
Micco Corporation
(Real estate and business investments)
Bettis C. Rainsford
President
The Rainsford Development Corporation
(General business development activities)
* Member Audit Committee
** Member Compensation Committee
Form 10-K
Upon written request, the Company will furnish without charge to any Delta
Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1999 including financial statements and schedules, but
excluding exhibits. Requests should be directed to:
Jane H. Greer, Vice President and Secretary, Delta Woodside Industries, Inc.,
233 North Main Street, Suite 200, Greenville, South Carolina 29601.
Annual Meeting
The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be
held on Thursday, November 4, 1999, at 10:30 a.m., at the Hyatt Regency Hotel,
220 North Main Street, Greenville, South Carolina.
<PAGE>
Delta Woodside Industries, Inc.
233 N. Main Street
Suite 200
Greenville, SC 29601
(864) 232-8301
