-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Adtsw5L+XfXRAcMJ7Pkne5tVM2jtMbstnIE3d+SGTCmlYKZRgiTC5tqUYNzawYlJ 2rBdhHMMXqiPb5goXnpGLg== 0000806624-95-000006.txt : 19951003 0000806624-95-000006.hdr.sgml : 19951003 ACCESSION NUMBER: 0000806624-95-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950701 FILED AS OF DATE: 19950929 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELTA WOODSIDE INDUSTRIES INC /SC/ CENTRAL INDEX KEY: 0000806624 STANDARD INDUSTRIAL CLASSIFICATION: BROADWOVEN FABRIC MILLS, COTTON [2211] IRS NUMBER: 570535180 STATE OF INCORPORATION: SC FISCAL YEAR END: 0628 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10095 FILM NUMBER: 95577665 BUSINESS ADDRESS: STREET 1: 233 N MAIN ST STREET 2: HAMMOND SQUARE STE 200 CITY: GREENVILLE STATE: SC ZIP: 29601 BUSINESS PHONE: 8038791580 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 1, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File Number 1-10095 DELTA WOODSIDE INDUSTRIES, Inc. (Exact name of registrant as specified in its charter) South Carolina 57-0535180 (State of Incorporation) (I.R.S. Employer Identification No.) 233 N. Main Street, Hammond Square, Suite 200 Greenville, South Carolina 29601 (Address of principal executive offices) (Zip code) 803/232-8301 Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, Par Value $.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of each class None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Exhibit Index at Page No._____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to be best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non- affiliates of the registrant as of September 5, 1995 was : Common Stock, $.01 par value - $198,327,805 The number of shares outstanding of each of the registrant's classes of Common Stock, as of September 5, 1995 was: Common Stock, par value $.01 24,409,576 shares DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Annual Report to shareholders for the fiscal year ended July 1, 1995 are incorporated by reference into Parts I and II. Portions of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A for the annual shareholders' meeting to be held on November 9, 1995 are incorporated by reference into Part III. Part I Item 1. BUSINESS General Delta Woodside Industries, Inc. ("Delta Woodside" or the "Company") is a South Carolina corporation with its principal executive offices located at 233 North Main Street, Hammond Square, Suite 200, Greenville, South Carolina 29601 (telephone number: 803-232-8301). All references herein to Delta Woodside or the Company refer to Delta Woodside Industries, Inc. and its subsidiaries. The Company manufactures and markets woven and knitted fabrics and apparel. The Company's textile segment produces a range of cotton, synthetic and blended fabrics, woven and knit, which are sold for the ultimate production of apparel, home furnishings and other products. The Company's apparel segment produces woven and knit apparel, including the "Duck Head" (Reg. trademark) line of casualwear marketed primarily in the Southeastern United States to department stores and specialty apparel retailers. The Company also operates 33 retail apparel outlet stores that sell primarily closeout and irregular "Duck Head" products and other woven and knit casualwear produced by the "Duck Head" division and other manufacturers. The Company also manufactures and distributes physical fitness equipment under the "Nautilus" (Reg. trademark) name. In June 1994, the Company sold its office products business. The Company has operations in 11 states, Costa Rica and Honduras, and employs approximately 7,500 employees. Delta Woodside Industries, Inc. is the successor by merger to Delta Woodside Industries, Inc., a Delaware corporation that was incorporated in 1986 and whose subsidiaries' businesses were acquired beginning in 1984. The corporation that is now Delta Woodside Industries, Inc. was incorporated in 1972. Products, Marketing and Manufacturing The Company conducts its textile fabrics operations through the Delta Mills Marketing (woven fabrics) and Stevcoknit (knitted fabrics) divisions. It conducts its woven and its knit apparel operations through the "Duck Head" and "Delta Apparel" (Reg. trademark) divisions. Certain retail sales of "Duck Head" and other manufacturers' products are made through the "Duck Head" Retail Outlet Stores division. The Company also manufactures and sells fitness equipment through the "Nautilus" (Reg. trademark) division, and licenses the use of both the "Duck Head" and "Nautilus" trademarks through International Apparel Marketing Corporation. Each division has its own management and employees and operates independently of the other divisions. Inter-segment sales in fiscal 1995, fiscal 1994 and 1993 accounted for no more than approximately 4%, 3% and 3%, respectively, of the total sales of any segment. Fabrics produced by Delta Woodside are either woven or knitted and are manufactured from cotton, wool or synthetic fibers or from synthetic filament yarns. Cotton and wool are purchased from numerous suppliers. Synthetic fiber and synthetic filament yarns are purchased from a smaller number of competitive suppliers. The Company sells its woven fabrics primarily to numerous apparel manufacturers and apparel resellers, including Levi, Haggar and Farah and private label apparel manufacturers for J. C. Penney, Sears and other retailers. The Company's knitted fabrics are sold for production of apparel for ultimate sales to catalogue companies, as well as to other branded and private label manufacturers. Apparel products are sold primarily to department and specialty retailers under the Company's "Duck Head" label, to private label apparel resellers and to screen printers. Textile Segment The textile segment manufactures and markets woven and knitted fabrics to manufacturers of apparel and home furnishings and other products. The Company's net sales of woven fabrics were $290.8 million, $288.6 million and $325.1 million and the Company's net sales of knit fabrics were $102.9 million, $102.8 million and $119.9 million, during fiscal 1995, 1994 and 1993, respectively. Item 1 (Continued) Delta Mills Marketing Company (Woven Fabrics). Delta Mills Marketing Company produces finished and unfinished woven fabrics used in the production of apparel, home furnishings and other products. "Finished" fabric refers to fabric which has been treated by washing, bleaching, dyeing and applying certain chemical finishes. Finished apparel fabric is ready to be cut and sewn into garments and is typically sold to manufacturers of apparel. Unfinished fabric, commonly referred to as "greige" (pronounced "gray") goods, is typically sold to converters who subsequently finish the fabric and sell it to manufacturers of apparel, home furnishings and other products. The Company's finished woven fabrics operation, through 7 of its plants, manufactures medium-weight woven fabrics sold in a finished state for use in the manufacture of men's and women's apparel and professional uniforms. Finished woven fabrics produced by the division are primarily sold directly to major apparel manufacturers. The division's marketing efforts focus on four primary apparel manufacturing groups: women's apparel, including fashion apparel; men's apparel; career apparel and uniforms; and military and other government uniforms and apparel. The division also engages in commission finishing, whereby it finishes fabric for converters. The finished woven fabrics operation sells and distributes its fabrics through Delta Mills Sales Company, a marketing office based in New York City, with sales personnel also operating from Atlanta, Dallas, Los Angeles and San Francisco. Approximately 69% of the division's finished woven fabrics are made from cotton or cotton/synthetic blends, while approximately 31% are made from spun synthetics, including varying blends of rayon, polyester and wool. Finished woven fabrics are principally woven according to projected sales based on strong indications from major customers, but finished according to specific purchase orders. The division's production of cotton and cotton/synthetic blend finished woven fabrics is largely integrated, with the division performing most of its own spinning and substantially all of its own weaving and finishing. The production of spun synthetic finished woven fabrics is fully integrated, with various plants in the division involved in spinning, weaving and finishing. With its printing capability, the Company believes that the division is the only substantially vertically integrated producer of battle dress camouflage military fabrics in the United States. The Company expects that its finished woven all cotton facilities will run at near full capacity during fiscal 1996. However, woven synthetic and greige goods facilities are not expected to run full schedules during fiscal 1996. The division also operates two plants included in its Woodside operation which produce a variety of unfinished light- weight woven fabrics sold for ultimate use in manufacturing apparel such as blouses, dresses and pajamas, and in manufacturing home furnishings, including draperies, curtains and comforters, and in medical and industrial products. Fabrics sold by the Woodside operation include 100% cotton, polyester/cotton blends, 100% polyester, 100% rayon, polyester/rayon blends, textured polyester and other "semi- fancy" fabrics of more complicated construction. The Woodside operation currently is operating at less than full production capacity. Stevcoknit (Knitted Fabrics). Stevcoknit, through 4 plants, spins yarn, knits and finishes a wide range of circular knit fabrics for use in the manufacture of knit apparel, and also provides yarn to the Company's apparel segment. Stevcoknit products are marketed to numerous apparel manufacturers through marketing staffs employed by Stevcoknit Marketing Company in New York City and Los Angeles, with sales personnel also located in North Carolina, Georgia and Dallas. To further promote sales of Stevcoknit's fabrics to apparel manufacturers, the marketing staff of Stevcoknit Marketing Company also contacts major retailers of products manufactured from the division's knitted fabrics. Discussions with these retailers provide information relating to fabric quality and trends in style and color. In addition to its sales to apparel manufacturers, the division also sells prepared for print fabrics to converters through a broker. Certain knitting operations are scheduled according to projected sales, but most knitting and finishing of the fabrics are performed to specific customer orders. Item 1 (Continued) The operations within the knitted fabrics operation are largely integrated. Various plants are equipped to perform all stages of the manufacturing process, from carding the raw fiber stock to dyeing and finishing the final fabric product. The fabrics produced by this segment are manufactured primarily by using 100% cotton and polyester/cotton blends. The Stevcoknit operation currently is running at less than full capacity. Apparel Segment The apparel segment produces and markets both woven apparel and knit apparel. The segment's products include the "Duck Head" line of men's and boys' casualwear, which includes pants, shorts and shirts. The knit apparel business includes T-shirts and sweatshirts which are sold under the labels of "Duck Head", "Delta Apparel", and various private labels. "Duck Head" Division. The division produces a line of men's and boys' casual apparel, sold under the "Duck Head" label, including pants, shorts, shirts and accessories. This division also sells a relatively small amount of men's and boys' woven workwear, sportswear and casualwear under the private labels of its customers. In fiscal 1994 the division began licensing various other categories of apparel and accessories. "Duck Head" labeled products are primarily marketed by sales staff employed by Duck Head Marketing Company to regional and national retailers with stores in the South and South Atlantic regions. The "Duck Head" trademark has been associated with apparel for many decades, but has traditionally been marketed primarily to a Southeastern customer base. The Company acquired the brand in February 1989. The division sells its "Duck Head" products primarily to regional and national department store chains as well as specialty apparel retailers and through Company-operated outlet stores. The division currently displays "Duck Head" products in "Duck Head" specialty departments within some department stores. The "specialty department" display format permits the presentation of an entire line of clothing in a dedicated section of a store's clothing department, and has been increasingly used in department stores by the major national clothing brands. Gross sales of "Duck Head" labeled products were approximately $80.5 million, $95.4 million and $137.3 million during fiscal 1995, 1994 and 1993, respectively. "Duck Head" Apparel operates a total of 8 facilities located in Georgia and Costa Rica. The division purchases the fabrics used in its products from a number of producers. "Duck Head" is now acquiring less than one-half of its finished products from other companies throughout the world. This outside production takes the form of sewing fabric parts cut at "Duck Head" facilities, cutting and sewing with fabric and patterns supplied by "Duck Head", or providing finished garments made to "Duck Head" specifications. The division maintains a staff of quality specialists who consistently monitor work in process at outside companies. The Company believes that there is ample capacity among outside contractors worldwide to meet its future production requirements. The majority of the products is warehoused in the division's leased facilities. "Duck Head" labeled apparel items are generally required to be inventoried to permit quick shipment and to level production schedules, and customer private label apparel items are generally made only to order. The division's products are manufactured primarily from 100% cotton. The division's marketing office is based in Winder, Georgia with regional sales managers and sales personnel located throughout the country. "Delta Apparel". "Delta Apparel", which is headquartered in Duluth, Georgia, operates a total of 9 facilities and produces knitted T-shirts and sweatshirts. The division markets its products primarily to companies that screen print shirts for resale, and to department stores and other clothing stores for resale under the customer's private labels or under the Company's "Delta Apparel" label. Net sales in this division were $101.5 million, $84.1 million and $81.8 million during fiscal 1995, 1994 and 1993, respectively. The division's knit apparel marketing is performed by sales personnel of Delta Apparel Marketing Company with sales personnel located throughout the country. Sales personnel call directly on the retail trade, contacting department stores and the mass markets such as discount houses. This operation utilizes independent sales representatives to sell to screen printing companies. Some knit apparel items are inventoried to permit quick shipment and to level production Item 1 (Continued) schedules. Special fashion knit apparel items and customer private label knit apparel styles generally are made only to order. Of the yarn used by the Company's knit apparel operation, approximately one-half is produced by Stevcoknit with the remainder purchased from outside vendors; the knit apparel operation is otherwise largely vertically integrated. The business manufactures its own knitted fabrics, utilizing knitting, dyeing and finishing processes, and cuts and sews its finished knitted fabrics into apparel. The fabrics used by the division are either polyester/cotton blends or 100% cotton. Retail Apparel. The Company has 33 outlet stores in 11 states that sell principally closeout and irregular "Duck Head" products. These stores also sell a small amount of apparel items manufactured by other companies. Fitness Equipment "Nautilus" Fitness Equipment. Nautilus produces weight resistance and aerobic equipment for the institutional, medical and home markets. The current product line in the weight resistance category is called the "Next Generation", which consists of 45 individual machines that exercise the various muscle groups. Nautilus also produces an exclusive line of 30 weight resistance machines for women called "Nautilus for Women". Nautilus also manufactures Power Plus and Free Weight equipment which consists of 45 machines. As a supplement to the weight resistance line, Nautilus produces seven versions of a multi-station machine that serve those markets that have space and budget limitations. Nautilus currently produces seven aerobic machines for the institutional market: three recumbent bikes, two stairclimbers, a treadmill and a skate machine. Nautilus historically has been focused on the institutional market. Beginning in fiscal 1994, Nautilus launched a concerted effort to penetrate the home market. Nautilus historically targets health clubs, the public sector, YMCAs and similar institutions and the medical, amenity and corporate markets. Based on successful results from a test of the consumer market, national expansion will begin in fiscal 1996. The manufacturing operations at Nautilus are vertically integrated, including metal fabrication, upholstery, and a vacuum formed and injection molded plastics process. Raw material is inventoried, but finished machines are generally manufactured against customer orders. All manufacturing is done in Independence, Virginia. The Company believes that the manufacturing operation is currently operating at approximately 75% of present capacity, including certain new building space. Competition The cyclical nature of the textile and apparel industries, characterized by rapid shifts in fashion, consumer demand and competitive pressures, results in both price and demand volatility. The demand for any particular product varies from time to time based largely upon changes in consumer preferences and general economic conditions affecting the textile and apparel industries, such as consumer expenditures for nondurables. The textile and apparel industries are also cyclical because the supply of particular products changes as competitors enter or leave the market. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." The Company sells primarily to domestic customers and competes with numerous competitors, both domestic and foreign. The principal competitive factors are price, service, delivery time, quality and flexibility, with the significance of each factor depending upon the product involved. The Company's competitive position varies among the different goods produced. There are several major domestic competitors in the finished cotton and cotton/polyester blend woven fabrics area, none of which dominates the market. The Company believes that it has a strong competitive position with respect to the manufacture of spun synthetic slack-weight and skirt-weight woven fabrics, as well as wrinkle-resistant all cotton sportswear fabrics. The woven fabrics' Woodside operation is a major supplier of both polyester/rayon print cloth used in home furnishings and women's blouses and acetate fabric used in apparel linings and surgical tapes. There are several major domestic competitors in the Company's acetate linings business and Item 1 (Continued) its unfinished cotton and cotton/polyester blend print cloth business, but no company dominates any of these businesses. The knitted fabrics business in which Stevcoknit competes is highly competitive with several large competitors. However, the significant vertical integration of Stevcoknit's manufacturing operations and its experience in performing the more complicated manufacturing techniques required in the production of 100% cotton fabrics provide the Company with certain competitive advantages. The industry, nevertheless, remains highly competitive. The apparel segment competes with numerous domestic and foreign manufacturers of branded and private label apparel. Foreign competition has been an increasingly significant factor in the apparel manufacturing industry, particularly with respect to items that require labor-intensive production, such as shirts and jackets, and high cost luxury items. Although domestic apparel companies must compete to some extent on a price basis with foreign competition, the Company's management believes that domestic apparel companies can best compete by selling branded products, by manufacturing off-shore, by offering product flexibility, by responding quickly to changes in consumer demand and by providing more timely deliveries. The latter characteristics permit retailers to reduce their inventory costs and lower the risk that product availability will not match consumer demand. The Company's operations are oriented toward providing its apparel segment and the customers of its textile segment with all or some of these competitive advantages. The Company believes that it and its domestic customers can address quality control problems more easily than can manufacturers and distributors of foreign products. Furthermore, the customers of foreign suppliers generally face letter of credit fees, and occasionally face delivery delays and claims resolution difficulties. The Company believes that several aspects of its operations may mitigate some of the problems posed by competition within the domestic textile and apparel industries. The variety of the Company's products offers some degree of protection against the cyclical nature of the business of individual products. Management of the Company believes that the percentage of its production cost attributable to labor is comparable to that of its competitors. Other competitive strengths include: the ability to produce special fabrics such as textured blends; the modern equipment in several of its plants; and the Company's achievement of substantial vertical integration in its various divisions. Nautilus competes in the institutional fitness market which is fragmented and highly competitive. Nautilus competes with several national and local companies. The fitness equipment industry generally competes for business on price, quality, specifications and service. Management of the Company believes that Nautilus has a strong competitive position because of its high name recognition in markets and its reputation for high quality, durable equipment. Employees The Company has approximately 7,500 employees. The Company's employees are not represented by unions. The Company believes that its relations with its employees are good. Environmental and Regulatory Matters Delta Woodside is subject to federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions, ozone depletion and solid waste disposal. Delta Woodside's plants generate very small quantities of hazardous waste which are either recycled or disposed of off- site. Most of its plants are required to possess one or more discharge permits. The subsidiary which conducts the finished woven fabrics operations is subject to a Consent Order with the South Carolina Department of Health and Environmental Control dated September 26, 1985, which was executed prior to Delta Woodside's acquisition of the business. Pursuant to the Consent Order, which arose from a determination that several private drinking wells in the area of two of the subsidiary's plants had been contaminated, the subsidiary has discontinued the operation near these plants of a large spray field into which waste water sludge had been disposed and has placed into operation for such purpose a new and larger spray field. Delta Woodside expects that any continuing expenditures to comply with the Consent Order will be immaterial in amount. Item 1 (Continued) Some of the Company's plants have been unable to comply with the acute toxicity limits contained in the National Pollutant Discharge Elimination System (NPDES) permits held by the Company. With respect to certain such plants in North Carolina, the Company signed a Special Order by Consent with the North Carolina Department of Environmental Health and Natural Resources (DEHNR) which required the plants to achieve compliance with the acute toxicity limits by July 1995. The Company has applied for an extension to achieve compliance and, based on conversations with DEHNR, believes approval of this application is forthcoming. By a March 1992 letter, the Natural Resources Defense Council notified the Company of its intent to institute a "citizens' suit" under the Clean Water Act for certain alleged NPDES violations in North Carolina. No such suit has been initiated to date. By reason of the Special Order, the Company believes that any such suit, and compliance with the Special Order, would not have a material adverse impact on the Company. With respect to certain South Carolina plants, the Company is working with the appropriate state agency in developing a corrective action plan for addressing the toxicity issue. The Company has implemented several courses of action to achieve compliance with its NPDES permits and does not believe that the matter will have a material adverse impact on the Company. Generally, the environmental rules applicable to the Company are becoming increasingly stringent. The Company incurs capital and other expenditures in each year that are aimed at achieving compliance with current and future environmental standards. The Company does not expect that the amount of such expenditures will have a material adverse effect on its operations or financial condition. There can be no assurance, however, that changes in federal, state or local regulations, changes in regulatory policy or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of Delta Woodside's liability, if any, for past failures to comply with laws, regulations and permits applicable to its operations cannot be determined. Information contained under the subheading "Environmental Matters" in Management's Discussion and Analysis of Results of Operations and Financial Condition--Liquidity and Sources of Capital incorporated into Item 7 of this Form 10-K is incorporated herein by reference. Industry Segment Information Segment information made part of Note H of the Company's consolidated financial statements for the fiscal year ended July 1, 1995 is incorporated herein by reference. Other Information concerning order backlogs in Management's Discussion and Analysis of Results of Operations and Financial Condition," Consolidated Company Results, Fiscal 1995 Versus Fiscal 1994" incorporated into Item 7 of this Form 10-K is incorporated herein by reference. Item 2. PROPERTIES The following table provides a description of Delta Woodside's production and warehouse facilities. Approximate Square Approximate Location Utilization Footage Acreage Textile Segment Beattie Plant, Fountain Inn, SC (8) spin/weave 390,000 112 Furman Plant, Fountain Inn, SC (8) weave 116,000 21 Distribution Center, Greenville, SC (8) warehouse 88,000 12 Estes Plant, Piedmont, SC (8) spin/weave 332,000 114 Greer Plant, Greer SC (8) weave 255,000 10 Delta 3 Plant, Wallace, SC (8) dye/finish 555,000 527 Cypress Plant, Pamplico, SC (8) spin 144,000 4 Pamplico Plant, Pamplico, SC (8) spin/weave 275,000 520 Delta 2 Plant, Wallace, SC (8) dye/finish 347,000 295 Catawba Plant, Maiden, NC spin 115,000 34 Fayetteville Plant, Fayetteville, NC (6) unused 238,000 15 Carter Plant, Wallace, NC dye/finish 485,000 72 Greensboro Plant, Greensboro, NC(3) unused 195,000 10 Holly Plant, Wallace, NC knit/finish 224,000 3 Rainsford Plant, Edgefield, SC spin 296,000 43 Mickel Plant, Spartanburg, SC spin 207,000 14 Apparel Segment Maiden Plant, Maiden NC knit/dye finish/cut 305,000 45 Washington Plant, Washington, GA sew 129,800 6 Sandersville Plant, Sandersville, GA sew 27,000 5 Distribution Center, Knoxville, TN distribution 550,000 21 Decatur Plant, Decatur, TN (2) sew 75,000 11 Tellico Plains Plant, Tellico Plains, TN sew 100,000 17 Ashburn Plant, Ashburn, GA (1) sew 43,000 7 Sparta Plant, Sparta, GA (1) sew 21,000 2 Honduras Plant, San Pedro Sula, Honduras(1)(9) sew Baldwin Plant, Baldwin, GA (7) press/distribution 148,000 24 Distribution Center, Stone Mountain, GA(1) distribution 120,000 Monroe #3, Monroe, GA cut 52,000 7 Monroe #2, Monroe, GA sew/distribution 93,000 8 Winder Plant, Winder, GA (7) warehouse/retail 119,000 3 Harmony Plant, San Jose, Costa Rica sew 14,000 San Jose Plant, San Jose, Costa Rica (1) sew 60,000 6 Jupiter Plant, San Jose, Costa Rica sew 25,000 Winder, GA warehouse 10,000 Various (4) warehouse Various (5) stores Fitness Equipment Division Independence, VA manufacturing 251,000 54 Independence, VA (1) manufacturing 33,678 Item 2 (Continued) (1) Leased facility. (2) "Duck Head" Outlet Stores lease a portion of the facility for retail sales. (3) The knitted fabrics discontinued operations at this facility during the first quarter of fiscal 1996. (4) The apparel segment leases certain additional warehouse space from time to time. Approximately 266,000 square feet is leased currently with leases expiring through November 1995. (5) The "Duck Head" Outlet Stores Operation leases 33 facilities in 11 states, which leased space is Approximately 121,000 square feet. These leases expire at various dates through 2000. (6) The knitted fabrics operation closed this facility during fiscal 1993. (7) These locations will be closed in fiscal 1996. (8) Title to these facilities are held by the county under a fee-in- lieu arrangement. (9) The knit apparel operation has begun hiring and training, and expects to begin occupying this facility before the end of calendar 1995. Except as noted above all of the above production and warehouse facilities are owned by Delta Woodside and its subsidiaries, subject in certain cases to various outstanding mortgages and security interests. The apparel segment's Sparta plant, Sparta, Georgia and San Jose plant in San Jose, Costa Rica are leased on a month-to-month basis, and the Ashburn Plant in Ashburn, Georgia has a lease which expires in February 1999. The fitness division leases manufacturing capacity in Independence, Virginia which lease expires in July 1998. Delta Woodside leases corporate and division administrative offices in Greenville, South Carolina. The lease on the corporate offices expires December 1997 and leases on the administrative offices expire in 2008. Sales offices are leased in or near Charlotte, New York, Chicago, Newport Beach, San Francisco, Dallas and Los Angeles with leases expiring through December 2004. At the date of execution of this Form 10-K, the Company believes, with the exception of plants affected by the Company's modernization program, that its finished woven all cotton plants and finished woven synthetic plants are operating virtually at full production capacity while its unfinished woven fabrics operations are operating at slightly less than full production capacity. The knitted fabrics plants in the textile segment are operating at less than full capacity. Various factors affect the relative use by the Company's apparel segment of its own facilities and outside contractors in the various apparel production phases. This segment is currently using all its internal productive capacity. The fitness equipment operation is operating at approximately 75% of its production capacity as a result of new building space in excess of current volume. The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors. Item 3. LEGAL PROCEEDINGS From time to time the Company and its subsidiaries are defendants in legal actions involving claims arising in the normal course of its business, including product liability claims. The company believes that, as a result of its legal defenses, insurance arrangements and indemnification provisions with financially capable parties, none of these actions, if decided adversely, should have a material adverse effect on its business or financial condition taken as a whole. The Company has previously reported the award on November 24, 1993 by a jury in the Circuit Court of Montgomery County, Alabama (the "Circuit Court") of $29,056,000 to a former Duck Head independent sales representative (Ken Hoots) and two of his salesmen (Terry Long and Bill Pace) (the "Plaintiffs") against a subsidiary of the Company in a suit captioned "Ken Hoots, Terry Long and Bill Pace v. Duck Head Apparel Company, Inc., et al." (the "Hoots Suit"). The Hoots Suit commenced on March 17, 1992. After a hearing the Circuit Court judge reduced the verdict to $22,852,000 and entered judgment against the Company's subsidiary on March 28, 1994 as follows: (a) $852,000 to the Plaintiffs on their claim of breach of contract respecting alleged unpaid commissions, (b) $4,000,000 to Ken Hoots, $2,000,000 to Terry Long, and $1,000,000 to Bill Page for mental anguish on their claim for fraud, and (c) $15,000,000 to the Plaintiffs as punitive damages on their claim of fraud. On February 17, 1995, the Supreme Court of Alabama reduced the $7,000,000 of damages awarded for mental anguish by $3.5 million and affirmed the Circuit Court's ruling in all other respects. In June, 1995, the Company settled the case with the Plaintiffs, and the judgment was fully satisfied and discharged on June 8, 1995. A lawsuit with allegations similar to those in the Hoots Suit was commenced on October 1, 1993 against a subsidiary of the Company in the United States District Court for the Western District of Kentucky by an individual (Donnie Cecil) who has previously served as an independent sales representative for the Duck Head division. In July, 1995, this case was settled and the complaint was dismissed with prejudice by the Court on July 19, 1995. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the Company's 1995 fiscal year. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The material under the heading "Common Stock Market Prices and Dividends" on the inside front cover of the Company's annual shareholders' report for the year ended July 1, 1995 is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA The material under the heading "Selected Financial Data" on page 1 of the Company's annual shareholders' report for the year ended July 1, 1995 is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The material under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 4 through 10 (exclusive of graphs) of the Company's annual shareholders' report for the year ended July 1, 1995 is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included on pages 11, 12 and 14 through 28 of the Company's annual shareholders' report for the year ended July 1, 1995 are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The information required by this item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the heading "Ratification of Selection of Auditors". PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the headings "Election of Directors", "Executive Officers", and "Stock Ownership of Principal Shareholders and Management". Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the headings "Management Compensation" and "Compensation Committee Interlocks and Insider Participation". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the heading "Stock Ownership of Principal Shareholders and Management". Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the heading "Related Party Transactions". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedules The response to this portion of Item 14 is set forth on page F-2 included herein, which response is incorporated herein by reference. (3) Listing of Exhibits:* 3.1 Articles of Incorporation of the Company, as amended through February 5, 1989: Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of RSI Corporation and Porter Brothers, Inc., File No. 33-30247 (the "Form S-4"). 3.1.1 Articles of Amendment to Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1.2 to the Form S-4. 3.1.2 Articles of Merger of Harper Brothers, Inc. into RSI Corporation: Incorporated by reference to Exhibit 4.1.1 to the Registration Statement of the Company on Form S-8, File No. 33- 33116 (the "1990 Form S-8"). 3.1.3 Articles of Merger of Delta Woodside Industries, Inc., a Delaware corporation, into RSI Corporation: Incorporated by reference to Exhibit 4.1.2 to the 1990 Form S-8. 3.1.4 Articles of Merger of Duncan Office Supplies, Inc., into Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarterly period ended December 29, 1990 (the "December 1990 10-Q"). 3.1.5 Articles of Amendment to the Articles of Incorporation of Delta Woodside Industries, Inc., filed with the South Carolina Secretary of State on November 15, 1991: Incorporated by reference to Exhibit 4.6 to the Form 10-Q of the Company for the quarterly period ended December 28, 1991. 3.2 By-laws of the Company, as amended: Incorporated by reference to Exhibit 3.1.1 to the Form S-4. 3.2.1 Amendments to By-laws of the Company: Incorporated by reference to Exhibit 3.2 to the December 1990 10-Q. 3.2.2 Amendment to By-laws of the Company, adopted as of June 29, 1992: Incorporated by reference to Exhibit 3.2.2 to the Company's Form 10- K for the fiscal year ended June 27, 1992 (the "1992 10-K"). 4.1 See Exhibits 3.1, 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.1.5, 3.2, 3.2.1. and 3.2.2. 4.1.1 Specimen of Certificate for the Company's Common Stock: Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, File No. 33-42710 (the "Form S-3"). 4.2 Credit Agreement dated as of September 7, 1994 among Delta Woodside Industries, Inc., the Lenders named therein, and NationsBank of North Carolina, N.A., as Agent (with exhibits and schedules omitted) together with forms of Promissory Note, Subsidiary Guaranty and certain other documents. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit to the Credit Agreement upon request of the Commission. 4.2.1 February 15, 1995 Waiver respecting Credit Agreement: Incorporated by reference to Exhibit 4.3.1 to the Form 10-Q of the Company for the quarterly period ended December 31, 1994. Item 14 (Continued) 4.2.2 May 15, 1995 Waiver respecting Credit Agreement: Incorporated by reference to Exhibit 4.3.2 to the Form 10-Q of the Company for the quarterly period ended April 1, 1995 (the "March 1995 10-Q"). 4.2.3 Amendment Agreement dated as of June 9, 1995 to Credit Agreement dated as of September 7, 1994. 4.3 The Company hereby agrees to furnish to the Commission upon request of the Commission a copy of any instrument with respect to long-term debt not being registered in a principal amount less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10.1 Lease, dated December 27, 1987 by and between Hammond Square, Ltd. and the Company: Incorporated by reference to Exhibit 10.10 to Registration Statement No. 33-22563 on Form S-4 of Delta Woodside Industries, Inc., a Delaware corporation ("Registration Statement No. 33-22563"). 10.2** Delta Woodside Deferred Compensation Plan for Key Employees: Incorporated by reference to Exhibit 10.6 to the Form 10-Q of the Company for the quarterly period ended December 30, 1989. 10.3** Incentive Stock Award Plan effective July 1, 1990: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the fiscal quarter ended March 31, 1990. 10.4.1** Stock Option Plan effective as of July 1, 1990: Incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended June 30, 1990. 10.4.2** Amendment No. 1 to Stock Option Plan: Incorporated by reference to Exhibit 10.1 to the December 1990 10-Q. 10.4.3** Amendment to Stock Option Plan: Incorporated by reference to Exhibit 10.9.2 to the Company's Form 10-K for the fiscal year ended June 29, 1991 (the "1991 10-K"). 10.5 Stock Transfer Restrictions and Right of First Refusal Agreement between the Company and E. Erwin Maddrey, II: Incorporated by reference to Exhibit 10.2 to the December 1990 10-Q. 10.6 Stock Transfer Restrictions and Right of First Refusal Agreement between the Company and Bettis C. Rainsford: Incorporated by reference to Exhibit 10.3 to the December 1990 10-Q. 10.7** Summary of Delta Woodside Industries, Inc., Director Charitable Giving Program: Incorporated by reference to Exhibit 10.11 to the 1992 10-K. 10.7.1** Resolution to amend Directors' Charitable Giving Program dated February 2, 1995: Incorporated by reference to Exhibit 10.7.1 to the March 1995 10- Q. 10.8.1** Directors Stock Acquisition Plan: Incorporated by reference to Exhibit 10.14 to the 1991 10-K. 10.8.2** Amendment of Director Stock Acquisition Plan, dated April 30, 1992: Incorporated by reference to Exhibit 10.12.2 to the 1992 10-K. 10.9 See Exhibits 4.2, 4.2.1, 4.2.2 and 4.2.3. 13 Annual Report to Shareholders of the Company for the fiscal year ended July 1, 1995. Item 14 (Continued) 21 Subsidiaries of the Company. 23.1 Report on Schedule and Independent Auditors' Consent for the year ended July 1, 1995. 23.2 Independent Auditors' Consent for the years ended July 2, 1994 and July 3, 1993. 23.3 Report of Independent Auditors for the years ended July 2, 1994 and July 3, 1993. 27 Financial Data Schedule * All reports previously filed by the Company with the Commission pursuant to the Exchange Act, and the rules and regulations promulgated thereunder, exhibits of which are incorporated to this Report by reference thereto, were filed under Commission File Number 1-10095. ** This is a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K The Company did not file any report on Form 8-K during the fourth quarter of the fiscal year ended July 1, 1995. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DELTA WOODSIDE INDUSTRIES, INC. 9/25/95 /s/ E. Erwin Maddrey, II 9/18/95 Date E. Erwin Maddrey, II Date President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ C. C. Guy 9/26/95 /s/ E. Erwin Maddrey 9/18/95 C. C. Guy Date E. Erwin Maddrey, II Date Director President, Chief Executive Officer and Director /s/ James F. Kane 9/25/95 /s/ Bettis C. Rainsford 9/18/95 James F. Kane Date Bettis C. Rainsford Date Director Executive Vice President, Chief Financial Officer, Treasurer and Director /s/ Max Lennon 9/26/95 /s/ Douglas J. Stevens 9/18/95 Max Lennon Date Douglas J. Stevens Date Director Controller and Assistant Secretary /s/ Buck A. Mickel 9/26/95 Buck A. Mickel Date Director /s/ Buck Mickel 9/26/95 Buck Mickel Date Director EXHIBIT INDEX 4.2.3 Amendment dated as of June 9, 1995 to Credit Agreement dated as of September 7, 1994. 13 Annual Report to Shareholders of the Company for the fiscal year ended July 1, 1995. 21 Subsidiaries of the Company. 23.1 Report on Schedule and Independent Auditors' Consent for the year ended July 1, 1995. 23.2 Independent Auditors' Consent for the years ended July 2, 1994 and July 3, 1993. 23.3 Report of Independent Auditors for the years ended July 2, 1994 and July 3, 1993. ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED JULY 1, 1995 DELTA WOODSIDE INDUSTRIES, INC. GREENVILLE, SOUTH CAROLINA F-1 FORM 10-K--ITEM 14(a)(1) AND (2) DELTA WOODSIDE INDUSTRIES, INC. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Delta Woodside Industries, Inc. and subsidiaries included in the Annual Report of the Registrant to its shareholders for the Year ended July 1, 1995 are incorporated by reference in Item 8: Consolidated balance sheets--July 1, 1995 and July 2, 1994. Consolidated statements of operations--Years ended July 1, 1995, July 2, 1994 and July 3, 1993. Consolidated statements of shareholders' equity--Years ended July 1, 1995, July 2, 1994 and July 3, 1993. Consolidated statements of cash flows--Years ended July 1, 1995, July 2, 1994 and July 3, 1993. Notes to consolidated financial statements. The following consolidated financial statement schedule of Delta Woodside Industries, Inc. are included in Item 14(d): Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted from schedules filed have been omitted because the information is not applicable. F-2 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS DELTA WOODSIDE INDUSTRIES, INC.
COL. A COL. B COL. C COL. D COL. E ADDITIONS Balance at DESCRIPTION Beginning (1) (2) Deductions Balance at end of Period Charged to Costs Charged to Other Describe of Period and Expenses Accounts-Describe Deducted from asset accounts: Allowance for doubtful and returns Year ended July 1, 1995 $3,275,000 $3,311,000 $ 36,000 $ 988,000 $5,634,000 Year Ended July 2, 1994 $5,537,000 $3,886,000 $(1,658,000)(2) $4,490,000(1) $3,275,000 Year Ended July 3, 1993 $5,413,000 $2,025,000 $ 353,000(2) $2,254,000(1) $5,537,000 NOTES: (1) Uncollectible accounts written off. (2) Net change in sales allowances charged to income as a reduction of sales.
EX-4 2 AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT (this "Amendment"), dated as of June 9, 1995, is by and among DELTA WOODSIDE INDUSTRIES, INC., a South Carolina corporation (the "Borrower"); the Lenders party hereto (the "Lenders"); NATIONSBANK, N.A. (CAROLINAS) (formerly named NationsBank of North Carolina, N.A.), a national banking association, as agent for the Lenders (in such capacity, the "Agent"); and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association, and THE BANK OF NEW YORK, a New York banking association, as co-agents for the Lenders (in such capacity, the "Co-Agents"). W I T N E S S E T H: WHEREAS, pursuant to a Credit Agreement dated as of September 7, 1994 (the "Existing Credit Agreement") among the Borrower, the Lenders, the Agent and the Co-Agents, and the other agreements and instruments executed in connection therewith (such agreements and instruments, as amended from time to time, being hereinafter referred to as the "Existing Credit Documents"), the Lenders have extended commitments to make certain credit facilities available to the Borrower; and WHEREAS, the Borrower and the Lenders have agreed to make certain amendments to the Existing Credit Agreement; NOW, THEREFORE, in consideration of the agreements herein contained, the parties hereby agree as follows: PART I DEFINITIONS SUBPART 1.1. Certain Definitions. Unless otherwise defined herein or the context otherwise requires, the following terms used in this Amendment, including its preamble and recitals, have the following meanings: "Amended Credit Agreement" means the Existing Credit Agreement as amended hereby. "Amendment No. 1 Effective Date" is defined in Subpart 3.1. SUBPART 1.2. Other Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including its preamble and recitals, have the meanings provided in the Amended Credit Agreement. PART II AMENDMENTS TO EXISTING CREDIT AGREEMENT Effective on (and subject to the occurrence of) the Amendment No. 1 Effective Date, the Existing Credit Agreement is hereby amended in accordance with this Part II. Except as so amended, the Existing Credit Agreement and all other Credit Documents shall continue in full force and effect. SUBPART 2.1. Amendments to Section 1.1. Section 1.1 of the Existing Credit Agreement is hereby amended by: (i) inserting, in the alphabetically appropriate places, the following definitions: "Amendment No. 1" means that certain Amendment Agreement, dated as of June 9, 1995, among the Borrower, the Lenders, the Agent and the Co-Agents amending this Agreement as then in effect. "Amendment No. 1 Effective Date" has the meaning assigned to such term in Amendment No. 1. (ii) amending the definition of "Interest Coverage Ratio" to read in its entirety as follows: "Interest Coverage Ratio" means, as of any date of determination for the applicable Calculation Period then ended, the ratio of (i) Consolidated Net Income of the Borrower and its Consolidated Subsidiaries (before Consolidated Interest Expense and Consolidated Income Tax Expense) for such Calculation Period to (ii) Consolidated Interest Expense of the Borrower and its Consolidated Subsidiaries for such Calculation Period. For purposes hereof, (A) the term "Calculation Period" means (1) as of the last day of the fourth Fiscal Quarter of Fiscal Year 1995 and the last day of the first Fiscal Quarter of Fiscal Year 1996, the period of one Fiscal Quarter then ended, (2) as of the last day of the second Fiscal Quarter of Fiscal Year 1996, the period of two consecutive Fiscal Quarters then ended, (3) as of the last day of the third Fiscal Quarter of Fiscal Year 1996, the period of three consecutive Fiscal Quarters then ended and (4) as of the last day of the fourth Fiscal Quarter of Fiscal Year 1996 and the last day of each Fiscal Quarter thereafter the period of four consecutive Fiscal Quarters then ended, and (B) the term "Consolidated Interest Expense", in respect of any period, shall exclude any amount of litigation reserve of the Borrower as of April 1, 1995 which is subsequently reclassified in accordance with GAAP as interest expense. SUBPART 2.2. Amendment to Section 4.3. Section 4.3 of the Existing Credit Agreement is hereby amended by inserting the following subsection (b)(iii): (iii) The aggregate Commitments of the Lenders shall be reduced as of the last day of Fiscal Year 1996 and each Fiscal Year thereafter by $15,000,000. The annual Commitment reduction required pursuant to this clause (iii) shall be in addition to any Commitment reductions pursuant to this Section 4.3 during the related Fiscal Year. SUBPART 2.3. Amendments to Section 9.1. Subsections (a), (d), and (e) of Section 9.1 are amended to read in their entireties as follows: SECTION 9.1. Financial Ratios. Permit: (a) Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth of the Borrower and its Consolidated Subsidiaries as of the last day of any Fiscal Quarter occurring on or after the last day of Fiscal Year 1995 to be less than $240,000,000, increased on a cumulative basis as of the last day of each Fiscal Year thereafter by 50% of Consolidated Net Income of the Borrower and its Consolidated Subsidiaries for the Fiscal Year then ended (but not decreased to the extent that Consolidated Net Income for any Fiscal Year is a negative number). (d) Interest Coverage Ratio. The Interest Coverage Ratio to be less than the following proportions at the following times: (i) as of the last day of the fourth Fiscal Quarter of Fiscal Year 1995 and the last day of the first Fiscal Quarter of Fiscal Year 1996, 1.50 to 1.00; (ii) as of the last day of the second Fiscal Quarter of Fiscal Year 1996, 2.00 to 1.00; (iii) as of the last day of the third Fiscal Quarter of Fiscal Year 1996, 2.25 to 1.00; and (iv) as of the last day of the fourth Fiscal Quarter of Fiscal Year 1996 and the last day of each Fiscal Quarter thereafter, 2.50 to 1.00. (e) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio as of the last day of Fiscal Year 1996 and the last day of each Fiscal Year thereafter to be less than 1.25 to 1.00. PART III CONDITIONS TO EFFECTIVENESS SUBPART 3.1. Amendment No. 1 Effective Date. This Amendment shall be and become effective as of the date hereof (the "Amendment No. 1 Effective Date") when all of the conditions set forth in this Subpart 3.1 shall have been satisfied, and thereafter this Amendment shall be known, and may be referred to, as "Amendment No. 1." SUBPART 3.1.1. Execution of Counterparts of Amendment. The Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Agent) of this Amendment, which collectively shall have been duly executed on behalf of the Borrower and the Majority Lenders. In addition, each of the Subsidiary Guarantors shall have consented to the terms and conditions of this Amendment. SUBPART 3.1.2. Amendment Fee. The Borrower shall have paid in immediately available funds to the Agent on the date hereof an amendment fee equal to 10 basis points on the aggregate Commitments of the Lenders (the "Amendment Fee"). The Agent shall pay to each Lender on the date hereof such Lender's ratable portion (based on the proportion that the Commitment of such Lender bears to the aggregate Commitments of all the Lenders) of the Amendment Fee. PART IV MISCELLANEOUS SUBPART 4.1. Cross-References. References in this Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this Amendment. SUBPART 4.2. Instrument Pursuant to Existing Credit Agreement. This Amendment is a Loan Document executed pursuant to the Existing Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Existing Credit Agreement. SUBPART 4.3. References in Other Loan Documents. At such time as this Amendment No. 1 shall become effective pursuant to the terms of Subpart 3.1, all references in the Loan Documents to the "Credit Agreement" shall be deemed to refer to the Credit Agreement as amended by this Amendment No. 1. SUBPART 4.4. Representations and Warranties. The Borrower hereby represents and warrants that (i) the representations and warranties contained in Article 6 of the Existing Credit Agreement (as amended by this Amendment) are correct on and as of the date hereof as though made on and as of such date and after giving effect to the amendments contained herein (except that representations and warranties expressly stated in the Existing Credit Agreement to be made as of a particular date shall only be deemed made as of that date) and (ii) no Default or Event of Default exists on and as of the date hereof. SUBPART 4.5. Expenses. The Borrower agrees to pay all reasonable out-of-pocket expenses (including fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution and delivery of this Amendment. SUBPART 4.6. Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SUBPART 4.7. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NORTH CAROLINA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. SUBPART 4.8. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the day and year first above written. Borrower DELTA WOODSIDE INDUSTRIES, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President & CFO Agent NATIONSBANK, N.A. (CAROLINAS), as Agent By: /s/ E. Phifer Helms Title: Senior Vice President Co-Agents BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Co-Agent By: /s/ Wayne H. Riess Title: Vice President THE BANK OF NEW YORK, as Co-Agent By: /s/ Gregory L. Batson Title: Vice President [Signatures Continued] Lenders NATIONSBANK, N.A. (CAROLINAS) By:/s/ E. Phifer Helms Title: Senior Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Wayne H. Riess Title: Vice President THE BANK OF NEW YORK By: /s/ Gregory P. Shefrin Title: Assistant Vice President FIRST UNION NATIONAL BANK OF SOUTH CAROLINA By: /s/ Harry C. Farthing Title: Vice President WACHOVIA BANK OF SOUTH CAROLINA By: /s/ Thomas F. Snider Title: Vice President THE BANK OF NOVA SCOTIA By: Title: CHASE MANHATTAN BANK, N.A. By: Title: PNC BANK, NATIONAL ASSOCIATION By: /s/ James A. Fink Title: Vice President NATWEST BANK N.A. (formerly NATIONAL WESTMINSTER BANK USA) By: /s/ Kurt S. Pohmer Title: Assistant Vice President [Signatures Continued CONSENTED AND AGREED TO BY: ALCHEM CAPITAL CORPORATION By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO ARMONIA TEXTIL, SOCIEDAD ANONIMA By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO CARGUD, SOCIEDAD ANONIMA By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO DELTA CONSOLIDATED CORPORATION By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO DELTA MERCHANDISING, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO DELTA MILLS, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO DUCK HEAD APPAREL COMPANY, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO NAUTILUS DIRECT, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO NAUTILUS INTERNATIONAL, INC. By: /s/ Bettis C. Rainsford Title: Executive Vice President and CEO EX-99 3 1995 ANNUAL REPORT (Delta Woodside logo appears here) CONTENTS Common Stock Market Prices and Dividends.............................................Inside Front Cover Selected Financial Data..................................................1 Letter to Shareholders.................................................2-3 Management's Discussion and Analysis............................................................4-10 Operations by Industry Segment............................................................11-13 Report of KPMG Peat Marwick LLP...........................................................14 Consolidated Financial Statements.........................................................15-28 Corporate Directory..............................................Inside Back Cover COMMON STOCK MARKET PRICES AND DIVIDENDS The Common Stock of the Company is listed on the New York Stock Exchange under the symbol DLW. The stock transfer agent for Delta Woodside Industries, Inc. is First Union National Bank of North Carolina, Shareholder Services Group, Two First Union Center, Charlotte, North Carolina 28288-1154. The following table presents a two-year history of the high and low stock sales prices for the Common Stock, as reported by the New York Stock Exchange composite tape, and cash dividends declared per share:
1995 1994 FISCAL QUARTERS: High Low High Low First Quarter $12 $10 5/8 $11 7/8 $10 1/4 Second Quarter 11 1/2 9 1/8 11 3/8 10 3/8 Third Quarter 11 8 3/8 12 1/2 9 3/4 Fourth Quarter 9 3/8 7 5/8 12 1/4 10 7/8
Cash Dividends Declared First Quarter $.10 $.10 Second Quarter .10 .10 Third Quarter .10 .10 Fourth Quarter .10 .10
Fiscal Year: The Company's operations are based on a fifty-two or fifty-three week fiscal year ending on the Saturday closest to June 30. As of August 22, 1995 there were approximately 2,201 holders of record of the Company's Common Stock. Dividend payments depend upon the Company's earnings, financial condition, capital requirements and other relevant factors. The most restrictive of the Company's loan covenants in the loan facility, described in Note E, requires a certain minimum tangible net worth. Under this loan covenant at July 1, 1995, retained earnings of approximately $10.5 million are available for dividends during fiscal 1996. SELECTED FINANCIAL DATA In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share Data
OPERATIONS (1) 1995 1994 1993 1992 1991 1990 1989 1988 Net Sales $597,541 $613,776 $686,239 $5705,037 $590,019 $500,894 $569,052 $488,568 Cost of Goods Sold 499,093 514,840 564,352 563,827 480,396 427,788 470,265 409,231 Gross Profit 98,448 98,936 121,887 141,210 109,623 73,106 98,787 79,337 Operating Profit (Loss) excluding Litigation, Restructuring Charges 25,058 21,582 55,863 80,628 61,374 37,591 69,245 54,349 Litigation (Credit) Charge (7,000) 27,096 Restructuring (Credit) Charges (553) 9,199 2,265 Operating Profit (Loss) 32,611 (14,713) 55,863 80,628 61,374 35,326 69,245 54,349 Corporate Expense 3,448 3,300 3,278 3,802 2,140 2,249 3,009 2,002 Earnings (Loss) Before Interest and Taxes 31,367 (18,013) 52,585 76,826 59,234 33,077 66,513 54,209 Interest Expense 13,646 8,639 7,775 11,479 22,115 25,768 20,929 12,685 Income (Loss) Before Income Taxes 17,770 (25,930) 45,172 65,801 37,543 8,029 45,940 41,705 Income Tax Expense (Benefit) 7,672 (8,633) 16,968 25,786 13,600 2,020 15,643 13,850 Income (Loss) Before Cumulative Effect of Accounting Change 10,098 (17,297) 28,204 40,015 23,943 6,009 30,297 27,855 Cumulative Effect of Accounting Change -- Income Taxes (875) Net Income (Loss) 10,098 (17,297) 27,329 40,015 23,943 6,009 30,297 27,855 FINANCIAL DATA (1) Cash Flow (Net Income (Loss) plus Depreciation and Amortization) (8) 34,690 9,596 46,148 54,843 39,041 19,263 40,025 32,421 Capital Expenditures/Capital Leases 41,834 29,856 49,575 42,916 15,793 19,250 46,048 32,141 Depreciation and Amortization (8) 24,592 26,893 18,819 14,828 15,098 13,254 9,728 4,566 Working Capital 286,887 241,950 262,111 266,356 105,498 71,967 78,726 60,811 Long-Term Debt and Capital Leases 219,119 161,948 130,464 110,414 71,189 85,704 88,791 35,254 Funded Debt (2)(5) 219,395 162,812 132,200 112,133 188,352 227,097 223,397 118,528 Shareholders' Equity (3) 286,499 284,877 336,249 318,781 172,647 127,575 127,169 86,462 Capital Employed (4) 505,894 447,689 468,449 430,914 360,999 354,672 350,566 204,990 Total Assets (5) 610,296 567,003 573,946 524,756 434,424 414,497 331,066 177,300 FINANCIAL RATIOS (1) Net Sales divided by Inventory 2.6 3.0 3.5 4.0 4.3 3.5 4.4 6.3 Net Sales divided by Accounts Receivable 4.9 5.2 4.9 4.3 4.2 4.5 4.6 4.9 Net Sales divided by Capital Employed 1.2 1.4 1.5 1.6 1.6 1.4 1.6 2.4 Operating Income (Loss) as % of Capital Employed 6.2 (3.9) 11.3 17.9 16.5 9.5 19.1 26.5 Current Ratio 4.8 3.5 4.1 4.4 1.6 1.4 1.7 2.2 Interest Coverage 2.3 (2.1) 6.8 6.7 2.7 1.3 3.2 4.3 Gross Profit as % of Sales 16.5 16.1 17.8 20.0 18.6 14.6 17.4 16.2 Pretax Income (Loss) as % of Sales 3.0 (4.2) 6.6 9.3 6.4 1.6 8.1 8.5 Net Income (Loss) as % of Sales 1.7 (2.8) 4.0 5.7 4.1 1.2 5.3 5.7 Net Income (Loss) as % of Beginning Equity 3.5 (5.1) 8.6 23.2 18.8 4.7 35 47 COMMON STOCK DATA (PER SHARE) (1)(6) Net Income (Loss) .42 (.70) 1.03 1.62 1.27 .32 1.65 1.60 Dividends .40 .40 .40 .35 .30 .30 .20 .05 Book Value 11.76 11.75 12.72 12.07 8.17 6.76 6.82 4.97 Price Range (7) -- High 12 12 1/2 18 3/8 25 1/4 14 1/8 17 7/8 16 1/2 14 1/4 -- Low 7 5/8 9 3/4 11 1/8 13 1/2 3 5/8 6 1/2 8 3/4 5 1/4 Weighted Average Shares Outstanding 24,317 24,550 26,421 24,670 18,879 18,733 18,338 17,385 Approximate Number of Shareholders 2,154 2,221 2,340 2,255 2,062 2,575 1,475 1,250 OPERATIONS (1) 1987 1986 Net Sales $417,461 $141,810 Cost of Goods Sold 343,623 118,909 Gross Profit 73,838 22,901 Operating Profit (Loss) excluding Litigation, Restructuring Charges 49,102 15,027 Litigation (Credit) Charge Restructuring (Credit) Charges Operating Profit (Loss) 49,102 15,027 Corporate Expense 1,167 138 Earnings (Loss) Before Interest and Taxes 46,993 14,889 Interest Expense 12,939 5,197 Income (Loss) Before Income Taxes 34,238 9,983 Income Tax Expense (Benefit) 12,667 4,724 Income (Loss) Before Cumulative Effect of Accounting Change 21,571 5,259 Cumulative Effect of Accounting Change -- Income Taxes Net Income (Loss) 21,571 5,259 FINANCIAL DATA (1) Cash Flow (Net Income (Loss) plus Depreciation and Amortization) (8) 24,908 7,494 Capital Expenditures/Capital Leases 7,924 2,478 Depreciation and Amortization (8) 3,337 2,235 Working Capital 63,602 8,808 Long-Term Debt and Capital Leases 38,832 21,530 Funded Debt (2)(5) 115,732 48,263 Shareholders' Equity (3) 59,015 8,803 Capital Employed (4) 174,747 57,066 Total Assets (5) 149,116 56,736 FINANCIAL RATIOS (1) Net Sales divided by Inventory 5.8 8.2 Net Sales divided by Accounts Receivable 4.5 4.6 Net Sales divided by Capital Employed 2.4 2.5 Operating Income (Loss) as % of Capital Employed 27.0 26.6 Current Ratio 2.2 1.4 Interest Coverage 3.6 2.9 Gross Profit as % of Sales 17.7 16.1 Pretax Income (Loss) as % of Sales 8.2 7.0 Net Income (Loss) as % of Sales 5.2 3.7 Net Income (Loss) as % of Beginning Equity 245 148 COMMON STOCK DATA (PER SHARE) (1)(6) Net Income (Loss) 1.36 .35 Dividends -- -- Book Value 3.41 .59 Price Range (7) -- High 16 1/2 -- -- Low 9 7/8 -- Weighted Average Shares Outstanding 15,840 15,000 Approximate Number of Shareholders 1,300 N/A
(1) Financial data reflect the following major business additions from their respective dates of acquisition: (i) a portion of the knit apparel operation acquired on September 30, 1985; (ii) the major portion of the woven fabrics operation and the major portion of the knitted fabrics operation acquired at the beginning of fiscal 1987; (iii) a portion of the knitted fabrics operation acquired on December 27, 1986; (iv) a portion of the knit apparel operation and a portion of the woven apparel operation acquired on September 7, 1988; (v) a portion of the woven apparel operation (including the "Duck Head" label) acquired on February 1, 1989; and (vi) Nautilus International and a portion of the affiliated license products company acquired January 20, 1993. (2) Funded Debt includes long- and short-term debt, capital leases and offset factor borrowings. See Note 4. (3) Shareholders' Equity at June 27, 1992 and June 29, 1991 includes approximately $113 million and $25.5 million of net proceeds from sales of Common Stock in October 1991 and June 1991, respectively. (4) Capital Employed includes shareholders' equity and funded debt. (5) Prior to fiscal 1990, the Company offset certain assigned receivables and borrowings relating to its former factor agreements. Had these items not been offset, the Company's accounts receivable and notes payable at the end of the 1989, 1988, 1987 and 1986 fiscal years would have each been increased by approximately $79.4 million, $73.6 million, $64.7 million and $16.2 million, respectively. (6) Per share data and weighted average common shares outstanding for fiscal 1987, 1986 and 1985 give retroactive effect to the issuance of 15,000,000 shares of Common Stock relating to the reorganization of companies under common control effective November 25, 1986. The number of shares outstanding at July 1, 1995, July 2, 1994 and July 3, 1993 for financial reporting purposes was 24,357,000, 24,246,000 and 26,437,000 respectively. (7) The Company's Common Stock began trading publicly in February 1987. (8) Depreciation and amortization include certain write-downs of property and equipment. 1 TO OUR FELLOW SHAREHOLDERS (Photo of E. Erwin Maddrey, II appears here) E. ERWIN MADDREY, II To Our Fellow Shareholders: Although our fiscal 1995 net sales and operating profits from continuing businesses (excluding special credits and charges) moved up slightly from last fiscal year, we do not consider our results satisfactory. Several of our business units operated in difficult markets caused by a poor climate for soft goods sales at retail. Poor retail times are followed by good periods. Our emphasis this past year has been to continue our efforts to reduce manufacturing costs so that we can compete on a world-wide basis. We began our long-range program to modernize our woven textile facilities, operated by Delta Mills Marketing Company. This is Delta Woodside's largest operation and one that has been consistently profitable ever since we acquired it in 1986. This operation is a leader in bottomweight finished fabrics, and we intend to expand its position in these markets. During fiscal 1996, we will move a large spinning and weaving mill out of commodity lightweight unfinished fabric (printcloth) production into production of heavier fabrics for finishing. Simultaneously, we will add a finishing line to our continuous finishing plant to accommodate this additional production for finishing. During fiscal 1995, we began replacing older weaving machines with new, more efficient, machines. We will continue to do this during fiscal 1996. This long-term program has caused varying degrees of internal disruption to the operations of this business, and we expect these disruptions to continue as this program progresses. We began site preparation for our new Duck Head distribution center in Winder, Georgia during fiscal 1995. We expect to begin moving finished goods into this new facility towards the end of this calendar year, and to open our new Duck Head Apparel and Duck Head Retail Outlet Stores headquarters in this facility early in calendar 1996. This should lower our branded apparel distribution costs and contribute to more efficient administrative operations for these two businesses. During fiscal 1995, we intentionally pulled back our branded apparel business volume while we re-engineered the systems that had previously failed to support the rapid growth of this business in previous years. Consequently, service to our retail customers during our Spring and Fall 1995 seasons showed great improvement over that of previous years. We feel that we are now ready to support a regrowth of this business with reliable systems. Due to prior years' failure to properly match inventory deliveries to our facilities with commitments to our retail customers, our branded apparel inventories have gotten too high. Since our branded apparel lines are traditionally styled, we believe that it is in the Company's best interest to reduce excess inventory in an orderly manner over a period of time rather than sell them in large quantities at distressed prices. We are opening several Duck Head Clearance Stores to offer this merchandise to consumers at prices attractive to them and to us. Our knitted non-branded apparel operation, Delta Apparel, had a record year both in sales and operating profits. Net sales passed the $100 million mark and profit margins were improved substantially. During fiscal 1995, we decided to start up a new sewing operation in Honduras to lower our average costs of producing garments for this business. We have begun hiring and training on our selected site, near San Pedro Sula, and expect to begin occupying our sewing facility before the end of the 1995 calendar year. Our knitted textile operation, Stevcoknit Fabrics, began fiscal 1995 with the advantages from its modernization and consolidation programs completed during fiscal 1994. Positive results were achieved for the first nine months of fiscal 1995, but beginning in March of this year, demand for fabrics prepared for printing and sold to converters slowed dramatically. This market decline impacted our knitted textile plant utilization 2 severely, and results from this business in the last quarter of fiscal 1995 were negative. Lack of any substantial demand for these products is expected to continue at least through the first half of fiscal 1996. We have made the decision to enter the consumer market with products from our Nautilus fitness equipment business. We offered our first products for consumers through direct sales during fiscal 1995. We expect to put costs into this effort for at least two years before sales rise to a breakeven level, but we are aware that the consumer market for fitness products is substantially larger than Nautilus' traditional commercial markets. At the same time, we intend to maintain our position as a leading supplier of fitness equipment to these traditional Nautilus markets. We are moving into fiscal 1996 with consumer apparel purchases still remaining at relatively low levels. At the same time, imports of textiles and apparel have continued to increase. The combination of these factors, together with historically high-priced cotton and synthetic fibers, will continue to squeeze our profit margins during the first half of fiscal 1996. However, we have been dramatically reducing our manufacturing costs for a number of years now, and have confidence that these improvements in our competitive position will insure the continued viability of our company as the movement of textile and apparel production and marketing around the world accelerates. We are therefore optimistic that we will begin to see better earnings performance in the second half of fiscal 1996. (Photo of Bettis C. Rainsford appears here) BETTIS C. RAINSFORD (Signature of E. Erwin Maddrey, II) E. Erwin Maddrey, II President and Chief Executive Officer (Signature of Bettis C. Rainsford) Bettis C. Rainsford Executive Vice President, Treasurer and Chief Financial Officer 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED COMPANY RESULTS FISCAL 1995 VERSUS FISCAL 1994 Consolidated net sales for the year ended July 1, 1995 were $597.5 million as compared to $613.8 million in the fiscal year ended July 2, 1994, a decrease of 3%. Sales in fiscal 1994 included $17.5 million from the Company's Harper Brothers operation which was sold in June of 1994. Net sales in fiscal 1995 increased in the textile segment and decreased in the apparel segment as compared with net sales in fiscal 1994. Consolidated gross profit margin for fiscal 1995 was 16.5%, as compared to the gross profit margin of 16.1% in the prior fiscal year. Gross margins improved slightly in the apparel segment, and decreased in the Company's textile and "other business" segment. Consolidated selling, general, and administrative expense for fiscal 1995 totaled $77.0 million, or 13% of net sales, compared to $82.2 million, or 13% of net sales, incurred in fiscal 1994. (Bar graph appears here with the following plot points) NET SALES FISCAL YEARS ENDED JUNE OR JULY (IN THOUSANDS OF DOLLARS) 1990 1991 1992 1993 1994 1995 500,894 590,019 705,037 686,239 613,776 597,541 Net interest expense totaled $13.6 million for the year ended July 1, 1995 as compared to $7.9 million incurred in fiscal 1994, due to the combination of higher interest rates and higher average debt levels. The Company's outstanding debt at July 1, 1995 was $219.4 million compared with $162.8 million at July 2, 1994. Final settlement of the Alabama litigation, higher accounts receivable and inventories, and higher capital expenditures accounted for the major part of the Company's need for additional borrowed funds during the latest fiscal year. The effective income tax rates for the 1995 and 1994 fiscal years were 43% and 33%, respectively. The lower tax rate for fiscal 1994 was primarily due to the different effects that permanent nondeductible tax items had on the pretax losses in fiscal 1994, as compared to the effect on pretax income in fiscal 1995. Net income for the year ended July 1, 1995 was $10.1 million as compared to a net loss of $17.3 million in the year ended July 2, 1994. Net income for fiscal 1995 included pretax credits to income of $7.6 million from the reversal of certain reserves established in fiscal 1994 and referenced in the next sentence. In fiscal 1994, the Company charged pretax income for $27.1 million to establish a reserve for a judgment entered by an Alabama court with respect to a jury award made on November 24, 1993, to three former independent sales representatives of a subsidiary of the Company (the "Alabama litigation"). During fiscal 1995, the Alabama litigation was settled, and all reserves and accruals relating to this action were adjusted appropriately. In addition, in fiscal 1994 the Company charged pretax income $9.2 million for expenses related to restructuring decisions made during that year. Without these special credits and charges, net income of approximately $5.5 million and $5.7 million would have resulted for fiscal years 1995 and 1994, respectively. The Company also retained approximately $1.8 million in its restructuring reserve, principally for rent payments on its former Harper Brothers facilities not yet sublet, and for costs associated with the centralization of Duck Head's distribution system. Net income for fiscal 1995 includes life insurance proceeds of $2.2 million. Consolidated inventories totaled $226.0 million at July 1, 1995 as compared to $203.8 million at July 2, 1994, an increase of 11%. Ending inventories were higher in all three of the Company's business segments at July 1, 1995 than at July 2, 1994, due principally to shipments during the last several months of fiscal 1995 not reaching anticipated levels. The Company's order backlog at July 1, 1995 stood at $140.0 million as compared to $151.5 million at July 2, 1994, a decrease of $11.5 million, or 8%. Order backlogs were lower in the textile and apparel segments, and higher in the Company's "other business" segment at the end of fiscal 1995 than they were at the end of fiscal 1994. 4 The Company believes that its profit margins for the first half of fiscal 1996 will remain under severe pressure due principally to historically high-priced cotton and synthetic fibers, and due to continued weak demand for knit textiles prepared for printing. FISCAL 1994 VERSUS FISCAL 1993 Consolidated net sales for the fiscal year ended July 2, 1994 (52 weeks) were $613.8 million, a decrease of $72.4 million from the prior year's $686.2 million (53 weeks). Net sales in fiscal 1994 decreased in both the textile and apparel segments as compared with net sales in fiscal 1993. Consolidated gross profit margin for fiscal 1994 decreased to 16% compared to 18% in fiscal 1993. Gross margins in fiscal 1994 were impacted by disruption costs associated with the consolidation of the Company's knit finishing plants, by low prices on the sale of closeout apparel merchandise, and by cotton costs rising more rapidly than prices in the January-June 1994 period. Consolidated selling, general, and administrative expense for fiscal 1994 was $82.2 million, or 13% of sales, compared to $73.4 million, or 11% of sales in fiscal 1993. In fiscal 1994, the Company charged income for $27.1 million to establish a reserve for litigation. The Alabama litigation was settled in June of fiscal 1995 and the Company reduced the litigation reserve by $7 million. (Bar graph appears here with the following plot points) NET INCOME (LOSS) FISCAL YEARS ENDED JUNE OR JULY (IN THOUSANDS OF DOLLARS) 1990 1991 1992 1993 1994 1995 6,009 23,943 40,015 27,329 (17,297) 10,093 In view of weak market conditions and the Company's poor performance in the July to December 1993 period, the Company made certain restructuring decisions at the end of its second 1994 fiscal quarter. Among others, these decisions included the sale of the office products division, the closing of a former spinning plant building and discontinuing the girls and juniors line in the Duck Head Apparel division. The remainder of the restructuring charges to pretax income incurred in the second quarter of fiscal 1994 involved several smaller projects, principally those relating to the consolidation of the physical facilities of the knit textile division. These restructuring decisions included write-downs of $1.6 million of goodwill and $2.1 million of property, plant and equipment. Net interest expense totaled $7.9 million during fiscal 1994 as compared to $7.4 million in fiscal 1993. The Company's outstanding debt at July 2, 1994 was $162.8 million compared with $132.2 million at July 3, 1993. During the first six months of fiscal 1994, the Company repurchased 2.3 million shares of its Common Stock for approximately $25.3 million. The effective income tax rates for the 1994 and 1993 fiscal years were 33% and 39%, respectively. The lower tax rate for fiscal 1994 was primarily due to the different effects that permanent nondeductible tax items had on the pretax losses in fiscal 1994, as compared to the effect on pretax income in fiscal 1993. Net losses for the year ended July 2, 1994 were $17.3 million compared with net income of $27.3 million for the prior fiscal year. If the charges taken in fiscal 1994 for the Alabama litigation and restructuring were excluded, a fiscal 1994 net income of approximately $5.7 million would have resulted. Consolidated order backlogs totaled $151.5 million at July 2, 1994, a decrease of $10.6 million, or 7%, from total backlogs at July 3, 1993. Order backlogs for woven textiles and branded apparel were lower, and backlogs for knitted textiles and apparel were higher, at the end of fiscal 1994 as compared to fiscal 1993. The Company believes that order backlogs are generally indicative of future sales. DIVISION RESULTS TEXTILE SEGMENT FISCAL 1995 VERSUS FISCAL 1994 The Company's textile segment consists of finished woven and knitted textile fabrics sold principally to manufacturers of apparel products. The Company also sells greige goods to fabric converters for various end uses. Net sales in the Company's textile segment increased from $391.4 million in the fiscal year ended July 2, 1994 to $393.7 million in the fiscal year ended July 1, 1995. Sales of both woven and knitted textiles were slightly higher in the latest fiscal year than in the prior fiscal year. In the woven textile sector, lower sales of unfinished 5 fabrics were more than offset by higher sales of finished cotton and blended fiber fabrics. Sales of woven textiles accounted for approximately 47%, 47% and 49% of the Company's consolidated net sales for fiscal years 1993, 1994 and 1995, respectively. Sales of knit textiles accounted for approximately 17%, 17% and 17% in each of the three most recent fiscal years. (Bar graph appears here with the following plot points) NET INCOME AS A % OF SALES FISCAL YEARS ENDED JUNE OR JULY 1990 1991 1992 1993 1994 1995 1.2 4.1 5.7 4.0 -2.8 1.7 Gross profit margins in the textile segment declined from 12% in fiscal 1994 to 11% in fiscal 1995. Gross margins for knitted textiles improved from fiscal 1994 to fiscal 1995, despite a dramatic slowdown since March 1995 in demand for textiles knitted and prepared for printing. Gross margins for woven textiles declined from fiscal 1994 to fiscal 1995, being adversely impacted by poor prices obtained in sales of unfinished fabrics, by higher raw material costs, and by certain manufacturing disruptions caused by the Company's plant modernization program. The Company expects continuing disruptions to occur as the major modernization program in its woven textile facilities progresses over the next several years. The purpose of this large capital project is to expand the Company's position in bottomweight finished fabric markets and to lower production costs. Selling, general, and administrative expenses in the textile segment for the year ended July 1, 1995 totaled $22.1 million as compared with $23.9 million in the fiscal year ended July 2, 1994. As a percent of net sales, these costs were 5.6% in fiscal 1995 as compared to 6.1% in fiscal 1994. (Bar graph appears here with the following plot points) SHAREHOLDERS' EQUITY FISCAL YEARS ENDED JUNE OR JULY (IN THOUSANDS OF DOLLARS) 1990 1991 (1) 1992 (2) 1993 1994 1995 127,575 172,647 318,781 336,249 284,877 286,499 1 1991 Common Stock Offering Proceeds: $25,497 2 1992 Common Stock Offering Proceeds: $113,291 Operating profits in the textile segment increased $2.7 million, or 14%, from fiscal 1994 to fiscal 1995. During fiscal 1995, the textile segment contributed 66% of the Company's consolidated net sales and 45% of the Company's consolidated gross profit, as compared to 64% and 46%, respectively, in fiscal 1994. Textile segment inventories were 3.3% higher at July 1, 1995 than at July 2, 1994. Knitted textiles accounted for the increase in the segment's inventory level, due to a marked slowdown towards the end of fiscal 1995 in new orders for fabric prepared for printing. The textile segment's capital expenditures totaled approximately $35.2 million for fiscal 1995. The major portion of these expenditures were related to the woven textile long-term modernization project. The Company expects that its woven textile facilities will operate at, or near full capacity, during fiscal 1996. However, its knitted textile facilities are not expected to run near full capacity for at least the first six months of fiscal 1996. Cotton prices reached a twentieth century record high during the last months of fiscal 1995. At the same time, prices of synthetic fibers utilized by the Company also escalated. The Company has been able to negotiate higher prices for many of its finished textile fabrics, but not at prices high enough to cover increases in its current average fiber costs. Profits in the textile segment are sensitive to the amount of its manufacturing capacity that is utilized, to the cost and availability of its principal raw materials, and to the mix of goods produced. 6 FISCAL 1994 VERSUS FISCAL 1993 Net sales in the textile segment decreased from $444.9 million in the fiscal year ended July 3, 1993 to $391.4 million in the fiscal year ended July 2, 1994. Net sales of knitted textiles were down 14% from fiscal 1993 due to the lower number of units sold, to lower unit sales prices, and to disruptions in the Company's knit fabric finishing operations resulting from the combining of two finishing plants into one during the year. Average prices in all knit fabric categories declined during most of fiscal 1994 as compared to fiscal 1993. Sales of woven textiles were 11% lower in fiscal 1994 than in fiscal 1993. Higher sales of all cotton finished fabric (1% increase) were more than offset by a sharp decline in sales of synthetic fiber finished fabrics (19% decrease) and greige goods (24% decrease). (Bar graph appears here with the following plot points) EARNINGS (LOSS) PER SHARE FISCAL YEARS ENDED JUNE OR JULY DOLLARS PER SHARE 1990 1991 1992 1993 1994 1995 .32 1.27 1.62 1.03 -.70 .42 1990 Weighted Average Shares Outstanding--18,733,000 1991 Weighted Average Shares Outstanding--18,879,000 1992 Weighted Average Shares Outstanding--24,670,000 1993 Weighted Average Shares Outstanding--26,421,000 1994 Weighted Average Shares Outstanding--24,550,000 1995 Weighted Average Shares Outstanding--24,317,000 Gross profit margins in the textile segment declined from 13% in fiscal 1993 to 12% in fiscal 1994. While gross profit margins in woven textiles were equal in fiscal 1994 to those of the prior year, margins in knitted textiles were 4.4 percentage points lower. The drop in knitted textile margins was due to the lower unit selling prices noted above, and to high unfavorable manufacturing variances associated with the disruption caused by the finishing plants' consolidation. Selling, general and administrative costs in the textile segment were slightly higher in fiscal 1994 than in fiscal 1993. As a percent of net sales, these costs were 6.1% in fiscal 1994 as compared to 5.2% in fiscal 1993. Operating profits in the textile segment decreased $15.1 million, or 43%, from fiscal 1993 to fiscal 1994. The lower volume and lower gross margins discussed above were the principal contributors to this decrease. The textile segment contributed 64% and 65% of the Company's consolidated net sales and 46% and 47% of the Company's consolidated gross profit for the fiscal years 1994 and 1993, respectively. Textile segment inventories increased by $8.2 million from the end of fiscal 1993 to the end of fiscal 1994. The major part of this increase was in woven greige goods inventory. The textile segment's capital expenditures totaled approximately $18 million for fiscal 1994. The major portion of this amount was for the knitted textile plant consolidation project and knitted fabric finishing equipment. APPAREL SEGMENT FISCAL 1995 VERSUS FISCAL 1994 The Company's apparel segment consists of woven and knit branded apparel sold primarily to retailers and knit apparel sold to screen printers, distributors, and private label accounts. Net sales in this segment decreased by $2.8 million, or 2%, from fiscal 1994 to fiscal 1995. Increased sales of non-branded knit apparel were more than offset by decreases in sales of branded apparel. Increased sales of non-branded knit apparel were due to both increased units and average prices. Lower sales of branded apparel were due to fewer units being sold. Sales of non-branded knit apparel accounted for approximately 12%, 14%, and 17% of the Company's consolidated net sales for fiscal years 1993, 1994 and 1995, respectively. Sales of branded apparel accounted for approximately 19%, 15% and 12% for fiscal years 1993, 1994 and 1995, respectively. During fiscal 1995, the Company decided to establish a new sewing operation for non-branded knit apparel items in Honduras. The Company has begun hiring and training at its selected site, and expects to begin occupying this facility before the end of calendar 1995. Construction of the Company's branded apparel distribution center in Winder, Georgia, is in progress. The Company expects to begin moving stock into this new consolidated warehouse in November of 1995, and to open its new Duck Head Apparel and Duck Head Retail Outlet Stores headquarters early in calendar 1996. The Company believes that this facility will lower its branded apparel distribution costs and contribute to more efficient administrative operations for these two businesses. The Company believes that its systems for planning inventory acquisitions and its distribution systems are now operating satisfactorily. 7 Gross profit margins in the apparel segment increased from 20% in fiscal 1994 to 25% in fiscal 1995. Gross margins improved in both non-branded knit apparel as well as branded apparel, due to better average prices for knit non-branded apparel as compared to the prior fiscal year, and to better managed sales of closeout branded apparel as compared to the prior fiscal year. The apparel segment represented 29% of the Company's fiscal 1995 consolidated net sales and 44% of the Company's fiscal 1995 consolidated gross profit, as compared to 29% and 36%, respectively, in fiscal 1994. Selling, general, and administrative expenses in the apparel segment totaled $35.7 million in fiscal 1995, a 4% reduction from fiscal 1994. These expenses were 20% of net sales in fiscal 1995 as compared to 21% in fiscal 1994. Fiscal 1995 operating profits in the apparel segment totaled $14.7 million as compared to an operating loss of $31.3 million in fiscal 1994. When the unusual credit and charges to operating profits referred to earlier are removed from both years, operating profits would have been $7.7 million in fiscal 1995 as compared with an operating loss of $1.3 million in fiscal 1994. Inventories in the apparel segment at July 1, 1995 totaled $127.3 million, compared to $110.3 million at July 2, 1994. Inventories of non-branded knit apparel increased in proportion to the increase in sales of these products. Inventories of branded apparel increased due to sales of these products being less than anticipated. As reported previously, the Company considers a portion of its branded apparel inventories excessive. At July 1, 1995, the Company estimates that $30 to $50 million of this inventory is in excess of its current requirements. Since the Company's branded apparel lines are traditionally styled, the Company believes that it is best to reduce excess inventory in an orderly manner over a period of time rather than to sell these inventories in large quantities at distressed prices. Management has developed a program to reduce these inventories over the next three years through its retail outlet stores and by reducing production. Although the Company feels that it has adequate reserves to cover any future price markdowns of these inventories, no estimate can be made of the range of amounts of loss that are reasonably possible should the program not be successful. Capital expenditures in the apparel segment were $4.8 million during fiscal 1995. These represented improvements in the knitting, fabric finishing, and sewing facilities in this segment. The Company presently is establishing a new sewing facility in Honduras. It is contemplated that the facility will be leased, but the Company may make capitalized leasehold improvements and will make additional capital investments for equipment to be used in this facility. The apparel segment's operating results are dependent in large part on orders from retailers, distributors, and screen printers who supply finished garments to retailers. Generally, when retail sales of apparel are strong, the Company's apparel segment benefits. This segment's operating results are also dependent on the utilization of its owned and leased manufacturing facilities. The Company believes that it will operate its non-branded knit apparel facilities at or near full capacity during fiscal 1996. However, it does not believe that its branded apparel facilities will be fully utilized during part or all of fiscal 1996. A lawsuit with allegations similar to those in the Alabama litigation had been pending in the United States District Court for the Western District of Kentucky. During fiscal 1995, this case was settled out of court for an amount not considered material by the Company. FISCAL 1994 VERSUS FISCAL 1993 Net sales in the apparel segment decreased by $31.1 million to $178.7 million from fiscal 1993 to fiscal 1994. Sales of branded apparel decreased significantly and sales of non-branded knit apparel increased slightly. Sales of branded apparel in fiscal 1994 decreased 26% to $95 million as compared to sales in fiscal 1993, with both unit sales and average unit price being lower in the same comparative period. Sales of non-branded knit apparel increased 3% to $84 million as compared to sales in fiscal 1993, with unit sales being higher and average unit price being slightly lower in the same comparative period. Gross profit margins decreased from 26% in fiscal 1993 to 20% in fiscal 1994. A gross margin increase in knit apparel was more than offset by decreased gross margins in branded apparel and outlet store operations. The apparel segment represented 29% and 31% of the Company's consolidated net sales, and 36% and 44% of the Company's gross profit for the fiscal years 1994 and 1993, respectively. The apparel segment's selling, general, and administrative expenses in fiscal 1994 were $37.1 million as compared to $35.1 million in fiscal 1993. These expenses were 21% of net sales in fiscal 1994 as compared to 17% for fiscal 1993. Fiscal 1994 operating losses for the apparel segment totaled $31.3 million, including $30 million for litigation, as compared to operating profits of $18.9 million in fiscal 1993. Inventories in the apparel segment at July 2, 1994 totaled $110.3 million, compared to $110.0 8 million at July 3, 1993. Branded apparel inventories fell slightly and non-branded knit apparel inventories rose slightly during fiscal 1994. Capital expenditures in the apparel segment were $3.8 million and $10.9 million during fiscal 1994 and 1993, respectively. These represented improvements in the knitting, fabric finishing, and sewing facilities in this segment. (Bar graph appears here with the following plot points) FUNDED DEBT TO EQUITY RATIO* FISCAL YEARS ENDED JUNE OR JULY 1990 1991 1992 1993 1994 1995 1.8 to 1 1.1 to 1 0.4 to 1 0.4 to 1 0.6 to 1 0.8 to 1 *For purposes of this chart only, funded debt includes long-and short-term debt, capital leases and offset factor borrowings. LIQUIDITY AND SOURCES OF CAPITAL During fiscal 1995, the Company financed its operations, capital expenditures, and dividends primarily through borrowings under its bank credit facility. The Company used $15.5 million to fund its operations in fiscal 1995. The Company generated operating cash flows of $32.8 million, and $62.7 million for the 1994 and 1993 fiscal years, respectively. During these periods, cash generated from operations and borrowings was used primarily to finance capital expenditures, including equipment purchases, pay dividends, acquire in fiscal 1993 100% of the stock of Nautilus International, Inc., 100% of the stock of Armonia Textil S.A. (Costa Rica) and its related assets, and 70% of the stock of Apparel Marketing Corporation, and in fiscal 1994 repurchase approximately 2.3 million shares of the Company's Common Stock. During fiscal 1995, cash used by investing activities included $32.2 million for purchases of property, plant, and equipment. Fiscal 1995 cash generated from financing activities of $46.1 million resulted primarily from net increases in bank debt of $57.5 million, partially offset by $9.7 million paid in dividends. As of July 1, 1995, the Company had working capital of $287 million, as compared to $242 million at July 2, 1994. Accounts receivable and inventories were $4.5 million and $22.2 million higher, respectively, at July 1, 1995 than at July 2, 1994. Accrued liabilities were $22.0 million lower at July 1, 1995 than at July 2, 1994, due primarily to the settlement of the Alabama litigation during fiscal 1995. As of June 9, 1995, the Company obtained certain amendments to its long-term Revolving Loan Facility (the "Credit Facility"). These amendments include adjustments to the amount of tangible net worth that the Company is required to maintain, as well as adjustments to the multiple of interest that the Company is required to cover by earnings before interest and taxes on a quarterly basis. As of that date, the requirement under the Credit Facility to cover certain fixed charges by a specified multiple was eliminated for fiscal 1995. Under the amendment, the amount of credit committed under the Credit Facility will be reduced by $15 million at the end of fiscal 1996 and by an additional $15 million at the end of each subsequent fiscal year. Upon settlement of the Alabama litigation, the original commitment under the Credit Facility of $275 million was reduced to $263.5 million as contemplated in the original credit agreement. The Credit Facility has a limit of $25 million for the purpose of issuing letters of credit. Availability under the Credit Facility is reduced by outstanding letters of credit which at July 1, 1995 totaled approximately $5.9 million. At July 1, 1995, borrowings under the Company's Credit Facility totaled $217.8 million at a weighted average interest rate of 6.8% per annum as compared to 5.18% at July 2, 1994. Certain conditions apply to the Company's ability to borrow under its Credit Facility, including continued compliance with financial covenants. See Note E of the accompanying financial statements for a description of loan covenants, which information is incorporated herein by reference. The Credit Facility will mature September 30, 1997, with a provision for one year extensions and (if the extension is made) on each anniversary of the termination date thereafter, such extension to be available only if consented to by all of the lenders. The Company's current interest rate on the major portion of funds borrowed under the Credit Facility is LIBOR plus .75% per annum, but the Credit Facility contains provisions that may decrease the spread over LIBOR depending upon certain financial ratios achieved by the Company. The Credit Facility is an unsecured general obligation of the Company. During fiscal 1995, the Company spent approximately $41.8 million in expenditures (on an accrual basis) for property, plant, and equipment. Of this amount, approximately $35.2 million was spent in the textile segment with the major expenditures relating to the long-term capital project for modernizing the Company's woven textile 9 production facilities. Approximately $4.8 million was spent in the apparel segment, and approximately $1.9 million was spent in the Company's "other business" segment. During fiscal 1996, the Company plans to spend approximately $58 million for capital improvements and new equipment. The majority of this amount is expected to be spent in continuing the woven fabrics modernization program. The Company also expects to complete in fiscal 1996 the construction of its new branded apparel distribution center in Georgia. The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors. The Company believes that cash flow generated by its operations and funds available under its existing credit lines should be sufficient to service its bank debt, to satisfy its day-to-day working capital needs, to fund its planned capital expenditures and to continue the payment of dividends. Based on the Company's history of generating taxable income, it is also likely that the Company will be able to realize its deferred tax assets as discussed in Note G. ENVIRONMENTAL MATTERS The Company believes that it is in compliance in all material respects with federal, state, and local environmental statutes and requirements. The Company's Nautilus business has been named as a "potentially responsible party" ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to three sites in North Carolina, South Carolina, and Mississippi. To the Company's knowledge, all of the transactions with these sites were conducted by a corporation (the "Selling Corporation") whose assets were sold in 1990 pursuant to the terms of an order of the United States Bankruptcy Court to another corporation, the stock of which was subsequently acquired by the Company in January 1993. At the North Carolina site, the Company's information is that there are over 1,400 PRPs, and the Selling Corporation is listed as a "de Minimis" party. The Company's most recent information indicates that the Selling Corporation's share of the costs of the surface removal action (the removal of drums, equipment and materials) for this site will be immaterial. The Company does not currently have information respecting the soil and groundwater cleanup costs that may be incurred with respect to this site. At the South Carolina site, there are over 700 PRPs, and the Selling Corporation has been listed as an "insolvent" party and would appear to qualify as a "de Minimis" party. The site's PRP group has completed a surface removal action, the Selling Corporation's part of which is immaterial. The PRP group is investigating soil and groundwater contamination at the site, but there is currently insufficient information available to estimate the cost of remediating that contamination. At the Mississippi site, the PRP group is in the process of performing a surface removal action and is investigating soil and groundwater contamination, both at the site and in the surrounding area. The Company's latest information is that the Selling Corporation is ranked eleventh out of a total of over 300 PRPs in contributions of material to the site, and, based on volume, the Selling Corporation contributed approximately 3% of the site's material. To the Company's knowledge, latest estimates of costs to clean up the site range up to $4 million. Trichloroethane, one of the substances delivered by the Selling Corporation to the site, has been found in the site's groundwater and at nearby residential drinking water wells. Although no assurance can be provided, the Company believes that it is shielded from liability at these three sites by the order of the United States Bankruptcy Court pursuant to which the Selling Corporation sold its assets to the corporation subsequently acquired by the Company. The Company has denied any responsibility at these three sites, has declined to participate as a member of the respective PRP groups, and has not provided for any reserves for costs or liabilities attributable to the Selling Corporation. 10 OPERATIONS BY INDUSTRY SEGMENT The Company operates principally in two segments: textiles and apparel. The textile segment's principal products are woven and knitted fabrics for apparel and home furnishings manufacturers. The apparel segment is the manufacturer of the "Duck Head" brand of casualwear, completed T-shirts, fleece goods and sportswear, and includes a retail apparel business. The apparel segment sells primarily to department stores and other apparel retailers. The Company also manufactures and sells Nautilus fitness equipment primarily to the institutional market.
July 1, 1995 July 2, 1994 July 3, 1993 Net Sales: Textiles Unaffiliated customers....................................................... $393,736,000 $391,401,000 $444,921,000 Intersegment................................................................. 20,192,000 15,660,000 12,331,000 413,928,000 407,061,000 457,252,000 Apparel, including retail stores Unaffiliated customers....................................................... 175,866,000 178,681,000 209,789,000 Intersegment................................................................. 1,000 175,866,000 178,681,000 209,790,000 Fitness equipment and other Unaffiliated customers....................................................... 27,939,000 43,694,000 31,529,000 Intersegment................................................................. 866,000 1,474,000 1,269,000 28,805,000 45,168,000 32,798,000 Intersegment Eliminations...................................................... (21,058,000) (17,134,000) (13,601,000) Total...................................................................... $597,541,000 $613,776,000 $686,239,000 Gross Profit: Textiles....................................................................... $ 44,321,000 $ 45,355,000 $ 57,075,000 Apparel, including retail stores............................................... 43,514,000 35,846,000 53,523,000 Fitness equipment and other.................................................... 10,613,000 17,735,000 11,289,000 Total...................................................................... $ 98,448,000 $ 98,936,000 $121,887,000 Operating Profit (Loss): Textiles....................................................................... $ 22,272,000 $ 19,606,000 $ 34,655,000 Apparel, including retail stores............................................... 14,663,000 (31,327,000) 18,900,000 Fitness equipment and other.................................................... (4,324,000) (2,992,000) 2,308,000 Total Operating Profit (Loss).............................................. 32,611,000 (14,713,000) 55,863,000 Interest expense............................................................... (13,646,000) (8,639,000) (7,775,000) Insurance proceeds............................................................. 2,204,000 Corporate expense.............................................................. (3,448,000) (3,300,000) (3,278,000) Interest income................................................................ 49,000 722,000 362,000 Income (Loss) Before Income Taxes.......................................... $ 17,770,000 $(25,930,000) $ 45,172,000 Identifiable Assets: Textiles....................................................................... $326,926,000 $314,378,000 $331,036,000 Apparel, including retail stores............................................... 234,811,000 195,370,000 203,166,000 Fitness equipment and other.................................................... 46,342,000 55,811,000 38,124,000 Corporate...................................................................... 2,217,000 1,444,000 1,620,000 Total...................................................................... $610,296,000 $567,003,000 $573,946,000 Depreciation and Amortization: Textiles....................................................................... $ 16,867,000 $ 16,552,000 $ 13,087,000 Apparel, including retail stores............................................... 5,824,000 6,210,000 4,649,000 Fitness equipment and other.................................................... 1,423,000 3,669,000 669,000 Corporate...................................................................... 478,000 462,000 414,000 Total...................................................................... $ 24,592,000 $ 26,893,000 $ 18,819,000 Capital Expenditures: Textiles....................................................................... $ 35,182,000 $ 18,334,000 $ 34,446,000 Apparel, including retail stores............................................... 4,812,000 3,844,000 10,941,000 Fitness equipment and other.................................................... 1,810,000 7,659,000 3,611,000 Corporate...................................................................... 30,000 19,000 577,000 Total...................................................................... $ 41,834,000 $ 29,856,000 $ 49,575,000
11 The textile segment sells to the apparel segment at a rate approximately 1% over cost. All other intersegment sales are at prices comparable to unaffiliated customers sales. Intersegment operating profit related to the intersegment sales is not significant. Operating profit is total revenue less operating expenses, excluding interest expense, corporate expense and interest income. Included in 1993 operating profit is a net gain on an involuntary conversion in the fitness equipment division. During the fourth quarter of fiscal 1995, the apparel segment settled a lawsuit and reduced related litigation reserves by $7,000,000. Previously during fiscal 1994, the apparel segment had recognized a charge of $27 million in connection with the lawsuit, and the textile, apparel and office products and other divisions recorded restructuring charges of $1,700,000, $2,900,000, and $4,600,000, respectively. Depreciation and amortization include certain writedowns of property and equipment. Identifiable assets are those assets that are used in the operations of each segment. Amounts shown for corporate assets consist principally of corporate office equipment and deferred loan costs. Capital expenditures include related accounts payable of $9,178,000, $1,010,000 and $1,694,000 for the 1995, 1994 and 1993 fiscal years, respectively. 12 DELTA WOODSIDE INDUSTRIES, INC. MARKETING STRUCTURE TEXTILES OTHER FITNESS EQUIPMENT DELTA MILLS STEVCOKNIT MARKETING CO. FABRICS CO. NAUTILUS INTERNATIONAL MARKETS SERVED: MARKETS SERVED: MARKETS SERVED: APPAREL: APPAREL: Bottomweight Fabrics, Childrens, Health Clubs, Women's Blouses & Men's, Women's Public Sector, Dresses, Suit Linings, Athletic Wear, YMCAs & Similar Government & Topweight & Institutions, Uniform Trade Bottomweight Medical, OTHER: Dress Fabrics, Amenity Facilities, Lamp Shades, Shirtings, Terry, Corporate Fitness Centers, Surgical Tapes Fleece, Jersey, Consumer Products Rib Fabrics
APPAREL RETAIL LICENSED OPERATIONS PRODUCTS DUCK HEAD DELTA APPAREL CO. APPAREL CO. DUCKHEAD INTERNATIONAL OUTLET STORES APPAREL MARKETING CORP. MARKETS SERVED: MARKETS SERVED: MARKETS SERVED: MARKETS SERVED: Department Stores & Screen Printers, Retail Consumers Department Stores, Specialty Retailers Sporting Goods Stores Sporting Goods Stores, Specialty Stores, Branded & Private-Label Direct Mail, Premiums, Clubs, Military
13 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS DELTA WOODSIDE INDUSTRIES, INC. We have audited the accompanying consolidated balance sheet of Delta Woodside Industries, Inc. as of July 1, 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying financial statements of Delta Woodside Industries, Inc. as of July 2, 1994 and July 3, 1993, were audited by other auditors whose report thereon dated August 17, 1994, except for the first sentence of the second paragraph of Note E, as to which the date is September 7, 1994, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta Woodside Industries, Inc. at July 1, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Greenville, South Carolina August 18, 1995 14 CONSOLIDATED BALANCE SHEETS Delta Woodside Industries, Inc.
JULY 1, 1995 July 2, 1994 ASSETS CURRENT ASSETS Cash and cash equivalents........................................................ $ 719,000 $ 2,077,000 Accounts receivable: Factor........................................................................ 63,085,000 55,440,000 Customers..................................................................... 64,143,000 64,921,000 127,228,000 120,361,000 Less allowances for doubtful accounts and returns............................. 5,634,000 3,275,000 121,594,000 117,086,000 Inventories Finished goods................................................................ 137,675,000 112,101,000 Work in process............................................................... 58,806,000 69,402,000 Raw materials and supplies.................................................... 29,553,000 22,300,000 226,034,000 203,803,000 Deferred income taxes............................................................ 8,951,000 12,028,000 Prepaid expenses and other current assets........................................ 5,826,000 1,942,000 TOTAL CURRENT ASSETS 363,124,000 336,936,000 PROPERTY, PLANT AND EQUIPMENT, at cost Land and land improvements.................................................... 5,783,000 5,318,000 Buildings..................................................................... 66,928,000 64,497,000 Machinery and equipment....................................................... 210,200,000 191,267,000 Furniture and fixtures........................................................ 8,112,000 6,943,000 Leasehold improvements........................................................ 2,778,000 2,517,000 Construction in progress...................................................... 18,651,000 9,271,000 312,452,000 279,813,000 Less accumulated depreciation................................................. 104,393,000 89,782,000 208,059,000 190,031,000 EXCESS OF COST OVER ASSIGNED VALUE OF NET ASSETS ACQUIRED, less accumulated amortization of $4,819,000 (1995) and $3,965,000 (1994).......................... 27,310,000 28,164,000 OTHER ASSETS....................................................................... 11,803,000 11,872,000 $610,296,000 $567,003,000
See notes to consolidated financial statements. 15
JULY 1, 1995 July 2, 1994 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable........................................................... $ 50,593,000 $ 46,712,000 Accrued employee compensation.................................................... 5,758,000 6,806,000 Litigation accrual -- Note L..................................................... 25,594,000 Accrued and sundry liabilities................................................... 19,610,000 15,010,000 Current portion of long-term debt................................................ 276,000 864,000 TOTAL CURRENT LIABILITIES 76,237,000 94,986,000 LONG-TERM DEBT..................................................................... 219,119,000 161,948,000 DEFERRED INCOME TAXES.............................................................. 21,473,000 18,808,000 OTHER LIABILITIES AND DEFERRED CREDITS............................................. 6,968,000 6,384,000 SHAREHOLDERS' EQUITY Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued and outstanding 24,357,000 shares (1995) and 24,246,000 shares (1994)......... 244,000 242,000 Additional paid-in capital....................................................... 163,364,000 162,114,000 Retained earnings................................................................ 122,891,000 122,521,000 286,499,000 284,877,000 COMMITMENTS AND CONTINGENCIES $610,296,000 $567,003,000
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF OPERATIONS Delta Woodside Industries, Inc.
Year Ended JULY 1, 1995 July 2, 1994 July 3, 1993 Net sales....................................................... $597,541,000 $613,776,000 $686,239,000 Cost of goods sold.............................................. 499,093,000 514,840,000 564,352,000 Gross profit.................................................... 98,448,000 98,936,000 121,887,000 Selling, general and administrative expenses.................... 77,037,000 82,223,000 73,404,000 Litigation (credit) charge...................................... (7,000,000) 27,096,000 Restructuring (credit) charge................................... (553,000) 9,199,000 28,964,000 (19,582,000) 48,483,000 Other (expense) income: Interest expense.............................................. (13,646,000) (8,639,000) (7,775,000) Interest income............................................... 49,000 722,000 362,000 Other......................................................... 2,403,000 1,569,000 4,102,000 (11,194,000) (6,348,000) (3,311,000) INCOME (LOSS) BEFORE INCOME TAXES 17,770,000 (25,930,000) 45,172,000 Income tax expense (benefit).................................... 7,672,000 (8,633,000) 16,968,000 Income (loss) before cumulative effect of accounting change..... 10,098,000 (17,297,000) 28,204,000 Cumulative effect of change in the method of accounting for income taxes.................................................. (875,000) NET INCOME (LOSS) $ 10,098,000 $(17,297,000) $ 27,329,000 Earnings (loss) per share of Common Stock before cumulative effect of accounting change................................... $ .42 $ (.70) $ 1.07 Cumulative effect of change in the method of accounting for income taxes.................................................. (.04) Earnings (loss) per share of Common Stock....................... $ .42 $ (.70) $ 1.03 Weighted average number of shares outstanding......................................... 24,317,000 24,550,000 26,421,000
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Delta Woodside Industries, Inc.
Additional Total Common Stock Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity Balance at June 27, 1992............................... 26,400,371 $264,000 $185,673,000 $132,844,000 $318,781,000 Incentive Stock Award Plan, shares issued............ 2,502 37,000 37,000 Stock Option Plan, shares issued..................... 33,188 265,000 265,000 Tax benefits of stock plans.......................... 262,000 262,000 Net income for the year ended July 3, 1993........... 27,329,000 27,329,000 Cash dividends paid -- $.40 a share.................. (10,569,000) (10,569,000) Other................................................ 825 144,000 144,000 Balance at July 3, 1993................................ 26,436,886 264,000 186,381,000 149,604,000 336,249,000 Incentive Stock Award Plan, shares issued............ 82,309 1,000 666,000 667,000 Stock Option Plan, shares issued..................... 22,188 194,000 194,000 Tax benefits of stock plans.......................... 144,000 144,000 Purchase and retirement of Common Stock.............. (2,295,650) (23,000) (25,271,000) (25,294,000) Net loss for the year ended July 2, 1994............. (17,297,000) (17,297,000) Cash dividends paid -- $.40 a share.................. (9,786,000) (9,786,000) Balance at July 2, 1994................................ 24,245,733 242,000 162,114,000 122,521,000 284,877,000 INCENTIVE STOCK AWARD PLAN, SHARES ISSUED............ 52,820 1,000 605,000 606,000 STOCK OPTION PLAN, SHARES ISSUED..................... 59,000 1,000 465,000 466,000 TAX BENEFITS OF STOCK PLANS.......................... 24,000 24,000 NET INCOME FOR THE YEAR ENDED JULY 1, 1995........... 10,098,000 10,098,000 CASH DIVIDENDS PAID -- $.40 A SHARE.................. (9,728,000) (9,728,000) OTHER................................................ (475) 156,000 156,000 BALANCE AT JULY 1, 1995 24,357,078 $244,000 $163,364,000 $122,891,000 $286,499,000
See notes to consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS Delta Woodside Industries, Inc.
Year Ended JULY 1, 1995 July 2, 1994 July 3, 1993 OPERATING ACTIVITIES Net income (loss).............................................. $ 10,098,000 $(17,297,000) $ 27,329,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................ 22,532,000 21,344,000 17,090,000 Amortization................................................ 2,060,000 1,859,000 1,729,000 Reduction in excess of cost over assigned value of net assets acquired............................. 1,549,000 Writedown of property and equipment......................... 2,141,000 Provision for losses on accounts receivable................. 3,311,000 3,886,000 2,025,000 Provision for deferred income taxes......................... 6,603,000 (10,810,000) 2,398,000 Losses (gains) on disposition of property and equipment............................................ 507,000 113,000 (2,916,000) Compensation under stock plans.............................. 1,096,000 1,005,000 317,000 Deferred compensation....................................... 738,000 928,000 1,126,000 Other....................................................... (70,000) 708,000 753,000 Changes in operating assets and liabilities net of effects from business acquisitions: Accounts receivable...................................... (7,819,000) 17,635,000 23,600,000 Inventories.............................................. (22,231,000) (6,265,000) (17,217,000) Other current assets..................................... (3,884,000) 1,610,000 (1,785,000) Litigation accrual....................................... (25,594,000) 25,594,000 Accounts payable and accrued expenses.................... (2,844,000) (11,183,000) 8,255,000 NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (15,497,000) 32,817,000 62,704,000 INVESTING ACTIVITIES Acquisitions of businesses, net of cash acquired............................................... (1,565,000) (20,194,000) Property, plant and equipment: Purchases................................................... (32,224,000) (30,525,000) (54,409,000) Proceeds of dispositions.................................... 734,000 698,000 5,878,000 Sale of business............................................... 2,102,000 Other.......................................................... (457,000) (697,000) (280,000) NET CASH (USED) BY INVESTING ACTIVITIES (31,947,000) (29,987,000) (69,005,000)
19
Year Ended JULY 1, 1995 July 2, 1994 July 3, 1993 FINANCING ACTIVITIES Proceeds from revolving lines of credit........................ $ 348,849,000 $ 33,000,000 $ 194,000,000 Repayments on revolving lines of credit........................ (291,395,000) (11,000,000) (172,640,000) Net borrowings on short-term line of credit.................... 10,347,000 Scheduled principal payments of long-term debt........................................................ (871,000) (1,781,000) (1,692,000) Repurchase and retirement of shares of Common Stock................................................ (25,294,000) Dividends paid................................................. (9,728,000) (9,786,000) (10,569,000) Other.......................................................... (769,000) 31,000 82,000 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 46,086,000 (4,483,000) 9,181,000 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (1,358,000) (1,653,000) 2,880,000 Cash and cash equivalents at beginning of year................... 2,077,000 3,730,000 850,000 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 719,000 $ 2,077,000 $ 3,730,000
See notes to consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Delta Woodside Industries, Inc. NOTE A -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Delta Woodside Industries, Inc. (the "Company") and its subsidiaries (all of which are wholly-owned, except for International Apparel Marketing Corporation which is 70% owned). All significant intercompany balances and transactions have been eliminated. INVENTORIES: Inventories are stated at the lower of cost or market determined using both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method for financial reporting based on estimated useful lives of three to thirty-two years, but predominantly over seven to ten years, and by accelerated methods for income tax reporting. REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific goods for later shipment at customers' request with related risk of ownership passing to such customers. INTANGIBLE ASSETS: Amortization is computed using the straight-line method. The excess of cost over assigned value of net assets acquired relating to certain business combinations is being amortized to expense primarily over periods of 40 years with other amounts amortized over 5 or 15 years. Loan acquisition costs are being amortized over 3 years. Other intangible assets are being amortized over periods of 3 to 40 years, but averaging approximately 10 years. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the intangible balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. INCOME TAXES: Under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted SFAS 109 in the first quarter of fiscal 1993 and reported the cumulative effect on the change in method of accounting for income taxes as of the beginning of the 1993 fiscal year. Net income was reduced by $875,000 as a result of the cumulative effect adjustment resulting from the change in accounting for income tax expense. CASH EQUIVALENTS: The Company considers all highly liquid investments of three months or less when purchased to be cash equivalents. EARNINGS PER COMMON SHARE: Per share data are computed based on the weighted average number of shares of Common Stock outstanding during each period. FISCAL YEAR: The Company's operations are based on a fifty-two, fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal years 1995 and 1994 each consist of 52 weeks; fiscal 1993 consists of 53 weeks. 21 NOTE B -- ACQUISITION OF BUSINESSES On January 20, 1993, the Company acquired all of the outstanding stock of Nautilus International, Inc., parent company of Nautilus Acquisition Corporation, a manufacturer of fitness equipment. Concurrent with this acquisition, the Company acquired 70% of the stock of Apparel Marketing Corporation which owns the apparel and related accessory licensing rights to the Nautilus name. These acquisitions have been accounted for by the purchase method of accounting, and the accompanying consolidated financial statements include the operations of the acquired businesses from the dates of their respective acquisitions. The total purchase price for the stock acquired in these two transactions was approximately $9.1 million. An additional $11.4 million was paid to retire indebtedness of Nautilus. The total cost of the acquisitions amounted to approximately $20.5 million. The cost exceeded the fair value of net assets acquired by approximately $4.9 million, which has been recorded as goodwill and is being amortized primarily over 40 years. NOTE C -- ACCOUNTS RECEIVABLE The woven fabrics operation assigns a substantial portion of its trade accounts receivable to a bank under a factor agreement. The assignment of these receivables is primarily without recourse, provided that customer orders are approved by the bank prior to shipment of goods, up to a maximum for each individual account. At July 1, 1995 the Company had no significant concentrations of credit risk, since substantially all of the Company's accounts receivable are due from many companies that produce apparel, home furnishings and other products and from department stores and specialty apparel retailers located throughout the United States. The Company generally does not require collateral for its accounts receivable. NOTE D -- INVENTORIES As reported previously, the Company considers its level of branded apparel inventories excessive. At July 1, 1995, the Company estimates that $30 to $50 million of this inventory is in excess of its current requirement. Management has developed a program to reduce these inventories over the next three years through its retail outlet stores and has reduced production to reflect the current sales demand. Although the Company feels that it has adequate reserves to cover any future price markdowns of these inventories, no estimate can be made of the range of amounts of loss that are reasonably possible should the program not be successful. As of July 1, 1995 and July 2, 1994, cost for certain inventories of the apparel segment are determined under the LIFO method representing 40% and 35%, respectively, of the cost of consolidated inventories. The balance of the cost of consolidated inventories is determined under the FIFO method. If the inventories of the apparel segment had been determined by the FIFO method, they would have been approximately the same as the reported amounts. 22 NOTE E -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND LEASES Long-term debt consists of:
July 1, 1995 July 2, 1994 Revolving Credit Facility (6.8% at July 1, 1995), with interest payable monthly........... $217,775,000 $150,005,000 Short-term note payable -- refinanced..................................................... 10,347,000 Industrial Revenue Bond payable monthly, through 2001 at 80% of a bank's base rate........ 1,296,000 1,535,000 Notes, payable in varying annual amounts, through 1996 at rates varying from 6% to 10%............................................................................... 130,000 148,000 Other..................................................................................... 194,000 777,000 219,395,000 162,812,000 Less current portion...................................................................... 276,000 864,000 $219,119,000 $161,948,000
Certain property, plant and equipment with a net book value of approximately $14,310,000 is collateral for the Industrial Revenue Bond payable of $1,296,000 at July 1, 1995. In September 1994, the Company obtained an unsecured Revolving Credit Facility of $275 million. The Credit Facility was reduced to $263.5 million upon settlement of the Alabama litigation in June 1995. The Credit Facility has a limit of $25 million for the purpose of issuing letters of credit. The Revolving Credit Facility will be reduced by $15 million each on June 29, 1996 and June 28, 1997 and will mature on September 30, 1997, with a provision for one-year extensions. At July 1, 1995, the Company's interest rate is LIBOR plus .75%. The Credit Facility contains provisions that may decrease the spread over LIBOR depending upon certain financial ratios achieved by the Company. At July 1, 1995 outstanding letters of credit of $5,882,000 issued to certain suppliers and not included in the accompanying financial statements reduced the unused portion of the facility to $39,844,000. The long-term revolving Credit Facility contains various restrictive covenants requiring minimum tangible net worth and certain other minimum financial ratios. The agreement also restricts additional indebtedness, dividends and capital expenditures. The Company is permitted, absent a default, to pay cash dividends up to $25 million. At July 1, 1995 the minimum tangible net worth requirement under the new Credit Facility would have limited available dividends to $10.5 million. Total interest expense incurred by the Company was $13,947,000, $8,639,000 and $8,005,000 in the 1995, 1994 and 1993 fiscal years, respectively, of which approximately $301,000 and $230,000 was capitalized in fiscal 1995 and 1993, respectively. Total interest paid during the 1995, 1994 and 1993 fiscal years was $12,940,000, $8,275,000 and $9,012,000, respectively. Rent expense relating to operating leases was approximately $6,081,000 (1995), $5,617,000 (1994) and $5,235,000 (1993). Aggregate principal maturities of all long-term debt and minimum payments under operating leases are as follows:
Long-term Operating Fiscal Year Debt Leases 1996..................... $ 276,000 $ 3,907,000 1997..................... 393,000 3,042,000 1998..................... 218,048,000 2,116,000 1999..................... 268,000 887,000 2000..................... 264,000 712,000 Later Years.............. 146,000 2,434,000 $219,395,000 $13,098,000
23 NOTE F -- SHAREHOLDERS' EQUITY During the first six months of fiscal 1994, the Company repurchased 2,296,000 shares of Common Stock at an average price of $11.02 for a total of $25.3 million. The Stock Option Plan was approved by the shareholders in fiscal 1991. The Plan gives the Company the right to grant awards or options for up to 300,000 shares of Common Stock to employees. Transactions under the Stock Option Plan are as follows:
Prices Outstanding Exercisable June 27, 1992..... $ 4.00-9.94 199,376 29,751 Granted......... 7.00-7.68 16,000 Became exercisable... 4.00-9.94 52,792 Exercised....... 4.00-9.94 (33,188) (33,188) Cancelled....... 4.00-9.19 (5,500) July 3, 1993...... 4.00-9.94 176,688 49,355 Granted......... 5.44 20,000 Became exercisable... 4.00-9.94 69,959 Exercised....... 4.00-9.94 (22,188) (22,188) Cancelled....... 4.00-9.94 (35,374) July 2, 1994...... 4.00-9.94 139,126 97,126 Granted......... 5.13-5.88 61,000 Became exercisable... 4.00-9.94 26,749 Exercised....... 4.00-7.00 (59,000) (59,000) Cancelled....... 4.00-9.94 (11,876) (1,750) July 1, 1995...... 4.00-9.94 129,250 63,125
The average exercise price for all options outstanding was $5.70 per share at July 1, 1995. These options expire on various dates beginning November 1995 and ending on November 1999. The options generally become exercisable in equal amounts on the first through fourth anniversaries of the date of grant and remain exercisable until the fifth anniversary of the date of grant. The excess of the fair market value over the exercise price at the date of grant is recognized as compensation expense over the period during which the options become exercisable. Related compensation expense was $161,000, $232,000 and $186,000 during fiscal 1995, 1994 and 1993, respectively. The Board of Directors intends to seek authorization to grant options for additional shares in the annual shareholders' meeting in the Fall of 1995. Options available for grant at July 1, 1995, July 2, 1994 and July 3, 1993 were 38,500, 87,624 and 72,250, respectively. The Incentive Stock Award Plan was approved by the shareholders during fiscal 1991. The Plan gives the Company the right to grant awards for up to 300,000 shares of Common Stock to employees. The Board of Directors intends to seek authorization to award additional shares in the annual shareholders' meeting in the Fall of 1995. Under the Incentive Stock Award Plan, awards for the right to purchase for $.01 per share up to 19,723 shares, 260,581 shares and 4,164 shares were granted to certain management and key employees during fiscal 1995, 1994 and 1993, respectively. The shares granted in excess of shares available are contingent upon shareholder approval. Generally, each award vests based in part on service and in part on achievement of certain performance goals over a three-year period. Compensation expense for the service portion is based on the market price of the stock on the date of award. Compensation expense for the performance portion is based on the prevailing market price of the stock. Tax benefits arising from the difference in market value between the date of grant and the date of issuance of Common Stock are recorded as an adjustment to additional paid-in capital. Compensation expense for the Company's incentive stock award plan including related tax assistance was $939,000, $1,111,000 and $561,000 for the fiscal years 1995, 1994 and 1993, respectively. The shares granted in fiscal 1994 and 1995 in excess of shares available are contingent upon shareholder approval. Shares available for grant at July 3, 1993 were 113,813. During November 1991, the shareholders authorized the Board of Directors to issue up to 10 million shares of preferred stock with a maximum aggregate par value of $250 million. The Board of Directors was also authorized to establish the particular terms including dividend rates, conversion prices, voting rights, redemption prices and similar matters. 24 NOTE G -- INCOME TAXES For fiscal 1995, the Company has an alternative minimum tax ("AMT") liability of approximately $1.6 million since its AMT liability is greater than its regular tax liability. To the extent that the Company pays AMT, it can apply such AMT as a credit against regular tax liabilities in future years. The Company expects to utilize future AMT credits as taxable income increases and current temporary differences reverse. At July 1, 1995, the Company has net operating loss carryforwards of $11 million for income tax purposes that expire in years 1996 through 2003. Those carryforwards resulted from the Company's 1986 acquisition of certain companies from J.P. Stevens & Co., Inc. and from the 1988 acquisition of Stanwood Corporation. In addition to net operating loss carryforwards, at the time of acquisition, Stanwood Corporation had general business credit carryforwards which totaled $835,000. The Company utilized $225,000 of these general business credit carryforwards in its fiscal 1992 federal income tax return. The remaining business credit carryforwards will expire in fiscal years ending 1999 through 2003. The Company expects the net operating loss remaining from the Stanwood acquisition of $9.2 million and general business credit carryforwards of $610,000 will be utilized prior to the expiration of the carryforward periods. For financial reporting purposes, a valuation allowance of $3.5 million was recognized in fiscal 1993 to offset the deferred tax assets recorded related to those carryforwards. If realized, the tax benefits for a portion of those items will be applied to reduce goodwill related to business acquisitions. Although the Tax Reform Act of 1986 placed annual limitations on utilizing NOLs and tax credits for companies which have changed ownership, this should not impact the Company's ability to ultimately utilize its carryovers. The maximum annual usage of the Stanwood NOL is limited by applicable provisions of the Internal Revenue Code to approximately $1 million per year. Deferred income taxes reflect the net tax effects of temporary differences between the financial statement amounts and amounts used for income tax purposes. At the end of fiscal 1995, the Company's gross deferred tax assets are approximately $26 million. The deferred tax assets have been reduced by a valuation allowance of approximately $5.6 million. The valuation allowance will be adjusted from time to time as the tax benefits are realized. During fiscal 1995, the valuation allowance increased by $1.7 million, primarily for the tax effect of certain current year state net operating losses. Significant components of the Company's deferred tax assets and liabilities are as follows:
1995 1994 Assets Litigation accrual............... $ 1,219,000 $10,316,000 Net operating loss carryforward................... 6,665,000 4,971,000 Inventory........................ 5,183,000 4,147,000 Tax credit carryforward.......... 4,370,000 2,560,000 Deferred compensation............ 2,111,000 2,010,000 Stock compensation accruals...... 837,000 810,000 Accrued vacation................. 696,000 551,000 Workers' compensation............ 311,000 320,000 Health claims.................... 1,310,000 374,000 Allowance for doubtful accounts....................... 1,527,000 235,000 Other............................ 2,080,000 1,694,000 Subtotal......................... 26,309,000 27,988,000 Valuation allowance.............. (5,631,000) (3,925,000) Deferred tax assets.............. 20,678,000 24,063,000 Liabilities Depreciation..................... 27,053,000 22,838,000 Inventory -- LIFO basis difference.......... 3,511,000 3,509,000 Intangibles...................... 2,128,000 2,364,000 Other............................ 508,000 2,132,000 Deferred tax liabilities......... 33,200,000 30,843,000 Net deferred tax liabilities............ $12,522,000 $ 6,780,000
Significant components of the provision for income taxes are as follows:
1995 1994 1993 Current: Federal income taxes........................................................... $ 883,000 $ 2,029,000 $11,980,000 State income taxes............................................................. 726,000 148,000 2,590,000 Total current................................................................ 1,609,000 2,177,000 14,570,000 Deferred: Federal income taxes (benefits)................................................ 5,190,000 (9,593,000) 1,901,000 State income taxes (benefits).................................................. 873,000 (1,217,000) 497,000 Total deferred............................................................... 6,063,000 (10,810,000) 2,398,000 Total provision.................................................................. $7,672,000 $ (8,633,000) $16,968,000
25 NOTE G -- INCOME TAXES (CONTINUED) The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rate:
1995 1994 1993 Income tax expense (benefit) at statutory rates................................... $6,220,000 $(9,076,000) $15,358,000 State taxes (benefits), net of federal benefit.................................... 1,039,000 (695,000) 1,951,000 Life insurance proceeds........................................................... (760,000) Amortization of excess of cost over assigned value of net assets acquired......... 280,000 865,000 303,000 Foreign subsidiary loss (income).................................................. 336,000 101,000 (218,000) State NOL benefits................................................................ (940,000) (736,000) Valuation allowance adjustments................................................... 1,706,000 372,000 Other............................................................................. (209,000) 536,000 (426,000) $7,672,000 $(8,633,000) $16,968,000
The Company made income tax payments of approximately $5,377,000, $2,350,000 and $20,171,000 during the 1995, 1994 and 1993 fiscal years, respectively. Effective June 28, 1992 the Company changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes." As permitted under the new rules, prior years' financial statements were not restated. The cumulative effect of adopting Statement 109 as of June 28, 1992 was to decrease fiscal 1993 net income by approximately $875,000. NOTE H -- OPERATIONS BY INDUSTRY SEGMENT Industry segment information for the Company presented on pages 11 and 12 of this Annual Report is an integral part of these financial statements. NOTE I -- EMPLOYEE BENEFIT PLANS Under the terms of the Delta Woodside Industries Employee Retirement Plan, the Board of Directors has the discretion to authorize contributions from time to time to the Retirement Plan of cash or a maximum of 504,790 shares of the Company's Common Stock. A trustee holds the assets of the Retirement Plan for the benefit of the participants who may withdraw amounts or shares only upon retirement, death, disability or other termination of employment. All employees of the Company who are at least 21 years of age with one year of service participate in the Retirement Plan. Amounts allocated to participant accounts generally vest over a five-year period. Each participant has the right to direct the trustee as to the manner in which shares held are to be voted. The Retirement Plan qualifies as an Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as a defined contribution plan. The Company's 1995, 1994 and 1993 contributions allocated to participants were $358,000, $363,000 and $1,581,000, respectively. The contributions were made in cash. The Company maintains a 401(k) employee savings and investment plan for employees meeting certain eligibility requirements. During fiscal 1995, the Company contributed $196,000 to the plan. The Company made no contributions to the plan during fiscal 1994 and 1993. The Company also maintains a 501(c)(9) trust, the Delta Woodside Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and employee contributions from the Company and makes disbursements for health claims and other qualified benefits. The Company has a Deferred Compensation Plan which permits certain management employees to defer a portion of their compensation. Deferred compensation accounts are credited with interest and are distributable after retirement, disability or employment termination. As of July 1, 1995 and July 2, 1994, the total liability amounted to $5,273,000 and $4,428,000, respectively. The Company insured the lives of certain management employees to assist in funding of the deferred compensation liability. The Company is the owner and beneficiary of the insurance policies. NOTE J -- AFFILIATED PARTY TRANSACTIONS The Company leases its corporate and other office space from a corporation whose stock is owned one-half each by the president and a vice president of the Company. Additional office space and retail store space is leased from the executive vice president. Certain of these leases are on a monthly basis with others expiring in 1997. Under the leases, the Company made payments of approximately $254,000, $292,000 and $226,000 for the 1995, 1994 and 1993 fiscal years, respectively. 26 NOTE K -- FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's carrying value of long-term debt approximates fair value since the rates are tied to floating rates. There are no other material finan- cial instruments which require fair value disclosure. NOTE L -- COMMITMENTS AND CONTINGENCIES During fiscal 1996, the Company plans to spend approximately $58 million for capital improvements and new equipment, primarily in continuation of the modernization program for the woven fabrics division of the Company's textile segment. The remainder of the fiscal 1996 capital expenditures include completion of construction of the "Duck Head" central distribution center, and various other projects across all of the Company's business segments. The Company believes that its facilities and equipment are adequate to allow it to remain competitive with its primary competitors. At July 2, 1994, the Company had accrued $25,594,000 in connection with an Alabama jury award. During fiscal 1995, the award was reduced by approximately $9.7 million following appeals by the Company, and was finally settled with the plaintiffs in June 1995. During fiscal 1994, the Company made certain decisions regarding its operations which resulted in a restructuring charge. These decisions included restructuring charges of $3.2 million for the sale of the office products business, $1.3 million to abandon plans to develop a spinning plant building and $2.4 million in the apparel segment to discontinue a women's line of apparel and consolidate distribution operations. These restructuring decisions include write-downs of $1.6 million of goodwill and $2.1 of property plant and equipment. The Company's Nautilus business has been named as a "potentially responsible party" under the Comprehensive Environmental Response, Compensation, and Liability Act with respect to three hazardous waste sites. To the Company's knowledge, all of the transactions with these sites were conducted by a corporation whose assets were sold in 1990 pursuant to the terms of an order of the United States Bankruptcy Court to another corporation, the stock of which was subsequently acquired by the Company in January 1993. The Company, therefore, has denied any responsibility at the sites and has declined to participate in any settlements. Accordingly, the Company has not provided for any reserves for costs or liabilities attributable to the previous corporation. At two sites the previous company is listed as a "de minimis" party. At the third site, the previous company is ranked eleventh out of a total of over 300 potentially responsible parties based on the company's volume of contribution of about 3%. Latest estimates of certain costs to clean up the site range up to $4 million. Although there is uncertainty as to several legal issues, the Company believes that it has certain defenses to liability at these sites. Based on the information currently known to it, the Company does not believe that the potential liabilities arising from these three sites will have a materially adverse impact on the Company. From time to time the Company and its subsidiaries are defendants in legal actions involving claims arising in the normal course of business, including product liability claims. The Company believes that, as a result of legal defenses, insurance arrangements and indemnification provisions with parties believed to be financially capable, none of these actions should have a material effect on its operations or financial condition. 27 NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the years ended July 1, 1995 and July 2, 1994:
Quarter Ended October 2 January 1 April 2 July 2 (In thousands, except per share data) 1995 Net sales.......................................................... $141,275 $ 142,520 $150,894 $162,852 Gross profit....................................................... 25,449 21,611 23,756 27,632 Net income (loss).................................................. 4,164 371 943 4,620 Earnings (loss) per share of Common Stock.......................... .17 .02 .04 .19
Quarter Ended October 2 January 1 April 2 July 2 (In thousands, except per share data) 1994 Net sales.......................................................... $146,426 $ 149,344 $155,194 $162,812 Gross profit....................................................... 24,369 17,989 28,156 28,422 Net income (loss).................................................. 1,794 (31,995) 6,581 6,323 Earnings (loss) per share of Common Stock.......................... .07 (1.31) .27 .26
During the first quarter of fiscal 1995, the Company recognized certain life insurance proceeds of $2.2 million. During the fourth quarter of fiscal 1995, the Company recognized a pretax credit of $7 million upon settlement of the Alabama lawsuit. During the second quarter of fiscal 1994, the Company recorded charges of $33 million for the Alabama lawsuit and $12.7 million for restructuring. The litigation charge was reduced to $27.1 million during the third quarter and the restructuring charge was reduced to $9.2 million during the fourth quarter due principally to a change in estimate related to the sale of the office products business. The Company made certain adjustments in the fourth quarter of fiscal 1994 resulting from changes in estimates that were material to the results of operations. The aggregate effect of the adjustments after applicable income taxes was an increase in net income of $2.4 million. 28 CORPORATE DIRECTORY OPERATING COMPANIES OF DELTA WOODSIDE INDUSTRIES, INC. DELTA MILLS MARKETING COMPANY P.O. Box 6126, Station B 100 Augusta Street Greenville, SC 29606 STEVCOKNIT FABRICS COMPANY P.O. Box 1500 Greer, SC 29652 DUCK HEAD APPAREL COMPANY P.O. Box 688 89 East Athens Street Winder, GA 30680 DELTA APPAREL COMPANY 3355 Breckinridge Boulevard Suite 100 Duluth, GA 30136 DUCK HEAD RETAIL OPERATIONS 233 N. Main St., Suite 250 Greenville, SC 29601 INTERNATIONAL APPAREL MARKETING CORPORATION 80 West 40th Street, Suite 42 New York, New York 10018 NAUTILUS INTERNATIONAL 709 Powerhouse Road Independence, Virginia 24348-0708 CORPORATE OFFICERS E. ERWIN MADDREY, II President and Chief Executive Officer BETTIS C. RAINSFORD Executive Vice President, Treasurer and Chief Financial Officer JANE H. GREER Vice President and Secretary DOUGLAS J. STEVENS Controller and Assistant Secretary BRENDA L. JONES Assistant Secretary BOARD OF DIRECTORS * C. C. GUY** Retired businessman * DR. JAMES F. KANE** Dean Emeritus, College of Business University of South Carolina * DR. MAX LENNON** President and Chief Executive Officer Eastern Foods, Inc. (Manufacturer and distributor of food products) E. ERWIN MADDREY, II President and Chief Executive Officer Delta Woodside Industries, Inc. BUCK A. MICKEL** Vice President and Director Micco Corporation (Real estate and business investments) BUCK MICKEL** Chairman of the Board and Chief Executive Officer RSI Holdings, Inc. (Sold prior business; seeking business opportunities) BETTIS C. RAINSFORD Executive Vice President, Treasurer and Chief Financial Officer Delta Woodside Industries, Inc. * Member Audit Committee ** Member Compensation Committee FORM 10-K Upon written request, the Company will furnish without charge to any Delta Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 1995 including financial statements and schedules, but excluding exhibits. Requests should be directed to: Jane H. Greer, Vice President and Secretary, Delta Woodside Industries, Inc., 233 North Main Street, Hammond Square, Suite 200, Greenville, South Carolina 29601. ANNUAL MEETING The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be held on Thursday, November 9, 1995, at 10:30 a.m., at the Hyatt Regency Hotel, 220 North Main Street, Greenville, South Carolina. DELTA WOODSIDE INDUSTRIES, INC. 233 N. Main Street Hammond Square, Suite 200 Greenville, SC 29601 (803) 232-8301 Delta Woodside Industries, Inc. 233 N. Main Street Suite 200 Greenville, S.C. 29601 EX-21 4 SUBSIDIARIES OF REGISTRANT Jurisdiction % Of of Stock Owned Other Names Under Name of Subsidiary Incorporation By Parent Which Do Business Alchem Capital Corporation DE 100% owned by Delta Woodside Industries, Inc. Delta Mills, Inc. DE 100% owned by Delta Mills Marketing by Alchem Capital Company; Stevcoknit Corporation Fabrics Company; Woodside Mills Delta Merchandising, SC 100% owned by Duck Head Retail Inc. Alchem Capital Operations Corporation Duck Head Apparel TN 100% owned by Delta Apparel Company, Inc. Alchem Capital Maiden Properties Corporation Delta Consolidated NY 100% owned by Delta Mills Sales Co. Corporation Alchem Capital Stevcoknit Marketing Co. Corporation Nautilus Marketing Co. Delta Apparel Marketing Co., Duck Head Marketing Co. Cargud, Sociedad Costa Rica 100% owned by Anonima Duck Head Apparel Company, Inc. Armonia Textil, S.A. Costa Rica 100% owned by Cargud, Sociedad Anonima Delta Apparel Honduras, S.A. Honduras 96% owned by Duck Head Apparel Company, Inc., and 1% each owned by Alchem Capital Corporation, Delta Woodside Industries, Inc., Delta Consolidated Corporation and Cargud, S.A. Nautilus VA 100% owned by International, Inc. Alchem Capital Corporation Nautilus Direct, Inc. NC 100% owned by Nautilus International, Inc. International Apparel NY 70% owned by Alchem Capital Marketing Corporation. Corporation EX-23 5 Exhibit 23.1--Report on Schedule and Independent Auditors' Consent for the Year Ended July 1, 1995 REPORT ON SCHEDULE The Board of Directors Delta Woodside Industries, Inc.: Under date of August 18, 1995, we reported on the consolidated balance sheet of Delta Woodside Industries, Inc. as of July 1, 1995, and the related consolidated statements of operations, shareholder's equity, and cash flows for the year then ended, as contained in the 1995 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule for the year ended July 1, 1995 as listed on Page F- 2 of Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG Peat Marwick LLP Greenville, South Carolina KPMG Peat Marwick LLP August 18, 1995 INDEPENDENT AUDITORS' CONSENT The Board of Directors Delta Woodside Industries, Inc.: We consent to the incorporation by reference in the registration statements (No. 33-38930 and No. 33-38931) on Form S-8 of Delta Woodside Industries, Inc., of our reports dated August 18, 1995, relating to the consolidated balance sheet of Delta Woodside Industries, Inc. as of July 1, 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended, and related schedule, which reports are incorporated by reference or appear in the July 1, 1995 annual report on Form 10-K of Delta Woodside Industries, Inc. KPMG Peat Marwick LLP Greenville, South Carolina KPMG Peat Marwick LLP September 27, 1995 EX-23 6 Exhibit 23.2--Independent Auditors' Consent for the Year Ended July 1, 1995 We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-38930 pertaining to the Delta Woodside Industries, Inc. Stock Option Plan and in the Registration Statement (Form S-8 No. 33-38931) pertaining to the Delta Woodside Industries, Inc. Incentive Stock Award Plan, of our report dated August 17, 1994, except for the third paragraph of Note D, as to which the date is September 7, 1994, with respect to the consolidated financial statements incorporated herein by reference and the financial statement schedules included herein for the years ended July 2, 1994 and July 3, 1993 in the Annual Report (Form 10-K) of Delta Woodside Industries, Inc. for the year ended July 1, 1995. /s/ Ernst & Young LLP Greenville, South Carolina September 29, 1994 EX-23 7 Exhibit 23.3--Report of Independent Auditors Board of Directors and Shareholders Delta Woodside Industries, Inc. We have audited the accompanying consolidated balance sheet of Delta Woodside Industries, Inc. as of July 2, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended July 2, 1994. Our audits also included the financial statement schedules of Delta Woodside Industries, Inc. for the years ended July 2, 1994 and July 3, 1993. These financial statements and schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examine, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidation financial position of Delta Woodside Industries, inc. at July 2, 1994, and the consolidated results of its operations and its cash flows for each of the two years in the period ended July 2, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Greenville, South Carolina August 17, 1994, except for the first sentence of the second paragraph of Note E, as to which the date is September 7, 1994 EX-27 8
5 This schedule contains summary financial information extracted from the registrant's condensed consolidated financial statements for the fiscal year ended July 1, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUL-01-1995 JUL-01-1995 719,000 0 127,228 5,634 226,034 363,124 312,452 104,393 610,296 76,237 219,119 244 0 0 286,255 610,296 597,541 597,541 499,093 499,093 (7,553) 3,311 13,646 17,770 7,672 10,098 0 0 0 10,098 .42 .42
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