-----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, Vw79z/KIbXnxS7NS/l8cy1L4EW4K6CWZJs0cpvBUv8ZciuW/e5GrTZfBTSy98Vh3 O7DbP4dyIsx4BmU+qeltdA== 0000806624-98-000016.txt : 19980928 0000806624-98-000016.hdr.sgml : 19980928 ACCESSION NUMBER: 0000806624-98-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980925 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: SEC FILE NUMBER: 001-10095 FILM NUMBER: 98715330 BUSINESS ADDRESS: STREET 1: 233 N MAIN ST STREET 2: HAMMOND SQUARE STE 200 CITY: GREENVILLE STATE: SC ZIP: 29601 BUSINESS PHONE: 8642328301 MAIL ADDRESS: STREET 1: 233 NORTH MAIN ST STREET 2: HAMMOND SQ STE 200 CITY: GREENVILLE STATE: SC ZIP: 29601 10-K 1 11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 27, 1998 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, Suite 200 Greenville, South Carolina 29601 (Address of principal executive offices) (Zip code) 864/232-8301 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, Par Value $.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of each class None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to be best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K [ ]. The aggregate market value of the common equity held by non- affiliates of the registrant as of September 15, 1998 was : Common Stock, $.01 par value - $51,738,989 The number of shares outstanding of each of the registrant's classes of Common Stock, as of September 15, 1998 was: Common Stock, par value $.01 - 24,657,850 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Annual Report to shareholders for the fiscal year ended June 27, 1998 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 24, 1998 are incorporated by reference into Part III. Item I Business General Delta Woodside Industries, Inc. ("Delta Woodside" or the "Company") is a South Carolina corporation with its principal executive offices located at 233 North Main Street, Suite 200, Greenville, South Carolina 29601 (telephone number: 864-232- 8301). All references herein to Delta Woodside or the Company refer to Delta Woodside Industries, Inc. and its subsidiaries. In the third quarter of fiscal year 1998, the Company has adopted the segment reporting provisions of Financial Accounting Standard 131. This standard requires the Company to report segment information for divisions whose operating results are regularly reviewed by the chief operating officer. The Company has three segments in continuing operations: Delta Mills Marketing Company, Duck Head Apparel Company and Delta Apparel Company. During fiscal 1998 the Company made the decision to exit the knit textile market by closing its Stevcoknit Fabrics Company operating division. The company also made the decision to exit the fitness equipment business and is seeking a buyer for its Nautilus International business. Stevcoknit Fabrics Company and Nautilus International have been reclassified and reported as discontinued operations. Delta Mills Marketing Company produces a range of cotton, synthetic and blended finished and unfinished woven products which are sold for the ultimate production of apparel, home furnishings, and other products. Duck Head Apparel 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 28 retail apparel outlet stores that sell primarily closeout and irregular "Duck Head" products. Delta Apparel manufactures and sells T-shirts, fleece goods and sportswear to distributors, screen printers and private label accounts. The Company has operations in 13 states, Costa Rica and Honduras, and has approximately 6,000 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 produces woven textile fabrics through its Delta Mills Marketing Company operating division. It conducts its branded and non-branded apparel operations through the "Duck Head" and "Delta Apparel" (Reg. Trademarks) divisions respectively. The Company also licenses the use of the "Duck Head" trademark. Each division has its own management and employees and operates independently of the other divisions under the overall direction of the Company's executive officers. Intersegment sales accounted for no more than approximately 2% of net sales in any segment for fiscal 1998, 1997, and 1996. Item I (Continued) Textile fabrics produced for sale, by the Company, are woven and are manufactured from cotton, wool or synthetic fibers or from synthetic filament yarns. Knit fabrics are manufactured by the Company, using cotton and polyester cotton blend yarns for use in its knit apparel operations. Cotton and wool are purchased from numerous suppliers. Synthetic fibers and synthetic filament yarns are purchased from a smaller number of competitive suppliers. The Company spins the major portion of the spun yarns used in its weaving and knitting operations. In manufacturing these yarns, the cotton and synthetic fibers, either separately or in blends, are carded (fibers straightened and oriented) and then spun into yarn. The Company combs (removing short fibers) some cotton fiber to make high quality yarns. In other fabrics, filament yarns are used. The spun or filament yarn is then woven into fabric on looms or knitted into fabric on knitting machines. The unfinished fabric at this stage is referred to as greige goods. Greige goods are typically sold to converters to enhance the fabric through finishing techniques and sell it to manfacturers of apparel, home furnishings and other products. Finished fabric refers to fabric that has been treated by washing, bleaching, dyeing and applying certain chemical finishes. Finished apparel fabric is ready to be cut and sewn into garments. Finished fabrics generally have significantly higher margins than greige goods. The Company sells its woven fabrics primarily to numerous apparel manufacturers and apparel resellers. Apparel products are sold primarily to department stores and specialty retailers under the Company's "Duck Head" label, to private label apparel resellers, and to distributors and screen printers. Delta Mills Marketing Segment The Company sells a broad range of fabrics primarily to branded apparel manufacturers and resellers, including Levi Strauss, Haggar Corp., the Wranglerr and Leer divisions of V.F. Corporation, Farah Incorporated, Kellwood Company, Liz Claiborne, Inc. and private label apparel manufacturers for J.C. Penney Company, Inc., Sears Roebuck & Company, Wal-Mart Stores, Inc., and other retailers. The Company believes that it is a leading producer of cotton pants-weight woven fabric used in the manufacture of casual slacks such as Levi Strauss' Dockersr and Haggar Corp.'s Wrinkle-Freer. Other apparel items manufactured with the Company's woven fabrics include women's chinos pants, women's blazers, career apparel (uniforms) and battle dress camouflage military uniforms. Net sales of woven fabrics were $342 million, $336 million, and $294 million during fiscal 1998, 1997, and 1996 respectively. Delta Mills Marketing Company has focused its marketing efforts on building close relationships with major apparel companies that have broad distribution channels and that the Company believes have positioned themselves for long term growth. The division's marketing efforts focus on four primary apparel manufacturing groups: women's apparel, including fashion apparel; men's apparel; career apparel and uniforms; and military and other government uniforms and apparel. The woven fabrics division sells and distributes its fabrics through a marketing office based in New York City (which serves the United States, Canadian and Mexican markets), Item I (Continued) with sales agents also operating from Atlanta, Chicago, Dallas, Los Angeles, San Francisco and Mexico. Approximately 70% of the division's fabric sales are made from cotton or cotton/synthetic blends, while approximately 30% of such sales are made from spun synthetics and other natural fibers, including various blends of rayon, polyester and wool. Woven fabrics are generally produced and shipped pursuant to specific purchase orders, which minimizes the Company's uncommitted inventory levels. The divisions production of cotton and cotton/synthetic blend finished woven fabrics is largely vertically integrated, with the division performing most of its own spinning, weaving and finishing. The production of spun synthetic finished woven fabrics is fully vertically integrated, with various plants in the division performing spinning, weaving, and finishing operations. In the production of military fabrics, the Company purchases a portion of its greige goods needs and finishes this fabric to specifications. The woven fabrics division is currently operating its manufacturing facilities at near full capacity. The division also produces a variety of unfinished light- weight woven fabrics that are ultimately used in the manufacture of apparel (including blouses, dresses and suit linings), home furnishings (including shower curtains) and medical tape. Fabrics include filament acetate, textured polyester and other "semi-fancy" fabrics of more complicated construction. The unfinished woven fabrics operation is operating at less than full capacity. Raw Materials Delta Mills Marketing Company's principle raw material is cotton, although it also spins polyester, wool, linen fiber, acrylic, nylon and rayon fibers and weaves filament acetate and textured polyester. Polyester is obtained primarily from three major suppliers, all of whom provide competitive prices. Polyester and rayon are currently at the lowest prices the Company has paid since fiscal year 1993. There can be no assurance, however, that this trend will continue. During fiscal year 1998, the Company's average price per pound of cotton purchased and consumed (including freight, carrying cost and cost for the relatively high amount of premium cotton the Company uses) was $.817, compared to $.833 in fiscal year 1997 and as compared to $.944 in fiscal year 1996. In fiscal year 1999 the company expects to use approximately 98 million pounds of cotton (including approximately 28 million pounds of premium cotton) and 12 million pounds of polyester in its manufacture of yarn for woven textiles. The company has contracted to purchase about 64% of its expected cotton requirements for fiscal year 1999. The percentage of the Company's cotton requirements that the Company fixes each year varies depending upon the Company's forecast of future cotton prices. The Company believes that recent cotton prices have enabled it to contract for cotton at prices that will permit it to be competitive with other companies in the United States textile industry when the cotton purchased for future use is put into production. To the extent that cotton prices decrease before the Company uses these future purchases, the Company could be materially and adversely affected as there can be no assurance that it would be able to pass along these increased cost to its customers. Item I (Continued) Duck Head Apparel Segment Duck Head produces collections of men's and boy's 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 boy's woven uniforms, sportswear and casualwear under the private labels of its customers. The division also licenses various other categories of apparel and accessories, through an affiliated company. "Duck Head" labeled products are primarily marketed by employed sales staff to regional and national retailers. The "Duck Head" trademark has been associated with apparel since 1865 and has been historically distributed in the Southeastern United States. The Company acquired the brand in February 1989. The Company has recently capitalized on the rise in popularity of the brand and expanded its marketing efforts in department stores. The division opened its first in-store Duck Head shop in April 1997 and now has installed over 500 men's and 200 boy's shops in major department stores. The "shop" display format of the entire Duck Headline utilizes dedicated retail floor space in the sportswear department positioned with other national brands. Gross sales of "Duck Head" labeled products were approximately $92 million, $90 million, and $79 million during fiscal 1998, 1997, and 1996, respectively. "Duck Head" Apparel operates a total of 3 facilities located in Georgia and Costa Rica. The division purchases the fabrics used in its products from a number of producers. "Duck Head" currently acquires a substantial amount of its finished products from other companies throughout the world. This outside production takes the form of sewing fabric parts cut at "Duck Head" facilities, cutting and sewing with fabric and patterns supplied by "Duck Head", or providing finished garments made to "Duck Head" specifications. The division maintains a staff of quality specialists who consistently monitor work in process at outside companies. The Company believes that there is ample capacity among outside contractors worldwide to meet its future production requirements. All of the products are warehoused in the division's facilities. "Duck Head" labeled apparel items are generally required to be inventoried to permit quick shipment and to level production schedules. Customer private label apparel items are generally made only to order. The division's products are manufactured primarily from 100% cotton. The division's marketing office is based in Winder, Georgia with regional sales managers and sales personnel located throughout the country. The "Duck Head division has 29 outlet stores located in 13 states that sell principally closeout and irregular "Duck Head" products. These stores also sell a small amount of apparel items manufactured by Duck Head licensees. Item I (Continued) Delta Apparel Segment Delta Apparel Company, headquartered in Duluth, Georgia, operates a total of 7 facilities and produces knitted T-shirts, polo-type shirts and sweatshirts. The division markets its products primarily to companies that screen print shirts for resale and to distributors. Net sales in this division were $108 million, $112 million and $123 million during fiscal 1998, 1997, and 1996, respectively. The division's marketing is performed by employed sales personnel located throughout the country. Sales personnel call directly on the retail trade, contacting department stores, distributors, screen printing companies and the mass marketers such as discount houses. This operation also utilizes independent sales representatives to sell to distributors and screen printing companies. Most knit apparel items are inventoried to permit quick shipment and to level production schedules. Special knit apparel items and customer private label knit apparel styles generally are made only to order. The division spins the majority of its yarn at the Company's modern facility in Edgefield , South Carolina, with the remainder being purchased from outside vendors. The division knits, dyes, finishes, and cuts fabric in a company owned plant in Maiden, North Carolina and sews garments in company owned plants in Tennessee, Georgia and Honduras. The division also uses outside sewing contractors when demand exceeds internal production capacities. Fabrics used by the division are primarily 100% cotton and polyester/cotton blends. 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 non-durable goods. The textile and apparel industries are also cyclical because the supply of particular products changes as competitors enter or leave the market. The Company sells textiles primarily to domestic apparel manufacturers, many of which operate offshore sewing operations. The Company competes with numerous domestic and foreign manufacturers, including companies larger in size and having greater financial resources than the Company. The principal competitive factors are price, service, delivery time, quality and flexibility, with the relative importance of each factor depending upon the needs of particular customers and the specific product offering. Delta Mills Marketing Company's competitive position varies by product line. There are several major domestic competitors in the finished cotton and cotton/polyester Item I (Continued) blend woven fabrics business, none of which dominates the market. The Company believes, however, that it has a strong competitive position in the all cotton pants-weight fabrics business, as well as the spun synthetic slack-weight and skirt-weight woven fabrics businesses. In addition, the Company is one of several major domestic suppliers of acetate unfinished fabric used in apparel linings and surgical tapes. Additional competitive strengths of the woven fabrics division include: knowledge of its customers' business needs; its ability to produce special fabrics such as textured blends; state of the art spinning, weaving and fabric finishing equipment at most of its facilities; substantial vertical integration; and its ability to communicate electronically with its customers. Foreign competition is a significant factor in the United States fabric market. The division believes that its relatively small manual labor component, highly-automated manufacturing processes and domestic manufacturing base allow the division to compete on a price basis and to respond more quickly than foreign producers to changing fashion trends and to its domestic customers' delivery schedules. In addition, the division benefits from protections afforded to apparel manufacturers based in certain Latin American and Caribbean countries that ship finished garments into the United States. NAFTA has effectively eliminated or substantially reduced tariffs on goods imported from Mexico if such goods are made from fabric originating in Canada, Mexico, or the United States. Section 807 provides for the duty free treatment of United States origin components used in the assembly of imported articles. The result is that duty is assessed only on the value of any foreign components that may be present and the labor cost incurred offshore in the assembly of apparel using United States origin fabric components. Because Section 807 creates an incentive to use fabric manufactured in the United States, it is beneficial to the division and other domestic producers of apparel fabrics. In addition, pursuant to Section 807A, apparel articles assembled in a Caribbean country, in which all fabric components have been wholly formed and cut in the United States, are subject to preferential quotas with respect to access into the United States for such qualifying apparel, in addition to the significant tariff reduction pursuant to Section 807. A similar program, enacted as a result of NAFTA and referred to as the Special Regime Program, provides even greater benefits (complete duty free, quota free treatment) for apparel assembled in Mexico from fabric components formed and cut in the United States. In contrast, apparel not meeting the criteria of Section 807, Section 807A, or the Special Regime Program, is subject to quotas and/or relatively higher tariffs. If Section 807, Section 807A or the Special Regime Program were repealed or altered in whole or in part, the Company believes that it could be at a serious competitive disadvantage relative to textile manufacturers in other parts of the world seeking to enter the United States market, which would have a material adverse effect on the division. Moreover, there can be no assurance that the current favorable regulatory environment will continue or that other geographic areas will not be afforded similar regulatory advantages. Item I (Continued) Duck Head Apparel Company 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 cost and lower the risk that product availability will not match consumer demand. The division is oriented towards supplying its customers with all or some of these competitive advantages. Delta Apparel Company competes with a number of domestic branded and private label manufacturers of T-shirts, Fleece products, and Placket shirts. Many of these companies are larger in size and have greater financial resources than the Company. The division also competes with imported garments to a lesser extent. The division, along with all of its major competition, makes use of Section 807 and Section 807A of the tariff code and/or NAFTA and assembles a substantial amount of its garment production in certain Latin American or Caribbean countries and Mexico. If Section 807 or Section 807A or any similar program were repealed or altered in whole or in part, the division believes it would be at a serious competitive disadvantage relative to textile and apparel manufactures in the rest of the world seeking to enter the United States market, which would have a material and adverse effect on the division. Moreover, there can be no assurance that the current favorable regulatory environment will continue or that other geographic areas will not be afforded similar regulatory advantages. Employees The Company has approximately 6,000 employees. The Company's employees are not represented by unions. The Company believes that its relations with its employees are good. Environmental and Regulatory Matters Delta Woodside is subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions, ozone depletion and solid waste disposal. Delta Woodside's plants generate very small quantities of hazardous waste which are either recycled or disposed of off-site. Most of its plants are required to possess one or more discharge permits. The information contained under the subheading "Environmental Matters" under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" incorporated into item 7 of this form 10-K is incorporated herein for reference. Item I (Continued) Generally, the environmental rules applicable to the company are becoming increasingly stringent. The Company incurs capital and other expenditures in each year that are aimed at achieving compliance with current and future environmental standards. The Company does not expect that the amount of such expenditures in the future will have a material adverse effect on its operations or financial condition. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of Delta Woodside's liability, if any, for past failures to comply with laws, regulations and permits applicable to its operations cannot be determined. Industry Segment Information Segment information made part of Note G of the Company's consolidated financial statements for the fiscal year ended June 27, 1998 is incorporated herein by reference. Other Information concerning order backlogs in "Management's Discussion and Analysis of Results of Operations and Financial Condition, Consolidated Company Results, Fiscal 1997, Verses Fiscal 1997" incorporated into Item 7 of this Form 10K is incorporated herein by reference. Item 2. PROPERTIES The following table provides a description of Delta Woodside's principal production and warehouse facilities. Approximate Square Location Utilization Footage Owned/Leased Delta Mills Marketing Company Greenville, SC Admin. Offices17,400 Leased (1) Beattie Plant, Fountain Inn, SC spin/weave 390,000 (2) Furman Plant, Fountain Inn, SC weave 155,000 (2) Estes Plant, Piedmont, SC spin/weave 332,000 (2) Delta 3 Plant, Wallace, SC dye/finish 555,000 (2) Cypress Plant, Pamplico, SC spin 144,000 (2) Pamplico Plant, Pamplico, SC spin/weave 275,000 (2) Delta 2 Plant, Wallace, SC dye/finish 347,000 (2) Catawba Plant, Maiden, NC spin 115,000 Owned Delta Apparel Company Duluth, GA Admin. Offices 40,244 Leased Rainsford Plant, Edgefield, SC spin 296,000 Owned(6) Maiden Plant, Maiden, NCknit/dye/finish/cut 305,000 Owned Washington Plant, Washington, GA sew 129,800 Owned Distribution Center, Knoxville, TN distribution 550,000 Owned Decatur Plant, Decatur, TN sew 75,000 Owned(4) Honduras Plant, San Pedro Sula, Honduras sew70,000 Leased(3) Duck Head Apparel Company Monroe #3, Monroe, GA cut 52,000 Owned Monroe #2, Monroe, GA pressing 93,000 Owned Harmony Plant, San Jose, Costa Rica sew 14,000 Owned San Jose Plant, San Jose, Costa Rica sew 60,000 Leased(3) 316 Distribution Center, Winder, GAadmin offices and warehouse200,000 Owned Various (5) stores Discontinued Operations Independence, VA manufacturing 251,000 Owned Greer, SC Admin. Offices 12,000 Owned Carter Plant, Wallace, NC dye/finish 485,000 Owned Holly Plant, Wallace, NC knit/finish 224,000 Owned Item 2. PROPERTIES (1) Lease expires in December 1998 with the right to renew for two additional five-year periods. (2) Titles to these facilities and substantially all of the equipment located in such facilities are held by three South Carolina counties under a fee-in-lieu-of-taxes arrangement, which has the effect of substantially reducing the Company's property taxes in South Carolina. Although the Company can reacquire such property at a nominal price, this would currently cause a significant increase in the amount of property taxes paid by the Company. (3) The Honduras plant has a lease that expires in November 2000. The San Jose plant is leased on a month-to-month basis. (4) The "Duck Head " Outlet Stores lease a portion of the facility for retail sales. (5) The "Duck Head" Outlet Stores operation leases 29 facilities in 13 states, which leased space is approximately 142,000 square feet. These leases expire at various dates through 2006. (6) The Rainsford Plant is owned by Delta Mills, Inc. The plant is managed by Delta Apparel Company. Except as noted above all of the above facilities are owned by Delta Woodside or one of its subsidiaries, subject in certain cases to various outstanding mortgages and security interests. Delta Woodside leases corporate offices in Greenville, South Carolina. The lease on the corporate offices expires September 1, 2003. Sales offices are leased in or near Charlotte, New York, Chicago, Newport Beach, San Francisco, Dallas and Los Angeles with leases expiring through December 2004. At the date of execution of this Form 10-K, the Company believes that its weaving plants are operating near full production capacity. Various factors affect the relative use by the Company's apparel division segment of their own facilities and outside contractors in the various apparel production phases. The apparel divisions are currently using the majority of their internal production capacity. The fitness equipment operation is operating at approximately 35% of its production capacity. The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors. The Company's accounts receivable and inventory, and certain other intangible property (including the capital stock of the Company's major United States subsidiaries), secure the Company's credit facility or the credit facility of the Company's indirect wholly owned subsidiary, Delta Mills, Inc. Item 3. LEGAL PROCEEDINGS From time to time the Company and its subsidiaries are defendants in legal actions involving claims arising in the normal course of its business, including product liability claims. The Company believes that, as a result of its legal defenses, insurance arrangements and indemnification provisions with financially capable parties, none of these actions is reasonably likely to have a material adverse effect on its results of operations or financial condition taken as a whole. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the Company's 1998 fiscal year. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The material under the heading "Common Stock Market Prices and Dividends" on the inside front cover of the Company's annual shareholders' report for the year ended June 27, 1998 is incorporated herein by reference. The following table shows the issuances by the Company during fiscal 1997 of its shares of common stock that were not registered under the Securities Act of 1933, as amended, and were not previously reported by the Company in a Form 10-Q. Amount of Class of Nature of Date of Issuance Common Stock Persons Transaction February 19, 1998 50 Employees Service Awards April 30, 1998 450 Employees Service Awards May 21, 1998 100 Employees Service Awards June 26, 1998 150 Employees Service Awards July 13, 1998 175 Employees Service Awards The Company believes these issuances are exempt from registration under the Securities Act of 1933 by reason of Section 4(2) of the Securities Act of 1933 and as not constituting a "sale". Item 6. SELECTED FINANCIAL DATA The material under the heading "Selected Financial Data" on page 1 of the Company's annual shareholders' report for the year ended June 27, 1998 is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The material under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 4 through 9 (exclusive of graphs) of the Company's annual shareholders' report for the year ended June 27, 1998 is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a part of Delta Woodside's business of converting fiber to finished fabric, the Company makes raw cotton purchase commitments and then fixes prices with cotton merchants who buy from producers and sell to textile manufacturers. Daily price fluctuations are minimal, yet long-term trends in price movement can result in unfavorable pricing of cotton for the Company. Before fixing prices, the Company looks at supply and demand fundamentals, recent price trends and other factors that affect cotton prices. The Company also reviews the backlog of orders from customers as well as the level of fixed price cotton commitments in the industry in general. Carrying Amount Fair Value (In thousands) Cotton in inventory $2,443 $2,456 Fiscal year 1999 fixed price purchase commitments $48,288 $51,437 Fiscal year 2000 fixed price purchase commitments $ 7,345 $ 7,441 Interest Rate Sensitivity The following debt obligations are sensitive to changes in interest rates: $150 million of unsecured ten year senior notes due 2007 at a fixed rate of 9.625%. $100 million of secured five-year revolving credit facility expiring 2002 with interest of 7.4% at June 27, 1998. Interest is based on LIBOR. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements included on pages 14 through 20 of the Company's annual shareholders' report for the year ended June 27, 1998 are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the headings "Election of Directors" ,"Executive Officers" and "Section 16 (a) Beneficial Ownership Reporting Compliance". Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the headings "Management Compensation" and "Compensation Committee Interlocks and Insider Participation". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the heading "Stock Ownership of Principal Shareholders and Management". Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission on or prior to 120 days following the end of the Company's fiscal year under the heading "Related Party Transactions". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) Financial Statements and Financial Statement Schedules The response to this portion of Item 14 is set forth on page F-2 included herein, which response is incorporated herein by reference. (3) Listing of Exhibits:* 3.1 Articles of Incorporation of the Company, as amended through February 5, 1989: Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of RSI Corporation and Porter Brothers, Inc., File No. 33- 30247 (the "Form S-4"). 3.1.1 Articles of Amendment to Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1.2 to the Form S-4. 3.1.2 Articles of Merger of Harper Brothers, Inc. into RSI Corporation: Incorporated by reference to Exhibit 4.1.1 to the Registration Statement of the Company on Form S-8, File No. 33- 33116 (the "1990 Form S-8"). 3.1.3 Articles of Merger of Delta Woodside Industries, Inc., a Delaware corporation, into RSI Corporation: Incorporated by reference to Exhibit 4.1.2 to the 1990 Form S-8. 3.1.4 Articles of Merger of Duncan Office Supplies, Inc., into Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarterly period ended December 29, 1990 (the "December 1990 10- Q"). 3.1.5 Articles of Amendment to the Articles of Incorporation of Delta Woodside Industries, Inc., filed with the South Carolina Secretary of State on November 15, 1991: Incorporated by reference to Exhibit 4.6 to the Form 10-Q of the Company for the quarterly period ended December 28, 1991. 3.2 By-laws of the Company, as amended: Incorporated by reference to Exhibit 3.1.1 to the Form S-4. Item 14 (Continued) 3.2.1 Amendments to By-laws of the Company: Incorporated by reference to Exhibit 3.2 to the December 1990 10-Q. 3.2.2 Amendment to By-laws of the Company, adopted as of June 29, 1992: Incorporated by reference to Exhibit 3.2.2 to the Company's Form 10-K for the fiscal year ended June 27, 1992 (the "1992 10-K"). 4.1 See Exhibits 3.1, 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.1.5, 3.2, 3.2.1. and 3.2.2. 4.1.1 Specimen of Certificate for the Company's Common Stock: Incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, File No. 33-42710 (the "Form S-3"). 4.2 Amended and Restated Credit Agreement dated as of March 15, 1996 among Delta Woodside Industries, Inc., the Lenders named therein, and NationsBank, N.A. as Agent (with exhibits and schedules omitted) together with forms of Promissory Notes, Subsidiary Guaranty, Borrower Security Agreement, Subsidiaries Security Agreement and certain other documents: Incorporated by reference to Exhibit 4.4 to the Form 10-Q of the Company for the quarterly period ended March 30, 1996. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules or exhibits to such agreement upon request of the Commission. 4.2.1 Amendment and Waiver Agreement dated as of May 20, 1996, by and among Delta Woodside Industries, Inc., the guarantors identified on the signature pages attached thereto and the lenders and agents thereto: Incorporated by reference to Exhibit 4.4.1 to the Form 8-K of the Company with date of May 28, 1996 (the "May 1996 8-K"). The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules or exhibits to such agreement upon request of the Commission. 4.2.2 Pledge Agreement dated as of May 20, 1996 by and among Delta Woodside Industries, Inc., the guarantors from time to time party thereto and NationsBank, N.A., in its capacity as agent for the lenders from time to time party to the Credit Agreement described therein: Incorporated by reference to Exhibit 4.4.2 to the May 1996 8-K. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules or exhibits to such agreement upon request of the Commission. Item 14 (Continued) 4.2.3 Second Amendment and Waiver Agreement dated as of December 20, 1996, among Delta Woodside Industries, Inc., the guarantors identified as such on the signature pages attached, the lenders and agents, together with forms of certain real estate lien documents: Incorporated by reference to Exhibit to the Form 10-Q of the Company for the quarterly period ended December 28, 1996. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules or exhibits to such agreement upon request of the Commission. 4.2.4 Credit Agreement dated as of August 25, 1997 among Delta Mills, Inc., as Borrower, certain subsidiaries of the Borrower from time to time party thereto, as guarantors, the several lenders from time to time party thereto, NationsBank, N.A., as Administrative Agent, and BNY Financial Corporation, as Collateral Agent, together with forms of certain related instruments, agreements and documents (excluding schedules): Incorporated by reference to Exhibit 4.2.4 to Form 8-K/A of the Company with date of September 25, 1997. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules to such agreement upon request of the Commission. 4.2.4.1 Amendment and Waiver Agreement dated as of May 11, 1998 respecting Credit Agreement dated as of Agreement dated as of August 25, 1997: Incorporated by reference to the Form 10-Q of the Company for the quarter ended March 28, 1998. 4.2.4.2 Second Amendment to Credit Agreement dated as of July 29, 1998 respecting Credit Agreement dated as of August 25, 1997. 4.2.5 Credit Agreement dated as of August 25, 1997 among Delta Woodside Industries, Inc., as Borrower, certain subsidiaries of the Borrower from time to time party thereto, as guarantors, the several Lenders from time to time party thereto and NationsBank, N. A. as Agent , together with forms of certain related instruments, agreements and documents (excluding schedules): Incorporated by reference to Exhibit 4.2.5 to Form 8- K/A of the Company with date of September 25, 1997. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedules to such agreement upon request of the Commission. 4.2.6 Indenture, dated as of August 25, 1997 with respect to Delta Mills, Inc.$150,000,000 Series A and Series B 9 5/8% Senior Notes due 2007, with The Bank of New York, as Trustee, together with forms of certain related instruments, agreements and documents: Incorporated by reference to Exhibit 4.2.6 to Form 8-K/A of the Company with date of September 25, 1997. Item 14 (Continued) 4.3 The Company hereby agrees to furnish to the Commission upon request of the Commission a copy of any instrument with respect to long-term debt not being registered in a principal amount less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10.1 Lease, dated December 27, 1987 by and between Hammond Square, Ltd. and the Company: Incorporated by reference to Exhibit 10.10 to Registration Statement No. 33-22563 on Form S-4 of Delta Woodside Industries, Inc., a Delaware corporation ("Registration Statement No. 33- 22563"). 10.2** Delta Woodside Deferred Compensation Plan for Key Employees: Incorporated by reference to Exhibit 10.6 to the Form 10-Q of the Company for the quarterly period ended December 30, 1989. 10.3** Incentive Stock Award Plan effective July 1, 1990: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the fiscal quarter ended March 31, 1990. 10.3.1** 1995 Amendment to the Incentive Stock Award Plan effective as of November 9, 1995: Incorporated by reference to Exhibit 10.3.1 to the Form 10-Q of the Company for the quarterly period ended December 30, 1995 (the "December 1995 10- Q"). 10.3.2** 1997 Amendment to Incentive Stock Award Plan effective as of November 6, 1997: Incorporated by reference to exhibit 99.1 to Registration Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-45771) 10.4.1** Stock Option Plan effective as of July 1, 1990: Incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended June 30, 1990. 10.4.2** Amendment No. 1 to Stock Option Plan: Incorporated by reference to Exhibit 10.1 to the December 1990 10-Q. 10.4.3** Amendment to Stock Option Plan: Incorporated by reference to Exhibit 10.9.2 to the Company's Form 10-K for the fiscal year ended June 29, 1991 (the "1991 10-K"). 10.4.4** 1995 Amendment to the Stock Option Plan effective as of November 9, 1995: Incorporated by reference to Exhibit 10.4.4 to the December 1995 10-Q. Item 14 (Continued) 10.4.5** 1997 Amendment to Stock Option Plan effective as of November 6, 1997: Incorporated by reference to Exhibit 99.1 to Registration Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-4567). 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** Delta Woodside Industries, Inc. Long Term Incentive Plan: Incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-4 of Delta Mills, Inc. (File No. 333-37617). 10.11 Registration Rights Agreement, dated as of August 25, 1997, by and among Delta Mills, Inc., Delta Mills Marketing, Inc. and NationsBanc Capital Markets, Inc.: Incorporated by reference to Exhibit 1.2 to Registration Statement on Form S- 4 of Delta Mills, Inc. (File No. 333-376-17). 10.12 Purchase Agreement relating to $150 million 9 5/8% Senior Notes due 2007, dated August 20, 1997, by and among Delta Mills, Inc., Delta Mills Marketing, Inc. and NationsBanc Capital Markets, Inc.: Incorporated by reference to Exhibit 1.1 to Registration Statement on Form S-4 of Delta Mills, Inc. (File No. 333-376-17). 10.13 See Exhibits 4.2, 4.2.1, 4.2.2, 4.2.3, 4.2.4, 4.2.4.1, 4.2.4.2, 4.2.5, and 4.2.6. Item 14 (Continued) 13 Annual Report to Shareholders of the Company for the fiscal year ended June 27, 1998. 21 Subsidiaries of the Company. 23.1 Report on Schedule and Independent Auditors' Consent. * 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 No report on Form 8-K was filed during the quarter ended June 27, 1998. (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. /s/ E. Erwin Maddrey, II Date E. Erwin Maddrey, II President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ C. C. Guy /s/ E. Erwin Maddrey C. C. Guy Date E. Erwin Maddrey, II Date Director President, Chief Executive Officer and Director /s/ James F. Kane /s/ Bettis C. Rainsford James F. Kane Date Bettis C. Rainsford Date Director Executive Vice President, Chief Financial Officer, Treasurer and Director /s/ Max Lennon /s/ Robert W. Humphreys Max Lennon Date Robert W. Humphreys Date Director Vice President - Finance /s/ Buck A. Mickel Buck A. Mickel Date Director EXHIBIT INDEX 4.2.4.2 Second Amendment to Credit Agreement 13 Annual Report to Shareholders of the Company for the fiscal year ended June 27, 1998. 21 Subsidiaries of the Company. 23.1 Report on Schedule and Independent Auditor's Consent. ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED JUNE 27, 1998 DELTA WOODSIDE INDUSTRIES, INC. GREENVILLE, SOUTH CAROLINA F-1 FORM 10-K--ITEM 14(a)(1) AND (2) DELTA WOODSIDE INDUSTRIES, INC. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Delta Woodside Industries, Inc. and subsidiaries included in the Annual Report of the Registrant to its shareholders for the Year ended June 27, 1998 are incorporated by reference in Item 8: Consolidated balance sheets- June 27, 1998 and June 28, 1997 Consolidated statements of operations--Years ended June 27, 1998, June 28, 1997 and June 29, 1996. Consolidated statements of shareholders' equity--Years ended June 27, 1998, June 28, 1997 and June 29, 1996. Consolidated statements of cash flows--Years ended June 27, 1998, June 28, 1997 and June 29, 1996. Notes to consolidated financial statements. The following consolidated financial statement schedule of Delta Woodside Industries, Inc. is included in Item 14(d): Schedule II -- Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted from schedules filed have been omitted because the information is not applicable. F-2 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS DELTA WOODSIDE INDUSTRIES, INC.
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 accounts: Year ended June 27, 1998 $ 5,358,000 $ 2,771,000 $ (333,000)(2) $ 1,379,000(1) $ 6,417,000 Year ended June 28, 1997 $ 6,258,000 $ 1,215,000 $ (171,000)(2) $ 1,944,000(1) $ 5,358,000 Year ended June 29, 1996 $ 5,634,000 $ 2,577,000 $ 695,000(2) $ 2,648,000(1) $ 6,258,000 Inventory reserves: Year ended June 27, 1998 $24,464,000 $14,904,000(3) $ 9,560,000 Year Ended June 28, 1997 $40,879,000 $16,415,000(3) $24,464,000 Year ended June 29, 1996 $14,052,000 $ 26,827,000 $40,879,000 NOTES: (1) Uncollectible accounts written off. (2) Net change in sales allowances charged to income as a reduction of sales. (3) Deducted from costs and expenses.
EX-4 2 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of July 29, 1998, is entered into by and among Delta Mills, Inc. (the "Borrower"), the guarantors identified as such on the signature pages attached hereto (the "Guarantors;" collectively, the Borrower and the Guarantors are referred to as the "Credit Parties"), the lenders identified as such on the signature pages hereto (the "Lenders"), NationsBank, N.A., as Administrative agent (the "Administrative Agent") for the Lenders, and BNY Financial Corporation, as Collateral agent (the "Collateral agent") for the Lenders. RECITALS A. The Borrower, the Guarantors, the Lenders, the Administrative Agent and the Collateral Agent entered into that certain Credit agreement dated as of August 25, 1997, as amended by that first Amendment and Waiver to Credit Agreement dated as of May 11, 1998 (as so amended, the "Existing Credit Agreement"). B. The Lenders have agreed to execute and deliver this Amendment on the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: PART I DEFINITIONS Subpart 1.1 General Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Amendment, including the preamble and recitals, have the meanings provided in the Existing Credit Agreement. SUBPART 1.2 Certain Definitions. Unless the context otherwise required, the following terms used in this Amendment shall have the indicated definitions: "Amended Credit Agreement' means the Existing Credit Agreement as amended hereby. "Amendment No. 2 Effective Date" has the meaning ascribed to such term in Part 4.1 of this Amendment. PART II AMENDMENTS TO EXISTING CREDIT AGREEMENT SUBPART 2.1 Amendment to Section 7.11. Sections 7.11(a), (c) and (d) of the Existing Credit Agreement are hereby amended and restated to read as follows: 7.11 Financial Covenants. (a) Interest Coverage Ratio. The Interest Coverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be greater than or equal to: Fiscal Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1998 2.5 2.5 1.1 1.1 1998 1.1 1.1 3.0 3.0 2000 3.0 3.0 3.0 3.2 2001 3.2 3.2 3.2 3.4 thereafter 3.4 (c) Leverage Ration. The Leverage Ratio, as of the last day of each fiscal quarter of the Consolidated Parties, shall be less than or equal to: Fiscal Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1998 4.5 4.5 9.0 9.0 1999 9.0 8.5 3.8 3.4 2000 3.4 3.4 3.4 3.0 thereafter 3.4 (d) Consolidated Tangible Net Worth. At all times the Consolidated Tangible Net Worth shall be greater than or equal to: (i) for the period from the Closing Date to and including the next to last day of the third fiscal quarter of fiscal year 1998 of the consolidated Parties, $50,000,000; (ii) for the period from the last day of the third fiscal quarter of fiscal year 1998 to and including the next to last day of the second fiscal quarter of fiscal year 1998 of the Consolidated Parties, $30,000,000; (iii) for the period from the last day of the second fiscal quarter of fiscal year 1999 to and including the next to last day of the fourth fiscal quarter of fiscal year 1999 of the Consolidated Parties, $35,000,000; (iv) for the period from the last day of the fourth fiscal quarter of fiscal year 1999 to and including the next to last day of fiscal year 2000 of the Consolidated Parties, $45,000,000; (v) for the period from the last day of fiscal year 2000 to and including the next to last day of fiscal year 2001 of the Consolidated Parties, $65,000,000; and (vi) for the period from the last day of fiscal year 2001 and thereafter, $80,000,000. SUBPART 2.2 Amendment to section 8.5. Clause (d) of Section 8.5 of the Existing Credit Agreement is amended to read as follows: 8.5 Asset Dispositions. (d) The aggregate net book value of all of the assets sold or otherwise disposed of by the Consolidated Parties in all such transactions after the Closing Date (excluding dispositions of the assets of the Stevcoknit division of the Borrower) shall not exceed $7,500,000, PART III REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES Each Credit Party hereby represents and warrants to the Administrative Agent and to each Lender that: (i) each of the representations and warranties of the Borrower contained in the Amended Credit Agreement or in any other Credit Document is true as of the date hereof (after giving effect to this Amendment); (ii) after giving effect to this Amendment, no Default of Event of the Default exists and is continuing under the Amended Credit Agreement; (iii)since the date of the last financial statements of the Borrower delivered to Lenders, no material adverse change has occurred in the business, financial condition, operations or prospects of the Consolidated Parties other than as previously disclosed to the Lenders; and (iv) no consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment. PART IV CONDITIONS TO EFFECTIVENESS SUBPART 4.1. Effective Time of Amendment. This Amendment shall be and become effective as of the first Business Day upon which each of the conditions set forth in this Subpart 4.1 shall have been completed to the satisfaction of the Administrative Agent and the Required Lenders (the " Amendment No. 2 Effective Date"). SUBPART 4.1. Execution of Amendment. The Administrative Agent shall have received counterparts (or other evidence of execution, including telephonic message, satisfactory to the Administrative Agent) of the due execution of this Amendment on behalf of the Credit Parties and the Required Lenders. SUBPART 4.2. Amendment Fees. The Administrative Agent shall have received from the Borrower, on the Amendment No.2 Effective Date, for the account of each Lender, in immediately available funds, an amendment fee of 0.05% of each Lender's Commitment. SUBPART 4.3. Other Documents. The Administrative Agent shall have received such other documents relating to the transactions contemplated hereby as the Administrative Agent or counsel to the Administrative Agent may reasonably request of the Borrower in writing on or before the amendment No. 2 Effective Date. SUBPART 4.4 Expenses of Administrative Agent. The Borrower shall have reimbursed the Administrative Agent for all reasonable out-of- pocket expenses of the Administrative Agent, including without limitation, all reasonable fees and expenses of its attorneys, incurred in connection with the negotiation, preparation or execution of this Amendment. PART V MISCELLANEOUS SUBPART 5.1 Further Assurances. As soon as practicable after receipt of a written request from the Administrative Agent, and in any event not later than 30 days from the date such request is received by the Borrower, The Credit Parties shall cause to be delivered to the Administrative Agent, in form and content reasonably satisfactory to the Administrative Agent, all documents or other instruments incident to the transactions contemplated by this Agreement in the reasonable judgment of the Administrative Agent. SUBPART 5.2. References. References in this Amendment to any Part or Subpart are unless otherwise specified, to such Part or Subpart of this Amendment. As of the Amendment No. 2 Effective Date, all references in the Credit Documents to the "Credit Agreement" shall be deemed to refer to such document as amended by this Amendment. SUBPART 5.3. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which constitute together one and the same agreement. SUBPART 5.4. Governing Law. This Amendment shall be deemed to be a contract made under and governed by the internal laws and judicial decisions of the State of North Carolina without giving effect to the conflict of law principles thereof. SUBPART 5.5 Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. SUBPART 5.6 Entire Agreement. The Amended Credit Agreement, this Amendment, and the other Credit Documents, as amended hereby, constitute the entire contract among the parties relative to the subject matter hereof. SUBPART 5.7 No Other Changes. Except as expressly modified and amended in this Agreement, all of the terms, provisions and conditions of the Credit Documents shall remain unchanged. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. BORROWER: DELTA MILLS, INC., a Delaware corporation By: /s/ Bettis C. Rainsford Name: Bettis C. Rainsford Title: EVP, Treasurer, CFO GUARANTOR: DELTA MILLS MARKETING, INC. a Delaware corporation By: /s/ Bettis C. Rainsford Name: Bettis C. Rainsford Title: EVP, Treasurer, CFO LENDERS: NATIONSBANK, N.A., individually as a Lender and in its capacity as Administrative Agent By: /s/ E. Phifer Helms Name: E. Phifer Helms Title: Senior Vice President BNY FINANCIAL CORPORATION, individually as a Lender and in its capacity as Collateral Agent By: /s/ J.M. Frangos_________ Name: J.M. Frangos Title: Senior Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ / Elaine L. Moore Name: Elaine L. Moore Title: Senior Vice President & Manager Consumer Finance COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH By: /s/ Theodore W. Cox Name: Theodore W. Cox Title: Vice President By: /s/ W. Jeffrey Vollack Name: W. Jeffrey Vollack Title: Senior Credit Office & Senior Vice President EX-13 3 -------------------------------- 1998 Annual Report -------------------------------- [Delta Woodside Logo] - -------------------------------------------------------------------------------- Contents Common Stock Market Prices and Dividends....Inside Front Cover Selected Financial Data........2 Letter to Shareholders.........3 Management's Discussion and Analysis....................4-8 Operations by Industry Segment.......................9 Report of KPMG Peat Marwick LLP..................10 Consolidated Financial Statements................11-20 Corporate Directory.....Inside Back Cover Common Stock Market Prices and Dividends The Common Stock of the Company is listed on the New York Stock Exchange under the symbol DLW. The stock transfer agent for Delta Woodside Industries, Inc. is First Union National Bank of North Carolina, Shareholder Services Group, Two First Union Center, Charlotte, North Carolina 28288-1154. The following table presents a two-year history of the high and low stock sales prices for the Common Stock, as reported by the New York Stock Exchange composite tape.
FISCAL QUARTERS: 1998 1997 ------------------- --------------------- High Low High Low --------- ---------- --------- --------- First Quarter $6 3/4 $5 5/16 $5 1/2 $4 5/8 - ----------------- ------- ------- ------ ------ Second Quarter 6 5/16 4 3/4 6 5/8 4 3/4 - ----------------- ------- ------- ------ ------ Third Quarter 5 9/16 4 5/16 8 5 1/2 - ----------------- ------- ------- ------ ------ Fourth Quarter 6 3/8 4 7/8 7 5 1/4 - ----------------- ------- ------- ------ ------
[Dividends] 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 September 18, 1998 there were approximately 1,857 holders of record of the Company's Common Stock. During fiscal 1998, the Company paid quarterly dividends of $.025 per share. The Company declared and paid dividends of $.10 per share in each of the first three quarters of fiscal 1996, and then stopped paying dividends until fiscal 1998. Dividend payments depend upon the Company's earnings, financial condition, capital requirements and other relevant factors. - -------------------------------------------------------------------------------- In Memoriam [Photo of Mr. Mickel appears here] Buck Mickel 1925-1998 Director of Delta Woodside Industries and a Friend of the Textile Industry During 41 years of active management in the construction industry as Chairman of Daniel International and later as President and Vice Chairman of Fluor Corporation, Buck Mickel was responsible for the construction of many of the textile plants located in the United States and throughout the world. In addition, Buck was instrumental in the growth of the U.S. textile industry by serving on the Boards of Graniteville Corporation; Monsanto Company; RSI Corporation; J.P. Stevens & Co., Inc.; and Delta Woodside Industries, Inc. He also served on the Boards of CSX, NationsBank, Duke Energy, Insignia Financial Group, Liberty Corporation and numerous others, which were also instrumental in helping out with the growth of the Textile Industry. Buck was a loving, caring, kind individual and a wonderful role model. We at Delta Woodside will truly miss his humor, his inspiration and his guidance. 1 - -------------------------------------------------------------------------------- Selected Financial Data In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share Data - -------------------------------------------------------------------------------- Operations 1998 1997 - ------------------------------------------------------------------------------- ---- ---- Net Sales $ 535,460 $530,278 - ------------------------------------------------------------------------------- --------- -------- Cost of Goods Sold 439,300 432,567 - ------------------------------------------------------------------------------- --------- -------- Gross Profit 96,160 97,711 - ------------------------------------------------------------------------------- --------- -------- Operating Profit (Loss) excluding Litigation and Restructuring Charges 35,233 46,644 - ------------------------------------------------------------------------------- --------- -------- Litigation (Credit) Charge - ------------------------------------------------------------------------------- Restructuring Charges (Credit) 8,895 - ------------------------------------------------------------------------------- --------- Operating Profit (Loss) 26,338 46,644 - ------------------------------------------------------------------------------- --------- -------- Earnings (Loss) Before Interest and Taxes 26,338 46,644 - ------------------------------------------------------------------------------- --------- -------- Interest Expense 23,395 23,354 - ------------------------------------------------------------------------------- --------- -------- Income (Loss) from Continuing Operations Before Income Tax 3,500 24,042 - ------------------------------------------------------------------------------- --------- -------- Income Taxes 884 9,256 - ------------------------------------------------------------------------------- --------- -------- Income (Loss) from Continuing Operations 2,616 14,786 - ------------------------------------------------------------------------------- --------- -------- Discontinued Operations (46,367) (7,395) - ------------------------------------------------------------------------------- --------- -------- Net Income (Loss) (43,751) 7,391 - ------------------------------------------------------------------------------- --------- -------- Financial Data - ------------------------------------------------------------------------------- Cash Flow (Income (Loss) from Continuing Operations plus Depreciation and Amortization) 33,173 37,404 - ------------------------------------------------------------------------------- --------- -------- Capital Expenditures 16,789 17,059 - ------------------------------------------------------------------------------- --------- -------- Depreciation and Amortization 30,557 22,618 - ------------------------------------------------------------------------------- --------- -------- Working Capital 170,761 229,568 - ------------------------------------------------------------------------------- --------- -------- Long-Term Debt 183,535 227,516 - ------------------------------------------------------------------------------- --------- -------- Funded Debt 195,253 233,597 - ------------------------------------------------------------------------------- --------- -------- Shareholders' Equity 179,567 225,367 - ------------------------------------------------------------------------------- --------- -------- Capital Employed 374,820 458,964 - ------------------------------------------------------------------------------- --------- -------- Total Assets 474,042 557,940 - ------------------------------------------------------------------------------- --------- -------- Financial Ratios - ------------------------------------------------------------------------------- Net Sales divided by Inventory 4.7 4.0 - ------------------------------------------------------------------------------- --------- -------- Net Sales divided by Accounts Receivable 4.5 4.7 - ------------------------------------------------------------------------------- --------- -------- Net Sales divided by Capital Employed 1.4 1.2 - ------------------------------------------------------------------------------- --------- -------- Operating Income (Loss) as % of Capital Employed 7.2 10.3 - ------------------------------------------------------------------------------- --------- -------- Current Ratio 2.8 3.8 - ------------------------------------------------------------------------------- --------- -------- Interest Coverage Ratio 1.1 2.0 - ------------------------------------------------------------------------------- --------- -------- Gross Profit as % of Sales 18.0 18.4 - ------------------------------------------------------------------------------- --------- -------- Income (Loss) from Continuing Operations Before Income Taxes as % of Sales 0.7 4.5 - ------------------------------------------------------------------------------- --------- -------- Income (Loss) from Continuing Operations as % of Sales 0.5 2.8 - ------------------------------------------------------------------------------- --------- -------- Income (Loss) from Continuing Operations as % of Beginning Equity 1.2 6.8 - ------------------------------------------------------------------------------- --------- -------- Common Stock Data (Per Share) - ------------------------------------------------------------------------------- Income (Loss) From Continuing Operations 0.11 0.60 - ------------------------------------------------------------------------------- --------- -------- Net Income (Loss) (1.78) 0.30 - ------------------------------------------------------------------------------- --------- -------- Dividends 0.10 - ------------------------------------------------------------------------------- --------- Book Value 7.29 9.19 - ------------------------------------------------------------------------------- --------- -------- Price Range -- High 6 3/4 8 - ------------------------------------------------------------------------------- --------- -------- -- Low 4 5/16 4 5/8 - ------------------------------------------------------------------------------- --------- -------- Weighted Average Shares Outstanding 24,575 24,513 - ------------------------------------------------------------------------------- --------- -------- Approximate Number of Shareholders 1,857 1,939 - ------------------------------------------------------------------------------- --------- -------- Operations 1996 1995 1994 - ------------------------------------------------------------------------------- ---- ---- ---- Net Sales $ 487,450 $467,202 $ 484,735 - ------------------------------------------------------------------------------- --------- -------- --------- Cost of Goods Sold 451,216 387,215 397,288 - ------------------------------------------------------------------------------- --------- -------- --------- Gross Profit 36,234 79,987 87,447 - ------------------------------------------------------------------------------- --------- -------- --------- Operating Profit (Loss) excluding Litigation and Restructuring Charges (20,018) 25,272 28,936 - ------------------------------------------------------------------------------- --------- -------- --------- Litigation (Credit) Charge (9,000) (7,000) 27,096 - ------------------------------------------------------------------------------- --------- -------- --------- Restructuring Charges (Credit) 8,259 (263) 7,463 - ------------------------------------------------------------------------------- --------- -------- --------- Operating Profit (Loss) (19,277) 32,535 (5,623) - ------------------------------------------------------------------------------- --------- -------- --------- Earnings (Loss) Before Interest and Taxes (19,277) 34,739 (5,623) - ------------------------------------------------------------------------------- --------- -------- --------- Interest Expense 18,993 13,646 8,639 - ------------------------------------------------------------------------------- --------- -------- --------- Income (Loss) from Continuing Operations Before Income Tax (37,822) 21,142 (13,540) - ------------------------------------------------------------------------------- --------- -------- --------- Income Taxes (14,561) 12,791 (5,281) - ------------------------------------------------------------------------------- --------- -------- --------- Income (Loss) from Continuing Operations (23,261) 8,351 (8,259) - ------------------------------------------------------------------------------- --------- -------- --------- Discontinued Operations (39,378) 1,747 (9,038) - ------------------------------------------------------------------------------- --------- -------- --------- Net Income (Loss) (62,639) 10,098 (17,297) - ------------------------------------------------------------------------------- --------- -------- --------- Financial Data - ------------------------------------------------------------------------------- Cash Flow (Income (Loss) from Continuing Operations plus Depreciation and Amortization) 1,337 25,484 8,998 - ------------------------------------------------------------------------------- --------- -------- --------- Capital Expenditures 59,512 40,559 11,113 - ------------------------------------------------------------------------------- --------- -------- --------- Depreciation and Amortization 24,598 17,133 17,257 - ------------------------------------------------------------------------------- --------- -------- --------- Working Capital (32,648) 286,887 241,950 - ------------------------------------------------------------------------------- --------- -------- --------- Long-Term Debt 283 219,119 161,948 - ------------------------------------------------------------------------------- --------- -------- --------- Funded Debt 242,644 219,395 162,812 - ------------------------------------------------------------------------------- --------- -------- --------- Shareholders' Equity 217,335 286,499 284,877 - ------------------------------------------------------------------------------- --------- -------- --------- Capital Employed 459,979 505,894 447,689 - ------------------------------------------------------------------------------- --------- -------- --------- Total Assets 537,716 610,296 567,003 - ------------------------------------------------------------------------------- --------- -------- --------- Financial Ratios - ------------------------------------------------------------------------------- Net Sales divided by Inventory 4.0 2.4 2.7 - ------------------------------------------------------------------------------- --------- -------- --------- Net Sales divided by Accounts Receivable 5.1 4.9 5.6 - ------------------------------------------------------------------------------- --------- -------- --------- Net Sales divided by Capital Employed 1.1 0.9 1.1 - ------------------------------------------------------------------------------- --------- -------- --------- Operating Income (Loss) as % of Capital Employed (4.1) 6.4 (1.1) - ------------------------------------------------------------------------------- --------- -------- --------- Current Ratio 0.9 4.8 3.5 - ------------------------------------------------------------------------------- --------- -------- --------- Interest Coverage Ratio (1.0) 2.5 (0.7) - ------------------------------------------------------------------------------- --------- -------- --------- Gross Profit as % of Sales 7.4 17.1 18.0 - ------------------------------------------------------------------------------- --------- -------- --------- Income (Loss) from Continuing Operations Before Income Taxes as % of Sales (7.8) 4.5 (2.8) - ------------------------------------------------------------------------------- --------- -------- --------- Income (Loss) from Continuing Operations as % of Sales (4.8) 1.8 (1.7) - ------------------------------------------------------------------------------- --------- -------- --------- Income (Loss) from Continuing Operations as % of Beginning Equity (8.1) 2.9 (2.5) - ------------------------------------------------------------------------------- --------- -------- --------- Common Stock Data (Per Share) - ------------------------------------------------------------------------------- Income (Loss) From Continuing Operations (0.95) 0.34 (0.34) - ------------------------------------------------------------------------------- --------- --------- --------- Net Income (Loss) (2.56) 0.42 (0.70) - ------------------------------------------------------------------------------- --------- --------- --------- Dividends 0.30 0.40 0.40 - ------------------------------------------------------------------------------- --------- --------- --------- Book Value 8.89 11.76 11.75 - ------------------------------------------------------------------------------- --------- --------- --------- Price Range -- High 9 3/4 12 12 1/2 - ------------------------------------------------------------------------------- --------- --------- --------- -- Low 4 3/8 7 5/8 9 3/4 - ------------------------------------------------------------------------------- --------- --------- --------- Weighted Average Shares Outstanding 24,443 24,317 24,550 - ------------------------------------------------------------------------------- --------- --------- --------- Approximate Number of Shareholders 2,081 2,154 2,221 - ------------------------------------------------------------------------------- --------- --------- ---------
- -------------------------------------------------------------------------------- (1) The amounts presented above for prior years have been restated to conform to the fiscal 1998 presentation of discontinued operations. The Stevcoknit knitted fabrics business and the Nautilus International fitness equipment business are presented as part of discontinued operations. (2) Capital Employed includes shareholders' equity and funded debt. (3) Depreciation and amortization include certain write-downs of property and equipment and reductions of excess of cost over assigned value of net assets acquired of $7 million, $15 million and $2 million in fiscal years 1998, 1996 and 1994, respectively. 2 - -------------------------------------------------------------------------------- To Our Fellow Shareholders To Our Shareholders: During the third quarter of fiscal 1998, we made the decision to exit the knit fabrics and fitness equipment businesses. This decision resulted in the closure of our Stevcoknit Fabrics Division and the announcement that we would sell our fitness equipment subsidiary, Nautilus International. These businesses are now accounted for as discontinued operations. We had participated in the knit fabrics business for the last twelve years with our Stevcoknit Fabrics Division. For the last several years the operating results in Stevcoknit had been unsatisfactory, despite our investment in modern equipment and expansion of our marketing efforts. We became convinced that this market was oversupplied, and demand for knit fabric made in the United States was weakening. Despite other competitors exiting this market, we saw demand and prices declining with little reasonable expectation for improvement. This decision resulted in the elimination of approximately 1,000 jobs in the division, and the closure of our knit, dye and finish plants in Wallace NC. The Mickel yarn plant has been sold, and the production from the Rainsford yarn plant has been directed to our Delta Apparel division. While we are saddened by the negative impact this decision had on many of our employees and the Wallace community, we are convinced that we made the best decision for the long term health of Delta Woodside and our shareholders. We purchased Nautilus International five years ago, with the hope that this strong consumer brand could be used to add value to our Delta Apparel division. While the Nautilus brand remains strong, we found that without a consumer product, it did not enhance the value of apparel. The fitness industry is going through a period of consolidation, and we felt the Nautilus brand would better fit a company whose core business is in the fitness industry. We now have three businesses that make up our continuing operations. Delta Mills Marketing Company which participates in the woven bottomweight apparel fabrics markets, Duck Head Apparel Company which provides moderately priced apparel for distribution through department stores, and Delta Apparel which produces knit apparel for the activewear market. Delta Mills Marketing Company had another excellent year in fiscal 1998. Sales were up two percent over fiscal 1997 to $343 million, which set a new record for the division. Operating profits, while down slightly from the prior year, were very good. This business has operated most facilities at capacity for the last two years. The capital expenditures made in recent years to modernize and expand capacity at this division continue to generate superior returns for Delta Woodside. We will be evaluating ways to further expand output in areas where demand for our products continue to exceed our capacity. Duck Head Apparel Company had a second consecutive year of growth in sales to $86 million during fiscal 1998. This represents a six percent increase over fiscal 1997 and occurred while the company reduced inventory by $8.6 million and improved customer service. Duck Head now has over 500 men's and 200 boys' in-store shops to help retailers display and merchandise the Duck Head products. This dedicated floor space allows us to provide a consistent message about Duck Head to the consumer and ensures us of having the proper space to display our merchandise. As we begin fiscal 1999, Duck Head will expand a consumer advertising program targeted to the 13 Southeastern states that make up their core business. We believe the program will fuel continued sales growth, and allow us to maintain the margins required to drive improved operating results. Delta Apparel, our knit apparel division, had a difficult year during fiscal 1998. Sales declined four percent due to price erosion in this market and a decline in units sold. This resulted in the division operating at a substantial loss for the year. Prices have stabilized in this market over the past six months, and demand for basic T-shirts has improved, but current market prices do not yet allow us to make an adequate return on our investment in this business. We believe we have competitive assets employed in the T-shirt business, but realize we must improve the return we are generating from this business. Inventories and debt were reduced by $18 million and $33 respectively during the 1998 fiscal year. This, combined with the $150 million of senior notes issued during the year, and the $130 million of revolving bank loan facilities the company has in place, has resulted in a much improved liquidity situation for Delta Woodside. Demand for our products seems to remain good as we enter our new fiscal year, although we are keeping a cautious eye on currency exchange rates that could suddenly change our competitive position with the rest of the world. We expect another good year out of our woven fabrics business, and improved results in our apparel operations. /s/ E. Erwin Maddrey, II - ----------------------------- E. Erwin Maddrey, II President and Chief Executive Officer /s/ Bettis C. Rainsford - ----------------------------- Bettis C. Rainsford Executive Vice President, Treasurer and Chief Financial Officer 3 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition The foregoing letter to shareholders and the following discussion contain certain "forward-looking statements". All statements, other than statements of historical fact, that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such matters as future revenues, future cost savings, future capital expenditures, business strategy, competitive strengths, goals, plans, references to future success and other such information are forward-looking statements. The words "estimate", "project", "anticipate", "expect", "intend", "believe" and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this Annual Report are based on the Company's expectations and are subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. These risks and uncertainties include, among others, changes in the retail demand for apparel products, the cost of raw materials, competitive conditions in the apparel and textile industries and the relative strength of the United States dollar as against other currencies and the discovery of unknown conditions (such as with respect to environmental matters, Year 2000 readiness and similar items). The Company does not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any projected results will not be realized. Consolidated Company Results Fiscal 1998 Versus Fiscal 1997 As a result of the history of operating losses at Stevcoknit Fabrics' knitting and knit finishing plants, and at the Nautilus fitness equipment business, the Company made the decision on March 3, 1998 to close its Stevcoknit Fabrics division and to sell its Nautilus International division (fitness equipment). Accordingly, operating results for those segments have been reclassified and reported as discontinued operations. The Company is selling the assets of the Stevcoknit division, and has retained a firm to sell the Nautilus International fitness equipment business. The Company expects to complete disposition of these businesses during the first six months of fiscal year 1999. Consolidated net sales for fiscal year 1998 were $535 million compared to $530 million for fiscal year 1997. Net sales increases in Delta Mills Marketing and in Duck Head Apparel were offset somewhat by a sales decrease at Delta Apparel. Consolidated gross margin for fiscal 1998 was down slightly, from the prior fiscal year. All of the Company's businesses experienced a decline in gross margin. For fiscal year 1998, the Company reported operating earnings of $26 million or 4.9% of net sales compared to $47 million or 8.8% of sales for the prior fiscal year. During fiscal 1998, operating profits decreased in all of the Company's segments due to lower margins, increased selling, general and administrative expenses, and as a result of certain restructuring charges at Delta Apparel and Duck Head Apparel. Interest expense was down slightly in fiscal year 1998 compared to fiscal 1997; net borrowings decreased, while interest rates increased. The interest rate on the senior notes issued on August 25, 1997 is higher than the interest rate on the prior revolving credit facility. The effective tax rate on income from continuing operations for fiscal 1998 was 25% as compared to 32% for fiscal 1997. The lower tax rate is a result of a reduction in valuation allowances recognized in the prior fiscal year. The Company also expects next year's income tax expense rate to be less than the statutory rate as anticipated improved earnings permit further reductions in estimated valuation allowances. Income from continuing operations declined in fiscal year 1998 from fiscal year 1997, primarily due to the restructuring and impairment and higher selling general and administrative expenses. In connection with the Company's decision to discontinue the business referred to above, the Company recognized a loss on disposal of discontinued operations of $37 million including a provision of $8.0 million for losses during the phase-out period and an income tax benefit of $1.2 million. The Company believes that it will recover the net book value of the assets of the discontinued businesses. However, the amount ultimately realized upon disposition could differ materially from the carrying value of these assets. In addition to these charges to income during fiscal 1998, the Company recognized an impairment charge of $12 million during fiscal year 1996 related to the property and equipment at the Stevcoknit division. Inventories were $114 million at June 27, 1998 compared to $134 million at June 27, 1997. The decrease in inventory occurred primarily at Duck Head Apparel and Delta Apparel. The Company's order backlog at June 27, 1998 was $158 million as compared to $161 million at June 28, 1997. Order backlogs were down at Delta Mills Marketing Company, and up at Duck Head Apparel and Delta Apparel. Consolidated Company Results Fiscal 1997 Versus Fiscal 1996 Consolidated net sales for fiscal year 1997 were $530 million as compared to $487 million in the prior fiscal year. Net sales in fiscal 1997 increased at Delta Mills Marketing and Duck Head Apparel, but decreased at Delta Apparel. Consolidated gross profit margin for fiscal 1997 was 18%, as compared to the gross profit margin of 7.4% in the prior fiscal year. Gross margins increased at both Delta Mills Marketing and Duck Head Apparel, but decreased at Delta Apparel. The lower margins in fiscal 1996 were primarily due to restructuring and impairment charges, and charges to increase the reserve for excess inventories at Duck Head Apparel. 4 - -------------------------------------------------------------------------------- Consolidated selling, general, and administrative expenses for fiscal 1997 totaled $53 million, or 9.9% of net sales, compared to $55 million, or 11% of net sales in fiscal 1996. These expenses increased at Delta Mills Marketing, but decreased at Duck Head Apparel and Delta Apparel. Consolidated operating profit for fiscal 1997 was $47 million as compared to a loss of $19 million in fiscal 1996. Losses in fiscal 1996 are attributed to the high cost of cotton in that year, a $25 million charge to increase market reserves associated with excess inventories at Duck Head Apparel, and $8 million of restructuring charges at Duck Head Apparel and Delta Apparel primarily for plant closings. Net interest expense totaled $23 million in fiscal 1997 as compared to $19 million in fiscal 1996, primarily due to higher average interest rates and higher loan fees. The effective income tax rates for the 1997 and 1996 fiscal years were 32% and 38%, respectively. The lower tax rate for fiscal 1997 was primarily due to a decrease in the valuation allowance for deferred tax assets. Income from continuing operations for fiscal 1997 was $16 million as compared to a loss of $38 million for fiscal 1996. Fiscal 1996 net income includes pretax credits to income of $9 million related to recovery of certain litigation charges recognized in fiscal 1994, and settled during fiscal 1995. The improvement in results of operations for fiscal 1997 is primarily attributable to more normal cotton price levels. Consolidated Inventories totaled $132 million at June 28, 1997 as compared to $120 million at June 29, 1996, an increase of 10%. The increase in inventory occurred primarily at Delta Apparel. Segment Results Delta Mills Marketing Company Fiscal 1998 Versus Fiscal 1997 Delta Mills Marketing manufactures and sells finished woven fabrics principally to manufacturers of apparel products. The segment also sells unfinished fabrics to converters for various end uses. Delta Mills Marketing is operating, and expects to continue during fiscal 1999 to operate, virtually at full capacity. Generally, profitability of this segment is enhanced by increases in the use of its manufacturing capacity and is affected by the relative mix of more or less profitable goods being produced and the cost and availability of raw materials. Net sales for fiscal year 1998 totaled $342 million, as compared to $336 million for fiscal year 1997, an increase of 2%. Sales of finished woven fabrics to commercial accounts and government accounts increased due to increased demand. These increases were largely offset by a sharp, 32% decline in sales of unfinished woven fabrics due to decreased demand. Gross profit in fiscal year 1998 was $63 million, as compared to $65 million in fiscal year 1997. The gross profit decline was due principally to the decline in the unfinished woven fabrics business in both volume and price. Operating earnings for fiscal year 1998 were $46 million, as compared to $51 million in fiscal year 1997. The decline in operating earnings is primarily a result of the decline in gross margins and due to increased selling, general and administrative expenses attributable in part to information technology project expenditures which are not expected to reoccur. Delta Mills Marketing Company Fiscal 1997 Versus Fiscal 1996 Net sales of Delta Mills Marketing were $336 million in fiscal year 1997 as compared to $294 million in fiscal year 1996, an increase of 14%, resulting from an increase in unit sales and unit prices. Sales of woven fabrics to commercial accounts increased due both to increased demand and to additional finishing capacity resulting from recent capital expenditures. This increase more than offset a decrease in sales of woven government fabrics due to a slowdown in procurement activity. During fiscal year 1997, Delta Mills Marketing's gross profit totaled $65 million, as compared to $34 million in fiscal year 1996, an increase of 93%. This gross profit improvement was due principally to higher sales, lower raw material costs and improved efficiencies resulting from the modernization project at the Beattie spinning and weaving plant. During fiscal 1997, selling, general and administrative expenses were $16 million as compared to $13 million during fiscal year 1996, an increase of 18%. The increase is primarily attributable to increased sales. Operating profit at Delta Mills Marketing was $51 million in fiscal year 1997, an improvement of $33 million as compared to fiscal year 1996. The improvement is a result of more normal cotton prices and factors described above. Delta Apparel Company Fiscal 1998 Versus Fiscal 1997 Delta Apparel manufactures and sells T-shirts, fleece goods and sportswear to distributors, screen printers and private label accounts. Operating results are dependent in large part on orders from retailers, distributors, and screen printers who supply finished garments to retailers. Generally, when retail sales of apparel are strong, Delta Apparel benefits. Its operating results are also dependent on the utilization of manufacturing facilities. The Company believes that Delta Apparel will operate its facilities at or near full capacity during fiscal 1999. Net sales for fiscal year 1998 were $106 million, a decline of 5.4% from sales of $112 million in fiscal year 1997. The decline in sales was due both to lower unit prices and to fewer units being shipped as compared to fiscal year 1997. Demand for basic T-shirts has improved, but pricing remains volatile and current 5 - -------------------------------------------------------------------------------- market prices do not allow us to make an adequate return on our investment. Gross profit declined from $4.3 million in fiscal year 1997 to $3.9 million in fiscal year 1998, as a result of increased competition. During the third quarter of fiscal 1998, Delta Apparel determined that the excess of cost over assigned value of net assets acquired in a prior acquisition, was impaired. Accordingly, a charge of $7.3 million was taken to write-off the excess of cost over assigned value of net assets acquired at Delta Apparel. The fiscal year 1998 operating loss, including the impairment of the excess of cost over assigned value of net assets acquired, was $18 million, compared to an operating loss of approximately $5.4 million in fiscal 1997. The increased loss was primarily a result of the impairment charge, but was also due to an increase in selling general and administrative expenses. Inventories at Delta Apparel at June 27, 1998 totaled $30 million, compared to $41 million at June 28, 1997. Delta Apparel Company Fiscal 1997 Versus Fiscal 1996 Net sales at Delta Apparel decreased 8.9% in fiscal 1997 compared to fiscal 1996. The decrease in sales was due primarily to a reduction in average unit prices, while unit sales rose slightly. During fiscal 1996, Delta Apparel established a new sewing operation in Honduras. The plant began producing garments in September 1995. In June 1996 the plant reached 55% of capacity, and full capacity in January 1997. Gross profit margins at Delta Apparel decreased to 3.9% in fiscal 1997 from 13% in fiscal 1996. The decrease was primarily attributable to higher cost inventory being shipped during the first six months of the fiscal 1997, coupled with lower unit billing prices. Fiscal 1997 operating losses at Delta Apparel were $5.4 million as compared to an operating profit of $2.8 million in fiscal 1996. Fiscal 1996 included restructuring charges of $2.6 million. The operating losses are attributable to a reduction in sales and a related dramatic reduction in gross profit during fiscal 1997. Inventories at Delta Apparel were $41 million at June 28, 1997, compared to $30 million at June 29, 1996. The increase in inventories resulted from a decline in sales and from higher operating costs per unit of inventory as fixed costs were spread over fewer units produced. Capital expenditures at Delta Apparel of $8.2 million during fiscal 1996, were primarily related to the new sewing facility in Honduras. In fiscal year 1997, capital expenditures were $2.4 million. Duck Head Apparel Company Fiscal 1998 Versus Fiscal 1997 The Company's Duck Head Apparel segment manufactures and sells woven and knitted apparel under the Duck Head label primarily to retailers and through the company's own outlet stores. Duck Head's operating results are dependent in large part on orders from retailers. Generally, Duck Head benefits when retail sales of apparel are strong. Operating results are also dependent on the utilization of owned and leased manufacturing facilities. The Company does not believe that Duck Head Apparel's facilities will be fully utilized during fiscal 1999. Duck Head Apparel has closed three manufacturing facilities during fiscal year 1998, and expects to sell these facilities during fiscal 1999. Net sales in the Duck Head Apparel segment increased by $5.0 million to $86 million in fiscal 1998. Sales to retail accounts increased while sales from the company's own stores decreased. The increase in sales to retailers was due primarily to increases in sales to the same accounts, as compared to fiscal year 1997. Gross profit margins at Duck Head Apparel decreased slightly in fiscal 1998, due principally to inventory reduction programs. Fiscal 1998 operating losses at Duck Head Apparel totaled $.9 million as compared to a $1.4 million operating profit in fiscal 1997. Included in the fiscal 1998 operating losses are $1.4 million of restructuring charges related to the closing of two sewing plants in Costa Rica and the closing of certain retail outlet stores. Selling, general and administrative expenses increased 9% from fiscal 1997, primarily due to increased merchandising and marketing expenses. Inventories at Duck Head Apparel decreased $8.6 million during fiscal 1998 resulting from a reduction in older obsolete inventory and lower levels of core and recent season close-outs. Higher capital expenditures of $7.4 million during fiscal 1998 were primarily for in-store shops and focal areas placed in major retailers. Duck Head Apparel Company Fiscal 1997 Versus Fiscal 1996 Net sales at Duck Head Apparel increased approximately $12 million from fiscal year 1996 to fiscal year 1997. The increase resulted from increased marketing efforts through Duck Head's use of in-store Duck Head shops. Gross profit margins at Duck Head returned to a more normal level of 35% in fiscal year 1997. Duck Head had negative gross margins in fiscal 1996 because of a $25 million write-down of excess inventories. Operating profit in fiscal year 1997 was $1.4 million compared to a loss of $38 million in fiscal year 1996. Fiscal 1996 includes restructuring charges of $4.1 million and credits to litigation expense of $9 million. Selling, general, and administrative expenses at Duck Head Apparel were $27 million in fiscal 1997, a decrease from $29 million in fiscal year 1996, primarily due to lower distribution costs at the new distribution center in Winder, Georgia, completed during fiscal year 1996. 6 - -------------------------------------------------------------------------------- In connection with the increased sales at Duck Head Apparel, inventories also increased during fiscal 1997. Capital expenditures at Duck Head Apparel were $13 million during fiscal 1996, primarily to complete the new distribution center in Winder, Georgia. LIQUIDITY AND SOURCES OF CAPITAL During fiscal 1998, the Company financed its capital expenditures primarily through cash generated from operations. During the fourth quarter of fiscal 1998, proceeds from the sale of plant and equipment and reductions in current assets of discontinued operations were used to reduce debt. The Company generated operating cash flows of $52 million, $29 million and $51 million for the 1998, 1997 and 1996 fiscal years, respectively. Cash generated from operations and borrowings has been used primarily to finance capital expenditures, including equipment purchases. Proceeds from sales of assets of discontinued operations at Stevcoknit Fabrics were used to reduce debt. At June 28, 1997, approximately $220 million of the Revolving Credit Facility due in September 1997 was classified as non-current because it was subsequently refinanced with the long-term debt described in the following paragraph. On August 25, 1997, a subsidiary of the Company, Delta Mills, Inc. "DMI" issued $150 million of unsecured ten-year senior notes, and obtained a secured five-year $100 million revolving line of credit subject to borrowing base limitations. At the same time, the company obtained a separate, $20 million line of credit due October 31, 1998. The $100 million revolving line of credit is backed by certain accounts receivable and inventory of DMI with a carrying value of $154 million at June 27, 1998. At June 27, 1998 interest on the senior notes and the $100 million revolving line of credit was 9.625% and 7.4%, respectively. In May 1998, the Company replaced the above referenced $20 million line of credit with a short-term $30 million revolving credit facility (subject to borrowing base limitations) which is due in May of 1999. This new facility is backed by certain accounts receivable and inventory of Delta Apparel, Duck Head Apparel and Nautilus International with a carrying value of $105 million at June 27, 1998. This credit facility has a term of one year and carries an interest rate that is two percentage points above the London Interbank Borrowing Rate. Loan covenants in the senior notes and the DMI revolving credit facility, among other matters limit the Company's ability to use cash generated by DMI to fund operations in the rest of the Company. At June 27, 1998 approximately $63 million was available under the DMI revolving credit agreement, and approximately $16 million was available under the separate short-term $30 million line of credit. The new credit facility and the senior notes also contain other restrictive covenants which include minimum tangible net worth and certain other minimum financial ratios. The agreement also restricts additional indebtedness, dividends and capital expenditures. During fiscal 1999, the Company plans to spend approximately $20 million for capital improvements and new equipment. The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors. The Company has considered the impact of Year 2000 issues on its computer systems and applications and developed a remediation plan. The Company expects conversion and testing to be completed during fiscal 1999. Expenditures in fiscal 1998 for the Year 2000 project amounted to $150,000 and the Company expects that completion of the various projects will result in additional expenditures of approximately $350,000. The Company received a refund of $2.2 million during fiscal 1998, from carry-back of an alternative minimum tax loss for fiscal 1997. The Company believes that cash flow generated from its operations and sales of assets of discontinued operations, along with funds available under its new credit lines, should be sufficient to service its bank debt, to satisfy its day-to-day working capital needs, fund its planned capital expenditures and to pay dividends. ENVIRONMENTAL MATTERS The Company is subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions, ozone depletion and solid waste disposal. The Company's plants generate very small quantities of hazardous waste which are either recycled or disposed of off-site. Most of its plants are required to possess one or more discharge permits. The Company is subject to a consent order that it entered into with the South Carolina Department of Health and Environmental Control on September 26, 1985 (the "Consent Order"), prior to Delta Woodside's acquisition of the business. The Consent Order arose from a determination that several private drinking wells in the area of two of the Company's plants had been contaminated. Pursuant to the Consent Order, the Company has discontinued the operation of a large spray field near these plants into which waste water sludge had been disposed and has placed into operation for such purpose a new larger adjacent spray field. The Company expects that any continuing expenditures to comply with the Consent Order will be immaterial. Two of the Company's South Carolina plants, the textile segment's Delta 2 and 3 finishing plants, have been unable to comply with certain toxicity and other permit-related limits contained in a National Pollutant Discharge Elimination System ("NPDES") permit held by the Company. The Company is working with the appropriate state agency to address these issues. To attempt to achieve compliance, the Company has completed required upgrades at a cost of approximately 7 - -------------------------------------------------------------------------------- $2.3 million and believes that the required effluent limits will be achieved by November 1, 1998. Although there is no assurance that the Company will be successful, and it could face administrative penalties if it is not, the Company does not currently believe that these matters will have a material adverse impact on the Company. The Company is currently assessing certain wastewater treatment system basins of a North Carolina plant that is no longer in operation but was a likely source of groundwater contamination. The Company currently has no plans to remediate any groundwater contamination. Although no assurance can be provided, the Company does not currently believe that this matter will have a material adverse impact on the Company. The Company's Nautilus business has been named as a "potentially responsible party" ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to three sites in North Carolina, South Carolina, and Mississippi. To the Company's knowledge, all of the transactions with these sites were conducted by a corporation (the "Selling Corporation") whose assets were sold in 1990 pursuant to the terms of an order of the United States Bankruptcy Court to another corporation, the stock of which was subsequently acquired by the Company in January 1993. At the North Carolina site, the Selling Corporation is listed as a "de Minimis" party, and at the South Carolina site, the Selling Corporation has been listed as an "insolvent" party and would appear to qualify as a "de Minimis" party. The Company believes that the Selling Corporation's share of liabilities at either of these sites will be immaterial. At the Mississippi site, the PRP group has completed the surface removal action and is investigating soil and groundwater contamination, both at the site and in the surrounding area. The Company's latest information is that the Selling Corporation is ranked eleventh out of a total of over 300 PRPs in contributions of material to the site, and, based on volume, the Selling Corporation contributed approximately 3% of the site's material. To the Company's knowledge, latest estimates of costs to clean up the site range up to $4 million. Trichlomethane, one of the substances delivered by the Selling Corporation to the site, has been found in 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. The Company believes that it is in compliance in all material respects with federal, state, and local environmental statutes and requirements. 8 - -------------------------------------------------------------------------------- Operations by Industry Segment In the third quarter of fiscal year 1998, the Company adopted the segment reporting provisions of Financial Accounting Standard 131. This standard requires the Company to report segment information for divisions which engage in business activity, whose operating results are regularly reviewed by the chief operating officer. The Company has three segments in continuing operations: Delta Mills Marketing Company, Delta Apparel and Duck Head Apparel. Delta Mills Marketing Company manufactures and sells woven fabrics for apparel and home furnishing manufacturers. Delta Apparel manufactures and sells T-shirts, fleece goods, and sportswear. Duck Head Apparel manufactures and sells casual apparel under the brand name "Duck Head" to department stores and specialty retailers. Operating profit does not include interest expense or interest income. The Company had two segments which are presented as discontinued operations: Stevcoknit Fabrics Company and Nautilus International. Stevcoknit Fabrics Company manufactured and sold knitted fabrics, and Nautilus International manufactures and sells fitness equipment.
June 27, 1998 June 28, 1997 June 29, 1996 --------------- --------------- ---------------- Net Sales: Delta Mills Marketing Company ........... $342,439,000 $336,181,000 $294,083,000 Delta Apparel Company ................... 106,298,000 112,311,000 123,297,000 Duck Head Apparel Company ............... 86,332,000 81,313,000 69,569,000 Other ................................... 391,000 473,000 501,000 ------------- ------------- ------------ Total .................................. $535,460,000 $530,278,000 $487,450,000 ============= ============= ============ Gross Profit: Delta Mills Marketing Company ........... $ 63,433,000 $ 65,058,000 $ 33,670,000 Delta Apparel Company ................... 3,890,000 4,343,000 16,006,000 Duck Head Apparel Company ............... 28,775,000 28,174,000 (13,373,000) Other ................................... 62,000 136,000 (69,000) ------------- ------------- ------------ Total .................................. $ 96,160,000 $ 97,711,000 $ 36,234,000 ============= ============= ============ Operating Profit (Loss): Delta Mills Marketing Company ........... $ 46,377,000 $ 50,580,000 $ 17,697,000 Delta Apparel Company ................... (17,739,000) (5,391,000) 2,777,000 Duck Head Apparel Company ............... (935,000) 1,431,000 (38,302,000) Other ................................... (1,365,000) 24,000 (1,449,000) ------------- ------------- ------------ Total Operating Profit (Loss) .......... 26,338,000 46,644,000 (19,277,000) Interest expense ........................ (23,395,000) (23,354,000) (18,993,000) Interest income ......................... 557,000 752,000 448,000 ------------- ------------- ------------ Income (Loss) From Continuing Operations Before Income Taxes ......... $ 3,500,000 $ 24,042,000 $(37,822,000) ============= ============= ============ Identifiable Assets: Delta Mills Marketing Company ........... $239,974,000 $247,915,000 $233,226,000 Delta Apparel Company ................... 98,257,000 120,366,000 120,628,000 Duck Head Apparel Company ............... 75,383,000 83,980,000 74,227,000 Other ................................... 12,308,000 8,099,000 11,936,000 ------------- ------------- ------------ 425,922,000 460,360,000 440,017,000 Discontinued operations ................. 48,120,000 97,580,000 97,699,000 ------------- ------------- ------------ Total .................................. $474,042,000 $557,940,000 $537,716,000 ============= ============= ============ Depreciation and Amortization: Delta Mills Marketing Company ........... $ 9,921,000 $ 10,101,000 $ 9,602,000 Delta Apparel Company ................... 15,252,000 7,788,000 10,331,000 Duck Head Apparel Company ............... 4,039,000 3,668,000 4,003,000 Other ................................... 1,345,000 1,061,000 662,000 ------------- ------------- ------------ Total .................................. $ 30,557,000 $ 22,618,000 $ 24,598,000 ============= ============= ============ Capital Expenditures: Delta Mills Marketing Company ........... $ 5,181,000 $ 12,042,000 $ 38,659,000 Delta Apparel Company ................... 4,141,000 2,396,000 8,206,000 Duck Head Apparel Company ............... 7,427,000 2,510,000 12,581,000 Other ................................... 40,000 111,000 66,000 ------------- ------------- ------------ Total .................................. $ 16,789,000 $ 17,059,000 $ 59,512,000 ============= ============= ============
Intersegment sales and profit are not significant and are not included in the accompanying segment information. Delta Mills Marketing Company had intersegment sales of $417,000 and $5,000 for fiscal years 1998 and 1997, respectively. Delta Apparel had intersegment sales of $2,192,000, $403,000 and $1,899,000 for fiscal years 1998, 1997 and 1996, respectively. Operating profit is total revenue less operating expenses, excluding interest expense and interest income. During the third quarter of fiscal 1998, Delta Apparel took a $7.3 million impairment charge to write off the excess of cost over assigned value of net assets acquired, and Duck Head Apparel recognized a charge of $1.4 million primarily associated with the closing of certain retail stores. Depreciation and amortization include certain write-downs of property, equipment and excess of cost over assigned value of net assets acquired. Identifiable assets are those assets that are used in the operations of each segment. At June 27, 1998, other identifiable assets include cash and insurance policies of $5.2 million and deferred loan costs of $5.2 million. During the fourth quarter of fiscal 1996, The Company took restructuring charges of $8.3 million primarily related to plant closings at Delta Apparel and Duck Head Apparel. At the same time Duck Head Apparel increased inventory reserves by $25 million for excess inventory. During the first quarter of fiscal 1996, Duck Head Apparel reduced related litigation reserves by $9 million related to certain litigation that was settled in the prior fiscal year. Capital expenditures include related accounts payable of $3,235,000, $1,431,000 and $5,518,000 as of the end of fiscal years 1998, 1997 and 1996 fiscal years, respectively. 9 - -------------------------------------------------------------------------------- ----------------------------------------------------- Independent Auditors' Report The Board of Directors and Shareholders Delta Woodside Industries, Inc. We have audited the accompanying consolidated balance sheets of Delta Woodside Industries, Inc. as of June 27, 1998 and June 28, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended June 27, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta Woodside Industries, Inc. at June 27, 1998 and June 28, 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 27, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Greenville, South Carolina August 14, 1998 ----------------------------------------------------- 10 - -------------------------------------------------------------------------------- Consolidated Balance Sheets Delta Woodside Industries, Inc.
June 27, 1998 June 28, 1997 --------------- -------------- ASSETS CURRENT ASSETS Cash and cash equivalents .......................................................... $ 2,753,000 $ 2,696,000 Accounts receivable: Factor ............................................................................ 81,256,000 83,676,000 Customers ......................................................................... 41,253,000 31,707,000 ------------ ------------ 122,509,000 115,383,000 Less allowances for doubtful accounts and returns ................................. 3,309,000 2,852,000 ------------ ------------ 119,200,000 112,531,000 Inventories Finished goods .................................................................... 52,219,000 63,783,000 Work in process ................................................................... 48,814,000 56,879,000 Raw materials and supplies ........................................................ 12,925,000 13,139,000 ------------ ------------ 113,958,000 133,801,000 Current assets of discontinued operations .......................................... 25,797,000 51,174,000 Deferred income taxes .............................................................. 861,000 9,627,000 Prepaid expenses and other current assets .......................................... 2,962,000 2,112,000 ------------ ------------ TOTAL CURRENT ASSETS ......................................................... 265,531,000 311,941,000 PROPERTY, PLANT AND EQUIPMENT, at cost Land and land improvements ........................................................ 5,062,000 5,096,000 Buildings ......................................................................... 66,995,000 66,491,000 Machinery and equipment ........................................................... 192,295,000 190,243,000 Furniture and fixtures ............................................................ 11,749,000 7,655,000 Leasehold improvements ............................................................ 3,068,000 2,903,000 Construction in progress .......................................................... 9,131,000 1,005,000 ------------ ------------ 288,300,000 273,393,000 Less accumulated depreciation ..................................................... 123,537,000 97,912,000 ------------ ------------ 164,763,000 175,481,000 NONCURRENT ASSETS OF DISCONTINUED OPERATIONS ........................................ 22,323,000 46,406,000 INTANGIBLE ASSETS, less accumulated amortization of $5,515,000 (1998) and $7,384,000 (1997)............................................................... 18,290,000 21,264,000 OTHER ASSETS ........................................................................ 3,135,000 2,848,000 ------------ ------------ $474,042,000 $557,940,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank debt ............................................................... $ 11,108,000 Trade accounts payable ............................................................. 41,592,000 $ 46,834,000 Accrued employee compensation ...................................................... 8,278,000 8,309,000 Accrued and sundry liabilities ..................................................... 23,059,000 19,504,000 Accrued restructuring charges ...................................................... 10,123,000 1,645,000 Current portion of long-term debt .................................................. 610,000 6,081,000 ------------ ------------ TOTAL CURRENT LIABILITIES .................................................... 94,770,000 82,373,000 LONG-TERM DEBT ...................................................................... 183,535,000 227,516,000 DEFERRED INCOME TAXES ............................................................... 3,716,000 14,324,000 OTHER LIABILITIES AND DEFERRED CREDITS .............................................. 12,454,000 8,360,000 SHAREHOLDERS' EQUITY Common Stock -- par value $.01 a share--authorized 50,000,000 shares, issued and outstanding 24,644,000 shares (1998) and 24,518,000 shares (1997) ................. 246,000 245,000 Additional paid-in capital ......................................................... 165,221,000 164,811,000 Retained earnings .................................................................. 14,100,000 60,311,000 ------------ ------------ 179,567,000 225,367,000 COMMITMENTS AND CONTINGENCIES $474,042,000 $557,940,000 ============ ============
See notes to consolidated financial statements. 11 - -------------------------------------------------------------------------------- Consolidated Statements of Operation Delta Woodside Industries, Inc.
Year Ended -------------------------------------------------- June 27, 1998 June 28, 1997 June 29, 1996 ----------------- --------------- ---------------- Net sales ............................................................... $ 535,460,000 $ 530,278,000 $ 487,450,000 Cost of goods sold ...................................................... 439,300,000 432,567,000 451,216,000 ------------- ------------- ------------- Gross profit ............................................................ 96,160,000 97,711,000 36,234,000 Selling, general and administrative expenses ............................ 60,738,000 52,697,000 55,433,000 Litigation (credit) ..................................................... (9,000,000) Restructuring and impairment charge ..................................... 8,895,000 8,259,000 Other income (expense) .................................................. (189,000) 1,630,000 (819,000) ------------- ------------- ------------- OPERATING PROFIT (LOSS) ............................................. 26,338,000 46,644,000 (19,277,000) Interest (expense) income: Interest expense ....................................................... (23,395,000) (23,354,000) (18,993,000) Interest income ........................................................ 557,000 752,000 448,000 ------------- ------------- ------------- (22,838,000) (22,602,000) (18,545,000) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........................................................... 3,500,000 24,042,000 (37,822,000) Income tax expense (benefit) ............................................ 884,000 9,256,000 (14,561,000) ------------- ------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS ................................ 2,616,000 14,786,000 (23,261,000) Discontinued Operations: (Loss) on disposal of discontinued operations less applicable income taxes ................................................................ $ (37,042,000) (Loss) from operations of discontinued operations less applicable income taxes ......................................................... (9,325,000) (7,395,000) (39,378,000) ------------- ------------- ------------- (46,367,000) (7,395,000) (39,378,000) NET INCOME (LOSS) ....................................................... $ (43,751,000) $ 7,391,000 $ (62,639,000) ============= ============= ============= Basic and diluted earnings (loss) per share: Continuing operations .................................................. $ 0.11 $ 0.60 $ (0.95) Discontinued operations ................................................ (1.89) (0.30) (1.61) ------------- ------------- ------------- Net earnings (loss) .................................................... $ (1.78) $ 0.30 $ (2.56) ============= ============= ============= Weighted average number of shares outstanding ........................... 24,575,000 24,513,000 24,443,000 ============= ============= =============
See notes to consolidated financial statements. 12 - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity Delta Woodside Industries, Inc.
Common Stock Additional Total -------------------------- Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity -------------- ----------- --------------- --------------- ---------------- Balance at July 1, 1995 ........................ 24,357,078 $244,000 $163,364,000 $ 122,891,000 $ 286,499,000 Incentive stock award plan, shares issued ..... 53,448 1,000 594,000 595,000 Stock Option Plan, shares issued .............. 49,125 375,000 375,000 Tax benefits of stock plans ................... (163,000) (163,000) Net (loss) .................................... (62,639,000) (62,639,000) Cash dividends paid -- $.30 a share............ (7,332,000) (7,332,000) ---------- --------- ------------- ------------- ------------- Balance at June 29, 1996 ....................... 24,459,651 245,000 164,170,000 52,920,000 217,335,000 Incentive stock award plan, shares issued ..... 54,348 608,000 608,000 Stock Option Plan, shares issued .............. 4,669 35,000 35,000 Net income .................................... 7,391,000 7,391,000 Other ......................................... (263) (2,000) (2,000) ---------- --------- ------------ ------------ ------------- Balance at June 28, 1997 ....................... 24,518,405 245,000 164,811,000 60,311,000 225,367,000 Incentive stock award plan, shares issued ..... 112,403 1,000 575,000 576,000 Stock Option Plan, shares issued .............. 11,255 75,000 75,000 Tax benefits of stock plans ................... (253,000) (253,000) Net (loss) .................................... (43,751,000) (43,751,000) Cash dividends paid -- $.10 a share............ (2,460,000) (2,460,000) Other ......................................... 2,026 13,000 13,000 ---------- -------- ------------ ------------- ------------- BALANCE AT JUNE 27, 1998 ....................... 24,644,089 $246,000 $165,221,000 $ 14,100,000 $ 179,567,000 ========== ======== ============ ============= =============
See notes to consolidated financial statements. 13 - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows Delta Woodside Industries, Inc.
Year Ended --------------------------------------------------- June 27, 1998 June 28, 1997 June 29, 1996 ----------------- --------------- ----------------- OPERATING ACTIVITIES Net income (loss) ................................................. $ (43,751,000) $ 7,391,000 $ (62,639,000) Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations ......................................... 43,684,000 2,148,000 33,023,000 Depreciation .................................................... 22,033,000 20,715,000 19,269,000 Amortization .................................................... 1,789,000 1,903,000 1,510,000 Write-down of property and equipment ............................ 3,819,000 Reduction in excess of cost over assigned value of net assets acquired ....................................................... 6,735,000 Provision for losses on accounts receivable ..................... 1,220,000 240,000 2,277,000 Provision for deferred income taxes ............................. (1,842,000) 4,697,000 (12,522,000) Losses (gains) on disposition of property and equipment ......... (46,000) (1,420,000) 1,300,000 Compensation under stock plans .................................. 664,000 643,000 807,000 Deferred compensation ........................................... 244,000 730,000 808,000 Other ........................................................... 30,000 (327,000) (70,000) Changes in operating assets and liabilities: Accounts receivable ............................................ (7,889,000) (16,945,000) (1,742,000) Inventories .................................................... 19,843,000 (11,597,000) 72,648,000 Other current assets ........................................... (850,000) 7,610,000 (4,817,000) Accounts payable and accrued expenses .......................... 9,123,000 10,339,000 (2,261,000) -------------- ------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................... 50,987,000 26,127,000 51,410,000 INVESTING ACTIVITIES Property, plant and equipment: Purchases ....................................................... (14,612,000) (20,510,000) (61,942,000) Proceeds of dispositions ........................................ 528,000 3,653,000 5,608,000 Investing activities of discontinued operations ................... 10,574,000 (2,613,000) (4,996,000) Other ............................................................. (296,000) (510,000) (90,000) -------------- ------------- -------------- NET CASH (USED) BY INVESTING ACTIVITIES ....................... (3,806,000) (19,980,000) (61,420,000) FINANCING ACTIVITIES Proceeds from revolving lines of credit ........................... $ 293,262,000 $ 68,904,000 $ 268,826,000 Repayments on revolving lines of credit ........................... (481,019,000) (85,134,000) (245,660,000) Scheduled principal payments of long-term debt .................... (682,000) (405,000) (272,000) Proceeds from issuance of long-term debt .......................... 145,688,000 6,915,000 Dividends paid .................................................... (2,460,000) (7,332,000) Other ............................................................. (1,913,000) (2,000) -------------- ------------- -------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES ................................................... (47,124,000) (9,722,000) 15,562,000 -------------- ------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................... 57,000 (3,575,000) 5,552,000 Cash and cash equivalents at beginning of year ..................... 2,696,000 6,271,000 719,000 -------------- ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 2,753,000 $ 2,696,000 $ 6,271,000 ============== ============= ==============
See notes to consolidated financial statements. 14 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Delta Woodside Industries, Inc. NOTE A -- SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Delta Woodside Industries, Inc. (the "Company") and its subsidiaries, (all of which are wholly-owned, except for International Apparel Marketing Corporation which was 70% owned as of the three years ended June 27, 1998). All significant intercompany balances and transactions have been eliminated. Certain amounts for the 1997 and 1996 fiscal years have been reclassified to conform to the 1998 presentation of discontinued operations. Cash Equivalents: The Company considers all highly liquid investments of three months or less when purchased to be cash equivalents. Inventories: Inventories are stated at the lower of cost or market determined using both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods. Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method for financial reporting based on estimated useful lives of three to thirty-two years, but predominantly over seven to ten years, and by accelerated methods for income tax reporting. Intangible Assets: Amortization is computed using the straight-line method. The excess of cost over assigned value of net assets acquired relating to certain business combinations is being amortized to expense over 40 years. Other intangible assets are being amortized over periods of 4 to 40 years, but averaging approximately 9 years. Impairment of Long-Lived Assets: When required by circumstances, the Company evaluates the recoverability of its long-lived assets by comparing estimated future undiscounted cash flows with the asset's carrying amount to determine if a write-down to market value is required. This policy was formally adopted by the Company in fiscal 1996. Revenue Recognition: Sales are recorded upon shipment or designation of specific goods for later shipment at customers' request with related risk of ownership passing to such customers. Income Taxes: Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings per Common Share: Per share data are computed based on the weighted average number of shares of Common Stock and Common Stock Equivalents outstanding during each period. The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 128, during fiscal 1998. The statement requires companies to present basic and diluted earnings per share. Common stock equivalents are approximately .2% of weighted average shares outstanding for the periods presented, and do not affect the calculation of earnings per share. These common stock equivalents are attributable to the stock option plan where the options have vested, but have not yet been exercised. Environmental Costs: Environmental compliance costs including ongoing maintenance, monitoring and similar costs, are expensed as incurred. Environmental remediation costs are accrued, except to the extent costs can be capitalized, when remedial efforts are probable, and the cost can be reasonably estimated. Cotton Procurement: The Company contracts to buy cotton with future delivery dates at fixed prices in order to reduce the effects of fluctuations in the prices of cotton used in the manufacture of its products. These contracts permit settlement by delivery and are not used for trading purposes. The Company commits to fixed prices on a percentage of its cotton requirements up to eighteen months in the future. If market prices for cotton fall below the Company's committed fixed costs and are not recoverable, the differential is charged to income at that time. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year: The Company's operations are based on a fifty-two, fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal years 1998, 1997 and 1996 each consist of 52 weeks. - -------------------------------------------------------------------------------- NOTE B -- ACCOUNTS RECEIVABLE The Delta Mills Marketing Company segment assigns a substantial portion of its trade accounts receivable to a bank under a factor agreement. The assignment of these receivables is without recourse, provided that customer orders are approved by the bank prior to shipment of goods, up to a maximum for each individual account. The Company's accounts receivable are due from many companies that market and produce apparel, home furnishings and other products, and from department stores and specialty apparel retailers located throughout the United States. The many companies represented in the Company's accounts receivable limits to a certain extent the concentration of credit risk. The Company generally does not require collateral for its accounts receivable. One customer accounted for 12%, 15% and 11% of sales for fiscal years 1998, 1997 and 1996, respectively. 15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE C -- INVENTORIES As of June 27, 1998 and June 28, 1997, cost for certain inventories at Delta Apparel and Duck Head Apparel is determined under the LIFO method representing 44% and 56%, respectively, of the cost of consolidated inventories. The balance of the cost of consolidated inventories is determined under the FIFO method. If these inventories had been determined by the FIFO method, they would have been approximately the same as the reported amounts. During fiscal 1996 the Company wrote down the value of certain excess inventories at Duck Head Apparel by approximately $25 million. - -------------------------------------------------------------------------------- NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND NOTES PAYABLE Long-term debt consists of:
June 27, 1998 June 28, 1997 --------------- -------------- Senior notes (9.625%), with interest payable semiannually .................... $150,000,000 Revolving Credit Facility (7.4% at June 27, 1998), with interest payable monthly or semiannually ......... 26,635,000 Revolving Credit Facility .......... $225,500,000 Industrial Revenue Bond payable monthly, through 2001 at 80% of a bank's base rate ....................... 578,000 818,000 Note to a bank payable monthly with interest at prime plus 1% ................... 6,712,000 6,953,000 Other .............................. 220,000 326,000 ------------ ------------ 184,145,000 233,597,000 Less current portion ............... 610,000 6,081,000 ------------ ------------ $183,535,000 $227,516,000 ============ ============
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI" issued $150 million of unsecured ten-year senior notes, and obtained a secured five-year $100 million revolving line of credit subject to borrowing base limitations. At the same time, the Company obtained a separate, $20 million line of credit due October 31, 1998. The net proceeds of the senior notes and initial borrowings under the revolving lines of credit were used to repay long-term debt. The $100 million revolving line of credit is backed by certain accounts receivable and inventory of DMI with a carrying value of $138 million at June 27, 1998. At June 28, 1997, approximately $220 million of the Revolving Credit Facility which was due in September 1997 was classified as noncurrent because it was subsequently refinanced as just described. In May 1998, the Company replaced the above referenced $20 million line of credit with a $30 million revolving credit facility (subject to borrowing base limitations) which is due in May of 1999 and is presented as short-term bank debt.This new facility is backed by certain accounts receivable and inventory of Delta Apparel, Duck Head Apparel and Nautilus International with a carrying value of $105 million at June 27, 1998. This credit facility has a term of one year and carries an interest rate that is two percentage points above the London Interbank Borrowing Rate. Loan covenants in the senior notes and the DMI revolving credit facility limit the Company's ability to use cash generated by DMI to fund operations in the rest of the Company. On June 27, 1998 approximately $63 million was available under the DMI revolving credit agreement, and approximately $16 million was available under the separate short-term $30 million line of credit. The new credit facility and the DMI credit facility and the senior notes also contain other restrictive covenants which include minimum tangible net worth and certain other minimum financial ratios. The agreements also restrict additional indebtedness, dividends and capital expenditures. At June 27, 1998, the net assets of the Company include net assets of the wholly owned subsidiary DMI of approximately $40 million which are subject to the restrictions described above. The carrying value of the Company's revolving credit agreements approximate fair value since the rates are tied to floating rates. At June 27, 1998 the carrying value of the senior notes was $150,000,000 and the fair value, based on quoted market prices was $150,375,000. Total interest expense incurred by the Company was $23,395,000, $23,656,000 and $19,703,000 in fiscal years 1998, 1997 and 1996, respectively, of which $302,000 and $710,000 was capitalized in fiscal years 1997 and 1996, respectively. Total interest paid during fiscal years 1998, 1997 and 1996 was $ 21,568,000, $17,546,000 and $19,357,000, respectively. During fiscal year 1997, the Company acquired certain machinery and equipment under noncancelable operating leases in connection with the modernization project in the woven fabrics division. The terms provide for total lease payments of $14 million over a period of five years. Rent expense relating to all operating leases of the company was approximately $7,471,000, $7,179,000 and $6,276,000 for fiscal 1998, 1997 and 1996, respectively. Aggregate principal maturities of all long-term debt, and minimum payments under operating leases are as follows:
Long-term Operating Fiscal Year Debt Leases - --------------------- --------------- ------------- 1999 ................ $ 610,000 $ 6,446,000 2000 ................ 6,723,000 6,517,000 2001 ................ 135,000 4,259,000 2002 ................ 42,000 2,624,000 2003 ................ 26,635,000 831,000 Later years ......... 150,000,000 794,000 ------------ ----------- $184,145,000 $21,471,000 ============ ===========
16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE E -- SHAREHOLDERS' EQUITY The Stock Option Plan was approved by the shareholders in fiscal 1991, and amended in fiscal 1996. The Plan gives the Company the right to grant awards or options for up to 600,000 shares of Common Stock to employees. Prior to the amendment, the Company could grant awards or options for up to 300,000 shares. Transactions under the Stock Option Plan are as follows:
Prices Outstanding Exercisable ---------------- ------------- ------------ July 1, 1995 .................. $ 4.00-$9.94 129,250 63,125 Granted ..................... 3.06- 4.38 254,675 Became exercisable .......... 3.38- 9.94 27,875 Exercised ................... 4.00- 5.13 (49,125) (49,125) Canceled .................... 5.88- 5.88 (7,500) ------- June 29, 1996 ................. 3.06- 9.94 327,300 41,875 Granted ..................... 2.50- 3.56 49,000 Became exercisable .......... 3.38- 7.68 25,750 Exercised ................... 3.38- 5.88 (4,669) (4,669) Canceled .................... 3.38- 9.94 (30,125) (12,000) ------- ------- June 28, 1997 ................. 2.50- 7.68 341,506 50,956 Granted ..................... 2.22- 3.38 148,000 Became exercisable .......... 2.50- 5.88 128,340 Exercised ................... 2.50- 3.38 (11,375) (11,375) Canceled .................... 3.06- 7.68 (20,750) (16,625) ------- ------- June 27, 1998 ................. 2.22- 5.88 457,381 151,296 ======= =======
The weighted average exercise price for all options outstanding was $3.53 per share at June 27, 1998. These options expire on various dates beginning August 1999 and ending in July 2003 The options generally become exercisable in equal amounts on the first through fourth anniversaries of the date of grant and remain exercisable until the fifth anniversary of the date of grant. The excess of the fair market value of the stock over the exercise price at the date of grant is recognized as compensation expense over the period during which the options become exercisable. Related compensation expense was $223,000, $223,000 and $152,000 during fiscal 1998, 1997 and 1996, respectively. Options available for grant at June 27, 1998, June 28, 1997 and June 29, 1996 were 221,700, 72,450 and 91,325, respectively. The Incentive Stock Award Plan was approved by the shareholders in fiscal 1991, and amended in fiscal 1996. The Plan gives the Company the right to grant awards for up to 800,000 shares of Common Stock to employees. Prior to the amendment, the Company could grant awards or options for up to 300,000 shares. Under the Incentive Stock Award Plan awards are granted for the right to purchase shares for $.01. Awards were granted to purchase up to 36,791 and 282,481 during fiscal 1998 and 1997, respectively. During fiscal 1996, rights to purchase 22,206 shares were canceled. 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 $775,000, $612,000 and $615,000 for the fiscal years 1998, 1997 and 1996, respectively. Shares available for grant at June 27, 1998 were 158,119. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." If compensation cost for the Company's two stock plans, described above, had been determined based on the provisions of SFAS No. 123, net income would have been approximately the same as that reported by the Company. The shareholders have authorized the Board of Directors to issue up to 10 million shares of preferred stock with a maximum aggregate par value of $250 million, and to establish the particular terms including dividend rates, conversion prices, voting rights, redemption prices and similar matters. No shares of preferred stock have been issued. - -------------------------------------------------------------------------------- NOTE F -- INCOME TAXES For fiscal 1998, the Company had a regular tax loss of $27 million and an alternative minimum tax (AMT) tax loss of $38 million. At June 27, 1998, the Company had regular tax loss carryforwards of $52 million for federal purposes and $125 million for state purposes. $9.2 million of the federal loss carryforward resulted from the 1988 acquisition of Stanwood Corporation and will expire in years 2002 and 2003. The Company's gross deferred tax assets are reduced by a valuation allowance to net deferred tax assets considered by management to be more likely than not realizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The valuation allowance increased $11,983,000 during fiscal 1998. 17 - -------------------------------------------------------------------------------- Significant components of the Company's deferred tax assets and liabilities are as follows:
1998 1997 ---------------- ---------------- Assets Net operating loss carryforward ........................... $26,478,000 $14,567,000 Inventory ................................. 3,907,000 11,070,000 Restructuring reserves .................... 5,491,000 598,000 Tax credit carryforward ................... 3,738,000 3,375,000 Deferred compensation ..................... 3,009,000 2,912,000 Health claims ............................. 2,388,000 2,218,000 Allowance for doubtful accounts ............................... 1,873,000 Accrued vacation .......................... 535,000 671,000 Stock compensation accruals ............... 743,000 491,000 Workers' compensation ..................... 293,000 293,000 Other ..................................... 1,338,000 1,130,000 ----------- ----------- Deferred tax assets ....................... 47,920,000 39,198,000 Valuation allowance ....................... (25,896,000) (13,913,000) ----------- ----------- Net deferred tax assets ................... 22,024,000 25,285,000 Liabilities Depreciation .............................. 20,041,000 24,354,000 Inventory -- LIFO basis difference ............................. 2,855,000 3,410,000 Intangibles ............................... 857,000 1,819,000 Accounts receivable write-down ............................. 1,017,000 Other ..................................... 109,000 399,000 ----------- ----------- Deferred tax liabilities .................. 24,879,000 29,982,000 ----------- ----------- Net deferred tax liabilities ......... $ 2,855,000 $ 4,697,000 =========== ===========
Significant components of the provision for income taxes are as follows:
1998 1997 1996 --------------- ---------------- ---------------- Current: Federal income taxes ............... $ 619,000 $(3,068,000) $ (8,962,000) State income taxes ............... 550,000 341,000 526,000 ---------- ----------- ------------ Total current ....... 1,169,000 (2,727,000) (8,436,000) Deferred: Federal income taxes (benefits)..... (1,583,000) 4,030,000 (10,506,000) State income taxes (benefits)..... (259,000) 667,000 (2,016,000) ---------- ----------- ------------ Total deferred ...... (1,842,000) 4,697,000 (12,522,000) ---------- ----------- ------------ Total provision .......... $ (673,000) $ 1,970,000 $(20,958,000) ========== =========== ============
The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rate:
1998 1997 1996 ----------------- --------------- ----------------- Income tax expense (benefit) at statutory rates ......... $(15,574,000) $3,276,000 $(29,259,000) State taxes (benefits), net of federal benefit ......... 189,000 655,000 (969,000) Amortization of excess of cost over assigned value of net assets acquired ................ 2,799,000 291,000 293,000 Foreign subsidiary loss (income) ........... 175,000 341,000 285,000 Valuation allowance adjustments ............. 11,983,000 (1,268,000) 9,550,000 Other ...................... (245,000) (1,325,000) (858,000) ------------ ---------- ------------ $ (673,000) $1,970,000 $(20,958,000) ============ ========== ============
The Company made no income tax payments for fiscal 1998 and 1997, but made income tax payments of approximately $1,628,000 during fiscal year 1996. The carryback of net operating losses for fiscal 1997 resulted in a tax refund of $2.2 million in fiscal 1998. - -------------------------------------------------------------------------------- NOTE G -- OPERATIONS BY INDUSTRY SEGMENT Industry segment information for the Company presented on pages and of this Annual Report is an integral part of these financial statements. - -------------------------------------------------------------------------------- NOTE H -- DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES As a result of the history of operating losses at Stevcoknit Fabrics' knitting and knit finishing plants, and at the Nautilus fitness equipment business, the Company made the decision on March 3, 1998 to close its Stevcoknit Fabrics division and to sell its Nautilus International division (fitness equipment). Accordingly, operating results for those segments have been reclassified and reported as discontinued operations. The Company is selling the assets of the Stevcoknit division, and has retained a firm to sell the Nautilus International fitness equipment business. The Company expects to complete disposition of these businesses during the first six months of fiscal year 1999. In connection with the decision to discontinue these businesses, the Company has recognized a loss on disposal of discontinued operations of $37 million including a provision of $8.0 million for losses during the phase-out period and an income tax benefit of $1.2 million. The Company believes that it will recover the net book value of the assets of the discontinued businesses. However, the amount ultimately realized upon disposition could differ materially from the carrying value of these assets. At June 27, 1998 the Company had outstanding approximately $14 million in accrued restructuring charges and reserves relating to discontinued operations. These amounts consist of $10 million and 18 - -------------------------------------------------------------------------------- $4 million which are presented as current and noncurrent liabilities, respectively. In addition to these charges to income, during fiscal 1996, the Company recognized an impairment charge of $12 million related to the property and equipment at the Stevcoknit division. The assets of discontinued businesses at June 27, 1998 and June 28, 1997, are as follows:
June 27, 1998 June 28, 1997 --------------- -------------- Accounts Receivable ................. $19,450,000 $24,504,000 Inventory ........................... 6,104,000 26,396,000 Other current assets ................ 243,000 274,000 ----------- ----------- Total current assets ............. 25,797,000 51,174,000 =========== =========== Property, plant and equipment net of accumulated depreciation ......... 11,535,000 34,930,000 Intangibles ......................... 10,788,000 11,476,000 ----------- ----------- Total Assets ..................... $48,120,000 $97,580,000 =========== ===========
Summarized results of operations for discontinued businesses are as follows:
June 27, 1998 June 28, 1997 June 29, 1996 --------------- --------------- ---------------- Net Sales .............. $109,452,000 $ 121,540,000 $ 112,722,000 Costs and expenses ............ 119,090,000 136,221,000 158,497,000 ------------ ------------- ------------- (Loss) before income taxes ........ (9,638,000) (14,681,000) (45,775,000) Income tax expense (benefit) ........... (313,000) (7,286,000) (6,397,000) ------------ ------------- ------------- (Loss) from operation of discontinued operations .......... $ (9,325,000) $ (7,395,000) $ (39,378,000) ============ ============= =============
During fiscal 1998, the Company recognized the impairment of the excess of cost over assigned value of net assets acquired in the Delta Apparel division by charging pretax income for $7.3 million. The Company also took a restructuring charge related to the closure of certain retail outlet stores in its Duck Head Apparel division. - -------------------------------------------------------------------------------- NOTE I -- EMPLOYEE BENEFIT PLANS On September 27, 1997 the Delta Woodside Industries Employee Retirement Plan ("Retirement Plan") merged into the Delta Woodside Employee Savings and Investment Plan ("401(k) Plan"). Future contributions to the 401(k) Plan in lieu of a contribution to the Retirement Plan will be made in cash and not in stock. In the 401(k) Plan employees may elect to convert DWI stock to other funds, but may not increase the amount of stock in their account. Each participant has the right to direct the trustee as to the manner in which shares held are to be voted. The Retirement Plan qualified as an Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as a defined contribution plan. Contributions of $328,000 and $400,000 were allocated to participants for fiscal 1997 and 1996, respectively. During fiscal 1998, 1997 and 1996, the Company contributed $615,000, $648,000 and $543,000, respectively, to the 401(k) Plan. The Company also maintains a 501(c)(9) trust, the Delta Woodside Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and employee contributions from the Company and makes disbursements for health claims and other qualified benefits. The Company has a Deferred Compensation Plan which permits certain management employees to defer a portion of their compensation. Deferred compensation accounts are credited with interest and are distributable after retirement, disability or employment termination. As of June 27, 1998 and June 28, 1997, the total liability amounted to $7,204,000 and $6,966,000, 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. Under the leases, the Company made payments of approximately $248,000, $254,000 and $216,000 for the 1998, 1997 and 1996 fiscal years, respectively. - -------------------------------------------------------------------------------- NOTE K -- COMMITMENTS AND CONTINGENCIES The Company has entered into agreements, and has fixed prices, to purchase cotton for use in its manufacturing operations. At June 27, 1998 minimum payments under these contracts with noncancelable contract terms were $48 million in fiscal 1999 and $7.3 million in fiscal 2000. These commitments were at prices which approximate current market value. During fiscal 1999, the Company plans to spend approximately $20 million for capital improvements to maintain its existing facilities 19 - -------------------------------------------------------------------------------- Two of the Company's South Carolina plants, Delta Mills Marketing Company's Delta 2 and 3 finishing plants, have been unable to comply with certain toxicity and other permit-related limits contained in a National Pollutant Discharge Elimination System ("NPDES") permit held by the Company. The Company is working with the appropriate state agency to address these issues. To attempt to achieve compliance, the Company has completed required upgrades at a cost of approximately $2.3 million and believes that the required effluent limits will be achieved by November 1, 1998. Although there is no assurance that the Company will be successful, and it could face administrative penalties if it is not, the Company does not currently believe that these matters will have a material adverse impact on the Company. The Company is currently assessing certain wastewater treatment system basins of a North Carolina plant that is no longer in operation but was a likely source of groundwater contamination. The Company currently has no plans to remediate any groundwater contamination. Although no assurance can be provided, the Company does not currently believe that this matter will have a material adverse impact on the Company. 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. - -------------------------------------------------------------------------------- NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the years ended June 27, 1998 and June 28, 1997.
1998 Quarter Ended --------------------------------------------------- Sept. 27 Dec. 27 Mar. 28 June 27 ------------- ----------- ----------- ------------- (In thousands, except per share data) Net sales .................................$139,142 $124,927 $121,516 $149,875 Gross profit .............................. 25,217 21,667 23,915 25,361 Income from continuing operations ......... 3,418 1,701 (4,273) 1,770 Net income (loss) ......................... 666 (570) (45,617) 1,770 Basic and diluted earnings (loss) from continuing operations per share of Common Stock ............................. 0.14 0.07 (0.17) 0.07 Basic and diluted earnings (loss) per share of Common Stock .......................... 0.03 (0.02) (1.86) 0.07 1997 Quarter Ended ------------------------------------------------------- Sept. 28 Dec. 28 Mar. 29 June 28 ------------- ------------- ------------- ------------- (In thousands, except per share data) Net sales ................................. $116,760 $131,768 $133,731 $148,019 Gross profit .............................. 23,529 23,571 25,563 25,048 Income from continuing operations ......... 3,419 3,339 4,522 3,506 Net income (loss) ......................... 2,003 2,158 2,608 622 Basic and diluted earnings (loss) from continuing operations per share of Common Stock ............................. 0.14 0.14 0.18 0.14 Basic and diluted earnings (loss) per share of Common Stock .......................... 0.08 0.09 0.11 0.03
During the fourth quarter of fiscal 1998, the Company made certain adjustments resulting from changes in estimates of inventory losses that were material to the results of operations. These changes resulted in a reduction in net income of $1.7 million or $.07 per share for the fourth quarter of fiscal 1998. During the third quarter of fiscal year 1998, the Company recognized restructuring and impairment charges of $37 million in connection with discontinued operations described in note H. In addition, the Company also recognized impairment of the excess of cost over assigned value of net assets acquired in the Delta Apparel division by charging pretax income for $7.3 million. In the same quarter, the Company also recognized other restructuring charges of $1.6 million primarily related to closure of certain facilities at Duck Head Apparel. 20 - -------------------------------------------------------------------------------- Corporate Directory Operating Companies of Delta Woodside Industries, Inc. Delta Mills Marketing Company P.O. Box 6126, Station B 100 Augusta Street Greenville, SC 29606 Duck Head Apparel Company P.O. Box 688 1020 Barrow Industrial Parkway Winder, GA 30680-0688 Delta Apparel Company 3355 Breckinridge Boulevard Suite 100 Duluth, GA 30136 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 Robert W. Humphreys Vice President Finance and Assistant Secretary Douglas J. Stevens Vice President International Brenda L. Jones Assistant Secretary Board of Directors * C. C. Guy** RSI Holdings, Inc. -- Director * Dr. James F. Kane** Dean Emeritus, College of Business University of South Carolina * Dr. Max Lennon** President Mars Hill College E. Erwin Maddrey, II President and Chief Executive Officer Delta Woodside Industries, Inc. Buck A. Mickel** President, CEO and Director -- RSI Holdings, Inc. Vice President -- Micco Corporation (Real estate and business investments) Bettis C. Rainsford Executive Vice President, Treasurer and Chief Financial Officer Delta Woodside Industries, Inc. * Member Audit Committee ** Member Compensation Committee Note, The board of directors lost a member as a result of the death of Buck Mickel. Mr. Mickel had served as a director of Delta Woodside since 1986. Form 10-K Upon written request, the Company will furnish without charge to any Delta Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1998 including financial statements and schedules, but excluding exhibits. Requests should be directed to: Jane H. Greer, Vice President and Secretary, Delta Woodside Industries, Inc., 233 North Main Street, Suite 200, Greenville, South Carolina 29601. Annual Meeting The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be held on Tuesday, November 24, 1998, at 10:00 a.m., at the Hyatt Regency Hotel, 220 North Main Street, Greenville, South Carolina. Delta Woodside Industries, Inc. 233 N. Main Street Suite 200 Greenville, SC 29601 (864) 232-8301 EX-21 4
EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Jurisdiction % Of of Stock Owned Other Names Under Name of Subsidiary Incorporation By Parent Which Do Business Alchem Capital DE 100% owned Corporation by Delta Woodside Industries, Inc. Delta Mills, Inc. DE 100% owned by Alchem Delta Mills Marketing Capital Corporation Company; Stevcoknit Fabrics Company; Woodside Mills Delta Merchandising, SC 100% owned by Duck Head Inc Alchem Capital Outlet Stores, Duck Head Clearance Duck Head Apparel TN 100% owned by Duck Head Apparel Company Company, Inc. Alchem Capital Delta Apparel Corporation Maiden Properties Delta Consolidated NY 100% owned by Delta Apparel Marketing Corporation Alchem Capital Duck Head Marketing. Corporation Cargud, Sociedad Costa Rica 100% owned by Anonima Duck Head Apparel Company, Inc. Armonia Textil, S.A. Costa Rica 100% owned by Cargud, Sociedad Anonima Delta Apparel Honduras, Honduras 96% owned by Duck Head S. A. Apparel Company, Inc., and 1% each owned by Alchem Capital Corporation, Delta Woodside Industries, Inc., Delta Consolidated Corporation and Cargud, S.A. Nautilus VA 100% owned by International, Inc. Alchem Capital Corporation International Apparel NY 100% owned by Alchem Marketing Corporation. Capital Corporation Delta Mills DE 100% owned by Delta Mills Sales Co. Marketing, Inc. Delta Mills, Inc. Stevcoknit Marketing Co.
EX-23 5 EXHIBIT 23.1 REPORT ON SCHEDULE The Board of Directors Delta Woodside Industries, Inc. Under date of August 14, 1998, we reported on the consolidated balance sheets of Delta Woodside Industries, Inc. as of June 27, 1998 and June 28, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three- year period ended June 27, 1998, as contained in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule for each of the years in the three-year period ended June 27, 1998, as listed in Item 14(d) 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 14, 1998 INDEPENDENT AUDITORS' CONSENT The Board of Directors Delta Woodside Industries, Inc. We consent to the incorporation by reference in the registration statements (Delta Woodside Industries, Inc. Stock Option Plan - Nos. 33- 38930, 333-01381 and 333-45767; Delta Woodside Industries, Inc. Incentive Stock Award Plan - Nos. 33-38931, 333-01383 and 333-45771; Delta Woodside Industries, Inc. Long-term Incentive Stock Award Plan No. 333-45769) on Form S-8 of Delta Woodside Industries, Inc., of our reports dated August 14, 1998, relating to the consolidated balance sheets of Delta Woodside Industries, Inc. as of June 27, 1998 and June 28, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three- year period ended June 27, 1998, and related schedule, which reports are incorporated by reference or appear in the 1998 annual report on Form 10-K of Delta Woodside Industries, Inc. /s/ KPMG Peat Marwick LLP Greenville, South Carolina KPMG Peat Marwick LLP September 25, 1998 EX-27 6
5 This schedule contains summary financial information extracted from the registrant's condensed consolidated financial statements for the fiscal year ended June 27, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR JUN-27-1998 JUN-27-1998 2,753 0 122,426 3,309 113,958 265,531 288,300 123,537 474,042 94,770 183,535 0 0 246 179,321 474,042 535,460 535,460 439,300 439,300 189 0 23,395 3,500 884 2,616 (46,367) 0 0 (43,751) (1.78) (1.78)
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