-----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, BfuYOhcYCTMGxm/NdDi8nErSwsDVOuEILYwHekyBxniV1DYYhgN4umNjz7g1/Hji I7TFCuQowcRJACHnC4b9Sw== 0001015402-99-001081.txt : 19991018 0001015402-99-001081.hdr.sgml : 19991018 ACCESSION NUMBER: 0001015402-99-001081 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990930 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: 99721177 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 3, 1999 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 1 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 17, 1999 was: Common Stock, $.01 par value - $38,992,955 The number of shares outstanding of each of the registrant's classes of Common Stock, as of September 17, 1999 was: Common Stock, par value $.01 - 23,804,384 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Annual Report to shareholders for the fiscal year ended July 3, 1999 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 4, 1999 are incorporated by reference into Part III. 2 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. The Company has three operating divisions. 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. Duck Head Apparel also operates 24 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 12 states, Costa Rica and Honduras, and has approximately 5,000 employees. During fiscal 1998 the Company made the decision to exit the knit textile market by closing its Stevcoknit Fabrics Company operating division. Also during fiscal 1998 the Company made the decision to exit the fitness equipment (Nautilus International) business. Stevcoknit Fabrics Company and Nautilus International have been classified and reported as discontinued operations. Most of the liquidation of Stevcoknit Fabrics Company was completed in fiscal 1998. The Nautilus International business was sold in January 1999. 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 1999, 1998, and 1997. Woven textile fabrics produced for sale by the Company 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 3 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. If sold at this stage, greige goods are typically sold to converters who, in turn, 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 Delta Mills Marketing Company sells a broad range of finished apparel fabrics primarily to branded apparel manufacturers and resellers, including Levi Strauss, Haggar Corp., the Wrangler and Lee divisions of V.F. Corporation, Farah Incorporated, Kellwood Company and Liz Claiborne, Inc., and private label apparel manufacturers for J.C. Penney Company, Inc., Sears Roebuck & Co., 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' Dockers and Haggar Corp.'s Wrinkle-Free . 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 $314 million, $342 million, and $336 million during fiscal 1999, 1998, and 1997 respectively. Sales of woven fabric to Levi Strauss & Co., Inc. accounted for approximately 15%, 12% and 15% of the Company's total net sales for fiscal 1999, 1998 and 1997, respectively. The loss of this account could have a material adverse effect on the results of the Company. 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 woven fabrics division sells and distributes its fabrics through a marketing office based in New York City (which serves the United States, Canadian and Mexican markets), with sales agents also operating from Atlanta, Chicago, Dallas, Los Angeles, San Francisco and Mexico. During fiscal years 1999, 1998, and 1997, approximately 78%, 70% and 70%, respectively, of the division's finished woven fabric sales were of fabrics made from cotton or cotton/synthetic blends, while approximately 22%, 30% and 30%, respectively, of such sales were of fabrics made from spun synthetics and other 4 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 division's production of cotton and cotton/synthetic blend and spun synthetic finished woven fabrics is largely vertically integrated, with the division performing most of its own spinning, weaving and finishing. In the production of military fabrics, the Company purchases a portion of its greige goods needs and finishes this fabric to specifications. The woven finished fabrics plants are currently operating at less than full capacity. The division also produces a variety of unfinished light-weight woven fabrics that are sold to converters of finished products. Due to import pressure, the unfinished fabrics business is being discontinued and is being replaced with more profitable product lines. This move away from the unfinished fabric production will be substantially complete in the first quarter of fiscal 2000. 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 and shirts. In addition, this division 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. "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 division has over 400 men's and 200 boy's Duck Head shops in major department stores. The "shop" display format of a large part of the Duck Head line utilizes dedicated retail floor space in the sportswear department positioned with other national brands. Net sales of "Duck Head" products were approximately $72 million, $86 million, and $81 million during fiscal 1999, 1998, and 1997, respectively. Duck Head Apparel operates 2 facilities located in Georgia and Costa Rica. The division purchases the fabrics used in its products from a number of producers. "Duck Head" also currently acquires a substantial amount of its finished products from other sourcing companies throughout the world. This outside production takes the form of sewing fabric parts cut at contractor's 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 distribution facility in Georgia. Duck Head labeled apparel items are generally required to be inventoried to permit reorder shipment and to level production schedules. Customer private 5 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 a showroom in New York, New York and sales personnel located throughout the country. The Duck Head division has 24 outlet stores located in 9 states that sell principally closeout and irregular Duck Head products. These stores also sell a small amount of apparel and accessory items manufactured by Duck Head licensees. DELTA APPAREL SEGMENT Delta Apparel Company, headquartered in Duluth, Georgia, operates a total of 5 facilities and produces knitted T-shirts, polo-type shirts and sweatshirts. The division markets its products primarily to companies that screen print shirts for resale and to distributors. Net sales in this division were $106 million, $106 million and $112 million during fiscal 1999, 1998, and 1997, 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. Demand for the division's products is strongest during the spring and summer months. Most knit apparel items are inventoried to permit quick shipment and to level production schedules during the months of lower demand. 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 a company owned plant in Georgia and in leased facilities in 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. RAW MATERIALS FOR YARN The Company's principal raw material for yarn is cotton, although it also spins polyester, wool, linen fiber, acrylic, lyocell, nylon and rayon fibers and weaves textured polyester filament. Polyester is obtained primarily from three major suppliers, all of whom provide competitive prices. For fiscal 1999 polyester prices were at the lowest prices the Company has paid since fiscal year 1993. However, management expects that trend to be reversed in fiscal 2000. 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 $.770 in fiscal year 1999 as compared to $.817 in fiscal year 1998, and, as compared to $.833 in fiscal year 1997. Management expects the downward trend in cotton prices to continue in fiscal 2000. In fiscal year 2000, the Company expects to use approximately 97 million 6 pounds of cotton (including approximately 15 million pounds of premium cotton) and 6 million pounds of polyester in its manufacture of yarn. The Company has contracted to purchase about 61% of its expected cotton requirements for fiscal year 2000. 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 its higher costs to its customers. In addition, to the extent that cotton prices increase and the Company has not provided for its requirements with fixed price contracts, the Company may be materially and adversely affected as there can be no assurance that it would be able to pass along these increased costs to its customers. 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. Delta Mills Marketing Company sells primarily to domestic apparel manufacturers, many of which operate offshore sewing operations. The division competes with numerous domestic and foreign fabric manufacturers, including companies larger in size and having greater financial resources than the Company. The principal competitive factors in the woven fabrics markets are price, service, delivery time, quality and flexibility, with the relative importance of each factor depending upon the needs of particular customers and the specific product offering. Management believes that the division maintains its ability to compete effectively by providing its customers with a broad array of high-quality fabrics at competitive prices on a timely basis. Delta Mills Marketing Company's competitive position varies by product line. There are several major domestic competitors in the finished cotton and cotton/polyester blend woven fabrics business, none of which dominates the market. The Company believes, however, that it has a strong competitive position in the all cotton pants-weight fabrics business. In addition, the Company believes that it is one of only two finishers successful in printing camouflage for sale to apparel suppliers of the U.S. Government and the only supplier that is vertically integrated for camouflage production. 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. 7 Foreign competition is a significant factor in the United States fabric market. The Delta Mills Marketing 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. 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 8 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 manufacturers 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 5,000 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 by reference. Generally, the environmental rules applicable to the Company are becoming increasingly stringent. The Company incurs capital and other expenditures in each year that are aimed at achieving compliance with current and future environmental standards. The Company does not expect that the amount of such expenditures in the future will have a material adverse effect on its operations or financial condition. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of Delta Woodside's liability, if any, for past failures to comply with laws, regulations and permits applicable to its operations cannot be determined. The Company's previously owned Nautilus business has been named as a "potentially responsible party" ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") with respect to three hazardous waste sites in North Carolina, South Carolina and Mississippi. To the Company's knowledge, all of the transactions with these sites were conducted by a corporation (the "Selling Corporation") whose assets were sold in 1990 pursuant to the terms of an order of the United States Bankruptcy Court to another corporation, the stock of which was subsequently acquired by the Company in January 1993. 9 At the North Carolina site, the Selling Corporations is listed as a "de Minimis" party, and at the South Carolina site, the Selling Corporation has been listed as an "insolvent" party and would appear to qualify as a "de Minimis" party. The Company believes that the Selling Corporation's share of the liabilities at either of these sites will be immaterial. At the Mississippi site, the PRP group has completed the surface removal action and is investigating soil and groundwater contamination, both at the site and in the surrounding area. The Company's latest information is that the Selling Corporation is ranked eleventh out of a total of over 300 PRPs in contributions of material to the site, and, based on volume, the Selling Corporation contributed approximately 3% of the site's material. To the Company's knowledge, latest estimates of costs to clean up the site range up to $4 million. Trichlomethane, one of the substances delivered by the Selling Corporation to the site, has been found in the site's groundwater and at nearby residential drinking water wells. Although no assurance can be provided, the Company believes that it is shielded from liability at these three sites by the order of the United States Bankruptcy Court pursuant to which the Selling Corporation sold its assets to the corporation subsequently acquired by the Company. The Company has denied any responsibility at these three sites, has declined to participate as a member of the respective PRP groups, and has not provided for any reserves for costs or liabilities attributable to the Selling Corporation. INDUSTRY SEGMENT INFORMATION Segment information made part of Note G of the Company's consolidated financial statements for the fiscal year ended July 3, 1999 is incorporated herein by reference. YEAR 2000 COMPLIANCE Information concerning year 2000 compliance in "Management's Discussion and Analysis of Results of Operations and Financial Condition, Year 2000 Compliance" incorporated into Item 7 of this Form 10-K 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 1999 Versus Fiscal 1998" incorporated into Item 7 of this Form 10-K is incorporated herein by reference. 10 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. Offices 17,400 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(5) Maiden Plant, Maiden, NC knit/dye/finish/cut 325,000 Owned Washington Plant, Washington, GA sew 129,800 Owned Distribution Center, Knoxville, TN distribution 550,000 Owned Honduras Plant, San Pedro Sula, Honduras sew 104,000 Leased(3) DUCK HEAD APPAREL COMPANY Monroe #2, Monroe, GA pressing 93,000 Owned San Jose Plant, San Jose, Costa Rica sew 60,000 Leased(3) 316 Distribution Center, Winder, GA admin offices and warehouse 200,000 Owned Various retail stores (4)
11 Item 2. PROPERTIES - ------- ---------- (1) Lease expires in December 2003 with the right to renew for an additional five-year period. (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 operation leases 24 facilities in 9 states, which leased space is approximately 75,000 square feet. These leases expire at various dates through 2006. (5) The Rainsford Plant is owned by Delta Mills, Inc., a wholly-owned indirect subsidiary of Delta Woodside. 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 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 plants in the Delta Mills Marketing division are operating at less than full production capacity. Various factors affect the relative use by the Company's apparel divisions of their own facilities and outside contractors in the various apparel production phases. The Delta Apparel division is currently using the majority of its internal production capacity. The Duck Head Apparel operation is operating at approximately 50% of its internal 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. 12 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 1999 fiscal year. 13 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND - ------ ---------------------------------------------- RELATED STOCKHOLDER MATTERS ----------------------------- The material under the heading "Common Stock Market Prices and Dividends" on the inside front cover of the Company's annual shareholders' report for the year ended July 3, 1999 is incorporated herein by reference. The following table shows the issuances by the Company during fiscal 1999 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. Date of Type of Amount of Class of Nature of Transaction Transaction Common Stock Persons Transaction ----------- ----------- ------------- --------- -------------- May 10, 1999 Issued 750 Employees Service Awards The Company believes that 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 July 3, 1999 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 3 through 7 of the Company's annual shareholders' report for the year ended July 3, 1999 is incorporated herein by reference. 14 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET - --------------------------------------------------------------------- RISK ---- COMMODITY RISK SENSITIVITY - ---------------------------- As a part of the Company's business of converting fiber to finished fabric, the Company makes raw cotton purchase commitments and then fixes prices with cotton merchants who buy from producers and sell to textile manufacturers. The Company may seek to fix prices up to 18 months in advance of delivery. Daily price fluctuations are minimal, yet long-term trends in price movement can result in unfavorable pricing of cotton for the Company. Before fixing prices, the Company looks at supply and demand fundamentals, recent price trends and other factors that affect cotton prices. The Company also reviews the backlog of orders from customers as well as the level of fixed price cotton commitments in the industry in general. At July 3, 1999, a 10% decline in the market price of the cotton covered by the Company's fixed price contracts would have a negative impact of approximately $4.2 million on the value of the contracts. At the end of fiscal 1998, a 10% decline in the market price of the Company's fixed price contracts would have had a negative impact of approximately $5.6 million on the value of the contracts. The decline in the potential negative impact from 1998 to 1999 is due principally to current cotton commitments being at significantly lower average prices than in fiscal 1998. The Company has changed to the current disclosure format from the format in the fiscal year 1998 10-K in an effort to improve the comparability of its disclosure to other companies in its industry. INTEREST RATE SENSITIVITY - --------------------------- The following debt obligations are sensitive to changes in interest rates: $150 million of unsecured ten year senior notes due 2007 at a fixed rate of 9.625%. $100 million of secured five year revolving credit facility expiring 2002 with interest of 6.93% at July 3, 1999. Interest is based on LIBOR. $30 million of short-term secured revolving credit facility expiring December 2000 with interest of 7.22% at July 3, 1999. Interest is based on LIBOR. An interest rate change would not have an impact on the fixed rate ten year senior notes totaling $150 million. An interest rate change would have a negative impact to the extent the Company increases borrowings against the revolving credit facilities. The impact would be dependent on the level of borrowings incurred. During fiscal years 1999 and 1998, based on the average principal balance outstanding, a 1% increase in interest rates would have resulted in increased interest expense of approximately $533,000 and $879,000, respectively. In fiscal year 2000, as of this date, the Company has no outstanding borrowings against the revolving credit facilities. 15 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------- ----------------------------------------------- The consolidated financial statements included on pages 10 through 13 of the Company's annual shareholders' report for the year ended July 3, 1999 are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE -------------------------- Not applicable. 16 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". 17 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. 18 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. 4.2 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"). 4.3 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. 4.3.1 First Amendment and Waiver Agreement dated as of May 11, 1998 respecting Credit Agreement dated as of August 25, 1997: Incorporated by reference to Exhibit 4.2.7 to the Form 10-Q of the Company for the quarter ended March 28, 1998. 4.3.2 Second Amendment to Credit Agreement dated as of July 29, 1998 respecting Credit Agreement dated as of August 25, 1997: Incorporated by reference to Exhibit 4.2.4.2 to the Form 10-K of the Company for the year ended June 27, 1998. 4.4 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. 19 4.5 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 September 1, 1998 and between Hammond Square, Ltd. and the Company. 10.2** Delta Woodside Deferred Compensation Plan for Key Managers, Amended and Restated Effective January 1, 1998 as amended. 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. 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. 333-45767). 20 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). 10.10 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). 10.11 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). 10.12** Letter dated December 14, 1998 to Robert W. Humphreys: Incorporated by reference to Exhibit 10.10 to the Form 10-Q/A of the Company for the quarterly period ended December 26, 1998 (the "December 1998 10-Q"). 10.12.1 ** Letter dated April 22, 1999 to Robert W. Humphreys. 10.13 ** Letter dated December 14, 1998 to Jane H. Greer: Incorporated by reference to Exhibit 10.11 to the December 1998 10-Q. 21 10.14 ** Letter dated June 8, 1998 to Douglas J. Stevens. 10.15 See Exhibits 4.3, 4.3.1, 4.3.2, and 4.4. 13 Annual Report to Shareholders of the Company for the fiscal year ended July 3, 1999. 21 Subsidiaries of the Company. 23.1 Report on Schedules and Independent Auditors' Consent for the years ended July 3, 1999, June 27, 1998 and June 28,1997. 27 Financial Data Schedule. * All reports previously filed by the Company with the Commission pursuant to the Exchange Act, and the rules and regulations promulgated thereunder, exhibits of which are incorporated to this Report by reference thereto, were filed under Commission File Number 1-10095. ** This is a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K ---------------------- The Company filed a Form 8-K with date of June 25, 1999. Items reported were: Item 5. Other events Item 7. Financial statements and exhibits (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. 22 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. September 30, 1999 /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 9/30/99 /s/ E. Erwin Maddrey 9/30/99 - ---------------- ------- --------------------- ------- C. C. Guy Date E. Erwin Maddrey, II Date Director President, Chief Executive Officer and Director /s/ James F. Kane 9/30/99 /s/ Bettis C. Rainsford 9/30/99 - ---------------- ------- ----------------------- ------- James F. Kane Date Bettis C. Rainsford Date Director Executive Vice President, Chief Financial Officer, Treasurer and Director /s/ William F. Garrett 9/30/99 - --------------------- ------- William F. Garrett Date Director /s/ Max Lennon 9/30/99 /s/ Robert W. Humphreys 9/30/99 - ---------------- ------- ----------------------- -------- Max Lennon Date Robert W. Humphreys Date Director Vice President - Finance /s/ Buck A. Mickel 9/30/99 - ----------------- ------- Buck A. Mickel Date Director 23
EXHIBIT INDEX 10.1 Lease, dated September 1, 1998, by and between Hammond Square, Ltd. and the Company. 10.2 Delta Woodside Deferred Compensation Plan for Key Managers, Amended and Restated Effective January 1, 1998 as amended. 10.12.1 Letter dated April 22, 1999 to Robert W. Humphreys. 10.14 Letter dated June 8, 1998 to Douglas J. Stevens. 13 Annual Report to Shareholders of the Company for the fiscal year ended July 3, 1999. 21 Subsidiaries of the Company. 23.1 Report on Schedules 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 JULY 3, 1999 DELTA WOODSIDE INDUSTRIES, INC. GREENVILLE, SOUTH CAROLINA F-1 FORM 10-K--ITEM 14(a)(1) AND (2) DELTA WOODSIDE INDUSTRIES, INC. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Delta Woodside Industries, Inc. and subsidiaries included in the Annual Report of the Registrant to its shareholders for the Year ended July 3, 1999 are incorporated by reference in Item 8: Consolidated balance sheets- July 3, 1999 and June 27, 1998. Consolidated statements of operations--Years ended July 3, 1999, June 27, 1998 and June 28, 1997. Consolidated statements of shareholders' equity--Years ended July 3, 1999, June 27, 1998 and June 28, 1997. Consolidated statements of cash flows--Years ended July 3, 1999, June 27, 1998 and June 28, 1997. Notes to consolidated financial statements. The following consolidated financial statement schedules of Delta Woodside Industries, Inc. are included in Item 14(d): Schedule I - Condensed Financial Information of Registrant 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.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (in thousands) Delta Woodside Industries, Inc. July 3, 1999 June 27, 1998 ----------- ----------- ASSETS CURRENT ASSETS CASH AND CASH EQUIVALENTS $3,519 $1,825 Accounts receivable 49 41 Less allowances for doubtful accounts 10 14 ----------- ----------- 39 27 Prepaid expenses and other current assets 595 827 ----------- ----------- TOTAL CURRENT ASSETS 4,153 2,679 PROPERTY, PLANT AND EQUIPMENT, at cost 1,341 1,833 Less accumulated depreciation 1,209 1,497 ----------- ----------- 132 336 INVESTMENT IN SUBSIDIARIES 74,202 127,842 ADVANCES TO SUBSIDIARIES 73,696 75,790 DEFERRED INCOME TAXES 831 OTHER ASSETS 2,872 2,864 ----------- ----------- TOTAL ASSETS $155,055 $210,342 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank debt $1,678 $11,108 Accounts payable and accrued liabilities 17,265 17,643 Deferred income taxes 584 1,148 ----------- ----------- TOTAL CURRENT LIABILITIES 19,527 29,899 LONG TERM DEBT DEFERRED INCOME TAXES 941 OTHER LIABILITIES AND DEFERRED CREDITS 607 876 SHAREHOLDERS' EQUITY Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued and outstanding 23,792,000 shares (1999) and 24,644,000 shares (1998) 238 246 Additional paid-in capital 160,863 165,221 Retained earnings (deficit) (27,121) 14,100 ----------- ----------- 133,980 179,567 COMMITMENTS AND CONTINGENCIES TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $155,055 $210,342
See notes to condensed financial statements.
CONDENSED STATEMENTS OF OPERATIONS (in thousands) Delta Woodside Industries, Inc. Year Ended ------------------------------------------ July 3, 1999 June 27, 1998 June 28, 1997 ----------- ------------- ------------ Net sales $728 $1,138 $1,305 Cost of goods sold 761 1,075 1,170 ----------- ------------- ------------ Gross profit (loss) (33) 63 135 Selling, general and administrative Expenses 2,977 552 (19) Equity in income (loss) of subsidiaries (46,140) (41,085) 5,094 Other income 18 107 185 ----------- ------------- ------------ OPERATING PROFIT (LOSS) (49,132) (41,467) 5,433 Interest (expense) income: Interest expense (1,430) (5,218) (22,290) Interest income 10,011 19,234 19,815 ----------- ------------- ------------ 8,581 14,016 (2,475) INCOME (LOSS) BEFORE INCOME TAXES (40,551) (27,451) 2,958 Income tax expense (benefit) (1,156) 16,300 (4,433) ----------- ------------- ------------ NET INCOME (LOSS) (39,395) (43,751) 7,391 Basic and diluted earnings ($1.63) ($1.78) $0.30 (loss) per share Weighted average number of shares outstanding 24,149 24,575 24,513
See notes to condensed financial statements.
CONDENSED STATEMENTS OF CASH FLOWS (in thousands) Delta Woodside Industries, Inc. Year Ended ------------------------------------------ July 3, 1999 June 27, 1998 June 28, 1997 ------------- ------------- ------------- OPERATING ACTIVITIES Net income (loss) ($39,395) ($43,751) $7,391 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net (income) loss 46,140 41,085 (5,094) Provision for deferred income taxes 1,208 (428) 457 Other 204 168 148 Changes in operating assets and liabilities (435) 14,927 (4,598) ------------- ------------- ------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 7,722 12,001 (1,696) INVESTING ACTIVITIES Dividends received from subsidiaries 7,500 8,000 ------------- ------------- NET CASH PROVIDED BY INVESTING ACTIVITIES 7,500 8,000 FINANCING ACTIVITIES Proceeds (repayments) from revolving lines of credit ($9,430) ($214,392) ($15,796) Net advances from subsidiaries 2,094 197,008 12,704 Dividends paid (2,419) (2,460) Repurchase common stock (4,520) Other 747 411 641 ------------- ------------- ------------- NET CASH (USED) BY FINANCING ACTIVITIES (13,528) (19,433) (2,451) ------------- ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVILENTS 1,694 568 (4,147) Cash and cash equivalents at beginning of year 1,825 1,257 5,404 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $3,519 $1,825 $1,257
See notes to condensed financial statements. NOTES TO CONDENSED FINANCIAL STATEMENTSDelta Woodside Industries, Inc. The accompanying financial statements of Delta Woodside Industries, Inc. should be read in conjunction with the consolidated financial statements of Delta Woodside Industries and its consolidated subsidiaries. BASIS OF PRESENTATION: Delta Woodside Industries, Inc. is the top parent of various wholly-owned subsidiaries which are engaged in the manufacture, sale, and distribution of textile and apparel products. Delta Woodside's investments in its wholly owned subsidiaries are reported in these condensed financial statements using the equity method of accounting. LONG TERM DEBT: A subsidiary of Delta Woodside has unsecured senior notes and a bank credit facility outstanding. See Note D of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Sources of Capital". The senior notes and the credit facility contain restrictions which, among other things, limit the subsidiary from paying cash dividends to Delta Woodside. Generally, with certain exceptions, dividends and certain other restricted payments are limited to $12.5 million plus 50% of the cumulative net income of the subsidiary from the beginning of fiscal 1998. Additionally, dividends and other restricted payments are not permitted in any instance where such payment would cause non-compliance with any other restrictive covenant. As of July 3, 1999 approximately $900 thousand was available under the cumulative net income test; however, payment of any further dividend would have caused a violation of a covenant regarding minimum tangible net worth. As of July 3, 1999, net assets of the subsidiary totaling approximately $50 million were restricted from distribution. F-2
Deducted from asset accounts Allowance for doubtful accounts: 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 Charged to Describe of Period and Expense Accounts-Describe - -------------------------- -------------- ------------ --------------- ------------ ------------- Year ended July 3, 1999 $ 6,417,000 $ 6,118,000 $ (579,000)(2) 4,329,000(1) $ 7,627,000 ============== ============ =============== ============ ============= 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 ============== ============ =============== ============ ============= Inventory reserves: Year ended July 3, 1999 $ 9,560,000 $ 6,083,000 $ 15,643,000 ============== ============ ============= 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 ============== ============ ============= 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-10.1 2 LEASE This lease is made this first day of September 1998, by and between Hammond Square, Ltd. (hereinafter referred to as "Landlord") and Delta Woodside Industries, Inc. (hereinafter referred to as "Tenant"). SECTION 1 DEFINITIONS 1.1 Regime. The term "Regime" means all that certain land and all ------ buildings, improvements, equipment and facilities erected thereon known as HAMMOND SQUARE HORIZONTAL PROPERTY REGIME, located in Greenville, South Carolina. 1.2 Master Deed. The term "Master Deed" means the Declaration of ------------ Condominium establishing Hammond Square Horizontal Property Regime and the by-laws of the Association as the same may be amended from time to time. 1.3 Association. The term "Association" means the entity responsible ----------- for the operation of the condominium regime, Hammond Square Condominium Owners Association, a non-profit unincorporated association. 1.4 Lease Year. The first lease year shall consist of twelve (12) ----------- consecutive full calendar months plus the partial month, if any, caused by the Commencement Date (as defined in Section 2.2) falling on other than the first day of a calendar month. Each succeeding lease year shall be for a period of twelve (12) full calendar months. 1.5 Common Areas. The term "Common Areas" means those areas, ------------- facilities, utilities, improvements, equipment and installations in the Regime which are from time to time designated for the nonexclusive use or benefit of other owners or tenants, their employees, agents, customers, licensees and invitees, and including Common Elements and Commercial Common Elements designated in the Master Deed. SECTION 2 DEMISE OF PREMISES AND TERM 2.1 Lease. Landlord hereby leases and demises to Tenant those certain ----- Premises crosshatched in red on the Floor Plan attached hereto as Exhibit "A" and by this reference made a part hereof, containing approximately 9,662 square feet (hereinafter referred to as the "Premises") together with all rights to use the Common Areas which are associated with or appurtenant to the ownership under the Master Deed, subject to such reasonable rules and regulations as Landlord shall adopt. If the Tenant shall perform the obligations set forth herein, the Tenant shall have and enjoy, during the entire term hereof, the peaceful, quiet and undisturbed possession of the premises. 1 2.2 Commencement and Expiration Dates of Term. The term of this Lease ------------------------------------------ and Tenant's obligation to pay rent hereunder shall commence on September 1, 1998. The term shall end, unless sooner terminated as hereinafter provided, on the last day of the fifth (5th) consecutive lease year following the Commencement Date. 2.3 Tenant Estoppel Certificate. The parties agree that, promptly upon --------------------------- the establishment of the Commencement Date, they will execute a stipulation acknowledging said date which shall be attached to this Lease and made a part hereof. In addition, within ten (10) days after written request by landlord or to such other party as may be designated by Landlord, a certificate stating that this Lease is in full force and effect and has not been modified, supplemented or amended in any way, except as indicated in such certificate; that all conditions and agreements hereunder to be performed by Landlord have been satisfied or performed, except as set forth in said certificate; that Tenant is not in default in the payment of rent or any of the other obligations required of Tenant hereunder; and that Tenant has paid Minimum Rent and any Additional Rent set forth hereunder as of the date set forth in the certificate. 2 SECTION 3 RENT 3.1 Minimum Rent. During the initial lease year, Tenant shall pay ------------- $13.00 per square foot for the 9,662 square feet being leased, or $125,606 per year, in equal monthly installments. Monthly installments of minimum rent shall be paid in advance on the first day of each calendar month, without demand, deduction of set off. In addition, Tenant shall pay monthly to Landlord, the parking fees charged by the City of Greenville for usage of the Mall 200 parking. The amount shall be the number of spaces multiplied by the rate per space charged by The City. The rental rate in subsequent years will be as follows: Year 2 $13.50/Sq. Ft. Year 3 $14.00/Sq. Ft. Year 4 $14.50/Sq. Ft. Year 5 $15.00/Sq. Ft. 3.2 Operating Costs. The Tenant shall pay to Landlord its prorata ---------------- share of any special or extraordinary assessments which may be assessed against the Premises pursuant to the provisions of the Master Deed, such prorata share being determined by a fraction, the numerator of which is the number of years remaining in the term of this lease and the denominator of which is the useful life, in years, of the improvement or repair for which the assessment was levied. 3.3 Common Area Control/Right of Relocation. Landlord and/or the ------------------------------------------- Association shall have the right at all times, in their sole discretion, to change the size, location, elevation, nature and/or use of any portion of all the Common Areas, the Regime or any part thereof as they may from time to time determine, including the right to change the size thereof, to change the location and size of the landscaping and buildings on the site, and to make additions to, subtractions from or rearrangements of said buildings; provided that no such change shall materially adversely affect the Premises or Tenant's use thereof. SECTION 4 USAGE 4.1 Use. Tenant shall use, occupy and operate the Premises solely for --- the purpose of business offices and for no other purpose whatsoever. Tenant shall not, without Landlord's prior written consent, keep anything within the Premises, or use the Premises for any purpose (other than use as business offices) which increases the insurance premium cost or invalidates any insurance policy carried on the Premises and Tenant shall pay as rent the amount of any such increase promptly upon demand by Landlord. 3 4.2 Rules and Regulations. Tenant shall observe faithfully and comply ----------------------- strictly with the Rules and Regulations attached hereto and made a part hereof by this reference, and with all other Rules and Regulations that Landlord may from time to time reasonably adopt or that may reasonably be established by the Association for the safety, operation, care and cleanliness of the Regime or the preservation of good order therein. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations, or for the breach of any covenant or condition in any lease, by any other owner (other than Landlord) or tenant in the Regime. SECTION 5 ALTERATION, REPAIR AND MAINTENANCE 5.1 Alterations by Tenant. Except for Tenant improvements to be ----------------------- constructed pursuant to Section 15.20 (a), Tenant shall not make any alterations to (including but not limited to alterations to the exterior, the storefront, signs and/or utility lines or systems within or serving the Premises) not secure any fixture or apparatus to the Premises without Landlord's prior written approval, which approval shall not be unreasonably withheld, and Tenant shall promptly remove upon order from Landlord any decoration or alteration made or installed upon the Premises without Landlord's written consent, which consent shall not be unreasonably withheld. All alterations, fixtures, betterments and improvements made to or installed upon the Premises shall remain upon the Premises, and shall become Landlord's property upon the expiration or earlier termination of this Lease unless Landlord shall require Tenant to restore the Premises to its original condition. 5.2 Repairs by Tenant. The Association (or Landlord if the Association ----------------- shall fail to do so) shall keep the structural portions of the Premises and the Common Area of the Regime, as applicable, in reasonable repair, provided that Tenant shall give Landlord or the Association written notice of the necessity for such repair as same affects the Premises. Tenant shall keep the interior of the Premises , together with the storefront and all doors and windows of the Premises, and all electrical, plumbing, and sprinkler systems located within the Premises, and any other mechanical installations located within the Premises, in reasonably good working order and repair, at its expense. Tenant shall also keep in reasonably good working order and repair the heating, ventilating and air conditioning systems that separately serve the Premises, whether such systems are located within the Premises or on the roof or at other locations within the building or the regime property. It is understood and agreed that Tenant shall be responsible for all maintenance and repair of the Premises except that which is the responsibility of the Association under the Master Deed. Tenant agrees to employ a suitable contractor approved by Landlord, which approval shall not be unreasonably withheld, to perform Tenant's obligations for maintenance of the heating, cooling and ventilating units serving the Premises, including at least annual inspections and cleaning , if necessary, of the system together with such servicing as each such inspection discloses as being 4 reasonably necessary or as shall be reasonably required by Landlord. Tenant shall promptly repair, at its expense, any damage to the Premises caused by bringing into the Premises any property for Tenant's use, or by the installation or removal of such property regardless of fault or by whom such damage may be caused, unless caused solely by the affirmative acts of negligence of Landlord, its agents or employees. In the event Tenant fails to make such repairs, Landlord may, at its option, but need not, make same and Tenant agrees to pay Landlord as additional rent the reasonable cost thereof promptly upon demand by Landlord. Tenant shall not overload the floor slab, electric wiring or utilities serving the Premises and shall install at Tenant's sole expense, after first obtaining Landlord's written approval, which approval shall not be unreasonably withheld, any additional electric wiring that may reasonably be required in connection with Tenant's apparatus, equipment or fixtures. 5.3 Liens. Tenant hereby indemnifies Landlord against, and shall keep ----- the Premises and the Regime free from liens for any work performed, material furnished, or obligations incurred by the Tenant. Should liens or claims be filed against the Premises or the Regime by reason of Tenant's acts or omissions, Tenant shall cause same to be discharged by bond or otherwise within fifteen (15) days after filing. 5.4 Signs and Displays. Tenant shall not place or have placed and -------------------- maintained on or within the Premises any sign, awning or advertising visible from the exterior of the Premises not first approved in writing by Landlord, which approval shall not be unreasonably withheld. Landlord shall have the exclusive right to use the roof and Tenant shall not affix any sign or aerial to the roof of the Premises. SECTION 6 DAMAGE, DESTRUCTION OR CONDEMNATION 6.1 Casualty. Except as otherwise provided herein, if the Premises are -------- damaged by fire or other insured casualty, the damage shall be repaired by Landlord or the Association to the extent of the insurance proceeds available therefor and the extent to which the Association is otherwise required to repair pursuant to the Master Deed. Tenant shall restore Tenant's improvements thereto to the extent of the insurance proceeds therefor immediately upon the completion of Landlord's work or simultaneously with such work to the extent practicable. Until repairs to the Premises are completed by the Association or Landlord, Rentals shall be abated in proportion to the part of the Premises, if any, which is unusable by Tenant in the conduct of its business, but if the damage is due to the fault or neglect of Tenant or its employees, agents or invitees, there shall be no abatement of rent. In the event that the Premises or other portions of the Regime are damaged to the extent that the Association, pursuant to the terms of the Master Deed, is not obligated to repair or restore the damage and the condominium owners do not elect to repair or restore, then this lease shall be terminated as of the date of such damage. 5 If the Association and Landlord should elect or be obligated pursuant to this Section 6.1 to repair or rebuild because of any damage or destruction, their obligation shall be limited to the basic building and any other work or improvements which may have been originally performed or installed at Landlord's or Association's expense. If the cost of performing Landlord's or Association's obligation exceeds the actual proceeds of insurance paid or payable to Landlord or the Association on account of such casualty, together with any contribution which might be required of the Association or unit owners pursuant to the Master Deed, Landlord may terminate this Lease unless Tenant, within fifteen (15) days after demand therefor, deposits with Landlord a sum of money sufficient to pay the difference between the cost of repair and the proceeds of insurance available for such purpose. Provided that Landlord or the Association shall fulfill its repair obligations, Tenant shall replace all work and improvements originally installed or performed by Tenant at its expense to the extent of the insurance proceeds therefor. Upon the termination of this Lease pursuant to the provisions of this Section 6.1, the parties shall be released thereby without further obligations to the other party coincident with the surrender of possession of the Premises to Landlord, except for items which have theretofore accrued and be then unpaid. In the event of such termination, all of Tenant's insurance proceeds covering Tenant's leasehold improvements in excess of the book value (net of amortization) to Tenant of such improvements, but excluding proceeds for trade fixtures, merchandise, signs and other personal property, shall be disbursed and paid to Landlord. Any security deposit paid by Tenant shall be refunded to Tenant. 6.2 Condemnation. If the whole of the Premises, or so much thereof as ------------- to render the balance unusable by Tenant, shall be taken under power of eminent domain, or otherwise transferred in lieu thereof, or if so much of the Regime is taken that the Regime is not restored, then this Lease shall automatically terminate as of the date possession is taken by the condemning authority. In the event of a total or partial taking, Landlord agrees to pay to Tenant, from the award allocable to the Premises, a sum equal to the book value (net of depreciation) of Tenant's improvements which are taken or rendered unusable. In addition, in the event of a total taking, there shall be subtracted from the award allocable to the Premises (a) all indebtedness of Landlord allocable to the Premises and (b) the book value of the Tenant's improvements. The remaining balance, if any, shall be divided between Landlord and Tenant as their respective interests would have appeared prior to any deduction from the award. Except for payment of the book value of improvements referred to above, there shall be no apportionment in the event of a partial taking which does not result in termination of this lease but Rent shall be apportioned according to the part of the Premises remaining usable by Tenant. 6 SECTION 7 UTILITIES 7.1 Payment. Tenant shall promptly pay all charges for utilities and ------- other services furnished to the Premises whether by Landlord or the applicable utility Company. Landlord shall not be liable for any interruptions or curtailment in utility services due to causes beyond the control of Landlord or, unless avoidable by the exercise of due care by Landlord, due to alteration, repair or improvement of the Premises or the Regime. 7.2 Utilities. Landlord and the Association shall have the right to --------- run utility lines, pipes, roof drainage pipes, conduit, wire, ductwork or sprinkler systems where necessary, through, in or beneath the Premises and to maintain the same in a manner which does not unduly interfere with Tenant's use thereof. SECTION 8 INDEMNIFICATION Tenant hereby agrees to indemnify and hold Landlord harmless from any and all claims, damages, liabilities or expenses (not covered by insurance payable to Landlord) arising out of (a) Tenant's use of the Premises or the Common Area of the Regime, (b) any and all claims arising from any breach or default in the performance of any obligation hereunder of Tenant, (c) any act, omission or negligence of Tenant, its agents or employees. Tenant further releases Landlord and the Association from liability for any damages sustained by Tenant or any other person claiming by, through or under Tenant due to the Premises, the Common Area, or any part thereof or any appurtenances thereto becoming out of repair, or due to the happening of any accident, including but not limited to any damage caused by water, snow, windstorm, tornado, gas, steam, electrical wiring, sprinkler system, plumbing, heating and air conditioning apparatus and from any acts or omissions of owners or other tenants within the Regime, except, in all cases, to the extent such damages are caused by Landlord's or Association's negligence. Landlord shall not be liable for any damage to or loss of Tenant's personal property, inventory, fixtures or improvements, from any cause whatsoever except the negligence of Landlord, and then only to the extent not covered by insurance to be obtained by Tenant in accordance with Section 10 hereof. Except for matters released by Tenant hereinabove, Landlord agrees to indemnify and hold Tenant harmless from any and all claims, damages, liabilities or expenses, not covered by insurance, arising from any default by Landlord under this lease or from the portion of any claim against Tenant by third parties resulting from the negligence of Landlord. SECTION 9 INSURANCE Tenant shall maintain at its sole expense during the term hereof, public liability insurance covering the Premises in an amount of $1,000,000.00 for injury or death to any one person and $3,000,000.00 for injury and/or death to any number of persons in any one accident and property damage insurance in an amount of $1,000,000.00 in companies reasonably satisfactory to Landlord in the 7 joint names of Landlord and Tenant. Tenant shall also keep in force fire and extended coverage insurance for the full replacement value of Tenant's improvements and Tenant's property located in the Premises, including personal property. If available at reasonable cost, Tenant will cause such insurance policies to name Landlord as an additional insured and to be written so as to provide that the insurer waives all right of recovery by way of subrogation against Landlord in connection with any loss or damage covered by the policy. In addition, Tenant shall keep in force workman's compensation or similar insurance to the extent required by law. Tenant shall deliver said policies or certificates thereof to Landlord within ten (10) days of the commencement of the term. Should Tenant fail to effect the insurance called for herein, Landlord may, at its sole option, procure said insurance and pay the requisite premiums, in which event, Tenant shall pay all sums so expended to Landlord, as additional rent following invoice. To the extent such endorsement is obtainable at reasonable cost, each insurer under the policies required hereunder shall agree by endorsement on the policy issued by it or by independent instrument furnished to Landlord that it will give Landlord fifteen (15) days prior written notice before the policy or policies in question shall be altered or canceled. Landlord agrees to use its best efforts to see that all insurance to be carried by the Association pursuant to the Master Deed is continually maintained and that such insurance provides that the insurer waives all rights of recovery by way of subrogation against Tenant. SECTION 10 REMEDIES OF LANDLORD 10.1 Default. In the event that Tenant (a) fails to pay all or any ------- portion of any sum due from Tenant hereunder or pursuant to any exhibit hereto within five (5) days following notice, (b) fails to cease al all conduct prohibited hereby immediately upon receipt of written notice from Landlord, (c) fails to take actions in accordance with the provisions of written notice from Landlord to remedy Tenant's failure to perform any of the terms, covenants and conditions hereof; (d) commits an act in violation of this Lease which Landlord has previously notified Tenant to cease more than once in any year; (e) becomes bankrupt, insolvent or files any debtor proceeding, makes any petition of bankruptcy; takes action for the appointment of a receiver for all or a portion of Tenant's assets, files a petition for a corporate reorganization by reason of insolvency; or makes an assignment for the benefit of creditors (any or all of the occurrences in this said Section 10.1 (f) shall be deemed a default on account of bankruptcy for the purposes hereof and such default on account of bankruptcy shall apply to and include any Guarantor of this Lease; (f) commits waste to the Premises; or (g) is otherwise in breach of Tenant's obligations hereunder and shall not have cured same within ten (10) days following written notice from Landlord; then Tenant shall be in default hereunder and Landlord may, at its option and without further notice to Tenant, terminate Tenant's right to possession of the Premises and without terminating this Lease re-enter and resume possession of the Premises and/or declare this Lease terminated, and may thereupon in either event remove all persons and property from the Premises, with or without resort to process of any court, either by force or otherwise. Provided, however, that with respect to any non-monetary default mentioned in Items 10.1(c) - (g) herein the period for curing such default shall be extended 8 to thirty (30) days provided Tenant is diligently attempting to cure same. Notwithstanding such re-entry by Landlord, Tenant hereby indemnifies and holds Landlord harmless from any and all loss or damage which Tenant may incur by reason of the termination of this Lease and/or Tenant's right to possession hereunder pursuant to this Section 10.1. In no event shall Landlord's termination of this Lease and/or Tenant's right to possession of the Premises abrogate Tenant's agreement to pay rent and additional charges due hereunder for the full term hereof. Following re-entry of the Premises by Landlord, Tenant shall continue to pay all such rent and additional charges as same become due under the terms of this Lease, together with all other reasonable expenses incurred by Landlord in regaining possession until such time, if any, as Landlord relates same and the Premises are occupied by such successor. Landlord agrees to use reasonable efforts to relet the premises. Upon reletting, sums received from such new lessee by Landlord shall be applied first to payment of reasonable costs incident to reletting; any excess shall then be applied to any indebtedness to Landlord from Tenant other than for Minimum Rent; and any excess shall then be applied against the deficiency between all amounts to be received hereunder and sums received by Landlord on reletting, which deficiency Tenant shall pay to Landlord in full, within five (5) days of notice of same from Landlord. Tenant shall have no right to any proceeds of reletting that remain following application of same in the manner set forth herein. 10.2 Cumulative Remedies. The various rights and remedies herein -------------------- granted to Landlord shall be cumulative and in addition to any others Landlord may be entitled to by law or in equity, and the exercise of one or more rights or remedies shall not impair Landlord's right to exercise any other right or remedy. In all events, Landlord shall have the right upon notice to Tenant to cure any breach by Tenant at Tenant's sole cost and expense, and Tenant shall reimburse Landlord for such expense upon demand. 10.3 Bankruptcy. If Landlord shall not be permitted to terminate this ----------- Lease as hereinabove provided because of the provisions of Title 11 of the United States Code relating to Bankruptcy, as amended ("Bankruptcy Code"), then Tenant as a debtor in possession of any trustee for Tenant agrees promptly, within no more than fifteen (15) days upon request by Landlord to the Bankruptcy Court, to assume or reject this Lease and Tenant on behalf of itself and any trustee agrees not to seek or request any extension or adjournment of any application to assume or reject this Lease by Landlord with such Court. In such event, Tenant or any trustee for Tenant may only assume this Lease if (A) it cures or provides adequate assurance that the trustees will promptly cure any default hereunder, (B) compensates or provides adequate assurance that Tenant will promptly compensate Landlord for any actual pecuniary loss to Landlord resulting from Tenant's defaults, and (C) provides adequate assurance of performance during the fully stated term hereof of all of the terms, covenants, 9 and provisions of this Lease to be performed by Tenant. In no event after the assumption of this Lease shall any then-existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth herein. Adequate assurance of performance of this Lease as set forth hereinabove shall include, without limitation, adequate assurance (1) of the source of rent provided for hereunder, and (2) the assumption of this Lease will not breach any provision hereunder. In the event of a filing of a petition under the Bankruptcy Code, Landlord shall have not obligation to provide Tenant with any services or utilities as herein required, unless Tenant shall have aid and be current in all payments of Operating Costs, utilities or other charges therefor. SECTION 11 TRANSFERS, ASSIGNMENT AND SUBLETTING 11.1 Assignment and Subletting. Tenant shall not, either voluntarily --------------------------- or by operation of law, sell, assign, hypothecate or otherwise transfer this Lease, or sublet the Premises or any part thereof (all of the foregoing collectively referred to as a "Transfer"), except that Tenant may, without violating this Lease, do any of the following: (a) merge or consolidate with, or transfer all or substantially all of its assets to, another corporation incorporated in any state of the United States or the District of Columbia, provided that the resulting or transferee corporation shall have a net worth of not less than $10,000,000.00 and further provided that such corporation assumes all the obligations of Tenant hereunder, in which event Tenant shall be relieved of its obligations hereunder, or (b) sublease all or any part of the Premises to any other person(s) or entity(ies). Landlord and Tenant acknowledge and agree that the foregoing restriction on Transfers has been freely negotiated by the parties hereto and that Landlord would not have entered into this Lease without Tenant's consent to the terms of this Section 11.2. Any attempted Transfer in violation hereof shall be void ab initio and, except as otherwise provided herein, Tenant shall remain primarily liable on this Lease and shall not e released from performing any of the terms, covenants and conditions of this Lease. The acceptance by Landlord or payments of Rent or additional rent following any assignment or transfer prohibited by this Section shall not be deemed to be a consent by Landlord to any such assignment or other transfer, nor shall the same be deemed to be a waiver of any right or remedy of Landlord hereunder. SECTION 12 SUCCESSION TO LANDLORD'S INTEREST 12.1 Attornment. Tenant shall attorn and be bound to any of Landlord's ---------- successors under all the terms, covenants and conditions of this Lease for the balance of the remaining term. 10 12.2 Subordination. This Lease shall be subordinate to the lien of any ------------- mortgage or security deed or the lien resulting from any other method of financing or refinancing now or hereafter in force against the Premises, any portion thereof, and to any and all advances to be made under such mortgages, and all renewals, modifications, extensions, consolidations and replacements thereof. The aforesaid provisions shall be self-operative and no further instrument of subordination shall be required to evidence such subordination. Tenant covenants and agrees to execute and deliver, upon demand, such further instrument or instruments subordinating this Lease on the foregoing basis to the lien of any such mortgage or mortgages as shall be desired by Landlord and any mortgages or proposed mortgages, and hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver such instrument or instruments within ten (10) days after written notice to do so. Provided, however, that the subordination described in this Section 12.2 shall be effective only in the event that the Mortgagee of lien holder shall have agreed in writing not to disturb the peaceful possession of the Premises by Tenant and to recognize the Tenant's rights under this lease so long as Tenant is not in default thereunder. 12.3 Mortgagee's Approval. If any mortgagee of the Premises requires --------------------- any modification of the terms and provisions of this Lease as a condition to such financing as Landlord may desire, then Landlord shall have the right to cancel this Lease if Tenant fails or refuses to approve and execute such modification(s) within thirty (30) days after Landlord's request therefor, provided said request is made prior to the Commencement Date. Upon such cancellation by Landlord, this Lease shall be null and void and neither party shall have any liability either for damages or otherwise to the other by reason of such cancellation. In no event, however, shall Tenant be required to agree, and Landlord shall not have any right of cancellation for Tenant's refusal to agree, to any modification of the provisions of this Lease relating to: the amount of rent or other charges reserved herein; the size and/or location of the Premises; the duration and/or Commencement Date of the term; or the construction of the improvements to be made by Landlord to the Premises prior to delivery of possession. SECTION 13 SURRENDER OF PREMISES At the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord broom clean and in the same condition as when tendered by Landlord, reasonable wear and tear and insured casualty excepted, subject to Section 6 hereof. Tenant shall promptly repair any damage to the Premises caused by the removal of any furniture, trade fixtures or other personal property placed in the Premises. 11 SECTION 14 MISCELLANEOUS 14.1 Attorney's Fees. In the event that it shall be reasonably ----------------- necessary for any party to engage attorneys for the enforcement of any of the terms of this lease the defaulting party shall pay to the non-defaulting party all costs reasonably incurred in connection therewith including reasonable attorneys fees. 14.2 Late Charges. All sums not paid when due shall bear interest at -------------- the highest legal rate not to exceed eighteen percent (18%) per annum calculated from said due date. 14.3 Accord and Satisfaction. No payment by Tenant or receipt by ------------------------- Landlord of a lesser amount than the charges herein stipulated shall be deemed to be other than on account of the earliest stipulated charges, nor shall any endorsement or statement on any check or letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of any amounts due hereunder or to pursue any other remedy provided herein. 14.4 Time of Essence. TIME IS OF THE ESSENCE OF THIS LEASE. ----------------- 14.5 Holding Over. Should Tenant, with Landlord's written consent, -------------- hold over at the end of the term, Tenant shall become a Tenant at will and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant shall pay rent and other charges at the highest monthly rate provided for herein. If Tenant holds over at the end of the term without Landlord's written consent, Tenant shall pay Landlord as liquidated damages, a sum equal to twice the rent which would be paid under the prior sentence by Tenant to Landlord for all the time Tenant shall so retain possession of the Premises; provided that the exercise of Landlord's rights under this clause shall not be interpreted as a grant of permission to Tenant to continue in possession. 14.6 Severability. In the event any provision of this Lease to any ------------ extent be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and the Lease and its provisions shall be valid and enforceable to the full extent permitted by law. 14.7 Brokers. Tenant indemnifies Landlord against any claims for ------- brokerage commissions agreed to by Tenant in connection herewith. 14.8 Waiver. No waiver by Landlord of any provision of this Lease ------ shall be deemed to be a waiver of any other provision hereof or of any subsequent breach by Tenant of the same provision. Landlord's consent to or approval of any act by Tenant shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act. No agreement by Landlord to accept Tenant's surrender of the Premises shall be valid unless written. 12 14.9 Right of Entry. Landlord shall have free access to the Premises ---------------- at all reasonable times to inspect same and to make such repairs, additions, improvements, changes or alterations to the Premises, as Landlord may reasonably elect to make. Tenant agrees that on and after ninety (90) days next preceding the expiration of the term hereof, Landlord or its agents shall have the right to show the Premises to potential tenants and to place notices offering the Premises for lease or sale or any part of the Premises. 14.10 Successors and Assigns. Except as otherwise provided herein, ------------------------ this lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, executors, successors and assigns. 14.11 Headings, Captions and References. The section captions ------------------------------------ contained in this Lease are for convenience only and do not in any way limit or amplify any term or provision hereof. The use of the terms "hereof", "hereunder" and "herein" shall refer to this Lease as a whole except where noted otherwise. 14.12 Survival of Obligations. The provisions of this Lease with ------------------------- respect to any obligation of Tenant or Landlord to pay any sum owing after the expiration or other termination of this Lease shall survive the expiration or other termination of this Lease. 14.13 Landlord and Tenant Relationship. Nothing herein contained shall --------------------------------- be deemed or construed by the parties hereto, nor by any other party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto. No estate shall pass from Landlord to Tenant, and this Lease shall not be subject to levy and/or sale and, except as otherwise provided herein, shall not e by Tenant. 14.14 Notices. Any notice required or permitted to be given hereunder ------- shall be in writing and may be given by personal delivery, by U. S. Certified Mail, postage prepaid, return receipt requested, addressed to Tenant at 233 N. Main St., Suite 200, Greenville, SC, and to Landlord at 233 N. Main St., Greenville, SC (or to such other address as is contained in a notice to the other Party), or by posting such notice to the Premises. Notices and demands shall be deemed to have been given (I) upon the date of the executed return receipt if sent by Certified Mail, provided that if delivery cannot be made or if any party shall refuse delivery, notices shall be deemed given when mailed, or (ii) upon delivery if personally delivered, and upon posting if posted to the Premises. 14.15 Representations. Tenant acknowledges that neither Landlord nor --------------- Landlord's agents, employees or contractors have made any representations or promises with respect to the Premises, the Regime or this Lease except as expressly set forth herein. 14.16 Jurisdictions. The laws of the State of South Carolina shall ------------- govern the interpretation, validity, performance and enforcement of this Lease. 13 14.17 Entire Agreement. This Lease constitutes the entire agreement ----------------- between the parties hereto with respect to the subject matter hereof and no subsequent amendment of agreement shall be binding upon either party unless it is signed by each party. The submission of this Lease shall not constitute an offer to Lease by Landlord and this Lease shall not be binding unless and until it is signed by Landlord and Tenant. 14.18 Special Stipulations. Insofar as the following Special --------------------- Stipulations conflict with any of the foregoing provisions, the Special Stipulations shall apply and control. IN WITNESS WHEREOF, the parties hereto have executed this Lease this day and year first above written. LANDLORD: -------- HAMMOND SQUARE, LTD. - ------------------------- ------------------------------- Witness By: TENANT: ------- DELTA WOODSIDE INDUSTRIES, INC. - ------------------------- ------------------------------- Witness By: 14 EX-10.2 3 DELTA WOODSIDE GROUP DEFERRED COMPENSATION PLAN FOR KEY MANAGERS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998
DELTA WOODSIDE GROUP DEFERRED COMPENSATION PLAN FOR KEY MANAGERS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998 TABLE OF CONTENTS PAGE ARTICLE I. REFERENCES, CONSTRUCTION AND DEFINITIONS 1 1.1 Adjustment Date . . . . . . . . . . . . . . . . 1 1.2 Beneficiary . . . . . . . . . . . . . . . . . . 1 1.3 Board . . . . . . . . . . . . . . . . . . . . . 2 1.4 Code. . . . . . . . . . . . . . . . . . . . . . 2 1.5 Committee . . . . . . . . . . . . . . . . . . . 2 1.7 Compensation. . . . . . . . . . . . . . . . . . 2 1.8 Deemed Deferrals. . . . . . . . . . . . . . . . 2 1.9 Deferral Account. . . . . . . . . . . . . . . . 3 1.10 Deferral Election . . . . . . . . . . . . . . . 3 1.11 Disability. . . . . . . . . . . . . . . . . . . 4 1.12 Effective Date. . . . . . . . . . . . . . . . . 4 1.13 Elective Deferrals. . . . . . . . . . . . . . . 4 1.14 Employee. . . . . . . . . . . . . . . . . . . . 4 1.15 Employment Year . . . . . . . . . . . . . . . . 4 1.16 ERISA . . . . . . . . . . . . . . . . . . . . . 4 1.17 Hour of Service . . . . . . . . . . . . . . . . 4 1.18 Installment Account . . . . . . . . . . . . . . 5 1.19 Interest Equivalent . . . . . . . . . . . . . . 5 1.20 Lump Sum Account. . . . . . . . . . . . . . . . 5 1.21 Month of Service. . . . . . . . . . . . . . . . 5 1.22 Named Fiduciary . . . . . . . . . . . . . . . . 5 1.23 Participant . . . . . . . . . . . . . . . . . . 5 1.24 Participating Company . . . . . . . . . . . . . 5 1.25 Plan. . . . . . . . . . . . . . . . . . . . . . 5 1.26 Plan Administrator. . . . . . . . . . . . . . . 5 1.27 Plan Year . . . . . . . . . . . . . . . . . . . 5 1.28 Retirement. . . . . . . . . . . . . . . . . . . 5 1.29 Savings Plan. . . . . . . . . . . . . . . . . . 6 1.30 Termination of Service. . . . . . . . . . . . . 6 1.31 Trigger Event . . . . . . . . . . . . . . . . . 6 1.32 Year of Service . . . . . . . . . . . . . . . . 6 ARTICLE II. ELIGIBILITY AND PARTICIPATION . . . . . . . 6 2.1 Eligibility . . . . . . . . . . . . . . . . . . 6 2.2 Participation . . . . . . . . . . . . . . . . . 6 2.3 Elective Deferrals. . . . . . . . . . . . . . . 6 2.4 Limitations on Elective Deferrals . . . . . . . 7 2.5 Deemed Deferrals. . . . . . . . . . . . . . . . 7 2.6 Method-of-Payment Election. . . . . . . . . . . 7 ARTICLE III. ACCOUNTS OF PARTICIPANTS . . . . . . . . . 7 3.1 Accounts. . . . . . . . . . . . . . . . . . . . 7 3.2 Accounting of Lump Sum Account. . . . . . . . . 7 3.3 Accounting of Installment Account . . . . . . . 8 ARTICLE IV. VESTING . . . . . . . . . . . . . . . . . . 9 ARTICLE V. BENEFITS . . . . . . . . . . . . . . . . . . 9 5.1 Method and Timing . . . . . . . . . . . . . . . 9 5.2 Payments to Beneficiary . . . . . . . . . . . . 10 5.3 Withholding Taxes; Employment Taxes . . . . . . 10 5.4 Payments To Relieve Financial Hardship. . . . . 11 ARTICLE VI. DESIGNATION OF BENEFICIARIES. . . . . . . . 11 6.1 Beneficiary Designation . . . . . . . . . . . . 11 6.2 Failure to Designate Beneficiary. . . . . . . . 12 ARTICLE VII. COMMITTEE. . . . . . . . . . . . . . . . . 12 7.1 Authority . . . . . . . . . . . . . . . . . . . 12 7.2 Voting. . . . . . . . . . . . . . . . . . . . . 12 7.3 Records . . . . . . . . . . . . . . . . . . . . 12 7.4 Liability . . . . . . . . . . . . . . . . . . . 12 7.5 Ministerial Duties. . . . . . . . . . . . . . . 13 ARTICLE VIII. AMENDMENT AND TERMINATION . . . . . . . . 13 ARTICLE IX. CLAIMS PROCEDURE. . . . . . . . . . . . . . 13 9.1 Filing of a Claim for Benefits. . . . . . . . . 13 9.2 Notification to Claimant of Decision. . . . . . 13 9.3 Procedure for Review. . . . . . . . . . . . . . 14 9.4 Decision on Review. . . . . . . . . . . . . . . 14 9.5 Action by Authorized Representative of Claimant 14 ARTICLE X. MISCELLANEOUS. . . . . . . . . . . . . . . . 15 10.1 Nonalienation of Benefits . . . . . . . . . . . 15 10.2 No Trust Created. . . . . . . . . . . . . . . . 15 10.3 No Employment Agreement . . . . . . . . . . . . 15 10.4 Funding Policy. . . . . . . . . . . . . . . . . 16 10.5 Binding Effect. . . . . . . . . . . . . . . . . 16 10.6 Entire Plan . . . . . . . . . . . . . . . . . . 16 10.7 Merger or Consolidation . . . . . . . . . . . . 16 10.8 Payment to Incompetent. . . . . . . . . . . . . 16 10.9 No Contributions. . . . . . . . . . . . . . . . 16
DELTA WOODSIDE GROUP DEFERRED COMPENSATION PLAN FOR KEY MANAGERS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998 PREAMBLE The Participating Companies have established this Plan to contribute to their long-range growth. It is the intention of the parties that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA. Except as specifically set forth in Section 10.5 below with respect to Delta Woodside Industries, Inc., a Participating Company shall be liable only with respect to obligations incurred pursuant to this Plan for its own Employees; no Participating Company shall be liable with respect to benefits due an Employee of any other Participating Company. Under the Plan, each year, each Participating Company awards a select group of its key Employees with deferred benefits based on the Employee's Elective and Deemed Deferrals for the year. Such benefits are normally payable by that Participating Company to its Employees or their beneficiaries upon Retirement, Disability, death, or other Termination of Service. By providing key Employees and their families with additional financial security, the Plan enables the Participating Companies to attract and to retain superior key personnel and provides an additional incentive to such Employees to continue to make that company prosperous. ARTICLE I. REFERENCES, CONSTRUCTION AND DEFINITIONS Unless otherwise indicated, all references to articles, sections and subsections shall be to the Plan as set forth in this Restatement. The Plan and all rights thereunder shall be construed and enforced in accordance with ERISA and, to the extent state law is applicable, the laws of the State of South Carolina. The article titles and the captions preceding sections and subsections have been inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provisions. Whenever used herein, the singular includes the plural, the masculine includes the feminine. Whenever used herein and capitalized, the following terms shall have the respective meaning indicated unless the context plainly requires otherwise. 1.1 ADJUSTMENT DATE. The last day of each calendar quarter, the date of a Trigger Event, and such other times as the Committee shall establish. 1.2 BENEFICIARY. The beneficiary or beneficiaries designated by a Participant pursuant to ARTICLE VI to receive the amount, if any, payable under the Plan upon the death of such Participant, or, where there has been no such designation or an invalid designation, the individual or entity, or the individuals or entities, who will receive such amount. 1.3 BOARD. The respective Boards of Directors of each of the Participating Companies. 1.4 CODE. The Internal Revenue Code of 1986, as now in effect or as hereafter amended. All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered. 1.5 COMMITTEE. The committee which administers the Plan and which is more particularly described in ARTICLE VII below. The Committee shall be constituted by the individuals who hold the following offices of Delta Woodside Industries, Inc.: President; Vice-President; and Controller. 1.7 COMPENSATION. Compensation with respect to any Participant means such Participant's wages as defined in Code 3401(a) and all other payments of compensation by a Participating Company (in the course of the Participating Company's business for a Plan Year for which the Participating Company is required to furnish the Participant a written statement under Code 6041(d), 6051(a)(3) and 6052). The determination of Compensation shall be made by excluding moving expenses, income from stock options, income from stock awards, income from incentive stock awards. 1.8 DEEMED DEFERRALS. With respect to a Participant, an amount equal to the SUM of SUBSECTIONS (A) and (B) below: (a) During each Plan Year, the difference between: (i) the Nonelective Contribution and forfeitures allocation for the Plan Year which would have been credited to the account of the Participant in the Savings Plan had the Participant's Elective Deferrals under this Plan counted as compensation under the Savings Plan for the Plan Year and had there been disregarded the compensation and annual addition limitations of 401(a)(17) and 415 of the Code and the corresponding provisions of the Savings Plan, and (ii) the Nonelective Contribution and forfeitures for the Plan Year actually credited to the Participant's account in the Savings Plan; PLUS (b) Subject to the limitations set forth in SUBSECTION (B)(II) below, and less the amount set forth in SUBSECTION (B)(III) below, during each Plan Year commencing on or after January 1, 1995, the following amount: (i) an amount equal to the following percentage of the Participant's Elective Deferrals in the Savings Plan for such Plan Year: # YEARS OF SERVICE % OF THE PARTICIPANT'S ELECTIVE DEFERRALS 0-9 15% 10-14 20% 15-19 25% 20-24 30% 25 and over 35% (ii) The amount computed under SUBSECTION (B)(I) above shall be limited as follows: (A) the above percentages shall not be applied to any portion of the Participant's Elective Deferrals which exceeds four percent (4%) of the Participant's Compensation, and in computing the Participant's Compensation, there shall be disregarded any portion of Compensation which exceeds an amount equal to the compensation limitation of 401(a)(17) of the Code as adjusted as of the start of the Plan Year (e.g., $160,000 for 1998); (B) the above percentages shall not be applied to any portion of the Participant's Elective Deferrals which exceeds an amount equal to the amount set forth in Code 402(g)(1) as adjusted as of the start of the Plan Year (e.g., $10,000 for 1998); and (C) for purposes of the above formula, "Years of Service" shall be calculated from the Participant's most recent date of hire. (iii) from the amount computed pursuant to SUBSECTION (B)(I) above (and as limited as provided in SUBSECTION (B)(II) above), the amount of any matching contribution allocated to the Participant's account under the Savings Plan for the Plan Year shall be subtracted. 1.9 DEFERRAL ACCOUNT. With respect to each Participant, the separate bookkeeping account (consisting of the Participant's Lump Sum Account and Installment Account) to be kept with respect to such Participant. 1.10 DEFERRAL ELECTION. An irrevocable election by a Participant to defer a portion of Compensation for a Plan Year, such election to be made in the manner prescribed in SECTION 2.3. Amounts so deferred are "Elective Deferrals." 1.11 DISABILITY. A physical or mental condition under which the Employee qualifies for disability benefits under the long-term disability plan of the Participating Company which employs the Employee; provided, however, if the Employee is not covered by such plan, the Employee shall be under a Disability if he would have qualified for disability benefits under the plan were he covered by the plan; provided, further, if there is no such plan, the Employee shall be under a Disability if by reason of sickness or injury the Employee cannot, after 60 days following the expiration of any sick pay to which the Participant may be entitled, perform each of the material duties of the Employee's regular occupation as the Committee in the exercise of its sole and absolute discretion shall determine based upon competent medical evidence satisfactory to the Committee. 1.12 EFFECTIVE DATE. The original Effective Date of this Plan is January 1, 1989. The Effective Date of this amended and restated Plan is January 1, 1998. 1.13 ELECTIVE DEFERRALS. With respect to a Participant for a Plan Year, the amount of the Participant's Compensation deferred pursuant to a Deferral Election. 1.14 EMPLOYEE. An individual in the service of the Participating Company if the relationship between him and the Participating Company is the legal relationship of employer and employee. 1.15 EMPLOYMENT YEAR. The 12-month period beginning on the Employee's date of hire. 1.16 ERISA. The Employee Retirement Income Security Act of 1974, as now in effect or as hereafter amended. All citations to sections of ERISA are to such sections as they may from time to time be amended or renumbered. 1.17 HOUR OF SERVICE. An Hour of Service means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by a Participating Company for the performance of duties during the applicable computation period; (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by a Participating Company (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, jury duty, disability, lay-off, military duty or leave of absence) during the applicable computation period; (3) each hour for which back pay is awarded or agreed to by a Participating Company without regard to mitigation of damages. These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather that the computation period in which the award, agreement or payment is made. The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). 1.18 INSTALLMENT ACCOUNT. With respect to each Participant, the account described in SECTION 3.3 below. 1.19 INTEREST EQUIVALENT. With respect to each Adjustment Date, the dollar amount to be added to the Participant's Lump Sum Account or Installment Account, as the case may be, equal to the product of the amount credited to the account as of the next preceding Adjustment Date reduced by one-half of the amount of benefit payments made since the next preceding Adjustment Date (i.e., during the "current calendar quarter") and increased by one-half of the Elective and Deemed Deferrals for the "current calendar quarter" allocable to such account, times THE GREATER OF (I) the Average AAA Corporate Bond Yield last published by Moody's Bond Survey before the next preceding Adjustment Date or (II) such other interest or yield rate as the Committee may designate for the Plan Year ending on such Adjustment Date. 1.20 LUMP SUM ACCOUNT. With respect to each Participant, the account described in SECTION 3.2 below. 1.21 MONTH OF SERVICE. A Month of Service means a calendar month during any part of which an Employee completed an Hour of Service. Except, however, a Participant shall be credited with a Month of Service for each month during the 12 month computation period in which he has not incurred a 1-Year Break in Service. 1.22 NAMED FIDUCIARY. Delta Woodside Industries, Inc. 1.23 PARTICIPANT. An Employee who has been notified pursuant to SECTION 2.1 that he is eligible to participate in the Plan and who has made a Deferral Election and any former Employee who has a Deferral Account under the Plan. 1.24 PARTICIPATING COMPANY. Delta Woodside Industries, Inc.; Delta Mills, Inc.; Delta Mills Marketing, Inc., Delta Consolidated Corporation; Duck Head Apparel Company, Inc.; Nautilus International, Inc.; Delta Merchandising, Inc.; and International Apparel Marketing Corporation. The term "Participating Company" shall be construed as if the Plan were solely the Plan of such Participating Company, unless the context plainly requires otherwise. Notwithstanding anything herein to the contrary, with the consent of Delta Woodside Industries, Inc., any other corporation or entity, whether an affiliate or subsidiary or not, may adopt this plan and all of the provisions hereof, and participate herein and be known as a Participating Company. 1.25 PLAN. The Delta Woodside Group Deferred Compensation Plan for Key Managers as contained herein and as may be amended from time to time hereafter. 1.26 PLAN ADMINISTRATOR. The Committee. 1.27 PLAN YEAR. The period commencing January 1 and ending on the first December 31 thereafter. 1.28 RETIREMENT. Termination of Service, other than on account of death, after attaining age 62. 1.29 SAVINGS PLAN. The Delta Woodside Industries, Inc. Savings and Investment Plan, a 401(k) profit sharing plan qualified under 401(a) of the Code, and any successor plan. 1.30 TERMINATION OF SERVICE. Termination of the Participant's employment with a Participating Company for any reason; provided, however, that the transfer of an Employee from employment by one Participating Company or affiliated company to employment by another Participating Company or affiliated company shall not constitute a Termination of Service. 1.31 TRIGGER EVENT. Any event designated as a "Trigger Event" by action of the Board of a Participating Company in the exercise of its sole and absolute discretion. 1.32 YEAR OF SERVICE. Any twelve consecutive Months of Service. For vesting purposes, the computation period shall be the Employment Year. For purposes of Deemed Deferrals only, the computation period shall be the Employment Year; however, only Years of Service from the Participant's most recent date of hire shall be considered. For all other purposes, the computation period shall be the Plan Year. ARTICLE II. ELIGIBILITY AND PARTICIPATION 2.1 ELIGIBILITY. Such Employees as the Committee designates shall be eligible to participate in this Plan; provided, however, that no Employee who is not a member of the "select group of management" or a "highly compensated employee," as defined in 201(2), 301(a)(3) and 401(a) of ERISA shall be eligible to become a Participant. 2.2 PARTICIPATION. The Committee shall notify each Employee selected to be a Participant of the Employee's eligibility, and an Employee so notified shall become a Participant by making a Deferral Election. 2.3 ELECTIVE DEFERRALS. For each Plan Year, each eligible Employee is entitled to make a Deferral Election, in such manner and form as the Committee prescribes, to defer Compensation for the Plan Year. Except in the case of an "unforeseeable emergency" as defined in Section 5.4 below, such election shall be irrevocable during the Plan Year. Deferral Elections shall be made as follows: (A) within 30 days following the adoption of this Plan to defer Compensation to be earned subsequent to the Deferral Election for the remainder of such Plan Year; (B) within 30 days following the date on which an Employee first becomes eligible to participate in this Plan to defer compensation to be earned subsequent to the Deferral Election for the remainder of such Plan Year; or (C) in all other cases on or before December 31 to defer compensation to be earned in succeeding Plan Years. The foregoing notwithstanding, each eligible Employee may make a special Deferral Election with respect to each bonus to which the Employee becomes entitled, provided that such Deferral Election is made before the Employee earns such bonus. 2.4 LIMITATIONS ON ELECTIVE DEFERRALS. The maximum amount of Elective Deferrals a Participant may make for a Plan Year shall be One Hundred percent (100%) of the Participant's Compensation which would otherwise be paid to the Participant during the Plan Year and which is not subject to another deferral agreement or other withholding. 2.5 DEEMED DEFERRALS. In addition to any Elective Deferrals, for each Plan Year for which a Participant has made a Deferral Election, the Participant shall receive credit for Deemed Deferrals. 2.6 METHOD-OF-PAYMENT ELECTION. Contemporaneously with the making of each Deferral Election, the Participant shall designate on a form prescribed by the Committee for such purpose whether the benefits pursuant to such Deferral Election are to be paid in a single sum or installments, as provided in SECTION 5.1(A). If a Participant fails to make such method-of-payment election, the Participant shall be deemed to have elected installment payments. ARTICLE III. ACCOUNTS OF PARTICIPANTS 3.1 ACCOUNTS. The Committee shall establish and cause to be maintained two separate accounts for each Participant to be known respectively as the Participant's "LUMP SUM ACCOUNT" and "INSTALLMENT ACCOUNT". 3.2 ACCOUNTING OF LUMP SUM ACCOUNT. As of each Adjustment Date, the Committee shall debit and credit each Participant's Lump Sum Account in the following order: (a) PAYMENTS. There shall be debited the amount of benefit payments made to or on behalf of the Participant or the Participant's Beneficiary during the Plan Year ending on the Adjustment Date (i.e., the "CURRENT CALENDAR QUARTER") and allocable to such Lump Sum Account. (b) INTEREST EQUIVALENT. The Committee, in the exercise of its sole and absolute discretion, shall determine the Interest Equivalent for the "current calendar quarter" and there shall be credited the Interest Equivalent, if any, for such Lump Sum Account. (c) ELECTIVE DEFERRALS. If the Participant elected pursuant to SECTION 2.6 for benefits payable under a Deferral Election for the "current Plan Year" to be paid in a single sum, then there shall be credited the Participant's Elective Deferrals made pursuant to such Deferral Election for the "current Plan Year." (d) DEEMED DEFERRALS. If the Participant elected pursuant to SECTION 2.6 for benefits payable under a Deferral Election for the "current Plan Year" to be paid in a single sum, then there shall be credited the Participant's Deemed Deferrals relating to such Deferral Election. (e) ADMINISTRATIVE EXPENSES. The Committee, in the exercise of its sole and absolute discretion, shall determine the amount of the expenses each Participating Company incurred for the "current Plan Year" in administering the Plan. There shall be debited such portion of the amount of such administrative expenses as the Committee determines, in the exercise of its sole and absolute discretion, to be equitable. 3.3 ACCOUNTING OF INSTALLMENT ACCOUNT. As of each Adjustment Date, the Committee shall debit and credit each Participant's Installment Account in the following order: (a) PAYMENTS. There shall be debited the amount of benefit payments made to or on behalf of the Participant or the Participant's Beneficiary during the Plan Year ending on the Adjustment Date (i.e., the "CURRENT CALENDAR QUARTER") and allocable to such Installment Account. (b) INTEREST EQUIVALENT. The Committee, in the exercise of its sole and absolute discretion, shall determine the Interest Equivalent for the "current calendar quarter" and there shall be credited the Interest Equivalent, if any, for such Installment Account on the last day of the calendar quarter. (c) ELECTIVE DEFERRALS. If the Participant elected pursuant to SECTION 2.6 for benefits payable under a Deferral Election for the "current Plan Year" to be paid in installments, then there shall be credited the Participant's Elective Deferrals made pursuant to such Deferral Election for the "current Plan Year." (d) DEEMED DEFERRALS. If the Participant elected pursuant to SECTION 2.6 for benefits payable under a Deferral Election to be paid in installments, then there shall be credited for the "current Plan Year" the Participant's Deemed Deferrals relating to such Deferral Election. (e) ADMINISTRATIVE EXPENSES. The Committee, in the exercise of its sole and absolute discretion, shall determine the amount of the expenses each Participating Company incurred for the "current Plan Year" in administering the Plan. There shall be debited such portion of the amount of such administrative expenses as the Committee determines, in the exercise of its sole and absolute discretion, to be equitable. ARTICLE IV. VESTING Participants are always One Hundred percent (100%) vested in the portion of their Deferral Accounts attributable to Elective Deferrals. Each Participant shall vest in that portion of the Participant's Deferral Account attributable to Deemed Deferrals (the "DEEMED DEFERRAL BENEFIT") at the same rate as the Participant vests in the Participant's account balance in the Savings Plan, except that upon, and at all times following, a Trigger Event, Participants of the Participating Company which has incurred such Trigger Event shall be One Hundred percent (100%) vested in their Deemed Deferral Benefits. If as of a Participant's Termination of Service the Participant is not fully vested in the Participant's account in the Savings Plan and a Trigger Event has not occurred, then the Participant shall forfeit the percentage of the Participant's Deemed Deferral Benefit equal to the percentage of the account in the Savings Plan in which the Participant is not vested as of such Termination of Service. ARTICLE V. BENEFITS 5.1 METHOD AND TIMING. (A) RETIREMENT, DISABILITY OR DEATH. (i) LUMP SUM PAYMENT. On the January 1st following the Participant's Retirement or Termination of Service on account of Disability or death, the Participating Company which is the employer of such Participant shall pay in a single sum to the Participant or the Participant's Beneficiary, as the case may be, an amount equal to the vested amount credited to the Participant's Lump Sum Account adjusted in accordance with SECTION 3.1 as of the last Adjustment Date preceding such payment. (ii) INSTALLMENTS. After the Participant's Retirement or Termination of Service on account of Disability or death, the Participating Company which is the employer of such Participant shall pay in 120 monthly installments the vested amount credited to the Participant's Installment Account. Payment shall commence on the first January 1st following such Retirement or Termination of Service, and shall continue on the first day of each month thereafter until 120 monthly payments have been made. The amount of each monthly installment payable during a Plan Year shall equal the quotient obtained by DIVIDING (1) the balance credited to the Participant's Installment Account as of the Adjustment Date next preceding the Plan Year BY (2) the number of installments remaining as of such Adjustment Date. As provided by and in accordance with ARTICLE III, during the period of payment of such installments the Participant's Installment Account shall continue to be credited with its Interest Equivalent. (iii) DISCRETIONARY PAYMENT UPON DEATH. Notwithstanding the provisions of SECTIONS 5.1(A)(I) and (II) above, upon a Participant's death, the Participating Company which is the employer of such Participant may, in the exercise of its absolute and sole discretion, pay in a single sum to the Participant's Beneficiary an amount equal to the vested amount credited to the Participant's Lump Sum Account and Installment Account adjusted in accordance with SECTION 3.1 as of the Adjustment Date next preceding such payment. Such lump sum payment shall discharge the Participating Company's obligation to pay benefits under this Plan to such Beneficiary. (b) OTHER TERMINATION OF SERVICE. On the first January 1st following the Participant's Termination of Service other than on account of Retirement, Disability or death, the Participating Company which is the employer of such Participant shall pay in a single sum to the Participant or the Participant's Beneficiary, as the case may be, an amount equal to the vested amount credited to the Participant's Lump Sum Deferral Account and Installment Deferral Account, both adjusted in accordance with ARTICLE III as of the last Adjustment Date preceding such January 1st. (c) TRIGGER EVENT. Upon the happening of a Trigger Event, the Participating Company which is subject to such Trigger Event shall immediately pay to each Participant which is its Employee, in a single sum, the amount credited to the Participant's Deferral Account adjusted in accordance with ARTICLE III as of the date of the Trigger Event. 5.2 PAYMENTS TO BENEFICIARY. In the event a Participant dies prior to full payment of the Participant's Deferral Account under this ARTICLE V, all remaining payments due hereunder shall be made to such Participant's Beneficiary; provided, however, if the Committee so directs in the exercise of its sole discretion, the Participating Company shall pay the remainder of the Deferral Account in one single sum. In the event the Beneficiary survives the Participant but dies prior to full payment of benefits hereunder, all remaining payments shall be made to the Beneficiary's estate. 5.3 WITHHOLDING TAXES; EMPLOYMENT TAXES. Any amounts paid to a Participant or Beneficiary shall be reduced by the amount of taxes required by law to be withheld. The Participating Company which is the employer of the Participant shall timely furnish the Participant and Beneficiary with the appropriate tax information form evidencing such payment and the amount thereof. Each Participating Company shall be solely responsible for paying employment taxes (e.g., FICA, FUTA, state unemployment), if any, attributable to payments to Participants and Beneficiaries which are its Employees. 5.4 PAYMENTS TO RELIEVE FINANCIAL HARDSHIP. Notwithstanding any provision in this Plan to the contrary, the Committee in the exercise of its sole and absolute discretion shall have the power and authority to direct a Participating Company to pay to a Participant or the Participant's Beneficiary such amount as is necessary to enable the Participant or Beneficiary to relieve or mitigate an "unforeseeable emergency". For purposes of the foregoing, an "UNFORESEEABLE EMERGENCY" shall have the meaning set forth in Internal Revenue Code Regulation 1.457-2(h)(4) and (5) and shall include a severe financial hardship to the Participant or Beneficiary resulting from a sudden and unexpected illness or accident of the Participant or Beneficiary or of a dependent (as defined in Code 152(a)) of the Participant or Beneficiary, loss of the Participant's or Beneficiary's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant or Beneficiary. The circumstances that will constitute an "unforeseeable emergency" will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved -- (a) through reimbursement or compensation by insurance or otherwise; (b) by liquidation of the Participant's or Beneficiary's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or (c) by cessation of deferrals under this Plan. College tuition or the costs of purchasing a home are not considered "unforeseeable emergencies." Withdrawals of amounts because of an "unforeseeable emergency" will only be permitted to the extent reasonably needed to satisfy the emergency need. The amount of any such payment shall be debited to the Participant's Lump Sum Account and Installment Account in such order as the Committee elects and shall not exceed the amount credited to the Deferral Account determined as of the Adjustment Date next following such payment and without regard to such payment. ARTICLE VI. DESIGNATION OF BENEFICIARIES 6.1 BENEFICIARY DESIGNATION. Every Participant shall file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his death. A Participant may from time to time revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. All decisions of the Committee concerning the effectiveness of any Beneficiary designation and the identity of any Beneficiary shall be final. If a Beneficiary shall die after the death of the Participant and prior to receiving the distribution that would have been made to such Beneficiary had such Beneficiary's death not occurred, and no alternate Beneficiary has been designated, then for the purposes of the Plan the distribution that would have been received by such Beneficiary shall be made to the Beneficiary's estate. 6.2 FAILURE TO DESIGNATE BENEFICIARY. Subject to SECTION 6.1, if no Beneficiary designation is in effect at the time of a Participant's death, the payment of the amount, if any, payable under the Plan upon his death shall be made to the Participant's surviving spouse, if any, or if the Participant has no surviving spouse, to the Participant's estate. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may direct the Participating Company to withhold payment without liability for any interest thereon, until the rights thereto are determined, or the Committee may direct the Participating Company to pay any such amount into any court of appropriate jurisdiction, and such payment shall be a complete discharge of the liability of the Participating Company therefor. ARTICLE VII. COMMITTEE 7.1 AUTHORITY. The Committee shall be responsible for the administration and interpretation of the Plan, shall act as the Plan Administrator and shall have all powers necessary to enable it to carry out its duties in the administration and interpretation of the Plan, and shall have the duty and power to determine, in the exercise of its sole and absolute discretion, all questions that may arise hereunder as to the status and rights of Participants and Beneficiaries in the Plan and as to the right of any individual to a benefit. 7.2 VOTING. The Committee shall act by a majority of the number then constituting the Committee, and such action may be taken either by vote at a meeting or in writing without a meeting. 7.3 RECORDS. The Committee shall keep a complete record of all its proceedings and all data relating to the administration of the Plan. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable. 7.4 LIABILITY. No member of the Committee shall be personally liable for any actions taken or omitted by the Committee unless the member's action or inaction involves willful misconduct. To the extent permitted by applicable law, each Participating Company shall indemnify and hold harmless each member of the Committee and each employee of the Participating Company acting pursuant to the direction of the Committee from and against any and all liability, claims, demands, costs and expenses (including reasonable attorneys' fees) arising out of or incident to any act or failure to act in connection with the administration of the Plan, except for any such act or failure to act that involves willful misconduct. 7.5 MINISTERIAL DUTIES. The Committee may appoint one of its members to perform such ministerial duties as the Committee delegates. ARTICLE VIII. AMENDMENT AND TERMINATION Each Participating Company reserves the right, at any time and from time to time, by action of its Board to amend or terminate the Plan with respect to itself and the Participants employed by it; provided, however, no such amendment or termination shall either (a) reduce the amount of any Deferral Account, determined as of the Adjustment Date coincident with or next preceding the amendment or termination, or (b) defer payment of such Deferral Account. ARTICLE IX. CLAIMS PROCEDURE The following claims procedure shall apply with respect to the Plan: 9.1 FILING OF A CLAIM FOR BENEFITS. If a Participant or Beneficiary (the "CLAIMANT") believes that he is entitled to benefits under the Plan which are not being paid to him, he shall file a written claim therefor with the Plan Administrator. In the event a member of the Plan Administrator shall be the claimant, all actions which are required to be taken by the Plan Administrator pursuant to this ARTICLE IX shall be taken instead by the remaining members of the Plan Administrator. 9.2 NOTIFICATION TO CLAIMANT OF DECISION. The following provisions are part of this Plan and are intended to meet the requirements of Part 5 of Title I of ERISA. Within 90 days after receipt of a claim by the Plan Administrator (or within 180 days if special circumstances require an extension of time), the Plan Administrator shall notify the claimant of his decision with regard to the claim. In the event of such special circumstances requiring an extension of time, there shall be furnished to the claimant prior to expiration of the initial 90-day period written notice of the extension, which notice shall set forth the special circumstances and the date by which the decision shall be furnished. If such claim shall be wholly or partially denied, notice thereof shall be in writing and worded in a manner calculated to be understood by the claimant, and shall set forth: (a) the specific reason or reasons for the denial; (b) specific reference to pertinent provisions of the Plan on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the procedure for review of the denial. If the Plan Administrator fails to notify the claimant of the decision in timely manner, the claim shall be deemed denied as of the close of the initial 90-day period (or the close of the extension period, if applicable). 9.3 PROCEDURE FOR REVIEW. Within 60 days following receipt by the claimant of notice denying his claim in whole or in part or, if such notice shall not be given, within 60 days following the latest date on which such notice could have been timely given, the claimant shall appeal denial of the claim by filing a written application for review with the Plan Administrator. Following such request for review, the Plan Administrator shall fully and fairly review the decision denying the claim. Prior to the decision of the Plan Administrator, the claimant shall be given an opportunity to review pertinent documents and to submit issues and comments in writing. 9.4 DECISION ON REVIEW. The decision on review of a claim denied in whole or in part by the Plan Administrator shall be made in the following manner: (A) Within 60 days following receipt by the Plan Administrator of the request for review (or within 120 days if special circumstances require an extension of time), the Plan Administrator shall notify the claimant in writing of its decision with regard to the claim. In the event of such special circumstances requiring an extension of time, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension. If the decision on review is not furnished in a timely manner, the claim shall be deemed denied as of the close of the initial 60-day period (or the close of the extension period, if applicable). (B) With respect to a claim that is denied in whole or in part, the decision on review shall set forth specific reasons for the decision, shall be written in a manner calculated to be understood by the claimant, and shall cite specific references to the pertinent plan provisions on which the decision is based. (C) The decision of the Plan Administrator shall be final and conclusive. 9.5 ACTION BY AUTHORIZED REPRESENTATIVE OF CLAIMANT. All actions set forth in this ARTICLE IX to be taken by the claimant may likewise be taken by a representative of the claimant duly authorized by him to act in his behalf on such matters. The Plan Administrator may require such evidence as it may reasonably deem necessary or advisable of the authority to act of any such representative. ARTICLE X. MISCELLANEOUS 10.1 NONALIENATION OF BENEFITS. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, attach, garnish or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. If a Participant or Beneficiary hereunder shall become bankrupt, or attempt (voluntarily or involuntarily) to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any right hereunder, or if any creditor shall attempt to attach, garnish, levy on or otherwise alienate or affect the right or benefit of any Participant or Beneficiary hereunder, then such right or benefit shall, in the discretion of the Committee, cease and terminate, and in such event, the Committee may hold or apply the same, or any part thereof, for the benefit of the Participant or Beneficiary in such manner and in such amounts and proportions as the Committee may deem proper. 10.2 NO TRUST CREATED. The Plan constitutes a mere promise by a Participating Company to make benefit payments in the future. The obligation of a Participating Company to make a payment hereunder shall constitute only a liability of such Participating Company to the Participant, and no Participating Company shall be liable to make a payment to any Participant who is not its Employee. Each such payment shall be made from the general funds of the Participating Company, and no Participating Company shall be required to establish or maintain any special or separate fund, or to purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payments shall be made. Neither a Participant nor a Beneficiary shall have any interest in any particular asset of a Participating Company by reason of its obligations hereunder, and the right of a Participant to receive payments under this Plan shall be merely the right of a general unsecured creditor of the Participating Company which is his employer. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between a Participating Company and a Participant or Beneficiary. 10.3 NO EMPLOYMENT AGREEMENT. Neither the execution of this Plan nor any action taken by a Participating Company pursuant to this Plan shall be held or construed to confer on a Participant any legal right to be continued as an employee of the Participating Company. This Plan shall not be deemed to constitute a contract of employment between a Participating Company and a Participant, nor shall any provision herein restrict the right of any Participant to terminate his employment with a Participating Company. 10.4 FUNDING POLICY. This Plan is unfunded, and benefits shall be paid from the general assets of the Participating Company which is the employer of the Participant. However, a Participating Company may reserve such funds, make such investments or purchase such insurance policies as it may from time to time choose to provide a source for payments under the Plan. The Participants and Beneficiaries shall have no claims to any such funds, investments or policies. 10.5 BINDING EFFECT. A Participating Company shall be liable only with respect to obligations incurred pursuant to this Plan for its own Employees; no Participating Company shall be liable with respect to benefits due an Employee of any other Participating Company. Notwithstanding the foregoing, Delta Woodside Industries, Inc., as direct or indirect parent of each of the other Participating Companies, guarantees payment and performance of the obligations of each of the other Participating Companies hereunder. Benefits under the Plan shall inure to the benefit of the Participant and the Participant's Beneficiary. 10.6 ENTIRE PLAN. This document and any amendments hereto contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 10.7 MERGER OR CONSOLIDATION. In the event of a merger or a consolidation of a Participating Company with another corporation or entity, or the acquisition of substantially all of the assets or outstanding stock of a Participating Company by another corporation or entity, then and in such event the obligations and responsibilities of such merged or acquired corporation under this Plan shall be assumed by any such successor or acquiring corporation or entity, and all of the rights, privileges and benefits of the Participants hereunder shall continue. 10.8 PAYMENT TO INCOMPETENT. Payments of benefits shall be made directly to a Participant or Beneficiary entitled thereof, or if such Participant or Beneficiary has been determined by a court of competent jurisdiction to be mentally or physically incompetent, then payment shall be made to the duly appointed guardian, conservator or other authorized representative of such Participant or Beneficiary. The Participating Company shall have the right to make payment directly to a Participant or Beneficiary until it has received actual notice of the physical or mental incapacity of such Participant or Beneficiary and notice of the appointment of a duly authorized representative of his estate. Any such payment to an authorized representative for the benefit of a Participant or Beneficiary shall be a complete discharge of all liability of the Participating Company therefor. 10.9 NO CONTRIBUTIONS. The Participant shall not be permitted to make any contributions to this plan. [SIGNATURES ON THE FOLLOWING PAGES] Executed as of December 31, 1997. DELTA WOODSIDE INDUSTRIES, INC. By: /s/ Jane H. Greer Its: Vice President DELTA MILLS, INC. By: /s/ Jane H. Greer Its: Vice President DELTA CONSOLIDATED CORPORATION By: /s/ Jane H. Greer Its: Vice President DUCK HEAD APPAREL COMPANY, INC. By: /s/ Jane H. Greer Its: Vice President NAUTILUS INTERNATIONAL, INC. By: /s/ Jane H. Greer Its: Vice President DELTA MERCHANDISING, INC. By: /s/ Jane H. Greer Its: Vice President INTERNATIONAL APPAREL MARKETING CORPORATION By: /s/ Jane H. Greer Its: Vice President DELTA MILLS MARKETING, INC. By: /s/ Jane H. Greer Its: Vice President FIRST AMENDMENT TO THE DELTA WOODSIDE GROUP DEFERRED COMPENSATION PLAN FOR KEY MANAGERS BY THIS AGREEMENT, Delta Woodside Group Deferred Compensation Plan for Key Managers (the "Plan") is hereby amended as follows, effective April 1, 1998: Section 5.1(b) is amended by addition of the following to the end of such section: Notwithstanding the foregoing, if a Participant's employment is terminated as a result of the sale or closure of a Participating Company, or of a subsidiary or division of a Participating Company, the Participating Company which is the employer of such Participant shall pay in a single sum to the Participant or the Participant's Beneficiary, as the case may be, an amount equal to the vested amount credited to the Participant's Lump Sum Deferral Account and Installment Deferral Account, both adjusted in accordance with ARTICLE III as of the last Adjustment Date preceding such sale or closure, such payment or payments to begin as soon as administratively feasible after such sale or closure. IN WITNESS WHEREOF, this amendment has been executed as of this 7th day of May, 1998. DELTA WOODSIDE INDUSTRIES, INC. DELTA MILLS, INC. By: E. Erwin Maddrey II By: E. Erwin Maddrey II -------------------------- -------------------------- Its: President & CEO Its: President & CEO DELTA CONSOLIDATED CORPORATION DUCK HEAD APPAREL COMPANY, INC. By: E. Erwin Maddrey II By: E. Erwin Maddrey II -------------------------- -------------------------- Its: President & CEO Its: President & CEO NAUTILUS INTERNATIONAL, INC. DELTA MERCHANDISING, INC. By: E. Erwin Maddrey II By: E. Erwin Maddrey II -------------------------- -------------------------- Its: President & CEO Its: President & CEO DELTA MILLS MARKETING, INC. By: E. Erwin Maddrey II ------------------------- Its: President & CEO EX-10.12.1 4 April 22, 1999 Mr. Robert W. Humphreys Delta Woodside Industries, Inc. 233 N. Main Street, Suite 200 Greenville, SC 29601 Dear Bob: This letter is to confirm our discussion concerning your new assignment as President & Chief Executive Officer of Delta Apparel. Congratulations. We believe that you are the right person to lead Delta Apparel, and begin getting a proper return for our stockholders. Your salary will be $300,000, and will be effective with the pay period beginning April 26, 1999. You will be guaranteed a bonus of $300,000 for the fiscal year July 4, 1999 - July 1, 2000. You must be on this job during this period. For fiscal 1999, you will be on the corporate bonus plan for the first ten months, then at the guaranteed annual $300,000 rate for the eleventh and twelfth months of fiscal 1999. As the CEO of Delta Apparel, we will want you to develop a year 2000 bonus plan for the division, to be approved by the new Board of Delta Apparel. Beginning with the 2001 fiscal year, you will be a participant in the Delta Apparel Bonus Plan. To receive any of the above, you must be on the job as President & CEO of Delta Apparel at that time. You do not want to move to the Duluth area. If you change your mind, we will move you. In the interim, we will pay your commutation costs from Greenville. It may make economic sense to rent an apartment in Duluth rather than pay motel rates, or lease a car for you rather than pay mileage. Mr. Robert W. Humphreys Page 2 April 22, 1999 The post spin-off Delta Apparel will have an Incentive Shares Plan that will be the same as, or very similar to, the existing Delta Woodside Plan. In addition, the new company will have an initial performance based Stock Option Plan, with 500,000 shares (assuming a 10-1 reverse split on the existing shares). Twenty-five percent of these shares will be reserved for you. To exercise this option, you must be on the job as President & CEO of Delta Apparel. The remaining shares will be available for you to distribute to other members of the Delta Apparel management employees. On December 14, 1998, I gave you a letter advising you that, "if your job is eliminated because of downsizing, restructuring, or a change of control before December 2000, you will be paid a bonus to stay of two years' salary, plus your regular severance. Since you have satisfactorily completed your part of this agreement, we will pay you the two years bonus to stay at your Financial Vice President's salary rate of $200,000. Since you are now employed at Delta Apparel, your regular severance will not be paid. With this payment, my letter of December 14, 1998, will no longer be in effect. This letter is written in anticipation of the restructuring/spin-offs occurring as planned. If they do not, then you will be the President & CEO of Delta Apparel, a division of Delta Woodside, and you will be elected a Director of Delta Woodside. Bob, congratulations, again. We are looking forward to working with you in the future. Best regards. Sincerely yours, E. Erwin Maddrey, II President & CEO EEM:hw cc: Ms. J. H. Greer EX-10.14 5 June 8, 1998 Mr. Douglas J. Stevens Delta Woodside Industries, Inc. 233 N. Main St., Suite 200 Greenville, SC 29601 Dear Doug: This letter is to cover your planned work schedule/beginning of retirement over the next three years. Starting with the 1999 fiscal year which begins June 28, 1998, you will begin to work about "half time". Because of the scheduling that may be required for a lengthy trip, "half time" could have several definitions. For example, if you are in town a week, you may prefer to work 2-1/2 days that week. If you take a trip that requires you to be gone for a week, you may want to take a week off, etc. In other words, this is a flexible schedule. You will be a full time employee of Delta Woodside and will serve as Vice President - International. You will report to me, but will be responsible for assisting the Presidents of Delta Mills Marketing, Duck Head and Delta Apparel in their international efforts. We expect your work schedule and plans to be developed in conjunction with these Division Presidents. Your salary will be $87,500 per year. All benefit programs in which you participate will remain in place. It is our intention to extend your participation in the Incentive Shares Plan and Stock Option Program when they come up for renewal at one-half the current level. An annual bonus plan for you for international development will be developed between the three Division Presidents, you and me. If the workload becomes such that the job cannot be done on a "half time" basis, then we will pay you at the rate of $85.00 per hour for the time required above "half time". All expenses will be paid by Delta Woodside. We expect you to have all time, expenses, etc., approved in advance by the appropriate Division President. Mr. Douglas J. Stevens Page 2 June 8, 1998 If you decide not to continue with this work schedule, or if you are unable to do so due to disability or death, or if Delta Woodside decides not to continue it, then you will be paid a severance of $150,000 if this should occur at the end of the first year, or $75,000 if this should occur at the end of the second year. We would pro-rate for months in between. If this should occur, you will be allowed to continue your insurance for one year as an active employee, then be covered under the Retiree Insurance Plan. As a corporate officer, we would like for you to attend the two Managers Meetings, the Planning Meetings and have an open invitation to the Quarterly Review Meetings and the Presidents Meetings. You can attend when your schedule permits or at your convenience. We'll probably want you to brief the Board once a year on our international progress. Although your schedule will be "half time", you know that we consider you a full time member of our corporate management group. Best regards. Sincerely yours, E. Erwin Maddrey, II President & CEO EEM:hw cc: Ms. J. H. Greer EX-13 6 1999 ANNUAL REPORT (Delta Woodside logo appears here) CONTENTS Common Stock Market Prices and Dividends.............................................Inside Front Cover Selected Financial Data............... Letter to Shareholders................ Management's Discussion and Analysis............................ Operations by Industry Segment............................. Report of KPMG LLP.................... Consolidated Financial Statements.......................... Corporate Directory..............................................Inside Back Cover COMMON STOCK MARKET PRICES AND DIVIDENDS The Common Stock of the Company is listed on the New York Stock Exchange under the symbol DLW. The stock transfer agent for Delta Woodside Industries, Inc. is First Union National Bank of North Carolina, Shareholder Services Group, Two First Union Center, Charlotte, North Carolina 28288-1154. The following table presents a two-year history of the high and low stock sales prices for the Common Stock, as reported by the New York Stock Exchange composite tape. FISCAL QUARTERS: 1999 1998 High Low High Low First Quarter 5 13/16 3 3/8 6 3/4 5 5/16 Second Quarter 6 1/4 3 15/16 6 5/16 4 3/4 Third Quarter 7 1/4 4 9/16 5 9/16 4 5/16 Fourth Quarter 7 1/4 4 13/16 6 3/8 4 7/8 Fiscal Year: The Company's operations are based on a fifty-two or fifty-three week fiscal year ending on the Saturday closest to June 30. The fiscal year 1999 was a fifty-three week year. The fiscal 1998 and 1997 years were fifty-two week years. As of September 17, 1999 there were approximately 2523 holders of record of the Company's Common Stock. During fiscal 1999 and 1998, the Company paid quarterly dividends of $.025 per share. Dividend payments depend upon the Company's earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Sources of Capital." During the first quarter of fiscal 2000, the Company suspended payments of dividends.
Selected Financial Data In Thousands, Except Ratios, Percentages, Number of Shareholders and Per Share Data 1999 1998 1997 1996 1995 Operations Net sales $493,027 $535,460 $530,278 $487,450 $467,202 Cost of goods sold 420,763 439,300 432,567 451,216 387,215 Gross profit 72,264 96,160 97,711 36,234 79,987 Operating profit (loss) excluding litigation, restructuring and plant closing charges 1,794 35,233 46,644 (20,018) 25,272 Litigation (Credit) (9,000) (7,000) Restructuring and Plant Closing Charges (Credits) 13,996 8,895 8,259 (263) Operating profit (loss) (12,202) 26,338 46,644 (19,277) 32,535 Earnings (loss) before interest & taxes (12,202) 26,338 46,644 (19,277) 34,739 Interest expense 19,929 23,395 23,354 18,993 13,646 Income (loss) from continuing operations before income taxes (31,664) 3,500 24,042 (37,822) 21,142 Income tax expense (benefit) 825 884 9,256 (14,561) 12,791 Income (loss) from continuing operations (32,489) 2,616 14,786 (23,261) 8,351 Income (loss) from discontinued operations (6,906) (46,367) (7,395) (39,378) 1,747 Net income (loss) (39,395) (43,751) 7,391 (62,639) 10,098 Financial data Cash flow (Net income (loss) from continuing operations plus depreciation and amortization) 9,699 33,173 37,404 1,337 25,484 Capital expenditures 14,766 16,789 17,059 59,512 40,559 Depreciation and amortization 42,188 30,557 22,618 24,598 17,133 Working capital 144,200 170,761 229,568 (32,648) 286,887 Long term debt & leases 150,158 183,535 227,516 283 219,119 Funded debt 158,546 195,253 233,597 242,644 219,395 Shareholder's Equity 133,980 179,567 225,367 217,335 286,499 Capital employed 292,526 374,820 458,964 459,979 505,894 Total assets 365,203 474,042 557,940 537,716 610,296 Financial ratios Net sales divided by inventory 5.1 4.7 4.0 4.0 2.4 Net sales divided by accounts receivable 5.0 4.5 4.7 5.1 4.9 Net sales divided by capital employed 1.7 1.4 1.2 1.1 0.9 Operating profit (loss) as % of capital employed (4.2) 7.0 10.2 (4.2) 6.4 Current ratio 3.1 2.8 3.8 0.9 4.8 Interest coverage ratio (0.6) 1.1 2.0 (1.0) 2.5 Gross profit as % of sales 14.7 18.0 18.4 7.4 17.1 Income (loss) from continuing operations before income taxes as % of sales (6.4) 0.7 4.5 (7.8) 4.5 Income (loss) from continuing operations as % of sales (6.6) 0.5 2.8 (4.8) 1.8 Income (loss) from continuing operations as % of beginning equity (18.1) 1.2 6.8 (8.1) 2.9 Common Stock Data (Per Share) Net income (loss) from continuing operations (1.35) 0.11 0.60 (0.95) 0.34 Net income (loss) (1.63) (1.78) 0.30 (2.56) 0.42 Dividends 0.10 0.10 0.30 0.40 Book value 5.55 7.29 9.19 8.89 11.76 Price range -- High 7 1/4 6 3/4 8 9 3/4 12 -- Low 3 3/8 4 5/16 4 5/8 4 3/8 7 5/8 Weighted average shares outstanding 24,149 24,575 24,513 24,443 24,317 Approximate number of shareholders 2,523 1,857 1,939 2,081 2,154 (1) The amounts presented for periods prior to fiscal 1998 have been restated to conform to the fiscal 1998 and fiscal 1999 presentation of discontinued operations. The Stevcoknit knitted fabrics business and the Nautilus International fitness equipment business are presented above as part of discontinued operations. (2) Capital Employed includes shareholders' equity and funded debt. (3) Depreciation and amortization include certain write-downs of property and equipment and reductions of excess of cost over assigned value of net assets acquired of $14 million, $7 million and $15 million in fiscal years 1999, 1998 and 1997, respectively.
TO OUR FELLOW SHAREHOLDERS To Our Shareholders: Fiscal 1999 was a difficult year for the Company. Sales volume was down 8% to $493 million and the Company reported a pre-tax loss from continuing operations of $31.7 million as compared to a pre-tax profit of $3.5 million in fiscal 1998. Sales volume at Duck Head Apparel, our branded apparel division, was down 16% from fiscal 1998, and operating losses in this division increased by $38 million from fiscal 1998. The decrease in sales at Duck Head was primarily due to the loss of a key account due to its acquisition by another retailer. The increase in operating losses was due primarily to a write-off of goodwill, increased advertising expenses, increased inventory reserves necessitated by the reduced volume, and changes in the estimated useful lives of certain asset categories. During the year, the Company announced plans to seek a buyer for the Duck Head division. The efforts to market this business resulted in no offers reflecting the value of this business, so the decision was made to retain Duck Head. Subsequent to the decision to retain the business, we hired Mr. Robert D. Rockey as President of Duck Head. Mr. Rockey has extensive experience in the branded apparel industry, primarily with Levi Strauss. We believe that Mr. Rockey's experience and expertise will enable Duck Head to return to profitability. Delta Mills Marketing Company, our woven textile division, had sales of $314 million, down from a record $342 million in fiscal 1998. Operating profits also fell to $40 million from $46 million in fiscal 1998. The reduction in both sales and operating profits was due primarily to a reduction in volume in the synthetics portion of this business. Volume also continued to fall in the sales of unfinished fabrics. We are in the process of converting certain assets used in the production of unfinished fabrics to the production of finished cotton fabrics, where demand remains good. We expect the results of the conversion of these assets to begin favorably impacting results in the second fiscal quarter of 2000. We have also reduced overhead costs associated with the synthetics business to more closely reflect our ongoing reduced volume in that product category. Delta Apparel, our knit activewear division, had sales of $106 million, which was unchanged from fiscal 1998. Operating losses in fiscal 1999 narrowed to $10 million from $18 million in fiscal 1998. While these results are far from satisfactory, we are encouraged by the improvements in this business. During the year, Mr. Robert W. Humphreys was named President of Delta Apparel. Mr. Humphreys has been with the Company for over 12 years, most recently as Vice President of Finance of Delta Woodside Industries. We are confident in Mr. Humphreys' ability to continue the improvement in this business. During the year, we completed the previously announced sale of the Nautilus International business, our fitness equipment division, and we essentially completed the liquidation of the Stevcoknit Fabrics division. These disposals, combined with our continued focus on inventory management, allowed the Company to reduce outstanding debt by nearly $37 million during fiscal 1999. During the third quarter of fiscal 1999, the Company announced that it was exploring alternatives to its current structure and capitalization. This process has led to the elimination of several options, but our review continues. It remains our belief that the best strategy for the Company and its shareholders will involve the separation of our three businesses into independent companies. Accordingly, we are in the process of developing a plan of action to address this concern. It is our belief that in the coming months, a definitive plan will be announced and implemented. Effective October 1, 1999, Mr. Bettis C. Rainsford resigned his position as Executive Vice President, Treasurer and Chief Financial Officer to pursue personal business interests. Mr. Rainsford will remain as a Director of the Company. Bettis and I founded the Company in 1983. Since that time he has provided invaluable service in a wide range of areas including the development and implementation of appropriate capitalization and business structures. The board and I will miss Bettis' contributions as an officer and we want to thank him for his years of service with Delta Woodside. We wish him well in his new endeavors. (Signature of E. Erwin Maddrey, II) E. Erwin Maddrey, II President and Chief Executive Officer MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The foregoing letter to shareholders and the following discussion contain certain "forward-looking statements". All statements, other than statements of historical fact, that address activities, events, or developments that the Company expects or anticipates will or may occur in the future, including such matters as future revenues, future cost savings, future capital expenditures, business strategy, competitive strengths, goals, plans, references to future success and other such information are forward-looking statements. The words "estimate", "project", "anticipate", "expect", "intend", "believe", and similar expressions are intended to identify forward-looking statements. The forward-looking statements in this Annual Report are based on the Company's expectations and are subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward looking statements. These risks and uncertainties include, among others, changes in the retail demand for apparel products, the cost of raw materials, competitive conditions in the apparel and textile industries, the relative strength of the United States dollar as against other currencies, changes in United States trade regulations and the discovery of unknown conditions (such as with respect to environmental matters, Year 2000 readiness, and similar items). The Company does not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any projected results will not be realized. CONSOLIDATED COMPANY RESULTS FISCAL 1999 VERSUS FISCAL 1998 During the third quarter of fiscal 1999, the Company announced a plan to spin-off the Duck Head and Delta Apparel divisions to the Company's shareholders and to sell for cash the remaining company. Due to a lack of adequate offers for the remaining company, this plan was subsequently terminated. At the time of the announcement of the termination of that plan, the Company announced that it was exploring other alternatives, including a recapitalization of Delta Mills which would involve a spin-off of the Duck Head and Delta Apparel divisions and a cash distribution to the Company's shareholders. Due to softness in the bond markets, particularly for textile and apparel issuers, this plan was also terminated. It is the Company's belief that the best strategy for the Company and its shareholders will involve the separation of the Company's three divisions into independent companies. Accordingly, the Company is in the process of developing a plan of action to address this concern. During fiscal 1999 the Company recognized impairment of the excess of cost over assigned value of net assets acquired in the Duck Head Apparel division and of certain real property in the Delta Apparel division, resulting in pretax charges totaling $14 million. Also in fiscal 1999, the Duck Head Apparel division took pretax charges of $14.7 million resulting from reducing the estimated useful lives of certain categories of assets to more closely reflect current industry standards, increasing inventory reserves due to poor sales levels, writing off store fixtures at former customers' premises, and reducing production capacity to more closely match reduced sales levels. During fiscal 1999, the Delta Apparel division took pretax charges of $3.1 million to increase reserves on certain discontinued and slow moving inventory categories, and to increase accounts receivable reserves and recorded a $2.6 million pretax charge to adjust the carrying value of certain plant assets. Consolidated net sales for fiscal year 1999 were $493 million compared to $535 million from continuing operations for the fiscal year ended June 27, 1998. Net sales decreased in Delta Mills Marketing and in Duck Head Apparel, while net sales in Delta Apparel were unchanged. Consolidated gross profit margin for fiscal 1999 was down from the prior fiscal year. Margins decreased significantly in Duck Head Apparel, increased in Delta Apparel, and were down slightly in Delta Mills Marketing. Consolidated selling, general, and administrative expense for fiscal 1999 totaled $ 69 million, or 14% of net sales compared to $ 61 million or 11% of net sales in the prior fiscal year. These expenses increased at Duck Head Apparel, decreased at Delta Mills Marketing, and were unchanged at Delta Apparel. In addition, the Company incurred expenses totaling $3.6 million that were not allocated to the segments. These expenses include severance costs, professional fees, and other costs associated with the Company's actions regarding the previously discussed plans for restructuring of the Company. For fiscal year 1999, the Company reported an operating loss of $12 million, as compared to an operating profit of $26 million in the prior fiscal year. Operating results were lower due to lower sales volume, lower margins, increased selling, general, and administrative expenses, and as a result of impairment charges at Duck Head Apparel and Delta Apparel. Interest expense was down 15% in fiscal year 1999 compared to fiscal 1998 due to a decrease in net borrowings. The effective tax rate on income from continuing operations for fiscal 1999 was a negative 3% as compared to 25% for fiscal 1998. The 1999 tax rate is the result of valuation allowances offsetting the tax benefit of the pretax losses, and state franchise and income tax expenses. Inventories were $96 million at July 3, 1999 compared to $114 million at June 27, 1998. Inventories decreased at all divisions. The Company's order backlog at July 3, 1999 was $98 million as compared to $158 million at June 27,1998. Order backlogs were down at all divisions, with the largest decline occurring at the Delta Mills Marketing division, primarily due to a decline in blanket contracts when specific color requirements are unknown related to a change in customer practices and a decline in orders as a result of market conditions, particularly in the synthetics business. CONSOLIDATED COMPANY RESULTS FISCAL 1998 VERSUS FISCAL 1997 As a result of the history of operating losses at Stevcoknit Fabrics' knitting and knit finishing plants, and at the Nautilus fitness equipment business, the Company made the decision on March 3, 1998 to close its Stevcoknit Fabrics division and to sell its Nautilus International division (fitness equipment). Accordingly, operating results for those segments have been reported as discontinued operations. Most of the liquidation of the Stevcoknit Fabrics business was completed in fiscal 1998. The Company sold its Nautilus International business in January 1999. Net sales from continuing operations for fiscal year 1998 were $535 million compared to $530 million for the fiscal year ended June 28, 1997. Net sales increases in Delta Mills Marketing and in Duck Head Apparel were offset somewhat by a sales decrease at Delta Apparel. Gross margin for fiscal 1998 was down slightly, from the prior fiscal year. All of the Company's businesses experienced a decline in gross margin. Selling, general, and administrative expense for fiscal 1998 totaled $61 million, or 11% of net sales compared to $53 million or 10% of net sales in the prior fiscal year. SG&A cost increased at Delta Mills Marketing Company due to increased spending on data processing systems, at Duck Head Apparel Company due to higher cost of in store shops and management salaries, and at Delta Apparel due to several factors including an increase in bad debt expense. The Company reported operating earnings of $26 million or 5% of net sales compared to $47 million or 8.8% of sales for the prior fiscal year. During fiscal 1998, operating profits decreased in all of the Company's segments due to lower margins, increased selling, general and administrative expenses and certain restructuring charges at Delta Apparel and Duck Head Apparel. Interest expense increased slightly in fiscal 1998 compared to fiscal 1997; net borrowings decreased, but interest rates increased. The interest rate on the senior notes issued on August 25, 1997 is higher than the interest rate on the prior revolving credit facility. The effective tax rate on income from continuing operations for fiscal 1998 was 25% as compared to 38% for fiscal 1997. The lower tax rate was a result of a reduction in valuation allowances recognized in the prior fiscal year. Inventories were $114 million at June 27, 1998 compared to $134 million at June 28, 1997. The decrease in inventory occurred primarily at Duck Head Apparel and at Delta Apparel. SEGMENT RESULTS DELTA MILLS MARKETING COMPANY FISCAL 1999 VERSUS FISCAL 1998 Delta Mills Marketing manufactures and sells finished woven fabrics principally to manufacturers of apparel products. The segment also sells unfinished fabrics to converters for various end uses. Delta Mills Marketing operated at less than full capacity during fiscal 1999 primarily due to less demand for synthetic finished apparel fabrics and unfinished fabrics sold to converters. These trends are expected to continue at least through the first half of fiscal year 2000. Consequently, the synthetic operations have been downsized to more closely match capacity with market demand and the unfinished fabrics production is being replaced with the more profitable finished cotton fabrics product lines. These changes are expected to position this segment to maintain profitability in the future. Generally, profitability of this segment is enhanced by increases in the use of its manufacturing capacity and is affected by the relative mix of more or less profitable goods being produced and the cost and availability of raw materials. Net sales for fiscal year 1999 totaled $314 million, as compared to $342 million for fiscal 1998 a decrease of 8.2%. Sales of synthetic fabrics declined 30% and accounted for the majority of the decline in sales. Sales of finished woven cotton fabrics to commercial accounts increased while government accounts decreased due to decreased demand. Sales of unfinished fabrics sold to converters continued to decline and will be replaced with more profitable product lines in fiscal year 2000. Gross profit in fiscal year 1999 was $57 million, as compared to $63 million in fiscal year 1998 and was approximately the same as a percent of sales for both fiscal years. The gross profit decline was due principally to the decline in the finished synthetic fabric business in both volume and capacity utilization. Operating earnings for fiscal year 1999 were $40 million as compared to $46 million in fiscal year 1998. The decline in operating earnings is primarily a result of the decline in gross profit and was somewhat offset by a reduction in selling, general and administrative expenses. Inventories at July 3, 1999 totaled $44.4 million, compared to $53.4 million at June 27, 1998. Capital expenditures in fiscal 1999 were $8.7 million as compared to $5.2 million in fiscal 1998. DELTA MILLS MARKETING COMPANY FISCAL 1998 VERSUS FISCAL 1997 Net sales for fiscal year 1998 totaled $342 million, as compared to $336 million for fiscal year 1997, an increase of 2%. Sales of finished woven fabrics to commercial accounts and government accounts increased due to increased demand. These increases were largely offset by a sharp, 32% decline in sales of unfinished woven fabrics due to decreased demand. Gross profit in fiscal year 1998 was $63 million, as compared to $65 million in fiscal year 1997. The gross profit decline was due principally to the decline in the unfinished woven fabrics business in both volume and price. Operating earnings for fiscal year 1998 were $46 million, as compared to $51 million in fiscal year 1997. The decline in operating earnings is primarily a result of the decline in gross margins and due to increased selling, general, and administrative expenses attributable in part to information technology project expenditures. Inventories at June 27, 1998 totaled $53.4 million, compared to $53.6 million at June 28, 1997. Capital expenditures in fiscal 1998 were $5.2 million as compared to $12.0 million in fiscal 1997. DELTA APPAREL COMPANY FISCAL 1999 VERSUS FISCAL 1998 Delta Apparel manufactures and sells T-shirts, fleece goods and sportswear to distributors, screen printers and private label accounts. Operating results are dependent in large part on orders from retailers, distributors, and screen printers who supply finished garments to retailers. Generally, when retail sales of apparel are strong, Delta Apparel benefits. Its operating results are also dependent on the utilization of its manufacturing facilities. Delta Apparel operated its facilities near full capacity during fiscal 1999. The Company believes that Delta Apparel will operate its facilities at or near full capacity during fiscal 2000. Net sales for fiscal year 1999 were $106 million, which was consistent with net sales of $106 million in fiscal year 1998. Fiscal year 1999 net sales were the result of increased unit sales offset by lower unit prices as compared to fiscal year 1998. Gross profit increased from $3.9 million in fiscal year 1998 to $5.7 million in fiscal year 1999 as a result of lower raw material costs and better manufacturing efficiencies. In fiscal year 1999 a charge of $2.6 million is included in gross profit to adjust the carrying value of certain plant assets. Also included in fiscal year 1999 is a charge of $1.7 million to increase reserves on certain discontinued and slow moving inventory categories. The fiscal year 1999 operating loss was $10 million, compared to an operating loss of $18 million in fiscal 1998. Delta Apparel's improved gross profit contributed to the reduction in operating losses for fiscal year 1999. The 1999 operating loss includes an impairment charge of $1.4 million to write down certain real property. The 1999 operating loss also includes a charge of $1.4 million to selling, general and administrative expenses to increase accounts receivable reserves. The fiscal 1998 operating loss includes an impairment charge of $7.5 million that was recorded to write off the excess of cost over assigned value of net assets acquired. Inventories at Delta Apparel at July 3, 1999 totaled $27 million, compared to $32 million at June 27, 1998. Capital expenditures in fiscal 1999 were $3.6 million as compared to $4.1 million in fiscal 1998. DELTA APPAREL COMPANY FISCAL 1998 VERSUS FISCAL 1997 Net sales for fiscal year 1998 were $106 million, a decline of 5.4% from sales of $112 million in fiscal year 1997. The decline in sales was due both to lower unit prices and to fewer units being shipped as compared to fiscal year 1997. Gross profit declined from $4.3 million in fiscal year 1997 to $3.9 million in fiscal year 1998, as a result of increased competition. During the third quarter of fiscal 1998, Delta Apparel determined that the excess of cost over assigned value of net assets acquired in a prior acquisition, was impaired. Accordingly, a charge of $7.5 million was taken to write-off the excess of cost over assigned value of net assets acquired at Delta Apparel. The fiscal year 1998 operating loss, including the impairment of the excess of cost over assigned value of net assets acquired, was $18 million compared to an operating loss of $5.4 million in the prior fiscal year. The increased operating loss was primarily a result of the impairment charge, but was also due to an increase in selling, general and administrative expenses. Inventories at Delta Apparel at June 27, 1998 totaled $32 million, compared to $41 million at June 28, 1997. Capital expenditures in fiscal 1998 were $4.1 million as compared to $2.4 million in fiscal 1997. DUCK HEAD APPAREL COMPANY FISCAL 1999 VERSUS FISCAL 1998 The Company's Duck Head Apparel segment manufactures and sells woven and knitted apparel under the Duck Head label primarily to retailers and through the company's own outlet stores. Duck Head's operating results are dependent in a large part on orders from retailers. Generally, Duck Head benefits when retail sales of apparel are strong. Operating results are also dependent on the utilization of its leased manufacturing facility. This facility was not fully utilized in fiscal 1999 and the Company does not believe that the facility will be fully utilized during fiscal 2000. Duck Head Apparel closed a manufacturing facility in fiscal 1999 and in fiscal 1999 two facilities which were closed in fiscal 1998 were sold. The facility closed in fiscal 1999 is expected to be sold in fiscal 2000. Net sales in the Duck Head Apparel segment decreased by $14.1 million to $72.3 million in fiscal 1999. Sales to retail accounts and sales from the Company's own stores both decreased. The decrease in sales to retailers was due primarily to the loss of a key account due to its being acquired by another retailer. The decrease in sales through the Company's own stores was due primarily to fewer stores being open in fiscal 1999 versus fiscal 1998. Gross profit in the Duck Head Apparel segment decreased by $18.9 million to $9.9 million in fiscal 1999. This change was principally due to $7.7 million of increased reserve charges taken on excess inventories and the decline in sales volume from fiscal year 1998. Also included in fiscal 1999 are charges totaling $1.5 million to reduce production capacity to more closely reflect reduced sales levels. Selling, general and administrative expenses in the Duck Head Apparel segment totaled $35.4 million in fiscal 1999, an increase of 27% from fiscal 1998. The increase was primarily due to increased marketing expenses and $5.6 million in accelerated amortization of in-store shops and computer equipment. Fiscal 1999 operating losses in Duck Head Apparel totaled $39.3 million as compared to a $.9 million operating loss in fiscal 1998. Included in the fiscal 1999 operating losses is a $12.6 million charge for the impairment of the excess of cost over assigned value of net assets acquired. Included in the fiscal 1998 operating losses are $1.4 million of restructuring charges related to the closing of two of the division's sewing plants in Costa Rica and for closing of additional retail outlet stores. Inventories at Duck Head Apparel at July 3, 1999 totaled $24.7 million compared to $28.3 million at June 26,1998. The net decrease in inventories reflects decreases in older obsolete inventory, partially offset by increases in both recent season closeouts and in the core inventory. Capital expenditures at Duck Head were $ 2.4 million and $7.4 million for fiscal years 1999 and 1998, respectively. The expenditures were primarily for fixtures for in-store shops and focal areas placed in major retailers and for hardware and software related to the company's information technology programs. DUCK HEAD APPAREL COMPANY FISCAL 1998 VERSUS FISCAL 1997 Net sales in the Duck Head Apparel segment increased by $5.0 million to $86 million in fiscal 1998. Sales to retail accounts increased while sales from the company's own stores decreased. The increase in sales to retailers was due primarily to increases in sales to the same accounts, as compared to fiscal 1997. Gross profit margins at Duck Head Apparel decreased slightly in fiscal 1998, due principally to inventory reduction programs. Fiscal 1998 operating losses at Duck Head Apparel totaled $.9 million as compared to a $1.4 million operating profit in fiscal 1997. Included in the fiscal 1998 operating losses are $1.4 million of restructuring charges related to the closing of two sewing plants in Costa Rica and the closing of certain retail outlet stores. Selling, general, and administrative expenses increased 9% from fiscal 1997, primarily due to increased merchandising and marketing expenses. Inventories at Duck Head Apparel decreased $8.6 million during fiscal 1998 resulting from a reduction in older obsolete inventory and lower levels of core and recent season close-outs. Higher capital expenditures during fiscal 1998 were primarily for in-store shops and focal areas placed in major retailers. LIQUIDITY AND SOURCES OF CAPITAL During fiscal 1999, the Company financed its capital expenditures through proceeds from the sale of discontinued operations and cash generated from operations. In addition, during fiscal 1999, proceeds from the sale of the assets of Nautilus International and the proceeds from the current assets of Stevcoknit Fabrics, both discontinued operations, were used to reduce debt. The Company generated operating cash flows of $54, $51 and $26 million for the 1999, 1998 and 1997 fiscal years, respectively. Cash generated from operations has been used primarily to finance capital expenditures and to reduce debt. On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI" issued $150 million of unsecured ten-year senior notes, and obtained a secured five-year $100 million revolving line of credit subject to borrowing base limitations. At the same time, the Company obtained a separate, $20 million line of credit due October 31, 1998. The $100 million revolving line of credit is backed by certain accounts receivable and inventory of DMI with a carrying value of $129 million at July 3, 1999. At July 3, 1999 interest rates on the senior notes and the $100 million revolving line of credit were 9.625% and 6.93% respectively. In May 1998, the Company replaced the above referenced $20 million line of credit with a short-term $30 million revolving credit facility (subject to borrowing base limitations) which was originally due in May of 1999. The term of this facility has subsequently been extended until December 1999. This credit facility is backed by certain accounts receivable and inventory of Delta Apparel and Duck Head Apparel with a carrying value of $79 million at July 3, 1999. This credit facility carries an interest rate that is two percentage points above the London Interbank Borrowing Rate. Loan covenants in the senior notes and the DMI revolving credit facility, among other matters, limit the Company's ability to use cash generated by DMI to fund operations in the rest of the Company. At July 3, 1999, the most restrictive of these covenants required DMI's tangible net worth to be $45 million. At July 3, 1999, pursuant to this covenant, no funds were available for distribution by DMI to the rest of the Company. At July 3, 1999 approximately $99 million was available under the DMI revolving credit agreement and approximately $25 million was available under the Company's separate short-term $30 million line of credit. The revolving credit facilities and the senior notes contain other restrictive covenants which include certain other required minimum financial ratios. The agreements also restrict additional indebtedness, dividends, and capital expenditures. On September 15, 1998, the Company announced a plan to repurchase, from time to time, up to 2.5 million shares of the Company's outstanding stock at prices and at times in the discretion of the Company's top management. Through July 3, 1999, the Company had purchased for retirement approximately one million shares of its common stock at a total cost of about $4.5 million. During fiscal 2000, the Company plans to spend approximately $12 million for capital improvements and new equipment. The Company believes that its equipment and facilities are generally adequate to remain competitive with its principal competitors. The Company has entered into agreements, and has fixed prices, to purchase cotton for use in its manufacturing operations. At July 3, 1999 minimum payments under these contracts with noncancelable contract terms were $42 million in fiscal 2000. The Company believes that cash flow generated from its operations, along with funds available under its credit lines, should be sufficient to service its debt, to satisfy its day-to-day working capital needs, and to fund its planned capital expenditures. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Risk Sensitivity As a part of the Company's business of converting fiber to finished fabric, the Company makes raw cotton purchase commitments and then fixes prices with cotton merchants who buy from producers and sell to textile manufacturers. The Company may seek to fix prices up to 18 months in advance of delivery. Daily price fluctuations are minimal, yet long-term trends in price movement can result in unfavorable pricing of cotton for the Company. Before fixing prices, the Company looks at supply and demand fundamentals, recent price trends and other factors that affect cotton prices. The Company also reviews the backlog of orders from customers as well as the level of fixed price cotton commitments in the industry in general. At July 3, 1999, a 10% decline in the market price of the cotton covered by the Company's fixed price contracts would have a negative impact of approximately $4.2 million on the value of the contracts. At the end of fiscal 1998, a 10% decline in the market price of the Company's fixed price contracts would have had a negative impact of approximately $5.6 million on the value of the contracts. The decline in the potential negative impact from 1998 to 1999 is due principally to current cotton commitments being at significantly lower average prices than in fiscal 1998. Interest Rate Sensitivity The following debt obligations are sensitive to changes in interest rates: $150 million of unsecured ten year senior notes due 2007 at a fixed rate of 9.625%. $100 million of secured five year revolving credit facility expiring 2002 with interest of 6.93% at July 3, 1999. Interest is based on LIBOR. $30 million of short-term secured revolving credit facility expiring December 2000 with interest of 7.22% at July 3, 1999. Interest is based on LIBOR. An interest rate change would not have an impact on the fixed rate ten year senior notes totaling $150 million. An interest rate change would have a negative impact to the extent the Company increases borrowings against the revolving credit facilities. The impact would be dependent on the level of borrowings incurred. During fiscal years 1999 and 1998, based on the average principal balance outstanding, a 1% increase in interest rates would have resulted in increased interest expense of approximately $533,000 and $879,000, respectively. In fiscal year 2000, as of this date, the Company has no outstanding borrowings against the revolving credit facilities. YEAR 2000 COMPLIANCE The Company has a variety of computers and systems that are subject to Year 2000 issues. The Year 2000 problem arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these programs do not differentiate between a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail, or cause erroneous results. The Company has considered the impact of Year 2000 issues on the Company's computer information systems and other equipment that use embedded technology such as micro-controllers, and has developed and implemented a remediation plan. The Company's Year 2000 plan includes 1) Identification of year 2000 issues, 2) Assessment and prioritization of issues, 3) Remediation, and 4) Testing for Year 2000 compliance. Because the Company has a wide variety of systems and equipment at various locations affected by the Year 2000 issue, various aspects of the Company's Year 2000 efforts are at different stages of progress. Most of the work now being done involves testing of Year 2000 solutions, tracking key vendor Year 2000 compliance, and testing contingency plans. Expenditures in fiscal 1998 for the Year 2000 project amounted to approximately $150,000. As a part of its plan to achieve Year 2000 compliance, the Company decided to accelerate the schedule for implementation of certain data collection systems. The cost of these systems is approximately $1.2 million. The Company spent approximately $1.5 million on software improvements and remediation work in fiscal year 1999, and expects to spend an additional $.4 million in fiscal year 2000, with completion expected by the first quarter of fiscal year 2000. Most key vendors and customers have documented assurance of current or planned readiness for the year 2000. The most likely worst-case scenario is that certain non-critical business systems might fail. The Company has developed contingency plans for all systems that had not been remediated as of July 3, 1999. Contingency plans include the option to disable certain systems or to use alternate methods of providing the same or similar service. The Company does not believe that these non-critical systems will have a material adverse impact on the Company's ability to generate revenue. In the event that the Company is unable to implement all or a part of its Year 2000 plan, then some of the Company's computer systems could fail. Any liability or lost revenue associated with systems failure cannot be reasonably estimated at this time. ENVIRONMENTAL MATTERS The Company is subject to various federal, state, and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions, ozone depletion, and solid waste disposal. The Company's plants generate very small quantities of hazardous waste which are either recycled or disposed of off site. Most of its plants are required to possess one or more discharge permits. The Company believes that it is in compliance in all material respects with federal, state, and local environmental statutes and requirements. Two of Delta Mills Marketing Company's South Carolina plants, the Delta 2 and 3 finishing plants, have been unable to comply with certain toxicity and other permit-related limits contained in a National Pollutant Discharge Elimination System ("NPDES") permit held by the Company. Additionally, high nitrate levels have been observed at the spray field for these plants. To attempt to achieve compliance with the non-toxicity NPDES permit limits, the Company completed certain upgrades in October 1998 at a cost of approximately $2.3 million. Since then, the Company has had two non-toxicity permit violations resulting in the payment of a de minimis penalty. The Company believes that it will be able to comply with the non-toxicity permit limits. The Company is working with the appropriate state agency to address the toxicity and nitrate issues. Although there is no assurance that the Company will be successful, and it could face additional administrative penalties if it is not, the Company does not currently believe that these matters will have a material adverse impact on the Company. The Company is currently assessing groundwater contamination at its discontinued Greensboro, North Carolina plant. The Company believes, however, that the source of the contamination was removed several years ago by the prior owner and the Company currently has no plans to remediate any groundwater contamination. Although no assurance can be provided, the Company does not currently believe that this matter will have a material adverse impact on the Company. OPERATIONS BY INDUSTRY SEGMENT In the third quarter of fiscal year 1998, the Company adopted the segment reporting provisions of Financial Accounting Standard 131. This standard requires the Company to report segment information for divisions which engage in business activity, whose operating results are regularly reviewed by the chief operating officer. The Company has three segments in continuing operations: Delta Mills Marketing Company, Delta Apparel and Duck Head Apparel. Delta Mills Marketing Company manufactures and sells woven fabrics for apparel and home furnishing manufacturers. Delta Apparel manufactures and sells T-shirts, fleece goods, and sportswear. Duck Head Apparel manufactures and sells casual apparel under the brand name "Duck Head" to department stores and specialty retailers. Operating profit does not include interest expense or interest income. The Company had two segments which are presented as discontinued operations: Stevcoknit Fabrics Company and Nautilus International. Stevcoknit Fabrics Company manufactured and sold knitted fabrics, and Nautilus International manufactured and sold fitness equipment. Intersegment sales and profit are not significant and are not included in the accompanying segment information. Delta Mills Marketing Company had intersegment sales of $662,000, $417,000 and $5,000 for fiscal years 1999, 1998 and 1997, respectively. Delta Apparel Company had intersegment sales of $467,000, $2,192,000 and $403,000 for fiscal years 1999, 1998 and 1997, respectively. Operating profit is total revenue less operating expenses, excluding interest expense and interest income. During the fourth quarter of fiscal 1999, Duck Head Apparel took a $12.6 million impairment charge to write off the excess of cost over assigned value of net assets acquired and Delta Apparel took a $1.4 million impairment charge to write down certain real property. Depreciation and amortization include certain write-downs of property, equipment and excess of cost over assigned value of net assets acquired. Identifiable assets are those assets that are used in the operations of each segment. At July 3, 1999, other identifiable assets include cash and insurance policies of $15.4 million and deferred loan costs of $4.8 million. During the third quarter of fiscal 1998, Delta Apparel took a $7.5 million impairment charge to write-off the excess of cost over assigned value of net assets acquired. In the same quarter, Duck Head Apparel recognized a charge of $1.4 million primarily associated with the closing of two of the division's sewing plants in Costa Rica and the closing of certain retail stores. Capital expenditures include related accounts payable of $2,154,000, $2,321,000, and $1,228,000 for the 1999, 1998 and 1997 fiscal years, respectively.
July 3, 1999 June 27, 1998 June 28, 1997 Net Sales: Delta Mills Marketing Company $314,162,000 $342,439,000 $336,181,000 Delta Apparel Company......... 106,313,000 106,298,000 112,311,000 Duck Head Apparel Company..... 72,259,000 86,332,000 81,313,000 Other......................... 293,000 391,000 473,000 ------------- ------------- ------------- Total..................... $493,027,000 $535,460,000 $530,278,000 ============= ============= ============= Gross Profit: Delta Mills Marketing Company. $56,745,000 $ 63,433,000 $ 65,058,000 Delta Apparel Company......... 5,665,000 3,890,000 4,343,000 Duck Head Apparel Company..... 9,888,000 28,775,000 28,174,000 Other......................... (34,000) 62,000 136,000 ------------- ------------- ------------- Total..................... $72,264,000 $ 96,160,000 $97,711,000 ============= ============= ============= Operating Profit (Loss): Delta Mills Marketing Company. $40,486,000 $ 46,377,000 $50,580,000 Delta Apparel Company......... (9,829,000) (17,739,000) (5,391,000) Duck Head Apparel Company..... (39,269,000) (935,000) 1,431,000 Other......................... (3,590,000) (1,365,000) 24,000 ------------- ------------- ------------- Total Operating Profit (Loss) (12,202,000) 26,338,000 46,644,000 Interest expense.............. (19,929,000) (23,395,000) (23,354,000) Interest income............... 467,000 557,000 752,000 ------------- ------------- ------------- Income (Loss) From Continuing Operations Before Income Tax ($31,664,000) $ 3,500,000 $24,042,000 ============= ============= ============= Identifiable Assets: Delta Mills Marketing Company. $213,874,000 $239,974,000 $247,915,000 Delta Apparel Company......... 85,483,000 98,257,000 120,366,000 Duck Head Apparel Company..... 46,209,000 75,383,000 83,980,000 Other......................... 18,535,000 12,308,000 8,099,000 ------------- ------------- ------------- 364,101,000 425,922,000 460,360,000 Discontinued operations....... 1,102,000 48,120,000 97,580,000 ------------- ------------- ------------- Total..................... $365,203,000 $474,042,000 $557,940,000 ============= ============= ============= Depreciation and Amortization: Delta Mills Marketing Company. $ 10,871,000 $ 9,921,000 $10,101,000 Delta Apparel Company......... 9,224,000 15,252,000 7,788,000 Duck Head Apparel Company..... 21,229,000 4,039,000 3,668,000 Other......................... 864,000 1,345,000 1,061,000 ------------- ------------- ------------- Total..................... $ 42,188,000 $ 30,557,000 $22,618,000 ============= ============= ============= Capital Expenditures: Delta Mills Marketing Company. $ 8,699,000 $ 5,181,000 $12,042,000 Delta Apparel Company......... 3,580,000 4,141,000 2,396,000 Duck Head Apparel Company..... 2,444,000 7,427,000 2,510,000 Other......................... 43,000 40,000 111,000 ------------- ------------- ------------- Total..................... $ 14,766,000 $ 16,789,000 $ 17,059,000 ============= ============= =============
INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS DELTA WOODSIDE INDUSTRIES, INC. We have audited the accompanying consolidated balance sheets of Delta Woodside Industries, Inc. as of July 3, 1999 and June 27, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended July 3, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta Woodside Industries, Inc. at July 3, 1999 and June 27, 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended July 3, 1999, in conformity with generally accepted accounting principles. KPMG LLP Greenville, South Carolina August 13, 1999
CONSOLIDATED BALANCE SHEETS Delta Woodside Industries, Inc. July 3, 1999 June 27, 1998 ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents................. $14,066,000 $2,753,000 Accounts receivable: Factor................................. 66,854,000 81,256,000 Customers.............................. 38,112,000 41,253,000 ------------- ------------ 104,966,000 122,509,000 Less allowances for doubtful accounts 6,959,000 3,309,000 And returns ============= ============ Inventories Finished goods......................... 46,459,000 52,219,000 Work in process........................ 39,570,000 48,814,000 Raw materials and supplies............. 10,094,000 12,925,000 ------------- ------------ 96,123,000 113,958,000 Current assets of discontinued operations 780,000 25,797,000 Deferred income taxes..................... 2,186,000 861,000 Prepaid expenses and other current assets. 1,946,000 2,962,000 ------------- ------------ TOTAL CURRENT ASSETS 213,108,000 265,531,000 PROPERTY, PLANT AND EQUIPMENT, at cost Land and land improvements............. 4,824,000 5,062,000 Buildings.............................. 62,146,000 66,995,000 Machinery and equipment................ 188,930,000 192,295,000 Furniture and fixtures................. 10,540,000 11,749,000 Leasehold improvements................. 2,869,000 3,068,000 Construction in progress............... 4,583,000 9,131,000 ------------- ------------ 273,892,000 288,300,000 Less accumulated depreciation.......... 129,976,000 123,537,000 ------------- ------------ 143,916,000 164,763,000 NONCURRENT ASSETS OF DISCONTINUED OPERATIONS............................... 322,000 22,323,000 INTANGIBLE ASSETS, less accumulated amortization of $1,859,000 (1999) and $5,515,000 (1998) 4,900,000 18,290,000 OTHER ASSETS................................ 2,957,000 3,135,000 ------------- ------------ $365,203,000 $474,042,000 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank debt $1,678,000 $11,108,000 Trade accounts payable.................... 25,354,000 41,592,000 Accrued employee compensation............. 7,772,000 8,278,000 Accrued and sundry liabilities............ 26,276,000 23,059,000 Accrued restructuring charges............. 1,118,000 10,123,000 Current portion of long-term debt......... 6,710,000 610,000 ------------- ------------ TOTAL CURRENT LIABILITIES 68,908,000 94,770,000 LONG-TERM DEBT.............................. 150,158,000 183,535,000 DEFERRED INCOME TAXES....................... 4,295,000 3,716,000 OTHER LIABILITIES AND DEFERRED CREDITS...... 7,862,000 12,454,000 SHAREHOLDERS' EQUITY Common Stock -- par value $.01 a share -- authorized 50,000,000 shares, issued and outstanding 23,792,000 shares (1999) and 24,644,000 shares (1998) 238,000 246,000 Additional paid-in capital................ 160,863,000 165,221,000 Retained earnings (deficit)............... (27,121,000) 14,100,000 ------------- ------------ 133,980,000 179,567,000 COMMITMENTS AND CONTINGENCIES $365,203,000 $474,042,000 ============= ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Delta Woodside Industries, Inc. July 3, 1999 June 27, 1998 June 28, 1997 ------------- ------------- ------------- Net sales............................... $493,027,000 $535,460,000 $530,278,000 Cost of goods sold....................... 420,763,000 439,300,000 432,567,000 ------------- ------------- ------------- Gross profit............................. 72,264,000 96,160,000 97,711,000 Selling, general and administrative 69,175,000 60,738,000 52,697,000 expenses Restructuring and impairment charge...... 13,996,000 8,895,000 Other income (expense)................... (1,295,000) (189,000) 1,630,000 ------------- ------------- ------------- OPERATING PROFIT (LOSS)................ (12,202,000) 26,338,000 46,644,000 Interest (expense) income: Interest expense....................... (19,929,000) (23,395,000) (23,354,000) Interest income........................ 467,000 557,000 752,000 ------------- ------------- ------------- (19,462,000) (22,838,000) (22,602,000) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (31,664,000) 3,500,000 24,042,000 Income tax expense ...................... 825,000 884,000 9,256,000 ------------- ------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS............................. (32,489,000) 2,616,000 14,786,000 Discontinued Operations: (Loss) on disposal of discontinued operations less applicable income taxes.......................... ($6,906,000) ($37,042,000) (Loss) from operations of discontinued businesses less applicable income taxes.............. (9,325,000) (7,395,000) ------------- ------------- ------------- (6,906,000) (46,367,000) (7,395,000) NET INCOME (LOSS)...................... ($39,395,000) ($43,751,000) $ 7,391,000 ============= ============= ============= Basic and diluted earnings (loss) per share: Continuing operations.................. ($1.35) $0.11 $0.60 Discontinued operations................ (0.28) (1.89) (0.30) ------------- ------------- ------------- Net earnings (loss).................... ($1.63) ($1.78) $0.30 ============= ============= ============= Weighted average number of shares outstanding.................. 24,149,000 24,575,000 24,513,000 ============= ============= =============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Delta Woodside Industries, Inc. Additional Retained Total Common Stock Paid-In Earnings Shareholders' Shares Amount Capital (Deficit) Equity Balance at June 29, 1996 24,459,651 $245,000 $164,170,000 $ 52,920,000 $217,335,000 Incentive stock award plan, shares issued 54,348 608,000 608,000 Stock Option Plan, shares issued 4,669 35,000 35,000 Net income.......... 7,391,000 7,391,000 Other............... (263) (2,000) (2,000) ------------ --------- ------------- ------------- ------------- Balance at June 28, 1997........ 24,518,405 245,000 164,811,000 60,311,000 225,367,000 Incentive stock award plan, shares issued 112,403 1,000 575,000 576,000 Stock Option Plan, shares issued 11,255 75,000 75,000 Tax benefits of stock plans... (253,000) (253,000) Net (loss)..... (43,751,000) (43,751,000) Cash dividends paid -- $.10 a share (2,460,000) (2,460,000) Other............... 2,026 13,000 13,000 ------------ --------- ------------- ------------- ------------- BALANCE AT JUNE 27, 1998........ 24,644,089 246,000 165,221,000 14,100,000 179,567,000 Incentive stock award plan, shares issued 72,435 1,000 344,000 345,000 Stock Option Plan, shares issued 56,751 411,000 411,000 Net (loss)........ (39,395,000) (39,395,000) Cash dividends paid -- $.10 a share (593,000) (1,826,000) (2,419,000) Share repurchases (978,647) (9,000) (4,511,000) (4,520,000) Other............... (3,119) (9,000) (9,000) ------------ --------- ------------- ------------- ------------- BALANCE AT JULY 3, 1999........ 23,791,509 $238,000 $160,863,000 ($27,121,000) $133,980,000 ============ ========= ============= ============= =============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Delta Woodside Industries, Inc. Year Ended July 3, 1999 June 27, 1998 June 28, 1997 OPERATING ACTIVITIES Net income (loss)..................... ($39,395,000) ($43,751,000) $7,391,000 Adjustments to reconcile net income to net cash provided by operating activities: Discontinued operations............ 35,450,000 41,548,000 389,000 Depreciation....................... 26,984,000 22,033,000 20,715,000 Amortization....................... 1,207,000 1,789,000 1,903,000 Write-down of property and equipment 1,416,000 Reduction in excess of cost over assigned value of net assets acquired............... 12,581,000 6,735,000 Provision for losses on accounts Receivable 3,650,000 457,000 (1,148,000) Provision for deferred income taxes. (1,175,000) 294,000 6,456,000 Losses (gains) on disposition of property and equipment.................... 3,129,000 (46,000) (1,420,000) Compensation under stock plans...... 748,000 664,000 643,000 Deferred compensation............... 48,000 244,000 730,000 Other............................... (21,000) 30,000 (327,000) Changes in operating assets and liabilities: Accounts receivable.............. 17,543,000 (7,126,000) (15,557,000) Inventories...................... 17,836,000 19,843,000 (11,597,000) Other current assets............. 913,000 (850,000) 7,610,000 Accounts payable and accrued expenses (26,445,000) 10,037,000 10,339,000 ------------- ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 54,469,000 51,901,000 26,127,000 INVESTING ACTIVITIES Property, plant and equipment: Purchases........................... (14,933,000) (15,526,000) (20,510,000) Proceeds of dispositions............ 3,571,000 528,000 3,653,000 Net (investing) divesting activities of discontinued operations.......................... 12,140,000 10,574,000 (2,613,000) Other.................................. 516,000 (296,000) (510,000) ------------- ------------- ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,294,000 (4,720,000) (19,980,000) FINANCING ACTIVITIES Proceeds from revolving credit.................. $297,434,000 $293,262,000 $68,904,000 Repayments on revolving credit. (333,499,000) (481,019,000) (85,134,000) Scheduled principal payments of long-term Debt (514,000) (682,000) (405,000) Proceeds from issuance of long-term Debt 145,688,000 6,915,000 Dividends paid......................... (2,419,000) (2,460,000) Repurchase common stock................. (4,520,000) Other................................... (932,000) (1,913,000) (2,000) ------------- ------------- ------------ NET CASH (USED) BY FINANCING ACTIVITIES (44,450,000) (47,124,000) (9,722,000) ------------- ------------- ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVILENTS 11,313,000 57,000 (3,575,000) Cash and cash equivalents at beginning year 2,753,000 2,696,000 6,271,000 ------------- ------------- ------------ CASH AND CASH EQUIVALENTS $14,066,000 $2,753,000 $ 2,696,000 ============= ============= ============
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Delta Woodside Industries, Inc. NOTE A -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Delta Woodside Industries, Inc. (the "Company") and its subsidiaries (all of which are wholly-owned, except for International Apparel Marketing Corporation which was 70% owned for the two years ending June 27, 1998, and wholly owned for the period ended July 3, 1999). All significant intercompany balances and transactions have been eliminated. Certain amounts for the 1998 and 1997 fiscal years have been reclassified to conform to the 1999 presentation. CASH EQUIVALENTS: The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market determined using both first-in, first-out (FIFO) and last-in, first-out (LIFO) methods. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method for financial reporting based on estimated useful lives of two to thirty-two years, but predominantly over seven to ten years, and by accelerated methods for income tax reporting. INTANGIBLE ASSETS: Amortization is computed using the straight-line method. The excess of cost over assigned value of net assets acquired relating to certain business combinations has been amortized to expense over 40 years. As of July 3, 1999, all such assets had been either disposed of or written down to zero value due to impairment. Other intangible assets are being amortized over periods of 5 to 10 years, but primarily over 10 years. IMPAIRMENT OF LONG-LIVED ASSETS: When required by circumstances, the Company evaluates the recoverability of its long-lived assets by comparing estimated future undiscounted cash flows with the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific goods for later shipment at customers' request with related risk of ownership passing to such customers. INCOME TAXES: Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS PER COMMON SHARE: Per share data are computed based on the weighted average number of shares of Common Stock and Common Stock Equivalents outstanding during each period. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, during fiscal 1998. The statement requires companies to present basic and diluted earnings per share. Common stock equivalents are approximately .2% to .3% of weighted average shares outstanding for the periods presented, and do not affect the calculation of earnings per share. These common stock equivalents are attributable to the stock option plan where the options have vested, but have not yet been exercised. ENVIRONMENTAL COSTS: Environmental compliance costs, including ongoing maintenance, monitoring and similar costs, are expensed as incurred. Environmental remediation costs are accrued, except to the extent costs can be capitalized, when remedial efforts are probable, and the cost can be reasonably estimated. COTTON PROCUREMENT: The Company contracts to buy cotton with future delivery dates at fixed prices in order to reduce the effects of fluctuations in the prices of cotton used in the manufacture of its products. These contracts permit settlement by delivery and are not used for trading purposes. The Company commits to fixed prices on a percentage of its cotton requirements up to eighteen months in the future. If market prices for cotton fall below the Company's committed fixed costs and it is estimated that the costs of cotton are not recoverable in future sales of finished goods, the differential is charged to income at that time. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FISCAL YEAR: The Company's operations are based on a fifty-two or fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal years 1998 and 1997 each consisted of 52 weeks and 1999 consisted of 53 weeks. NOTE B -- ACCOUNTS RECEIVABLE Delta Mills Marketing assigns a substantial portion of its trade accounts receivable to a bank under a factor agreement. The assignment of these receivables is primarily without recourse, provided that customer orders are approved by the bank prior to shipment of goods, up to a maximum for each individual account. The Company's accounts receivable are due from many customers that market and produce apparel, home furnishings and other products, and from department stores and specialty apparel retailers located throughout the United States. The many customers represented in the Company's accounts receivable limits to a certain extent the concentration of credit risk. The Company generally does not require collateral for its accounts receivable. One customer accounted for 15%, 12%, and 15% of sales for fiscal years 1999, 1998 and 1997, respectively. NOTE C -- INVENTORIES As of July 3, 1999 and June 27, 1998, cost for certain inventories at Delta Apparel and Duck Head Apparel is determined under the LIFO method representing 41% and 44%, respectively, of the cost of consolidated inventories. The balance of the cost of consolidated inventories is determined under the FIFO method. If these inventories had been determined by the FIFO method, they would have been approximately the same as the reported amounts. NOTE D -- LONG-TERM DEBT, CREDIT ARRANGEMENTS AND NOTES PAYABLE
Long-term debt consists of: July 3, 1999 June 27, 1998 ------------ ------------ Senior notes (9.625%), with interest payable semiannually $150,000,000 $150,000,000 Revolving Credit Facility (6.93% at July 3, 1999), with interest payable monthly or semiannually....... 26,635,000 Industrial Revenue Bond payable monthly, through 2001 at 80% of a bank's base rate...................... 339,000 578,000 Note to a bank payable monthly with interest at prime Plus 1% 6,415,000 6,712,000 Other............................................. 114,000 220,000 ------------ ------------ 156,868,000 184,145,000 Less current portion.............................. 6,710,000 610,000 ------------ ------------ $150,158,000 $183,535,000 ============ ============
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., "DMI" issued $150 million of unsecured ten-year senior notes, and obtained a secured five-year $100 million revolving line of credit. The $100 million revolving line of credit is backed by certain accounts receivable and inventory of DMI with a carrying value of $129 million at July 3, 1999. In May 1998, the Company obtained a short-term $30 million revolving credit facility (subject to borrowing base limitations) which is due in December of 1999. This credit facility is backed by certain accounts receivable and inventory of Delta Apparel and Duck Head Apparel with a carrying value of $79 million at July 3, 1999. This credit facility carries an interest rate that is two percentage points above the London Interbank Borrowing Rate. Loan covenants in the senior notes and the DMI revolving credit facility limit the Company's ability to use cash generated by DMI to fund operations in the rest of the Company. On July 3, 1999 approximately $99 million was available under the DMI revolving credit agreement, and approximately $25 million was available under the separate short-term $30 million line of credit. The credit facilities and the senior notes also contain other restrictive covenants which include required minimum tangible net worth and certain other required minimum financial ratios. The agreements also restrict additional indebtedness, dividends and capital expenditures. At July 3, 1999, the net assets of the Company include net assets of the wholly owned subsidiary DMI of approximately $50 million which are subject to the restrictions described above. Total interest expense incurred by the Company was $19,929,000, $23,395,000 and $23,656,000 in fiscal years 1999, 1998 and 1997, respectively, of which $302,000 was capitalized in fiscal year 1997. Total interest paid during fiscal years 1999, 1998 and 1997 was $18,021,000, $ 21,568,000, and $17,546,000, respectively. During fiscal year 1997, the Company acquired certain machinery and equipment under non-cancelable operating leases in connection with the modernization project in the woven fabrics division. The terms provide for total lease payments of $14 million over a period of five years. Rent expense relating to all operating leases of the Company was approximately $6,820,000, $7,471,000, $7,179,000 for fiscal 1999, 1998 and 1997, respectively. The carrying value of the Company's revolving credit agreements approximate fair value since the rates are tied to floating rates. At July 3, 1999 the carrying value of the senior notes was $150,000,000 and the fair value, based on quoted market prices was $142,500,000. Aggregate principal maturities of all long-term debt and minimum payments under operating leases are as follows:
Long-term Operating Fiscal Year Debt Leases 2000...... $ 6,710,000 $ 6,092,000 2001...... 144,000 4,839,000 2002...... 14,000 2,995,000 2003...... 722,000 Later year 150,000,000 754,000 ------------ ----------- $156,868,000 $15,402,000 ============ ===========
NOTE E -- SHAREHOLDERS' EQUITY The Stock Option Plan was approved by the shareholders in fiscal 1991, and amended in fiscal 1996 and fiscal 1998. The Plan gives the Company the right to grant options for up to 800,000 shares of Common Stock to employees. Prior to the fiscal 1996 and 1998 amendments, the Company could grant options for up to 300,000 and 600,000 shares, respectively. Transactions under the Stock Option Plan are as follows:
Prices Outstanding Exercisable June 29, 1996 3.06-9.94 327,300 41,875 Granted 2.50-3.56 49,000 Became exercisable 3.38-7.68 25,750 Exercised 3.38-5.88 (4,669) (4,669) Canceled 3.38-9.94 (30,125) (12,000) ----------- ------------- ---------- June 28, 1997 2.50-7.68 341,506 50,956 Granted 2.22-3.38 148,000 Became exercisable 2.50-5.88 128,340 Exercised 2.50-3.38 (11,375) (11,375) Canceled 3.06-7.68 (20,750) (16,625) ----------- ------------- ---------- June 27, 1998 2.22-5.88 457,381 151,296 Granted 2.47-2.50 55,500 Became exercisable 2.44-5.88 117,604 Exercised 2.91-5.88 (56,751) (56,751) Canceled 2.22-5.13 (38,187) (250) ----------- ------------- ---------- July 3, 1999 2.44-5.88 417,943 211,899 =========== ============= ==========
The weighted average exercise price for all options outstanding was $3.20 per share at July 3, 1999. These options expire on various dates beginning August 1999 and ending in August 2003. The options generally become exercisable in equal amounts on the first through fourth anniversaries of the date of grant and remain exercisable until the fifth anniversary of the date of grant. The excess of the fair market value of the stock over the exercise price at the date of grant is recognized as compensation expense over the period during which the options become exercisable. Related compensation expense was $308,000,$223,000, and $223,000 during fiscal 1999, 1998 and 1997, respectively. Options available for grant at July 3, 1999, June 27, 1998 and June 28, 1997 and were 127,887, 221,700, and 72,450, respectively. The Incentive Stock Award Plan was approved by the shareholders in fiscal 1991, and amended in fiscal 1996 and fiscal 1998. The Plan gives the Company the right to grant awards for up to 1,100,000 shares of Common Stock to employees. Prior to the fiscal 1996 and 1998 amendments, the Company could grant awards for up to 300,000 and 800,000 shares, respectively. Under the Incentive Stock Award Plan awards are granted for the right to purchase shares for $.01 per share. Awards were granted to purchase up to 2,950, 36,791, and 282,481 during fiscal 1999, 1998 and 1997, respectively. During fiscal 1999, rights to purchase 24,833 shares were cancelled. Generally, each award vests based in part on service and in part on achievement of certain performance goals over a three-year period. Compensation expense for the service portion is based on the market price of the stock on the date of award. Compensation expense for the performance portion is based on the prevailing market price of the stock. Tax benefits arising from the difference in market value between the date of grant and the date of issuance of Common Stock are recorded as an adjustment to additional paid-in capital. Compensation expense for the Company's incentive stock award plan including related tax assistance was $977,000, $775,000 and $612,000 for the fiscal years 1999, 1998 and 1997, respectively. Shares available for grant at July 3, 1999 were 180,002. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." If compensation cost for the Company's two stock plans, described above, had been determined based on the provisions of SFAS No. 123, net income would have been approximately the same as that reported by the Company. On September 15, 1998, the Company announced a plan to repurchase, from time to time, up to 2.5 million shares of the Company's outstanding stock at prices and at times in the discretion of the Company's top management. Through July 3, 1999, the Company had purchased for retirement approximately one million shares of its common stock at a total cost of about $4.5 million. The shareholders have authorized the Board of Directors to issue up to 10 million shares of preferred stock with a maximum aggregate par value of $250 million, and to establish the particular terms including dividend rates, conversion prices, voting rights, redemption prices and similar matters. No shares of preferred stock have been issued. NOTE F -- INCOME TAXES For fiscal 1999, the Company had a regular tax loss of $11 million and an alternative minimum tax (AMT) tax loss of $12 million. At July 3, 1999, the Company had regular tax loss carry-forwards of $66 million for federal purposes and $157 million for state purposes. Of the federal loss carry-forward, $9.2 million resulted from the 1988 acquisition of Stanwood Corporation and will expire in years 2002 and 2003. The Company's gross deferred tax assets are reduced by a valuation allowance to net deferred tax assets considered by management to be more likely than not realizable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The valuation allowance increased $8,744,000 during fiscal 1999. Significant components of the Company's deferred tax assets and liabilities are as follows:
1999 1998 ------------ ------------ Assets Net operating loss Carry-forward.................$32,223,000 $26,478,000 Inventory....................... 6,625,000 3,907,000 Restructuring reserves.......... 676,000 5,491,000 Tax credit carry-forward........ 3,738,000 3,738,000 Deferred compensation........... 3,027,000 3,009,000 Health claims................... 2,521,000 2,388,000 Accrued bonuses & vacation...... 533,000 535,000 Stock compensation accruals..... 802,000 743,000 Workers' compensation........... 239,000 293,000 Other........................... 2,248,000 1,338,000 ------------ ------------ Deferred tax assets 52,632,000 47,920,000 Valuation allowance.............(34,640,000) (25,896,000) Net deferred tax assets......... 17,992,000 22,024,000 Liabilities Depreciation.................... 17,616,000 20,041,000 Inventory -- LIFO basis difference......... 2,109,000 2,855,000 Intangibles..................... 0 857,000 Accounts receivable write-down.. 329,000 1,017,000 Other........................... 47,000 109,000 ------------ ------------ Deferred tax liabilities........ 20,101,000 24,879,000 ------------ ------------ Net deferred tax liabilities........... $2,109,000 $ 2,855,000 ============ ============
Significant components of the provision for income taxes are as follows:
1999 1998 1997 ----------- ------------ ------------ Current: Federal income taxes.......... $265,000 $ 120,000 $560,000 State income taxes............ 1,735,000 470,000 2,240,000 ----------- ------------ ------------ Total current............... 2,000,000 590,000 2,800,000 Deferred: Federal income taxes 730,000 253,000 5,550,000 State income taxes (benefits). (1,905,000) 41,000 906,000 ----------- ------------ ------------ Total deferred.............. (1,175,000) 294,000 6,456,000 Total provision for continuing operations................. $825,000 $884,000 $ 9,256,000 ----------- ------------ ------------ The total provision for income taxes related to: Discontinued Operations ($460,000) ($1,557,000) ($7,286,000) ----------- ------------ ------------ Total provision for income taxes $365,000 ($673,000) $ 1,970,000 =========== ============ ============
The reconciliation of income tax expense (benefit) computed at the Federal statutory tax rates for continuing and discontinued operations is as follows:
1999 1998 1997 ------------ ------------- ------------- Income tax expense (benefit) at statutory rates................ (13,664,000) ($15,574,000) $3,276,000 State taxes, net of federal benefit......................... 374,000 189,000 655,000 Amortization of excess of cost over assigned value of net assets acquired 5,900,000 2,799,000 291,000 Foreign subsidiary loss 358,000 175,000 341,000 Valuation allowance adjustments. 8,744,000 11,983,000 (1,268,000) Other........................... (1,347,000) (245,000) (1,325,000) ------------ ------------- ------------- $ 365,000 ($673,000) $1,970,000 ============ ============= =============
The Company made no estimated income tax payments for fiscal 1999, 1998 or 1997. The carry-back of net operating losses for fiscal 1997 resulted in a tax refund of $2.2 million in fiscal 1998. A tax refund of $600 thousand was received in fiscal 1999 as a result of a federal examination of previous tax years. NOTE G -- OPERATIONS BY INDUSTRY SEGMENT Industry segment information for the Company presented on page 8 of this Annual Report is an integral part of these financial statements. NOTE H -- DISCONTINUED OPERATIONS AND RESTRUCTURING AND IMPAIRMENT CHARGES DISCONTINUED OPERATIONS As a result of the history of operating losses at Stevcoknit Fabrics' knitting and knit finishing plants, and at the Nautilus International fitness equipment business, the Company made the decision on March 3, 1998 to close its Stevcoknit Fabrics division and to sell its Nautilus International division (fitness equipment). Accordingly, operating results for those segments have been reclassified and reported as discontinued operations. In connection with the decision to discontinue these businesses, the Company, in fiscal 1998, recognized an estimated loss on disposal of discontinued operations of $37 million including a provision of $8.0 million for losses during the phase-out period and an income tax benefit of $1.2 million. In fiscal 1999, the Company increased the estimate of the after-tax cost to discontinue these businesses and recognized after tax charges of $4.4 million and $3.5 million during the first and second quarters of fiscal year 1999, respectively, and decreased the estimate by $1.6 million in the third quarter of fiscal 1999. In the fourth quarter of fiscal 1999, the company adjusted the estimated tax impact of these disposals, resulting in a $.7 million charge. Proceeds from the liquidation of these divisions have been used to reduce indebtedness and to make capital expenditures. The assets of discontinued businesses at July 3, 1999 and June 27, 1998, are as follows:
July 3, 1999 June 27, 1998 ----------- ----------- Accounts Receivable ...................... $763,000 $19,450,000 Inventory................................... 0 6,104,000 Other current assets........................ 17,000 243,000 ----------- ----------- Total current assets....................... $780,000 $25,797,000 =========== =========== Property, plant and equipment net of accumulated depreciation............... $11,535,000 Other Assets ............................... 322,000 10,788,000 ----------- ----------- Total Non-current Assets 322,000 22,323,000 ----------- ----------- Total Assets.......................... $1,102,000 $48,120,000 =========== ===========
Summarized results of operations for discontinued businesses are as follows:
July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Net Sales $ 11,792,000 $109,452,000 $121,540,000 Costs and expenses net of charges to reserve 11,792,000 119,090,000 136,221,000 ------------ ------------- ------------- (Loss) before income taxes 0 (9,638,000) (14,681,000) Income tax expense (benefit) (313,000) (7,286,000) ------------ ------------- ------------- (Loss) from operation of discontinued businesses $ 0 ($9,325,000) ($7,395,000) ============ ============= =============
RESTRUCTURING AND IMPAIRMENT CHARGES During fiscal 1999, the Company recognized the impairment of the excess of cost over assigned value of net assets acquired in the Duck Head Apparel division by charging pretax income for $12.6 million. The Company also took an impairment charge to write down certain real property in the Delta Apparel division. During fiscal 1998, the Company recognized the impairment of the excess of cost over assigned value of net assets acquired in the Delta Apparel division by charging pretax income for $7.5 million. The Company also took a restructuring charge related to the closure of two sewing plants in Costa Rica and certain retail outlet stores in its Duck Head Apparel division. NOTE I -- EMPLOYEE BENEFIT PLANS On September 27, 1997 the Delta Woodside Industries Employee Retirement Plan merged into the Delta Woodside Employee Savings and Investment Plan (401(k)). Future contributions to the 401(k) plan in lieu of a contribution to the Retirement Plan will be made in cash and not in stock. In the 401(k) plan employees may elect to convert Delta Woodside Industries stock to other funds, but may not increase the amount of stock in their account. Each participant has the right to direct the trustee as to the manner in which shares held are to be voted. The Retirement Plan qualified as an Employee Stock Ownership Plan ("ESOP") under the Internal Revenue Code as a defined contribution plan. Contributions of $328,000 and $400,000 were allocated to participants in fiscal 1998 and fiscal 1997, respectively. During fiscal 1999, 1998 and 1997, the Company contributed $736,000, $615,000 and $648,000, respectively, to the 401(k) plan to match employee contributions. In addition to the matching contributions, the Company also made a discretionary contribution of $434,000 to the 401(k) plan in fiscal 1999. The Company also maintains a 501(c)(9) trust, the Delta Woodside Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer and employee contributions from the Company and makes disbursements for health claims and other qualified benefits. The Company has a Deferred Compensation Plan which permits certain management employees to defer a portion of their compensation. Deferred compensation accounts are credited with interest and are distributable after retirement, disability or employment termination. As of July 3, 1999 and June 27, 1998, the total liability amounted to $7,862,000 and $7,204,000, respectively. The Company insured the lives of certain management employees to assist in funding of the deferred compensation liability. The Company is the owner and beneficiary of the insurance policies. NOTE J -- AFFILIATED PARTY TRANSACTIONS The Company leases its corporate office space from a corporation whose stock is owned one-half each by the president and a vice president of the Company. Additional office space and retail store space is leased from the executive vice president. Under the leases, the Company made payments of approximately $169,000, $248,000 and $254,000 for the 1999, 1998 and 1997 fiscal years, respectively. NOTE K -- COMMITMENTS AND CONTINGENCIES The Company has entered into agreements, and has fixed prices, to purchase cotton for use in its manufacturing operations. At July 3, 1999 minimum payments under these contracts with non-cancelable contract terms were $42 million. During fiscal 2000, the Company plans to spend approximately $12 million for capital improvements and to maintain its existing facilities. The Company's previously owned Nautilus business has been named as a "potentially responsible party" ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") with respect to three hazardous waste sites in North Carolina, South Carolina and Mississippi. To the Company's knowledge, all of the transactions with these sites were conducted by a corporation (the "Selling Corporation") whose assets were sold in 1990 pursuant to the terms of an order of the United States Bankruptcy Court to another corporation, the stock of which was subsequently acquired by the Company in January 1993. At the North Carolina site, the Selling Corporations is listed as a "de Minimis" party, and at the South Carolina site, the Selling Corporation has been listed as an "insolvent" party and would appear to qualify as a "de Minimis" party. The Company believes that the Selling Corporation's share of the liabilities at either of these sites will be immaterial. At the Mississippi site, the PRP group has completed the surface removal action and is investigating soil and groundwater contamination, both at the site and in the surrounding area. The Company's latest information is that the Selling Corporation is ranked eleventh out of a total of over 300 PRPs in contributions of material to the site, and, based on volume, the Selling Corporation contributed approximately 3% of the site's material. To the Company's knowledge, latest estimates of costs to clean up the site range up to $4 million. Trichlomethane, one of the substances delivered by the Selling Corporation to the site, has been found in the site's groundwater and at nearby residential drinking water wells. Although no assurance can be provided, the Company believes that it is shielded from liability at these three sites by the order of the United States Bankruptcy Court pursuant to which the Selling Corporation sold its assets to the corporation subsequently acquired by the Company. The Company has denied any responsibility at these three sites, has declined to participate as a member of the respective PRP groups, and has not provided for any reserves for costs or liabilities attributable to the Selling Corporation. Two of Delta Mills Marketing Company's South Carolina plants, the Delta 2 and 3 finishing plants, have been unable to comply with certain toxicity and other permit-related limits contained in a National Pollutant Discharge Elimination System ("NPDES") permit held by the Company. Additionally, high nitrate levels have been observed at the spray field for these plants. To attempt to achieve compliance with the non-toxicity NPDES permit limits, the Company completed certain upgrades in October 1998 at a cost of approximately $2.3 million. Since then, the Company has had two non-toxicity permit violations resulting in the payment of a de minimis penalty. The Company believes that it will be able to comply with the non-toxicity permit limits. The Company is working with the appropriate state agency to address the toxicity and nitrate issues. Although there is no assurance that the Company will be successful, and it could face additional administrative penalties if it is not, the Company does not currently believe these matters will have a material adverse impact on the Company. The Company is currently assessing groundwater contamination at its discontinued Greensboro, North Carolina plant. The Company believes, however, that the source of the contamination was removed several years ago by the prior owner and the Company currently has no plans to remediate any groundwater contamination. Although no assurance can be provided, the Company does not currently believe that this matter will have a material adverse impact on the Company. From time to time the Company and its subsidiaries are defendants in legal actions involving claims arising in the normal course of business, including product liability claims. The Company believes that, as a result of legal defenses, insurance arrangements and indemnification provisions with parties believed to be financially capable, none of these actions should have a material effect on its operations or financial condition. NOTE L -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the years ended July 3, 1999 and June 27, 1998.
1999 Quarter Ended September 26 December 26 March 27 July 3 (In thousands, except per share data) Net sales.................... $ 130,622 $ 113,760 $109,507 $ 139,138 Gross profit.................. 28,351 19,998 15,329 8,586 Income (loss) from continuing operations 8,049 629 (4,329) (36,838) Net income (loss)............. 3,655 (2,840) (2,711) (37,499) Earnings (loss) from continuing operations per share of Common Stock.. 0.33 0.03 (0.18) (1.55) Earnings (loss) per share of Common Stock... 0.15 (0.12) (0.11) (1.58) 1998 Quarter Ended September 27 December 27 March 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 (loss) from continuing operations 3,418 1,701 (4,273) 1,770 Net income (loss)............ 666 (570) (45,617) 1,770 Earnings (loss) from continuing operations per share of Common Stock.. 0.14 0.07 (0.17) 0.07 Earnings (loss) per share of Common Stock... 0.03 (0.02) (1.86) 0.07
During the fourth quarter of fiscal 1999, the Company recognized impairment of the excess of cost over assigned value of net assets acquired in the Duck Head Apparel division and of certain real property in the Delta Apparel Division, resulting in pretax charges totaling $14 million. In the same quarter, the Duck Head Apparel division also took pretax charges of $14.7 million resulting from reducing the estimated useful lives of certain categories of assets to more closely reflect current industry standards, increasing inventory reserves due to poor sales levels, writing off store fixtures at former customers' premises, and reducing production capacity to more closely match reduced sales levels. Also in the fourth quarter, the Delta Apparel division took pretax charges of $3.1 million to increase reserves on certain discontinued and slow moving inventory categories, and to increase accounts receivable reserves. During the third quarter of fiscal 1999, the Company recorded a $2.6 million pre-tax charge to adjust the carrying value of certain plant assets. The quarterly impact of discontinued operations is discussed in Note H above. During the fourth quarter of fiscal 1998, the Company made certain adjustments resulting from changes in estimates of inventory losses that were material to the results of operations. These changes resulted in a reduction in net income of $1.7 million for the fourth quarter of fiscal 1998. During the third quarter of fiscal 1998, the Company recognized restructuring and impairment charges of $37 million in connection with discontinued operations described in Note H. In addition, the Company recognized impairment of cost over assigned value of net assets in the Delta Apparel division by charging pre-tax income for $7.5 million. In the same quarter, the Company also recognized pre-tax restructuring charges of $1.6 million primarily related to closure of certain facilities at Duck Head Apparel. 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 BOARD OF DIRECTORS * C. C. GUY** Retired businessman WILLIAM F. GARRETT President Delta Mills Marketing Company * DR. JAMES F. KANE** Dean Emeritus, College of Business University of South Carolina * DR. MAX LENNON** President Mars Hill College E. ERWIN MADDREY, II President and Chief Executive Officer Delta Woodside Industries, Inc. BUCK A. MICKEL** Vice President and Director Micco Corporation (Real estate and business investments) BETTIS C. RAINSFORD President The Rainsford Development Corporation (General business development activities) * Member Audit Committee ** Member Compensation Committee CORPORATE OFFICERS E. ERWIN MADDREY, II President and Chief Executive Officer JANE H. GREER Vice President and Secretary ROBERT W. HUMPHREYS Vice President and Assistant Secretary BRENDA L. JONES Assistant Secretary FORM 10-K Upon written request, the Company will furnish without charge to any Delta Woodside Shareholder a copy of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1999 including financial statements and schedules, but excluding exhibits. Requests should be directed to: Jane H. Greer, Vice President and Secretary, Delta Woodside Industries, Inc., 233 North Main Street, Suite 200, Greenville, South Carolina 29601. ANNUAL MEETING The Annual Meeting of Shareholders of Delta Woodside Industries, Inc. will be held on Thursday, November 4, 1999, at 10:30 a.m., at the Hyatt Regency Hotel, 220 North Main Street, Greenville, South Carolina. DELTA WOODSIDE INDUSTRIES, INC. 233 N. Main Street Suite 200 Greenville, SC 29601 (864) 232-8301 EX-21 7
SUBSIDIARIES OF REGISTRANT Jurisdiction % Of Names Under of Stock Owned Other 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, Inc. SC 100% owned by Duck Head Outlet Stores Alchem Capital Corporation Duck Head Clearance Stores Duck Head Apparel TN 100% owned by Duck Head Apparel Company Company, Inc. Alchem Capital Delta Apparel Corporation Delta Consolidated NY 100% owned by Delta Apparel Marketing Corporation Alchem Capital Corporation Duck Head Marketing. Cargud, Sociedad Costa Rica 100% owned by Anonima Duck Head Apparel Company, Inc. Armonia Textil, S.A. Costa Rica 100% owned by Cargud, Sociedad Anonima Delta Apparel Honduras, Honduras 96% owned by Duck Head S. A. Apparel Company, Inc., and 1% each owned by Alchem Capital Corporation, Delta Woodside Industries, Inc., Delta Consolidated Corporation and Cargud, S.A. Nautilus VA 100% owned by International, Inc. Alchem Capital Corporation International Apparel NY 100% owned by Alchem Marketing Corporation. Capital Corporation Delta Mills Marketing, Inc. DE 100% owned by Delta Mills Sales Co. Delta Mills, Inc. Stevcoknit Marketing Co.
EX-23.1 8 REPORT ON SCHEDULES ------------------- The Board of Directors Delta Woodside Industries, Inc. Under date of August 13, 1999, we reported on the consolidated balance sheets of Delta Woodside Industries, Inc. as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended July 3, 1999, as contained in the 1999 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 schedules for each of the years in the three-year period ended July 3, 1999, as listed on in Item 14(d) of Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ KPMG LLP --------------- Greenville, South Carolina KPMG LLP August 13, 1999 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 13, 1999, relating to the consolidated balance sheets of Delta Woodside Industries, Inc. as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended July 3, 1999, and related schedules, which reports are incorporated by reference or appear in the 1999 annual report on Form 10-K of Delta Woodside Industries, Inc. /s/ KPMG LLP --------------- Greenville, South Carolina KPMG LLP September 29, 1999 EX-27 9
5 This schedule contains summary financial information extracted from the registrants consolidated financial statements for the fiscal year ended July 3, 1999 and is qualified in its entirety by reference to such financial statements. 1000 YEAR JUL-03-1999 JUN-28-1998 JUL-03-1999 14066 0 104966 6959 96123 213108 273892 129976 365203 68908 150158 0 0 238 133742 365203 493027 493027 420763 420763 1295 0 19929 (31664) 825 (32489) (6906) 0 0 (39395) (1.63) (1.63)
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