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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 3, 1998
Commission File No. 1-11126
DYERSBURG CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
TENNESSEE 62-1363247
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1315 PHILLIPS ST., DYERSBURG, TENNESSEE 38024
(Address of Principal Executive Offices) (Zip Code)
(901) 285-2323
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, Par Value $.01/Share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
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. [ ]
As of December 11, 1998, 13,341,066 shares of common stock were outstanding. The
aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $29,560,000 based on the closing price of such
stock on the New York Stock Exchange (NYSE) on December 11, 1998, assuming, for
purposes of this report, that all executive officers and directors of the
registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Part III
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on January 27, 1999, are incorporated by reference into
Items 10, 11, 12 and 13.
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DYERSBURG CORPORATION
FORM 10-K REPORT
TABLE OF CONTENTS
PART I............................................................................4
ITEM 1 . BUSINESS........................................................4
General.........................................................4
Products .......................................................4
Manufacturing/Seasonality.......................................6
Sales and Marketing.............................................7
Inventory Management............................................7
Research and Development........................................7
Raw Materials...................................................8
Competition.....................................................8
Governmental Regulation.........................................8
Employees.......................................................9
Forward-Looking Statements/Risk Factors.........................9
Executive Officers of the Registrant...........................10
ITEM 2. PROPERTIES.....................................................11
ITEM 3. LEGAL PROCEEDINGS..............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............12
PART II..........................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................13
Market Information.............................................13
Holders .......................................................13
Dividends......................................................13
ITEM 6. SELECTED FINANCIAL DATA........................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........15
Results of Operations..........................................15
Liquidity and Capital Resources................................17
Seasonality....................................................17
Inflation......................................................18
Year 2000......................................................18
Risk Management................................................18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................39
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PART III ........................................................................39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............39
ITEM 11. EXECUTIVE COMPENSATION.........................................39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................39
PART IV..........................................................................39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K...........................................39
SIGNATURES.......................................................................40
INDEX TO EXHIBITS................................................................41
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PART I
ITEM 1. BUSINESS
GENERAL
Dyersburg Corporation (the "Company") is a leading manufacturer of knit
fleece, jersey and stretch fabrics sold principally to domestic apparel
producers. The Company's fleece fabrics are used to produce (i) outerwear
apparel suitable for outdoor recreational activities, as well as casual
sportswear; (ii) children's and women's sportswear, including sweatshirts and
sweatpants; (iii) infant blanket sleepers and (iv) blankets and throws. The
Company's jersey fabrics are used to produce a broad range of women's and
children's lightweight apparel, including tops and shorts. The Company's stretch
fabrics are used to produce a variety of activewear, including dancewear,
swimwear, biking and running garments, recreational and casual sportswear and
intimate apparel. The Company's manufacturing operations are vertically
integrated, beginning with the conversion of fiber into yarn and knitting,
dyeing and finishing the fabric in a wide range of styles and colors. The
Company's fabrics are used in apparel marketed by leading brands such as Calvin
Klein, Columbia, Health-Tex, Liz Claiborne, Osh Kosh B'Gosh, Patagonia, Polo,
Tommy Hilfiger and William Carter; and sold to catalog merchants and specialty
stores such as L.L. Bean and Eddie Bauer, department stores and national chains.
The Company was formed in 1929 and, through the early 1990s, marketed
its fabrics to apparel manufacturers that supplied children's and women's
apparel. In 1992, the Company began implementing a strategy of broadening its
line of higher margin, value-added knit fabrics, including outerwear fleece and
stretch fabrics, and targeting manufacturers of brand name apparel, catalog
merchants, specialty stores, department stores and national chains. To support
this shift in strategy, over the past several years the Company has upgraded its
manufacturing operations and has increased its investment in marketing, research
and development and customer service capabilities.
On August 27, 1997, the Company acquired AIH Inc. ("Alamac"), then a
subsidiary of WestPoint Stevens Inc. ("WestPoint Stevens") (the "Acquisition").
Formed in 1946, Alamac is a leading manufacturer of interlock, jersey, pique and
other knit fabrics sold primarily to domestic apparel producers. Alamac's
interlock fabrics are used to produce men's, women's and children's turtlenecks
and women's sportswear. Alamac's pique fabrics are used to produce a variety of
casual wear, including golf and polo shirts. Similar to the Company's other
manufacturing operations, Alamac's manufacturing operations are vertically
integrated.
The Company has integrated Alamac's sales and marketing personnel and
other resources with the Company's existing operations to establish coordinated
product development, marketing and customer service across its product lines for
its combined customer base. The Company has consolidated certain general and
administrative activities, where appropriate, to eliminate redundancies and
exploit economies of scale.
PRODUCTS
The Company's products are divided into six principal categories:
fleece, interlock, jersey, pique, rib and stretch.
Fleece. The principal uses of the Company's fleece fabrics are in
manufacturing outerwear, children's and women's activewear and infant blanket
sleepers. The Company's fleece fabrics are made of acrylic, polyester, cotton or
blends of these fibers. The fabric is dyed and undergoes a series of finishing
and abrading processes by which a surface is brushed or "napped" to give the
fabric the "hand" or feel associated with fleece.
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Outerwear Fleece. In 1992, the Company introduced a new line of
outerwear fleece designed for use in recreational and casual sportswear apparel
products. In 1993, this product line was complemented by the introduction of
Dyersburg E.C.O.(TM), outerwear fleece made of yarn using fibers from recycled
plastics. The Company's variety of outerwear fleece fabrics has grown
significantly, with new fabric weights, blends, fiber configurations and
finishes that promote functionality. The Company's outerwear fleece products are
engineered for water repellency, wickability, moisture vapor transport and
warmth. The Company's branded outerwear fleece products have grown to include
Kinderfleece targeted to children's outerwear, Citifleece targeted to adult
outwear, Dyersburg E.C.O. Lite, a lighter weight E.C.O. product, and
Triplex(TM), a new triple microdenier/Lycra(R) product line. Garments
manufactured from these products are primarily sold to catalog merchants and
specialty retailers.
Other Fleece Products. Fleece fabrics sold to the children's activewear
market, principally sweatshirts and sweatpants, are made of 100% acrylic fibers
or polyester/cotton blends. Acrylic's low cost, ability to be dyed brighter
colors and low shrinkage are of particular importance to the children's
activewear market. Fleece fabrics sold to manufacturers of women's activewear
are primarily made either of 50% polyester/50% cotton blends or polyester/cotton
blends with a higher cotton content. In recent years, there has been increased
use in activewear apparel of polyester/cotton blends, which management believes
is attributable to increased consumer demand for natural fibers, as well as the
greater receptivity of these fabrics to printing compared to 100% acrylic
fabrics. Polyester/cotton blends are also typically softer and less likely to
"pill" than 100% synthetics, while still offering less fabric shrinkage than
100% cotton products.
The Company's remaining major fleece fabric product categories are
fabrics used to manufacture infant blanket sleepers and for home furnishings.
The demand for infant blanket sleepers is primarily attributable to its fire
retardant characteristics. The Company's Maison Fleece(TM) brand blankets and
throws are made from the Company's outerwear fleece fabrics for sale to the
growing home furnishings market.
Interlock. Interlock is made from 100% cotton ring spun and
cotton/polyester blends. Interlock is used primarily in men's, women's and
children's turtlenecks and women's sportswear. Interlock is considered one of
the leading base fabrications for domestic knit fabric production. The Company
believes that the recent addition of this product line resulting from the
Acquisition will present significant cross-selling opportunities.
Jersey. The Company markets a line of jersey fabrics for use in a broad
range of women's and children's lightweight apparel, principally tops, T-shirts
and shorts. Jersey is a flat-knit fabric, which is typically made from a
polyester/cotton blend or from 100% cotton fibers and, unlike fleece, is not
surface-finished. Jersey fabrics are also generally lighter in weight than
fleece. The Company produces jersey fabric in tubular and open width form.
Pique. Pique is a textured knit and is the predominant fabric used in
men's golf shirts. Fabric for knit collars and cuffs manufactured by the Company
is the other significant ingredient necessary to participate in the golfwear
category.
Rib. Rib is a stretch fabric, used primarily in tops. The stretch
results from the fabric construction, rather than the use of spandex. Rib
continues to be an important fashion fabric for branded and mass merchant
womenswear, and another important addition to the Company's product offerings as
a result of the Acquisition.
Stretch. Stretch fabrics consist of custom formulations of cotton,
spandex, nylon and other synthetic yarns designed for comfort, performance and
styling. To produce a variety of shades and patterns, stretch fabrics may be
knit from dyed yarns, dyed as cloth, sold to independent printers for printing
or garment-dyed by the customer. These fabrics are used in a variety of fashion
and activewear products, including dancewear, swimwear, biking and running
garments, recreational and casual sportswear and intimate apparel. The majority
of these fabrics are used by leading manufacturers to produce higher-priced
branded sportswear products. A new stretch product, Synsation, was introduced in
late 1996 aimed at the swimwear market.
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MANUFACTURING/SEASONALITY
To support the Company's strategy of broadening its line of value-added
fabrics and to increase its manufacturing efficiencies and reduce manufacturing
costs, the Company has invested significantly in its manufacturing operations.
During 1996, the Company updated its yarn manufacturing facilities resulting in
a reduction in the production of off-quality yarns and a decrease in the labor
component of its manufacturing costs. The Company's dyeing and finishing
operations have also been significantly expanded and redesigned to accommodate
sales of outerwear fleeces and performance cottons. As a result of its plant
modernization program, the Company has improved its ability to produce high
quality, competitively priced fabrics and to be versatile and flexible with
respect to the weight, gauge and composition of its fabrics. The Company's yarn
spinning, knitting, dyeing and finishing equipment can be used with a variety of
fibers and blends to meet shifts in consumer demand.
Knitted fabrics are made almost entirely from yarns containing acrylic,
cotton or polyester fibers or blends of these materials. These fibers are
blended, if required, carded to disentangle locks and straighten individual
fibers and drawn to produce continuous untwisted strands called "slivers." The
slivers are spun, drawn and twisted to produce yarn. The Company produces the
majority of its yarns, but also purchases yarn from a number of vendors. The
Company maintains several sources for branded and non-branded spandex and
synthetic blend yarns. The yarn is subsequently knit into fabric known as
"greige" or undyed fabric. After knitting is completed, the greige fabric is
dyed in computer-controlled, pressurized dyeing machines. Fabric dyeing is the
most time-consuming operation in fleece fabric manufacturing, with dyeing cycles
ranging from four to twelve hours, depending on the fabric and color dyed.
Efficiency and quality controls implemented as part of a plant modernization
program and new equipment have increased the Company's ability to match colors
and reduce energy costs and are expected to reduce the time consumed in the
dyeing process, as well as the overall production time for the Company's
fabrics. The Company is able to dye certain of its yarns, as well as fabric,
which allows it to produce fabrics in an unlimited variety of stripes and
patterns.
The Company finishes fleece fabric surfaces by napping or utilizing
other processes. Fabrics are napped by being fed through machines that fluff one
side of the fabric with rotating wire brushes, and then finished to produce the
distinctive pile and feel of fleece through Company-developed processes that
polish, raise and shear the fibers. Jersey fabric is a smooth, flat-knit fabric
that is dyed but is not surface-finished. The Company also produces pile
finished fleece fabrics, where a special knit construction produces an unusually
long nap. This deep "pile" can be "tumbled" in rotary dryers to create a pilled
or "sherpa" look; embossed, where patterns are cut into the pile; or sheared,
where the fibers are uniformly cut to form a very dense, compact fabric with a
smooth surface. In addition, with a special knit construction, fabrics produced
with any of these finishing techniques can be napped on both sides. The Company
also offers fabrics, both fleece and jersey, that are mechanically compacted to
reduce the wash shrinkage of garments.
The Company has two manufacturing facilities in Dyersburg, Tennessee,
one facility in each of Trenton and Cleveland, Tennessee and one facility in
each of Lumberton, Elizabethtown, Clinton and Hamilton, North Carolina. The
original Dyersburg facility spins 100% synthetic (acrylic or polyester), 60%
cotton/40% polyester and 50% polyester/50% cotton yarns. The Trenton facility
spins 100% cotton yarns as well as cotton/synthetic blends. These yarns are used
along with yarns purchased from outside sources to knit fleece and jersey
fabrics at the Dyersburg knitting facility prior to dyeing and finishing. The
Company's facility in Cleveland, Tennessee uses the Company's yarn as well as
purchased yarn from outside sources to knit, dye and finish stretch and lining
fabrics.
The Clinton facility produces approximately 60% of Alamac's cotton and
polyester yarn needs with the remaining requirements obtained from outside
vendors. All yarn dyeing requirements of Alamac are produced at the
Elizabethtown facility and shipped to the Lumberton and Hamilton facilities
where yarns are knitted into fabrics and finished.
Although the capacity at the Company's facilities varies by product
mix, the Company believes that only modest additional capacity could be added
without additional capital investments in equipment. Management believes that
the Company has the space to accommodate investments in equipment, and equipment
is available for purchase by the Company.
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The Company's sales have historically had a pronounced seasonal pattern
with the majority of its sales occurring during its third and fourth quarters.
See "Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations."
SALES AND MARKETING
The Company maintains sales offices in New York, Charlotte, Seattle,
Atlanta and Los Angeles. The Company employs sales representatives and utilizes
a network of independent sales agents coordinated through its marketing
organization in New York. In addition to calling on the Company's customers, the
Company's sales representatives attempt to create additional demand for the
Company's products by marketing directly to brand name clothing designers and
retailers.
The Company also maintains a resource center at its Elizabethtown
facility, where customers have access to a designer, six fully electronic
knitting machines and color and fabric libraries to facilitate the design and
development of apparel lines.
INVENTORY MANAGEMENT
The Company's customers typically negotiate their purchases from the
Company through informal purchase orders that specify their anticipated fabric
needs over periods as long as five months. The orders are revocable and serve
primarily to outline the customers' intentions over a specified term and permit
the Company to "block out" its production schedule. Although orders are subject
to cancellation by customers at any time before the Company receives color
specifications from the customers, fabric produced for canceled orders can
ordinarily be used to fill other orders. Because these informal purchase orders
are cancelable, the Company has no appreciable long-term backlog.
In order to facilitate its ability to respond quickly to customer
demands and due to the seasonal nature of the Company's business, the Company
puts substantial efforts into the management of its inventory. Based in part
upon the volume of informal customer purchase orders, the Company builds an
inventory of uncolored and basic color fabrics (such as blacks, whites and gray
heathers) during the Company's off-peak season. As customers determine their
precise needs, they provide the Company with firm orders for fabrics with
specific dyeing and finishing requirements. The Company's build-up of inventory,
together with its modern dyeing and distribution facilities, permits the Company
to quickly color, finish and ship fabric during the peak demand season. In
addition, the Company's ability to manage its inventory and to efficiently dye
and distribute its fabrics also enables the Company to produce and ship fabrics
not contained in inventory.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are coordinated
through the Company's marketing department and are directed toward maintaining
and improving the quality of the Company's products and the development of new
value-added products such as Dyersburg E.C.O., Synsation(TM), Kinderfleece(TM),
Citifleece(TM) and Maison Fleece to meet the changing needs of the knit fabric
market. Emphasis is placed on physical characteristics that provide competitive
differentiations between fabrics including "hand" or feel, warmth, fade
resistance and shrinkage reduction. The Company's research and development
activities are also focused on providing innovative stretch fabrics that will
meet the evolving needs of its customers, while developing new products to gain
entry in other markets. The Company was instrumental in developing products from
DuPont Lycra(R) spandex and DuPont Supplex(R) nylon to provide customers with
new types of performance fabrics that exhibit unique properties.
The costs of the Company's research and development activities are not
considered by management to be material to the results of operations or the
financial condition of the Company.
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RAW MATERIALS
The Company uses three primary fibers as raw material for producing
yarn: acrylic, polyester and cotton. Cotton makes up approximately 50%, acrylic
approximately 10%, and polyester approximately 40% of the raw material fiber
used in production. Cotton is an agricultural commodity, while acrylic and
polyester are petroleum based. These items are subject to market price
fluctuations, but supplies are not dependent on any single vendor, and
management believes that sources for materials will be adequate to meet
requirements. The Company purchases yarns from a number of vendors and maintains
several sources for branded and non-branded spandex and synthetic blend yarns.
COMPETITION
The textile industry is extremely competitive and includes numerous
companies, no one of which is dominant in the industry. The Company and its
competitors market their products nationwide, as domestic shipping costs are not
a significant competitive factor. The Company's primary competition comes from
suppliers of knit fabric. The Company also competes with vertically integrated
apparel manufacturers that produce the fabric used in their apparel products and
with foreign manufacturers. The primary competitive factors in the textile
industry are product styling and differentiation, quality, customer service and
price. The importance of these factors is determined by the need of particular
customers and the characteristics of particular products.
GOVERNMENTAL REGULATION
The Company is subject to various federal, state and local
environmental laws and regulations limiting the discharge, storage, handling and
disposal of a variety of substances and wastes used in or resulting from its
operations and potential remediation obligations thereunder, particularly the
Federal Water Pollution Control Act, the Clean Air Act, the Resource
Conservation and Recovery Act (including amendments relating to underground
tanks) and the Comprehensive Environmental Response, Compensation and Liability
Act, commonly referred to as "Superfund" or "CERCLA." The Company has obtained,
and believes it is in compliance in all material respects with, all material
permits required to be issued by federal, state or local law in connection with
the operation of the Company's business as described herein.
The operations of the Company also are governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder which, among other things,
establish cotton dust, formaldehyde, asbestos and noise standards and regulate
the use of hazardous chemicals in the workplace. Alamac uses resins containing
formaldehyde in processing some of its products. Although the Company does not
use asbestos in the manufacture of its products, some of its facilities contain
some structural asbestos that management believes is all properly contained.
Many of the manufacturing facilities owned by the Company have been in
operation for several decades. Historical waste disposal and hazardous substance
releases and storage practices may have resulted in on-site and off-site
remediation liability for which the Company would be responsible. In addition,
certain wastewater treatment facilities and air emission sources may have to be
upgraded to meet more stringent environmental requirements in the future.
Although the Company cannot with certainty assess at this time the impact of
future emission standards or enforcement practices under the foregoing
environmental laws and regulations and, in particular, under the 1990 Clean Air
Act, upon its operations or capital expenditure requirements, the Company
believes that it is currently in compliance in all material respects with
applicable environmental and health and safety laws and regulations. The Company
is aware of certain environmental contamination at the Alamac facilities. The
Company estimates that the cost to remediate such contamination will range from
approximately $1.0 million to $2.0 million. Pursuant to the Stock Purchase
Agreement, WestPoint Stevens has agreed to indemnify the Company for a portion
of such costs. Further reference is made to Note 11 "Contingencies" beginning on
page 37.
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EMPLOYEES
At October 3, 1998, the Company employed approximately 3,160 people in
hourly, salaried, supervisory, management and administrative positions. No labor
union represents any of the Company's employees and the Company believes its
relationship with its employees to be good.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
This Form 10-K contains certain forward-looking statements made in
reliance upon the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, regarding the anticipated financial and operating results of
the Company. The Company undertakes no obligation to update or revise any such
forward-looking statements. The following cautionary statements identifying
important factors that could cause the Company's actual results to differ
materially from those projected in any forward-looking statements made by, or on
behalf of, the Company. These factors, many of which are beyond the Company's
control, include substantial leverage, restrictions imposed by terms of
indebtedness, changes in the cost and availability of raw materials, competition
with other suppliers, the cost and availability of labor, governmental
regulation, governmental trade policies with foreign nations and changes in
demand or product mix.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of October 3, 1998. All officers serve at the
discretion of the Board of Directors.
Name Age Position
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T. Eugene McBride 55 Chief Executive Officer and Chairman
Jerome M. Wiggins 58 President and Chief Operating Officer
Janice L. Whitlock 47 President - Marketing
William S. Shropshire, Jr. 41 Executive Vice President, Chief
Financial Officer, Secretary and Treasurer
Don S. Carswell 51 President - International-Operations
Mark A. Cabral 45 Executive Vice President of Operations
- Alamac
Stephen J. Dauer 57 Sr. Vice President - Sales
Paul L. Hallock 50 Vice President - Finance and Assistant
Secretary - Treasurer
Harry M. Harden 40 Vice President - Human Resources
Hunter Lee Lunsford, III 41 Executive Vice President of Operations
- Dyersburg Fabrics
Jerry W. Miller 47 President - United Knitting
Jerry W. Patton 51 Vice President - Information Services
The following is additional information with respect to the above-named
executive officers.
Mr. McBride joined the Company in September 1988 as Executive Vice
President and was named President and Chief Operating Officer in January 1989.
He was named Chief Executive Officer, in September 1990 and Chairman of the
Board of Directors in July 1995. Prior to joining the Company, Mr. McBride was
Vice President - Operations at Pannill Knitting from 1986 to 1988 and Vice
President - Manufacturing at Buster Brown Apparel from 1980 to 1986.
Mr. Wiggins was elected President and Chief Operating Officer in July
1997 and previously served as President - Operations since January 1996. Mr.
Wiggins became a director of the Company in 1992. He joined the Company in
August 1989 as Vice President and Chief Financial Officer, Treasurer and
Secretary. Prior to joining the Company in 1989, he was Vice President of
Finance and Chief Financial Officer of V.F. Corporation, an apparel
manufacturer.
Ms. Whitlock, President - Marketing since December 1995, joined the
Company in September 1994 as Vice President of Merchandising. Previously, she
was Vice President of Merchandising at Flynt Fabrics and Burlington Industries.
Mr. Shropshire, a certified public accountant, joined the Company as
Executive Vice President, Chief Financial Officer, Secretary and Treasurer in
October 1996. For the previous five years, he was Chief Financial Officer and
Senior Vice President for Charter Bancshares, Inc.
Mr. Carswell, President - International Operations, joined the Company
in July 1998. He joins Dyersburg from Oxford Industries where he worked for over
25 years. Most recently, he was President of the Tommy Hilfiger Golf division,
and previously served as President of Polo For Boys and Senior Vice President of
Planning and Development for the Oxford Shirt Group.
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Mr. Cabral joined Alamac Knit Fabrics in 1970 and was named Executive
Vice President of Operations at Alamac Knit Fabrics on September 1, 1998. His
assignments have included being Plant Manager of the Elizabethtown complex,
General Manager of Manufacturing, and most recently Vice President of
Manufacturing.
Mr. Dauer became the Sr. Vice President - Sales in January 1996 after
joining the Company as Vice President - Marketing in June 1984.
Mr. Hallock joined the Company in April 1977. He was named Assistant
Secretary in October 1978, Assistant Secretary - Treasurer in October 1981, and
Vice President - Finance in March 1987.
Mr. Harden, Vice President of Human Resources for the Corporation since
his appointment on October 1, 1997. He was Director of Human Resources for the
Alamac Division of WestPoint Stevens from 1989 to 1997.
Mr. Lunsford joined the Company in August 1997 as Vice President -
Manufacturing. He was named Executive Vice President of Operations at Dyersburg
Fabrics on April 22, 1998. Prior to joining the Company, Mr. Lunsford served as
Plant Manager from February 1992 until February 1997 and General Manager from
February 1997 until August 1997 at Dan River, a textile manufacturer.
Mr. Miller joined the Company in August 1993 as Director of
Manufacturing and was named Vice President of Manufacturing in May 1994. He was
named President of United Knitting, Inc. ("UKI") in June 1997.
Mr. Patton joined the Company in 1966 in the production area. He was
named MIS Director in May 1990, Vice President - MIS in September 1993 and Vice
President - Administration in January 1996. Mr. Patton was named Vice President
- - Information Services in October 1997.
ITEM 2. PROPERTIES
The Company's business is conducted primarily through facilities
located in Dyersburg, Trenton and Cleveland, Tennessee and Clinton,
Elizabethtown, Hamilton and Lumberton, North Carolina. Each of these facilities
and the property on which they are located are owned by the Company. The Company
leases selling offices in New York, New York; Charlotte, North Carolina;
Seattle, Washington; Atlanta, Georgia and Los Angeles, California. The New York
office contains approximately 13,000 square feet. The remaining offices have
substantially less square footage.
The primary Dyersburg facility was built in 1929 with 275,000 square
feet of floor space. After several expansions, it now contains approximately
888,000 square feet of plant space situated on 30 acres of land. The knitting
facility (completed December 1993) encompasses approximately 155,000 square feet
situated on approximately 30 acres in the Dyersburg Industrial Park. The floor
space is distributed as follows: 684,000 square feet for manufacturing, 273,000
square feet for warehousing and distribution, 28,000 square feet for offices and
60,000 square feet for maintenance shops and boiler space. A new warehouse
facility containing approximately 213,000 square feet was completed in September
1997.
The Trenton facility was built in the 1930s with approximately 94,000
square feet of floor space and has been expanded to approximately 188,000 square
feet. The floor space is distributed as follows: approximately 98,000 square
feet for manufacturing, approximately 61,000 square feet for warehousing,
approximately 24,000 square feet for office space and approximately 5,000 square
feet for maintenance and boiler space.
The Cleveland facility was built in 1986 with approximately 70,000
square feet of floor space followed by a 38,000 square foot expansion in 1991. A
45,000 square foot addition (primarily warehouse, distribution and laboratory
facilities) was completed in December 1994. A new 19,200 square foot expansion
was completed in December 1997.
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The Clinton facility was built in 1965 and contains approximately
367,000 square feet situated on approximately 48 acres of land. The
Elizabethtown facility was built in 1971 and contains approximately 193,000
square feet situated on approximately 148 acres of land. The Hamilton facility
was built in 1961 and contains approximately 383,000 square feet situated on
approximately 106 acres of land. The Lumberton facility was built in 1962 and
contains approximately 414,000 square feet situated on approximately 198 acres
of land.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various routine lawsuits arising out of the
conduct of its business, none of which are expected by the Company to have a
material adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 1998 ended October 3, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded on the New York Stock Exchange
under the symbol "DBG." The range of high and low sales prices of the Common
Stock during each quarter of the last two fiscal years are presented below:
High Low
-------- ---------
1998 First $ 14 $11
Second 12 7 11/16
Third 8 1/4 5 1/16
Fourth 6 3 1/2
1997 First 7 1/4 5 3/8
Second 7 1/2 6 1/2
Third 8 5/8 7
Fourth 13 7/16 8 1/4
HOLDERS
As of December 11, 1998, the Company had approximately 13,341,066
shareholders based on the number of record holders of the Company's Common Stock
and an estimate of the number of individual participants represented by security
position listings.
DIVIDENDS
During each quarter of fiscal 1998 and fiscal 1997, the Company
declared and paid regular quarterly cash dividends of $ .01 per share of Common
Stock.
The documents relating to the Company's debt instruments permit
dividends and certain other payments, including stock repurchases, by the
Company provided that such payments comply with certain restrictions. As of
October 3, 1998, the Company was in compliance with such financial covenants and
management of the Company does not believe that such restrictions are likely to
limit materially the anticipated future payments of dividends on the Common
Stock.
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ITEM 6. SELECTED FINANCIAL DATA
1998 1997(A) 1996 1995 1994(B)
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except ratios, percentages and per share data)
SUMMARY OF OPERATIONS:
Net sales $ 417,525 $ 250,193 $ 195,866 $ 199,413 $ 180,520
Income before income taxes and
extraordinary loss 12,346 21,900 14,254 12,542 (c) 17,844
Income taxes 5,313 8,634 5,854 5,982 7,496
Income before extraordinary loss 7,033 13,266 8,400 6,560 10,348
Extraordinary loss -- (905) (d) -- -- --
Net income 7,033 12,361 8,400 6,560 10,348
PER SHARE OF COMMON STOCK:
Earnings Per Share (diluted)
Income before extraordinary loss $ 0.53 $ 1.01 $ 0.61 $ 0.46 $ 0.73
Extraordinary loss -- (0.07) -- -- --
Net income 0.53 0.94 0.61 0.46 0.73
Cash dividends 0.04 0.04 0.04 0.04 0.04
Stock range:
High 14.00 13.44 6.25 6.63 8.75
Low 3.50 5.38 3.88 4.25 6.38
Book value 8.13 7.61 6.75 6.08 5.65
Weighted average common
shares outstanding (diluted) 13,336 13,210 13,681 14,271 14,175
CAPITAL EXPENDITURES AND DEPRECIATION:
Capital expenditures $ 17,564 $ 14,041 $ 11,778 $ 12,816 $ 14,278
Depreciation 15,721 11,742 9,573 10,001 8,630
STATISTICAL DATA:
Income before extraordinary item to average
shareholders' equity 6.72% 14.05% 9.76% 7.90% 14.40%
Inventory turnover (e) 5.81 5.69 (f) 5.20 5.96 5.74
Accounts receivable turnover (g) 5.79 5.75 (f) 5.63 5.53 5.68
Interest coverage (h) 1.55 3.93 3.31 3.03 4.58
Current ratio 3.01 2.69 4.37 3.79 3.65
SELECTED BALANCE SHEET DATA:
Working capital $ 84,577 $ 80,514 $ 52,083 $ 45,227 $ 47,219
Total assets 363,134 366,814 195,007 188,872 194,192
Long-term obligations, excluding
current portion 198,900 203,450 80,950 76,800 87,276
Shareholders' equity 108,371 101,104 88,742 86,258 80,266
(a) Fifty-three weeks. Includes operations of Alamac effective August 27, 1997.
(b) Includes operations of United Knitting effective January 19, 1994.
(c) Includes a pre-tax write-down of fixed assets of $2,153.
(d) Early extinguishment of debt negotiated with Alamac purchase.
(e) Cost of sales divided by average inventory.
(f) Excludes impact of Alamac.
(g) Net sales divided by average net accounts receivable.
(h) Net income before interest, taxes and extraordinary item divided by the
sum of annual interest and amortization of debt costs.
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15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's fiscal year ends on the Saturday closest to September 30,
which resulted in a fifty-three week fiscal year in 1997 and a fifty-two week
fiscal year in 1998 and 1996. The Company's fiscal 1998 results include the full
year's operations of the following subsidiaries: Dyersburg Fabrics Inc., United
Knitting, Inc., IQUE Inc. and Alamac. The fiscal 1997 results include six weeks
of operations of Alamac, which was acquired as of August 27, 1997. The fiscal
1996 results include operating results from IQUE Inc. effective April 18, 1996.
During fiscal 1998, the domestic circular knit industry was
characterized by accelerating consolidation and a supply/demand imbalance that
adversely affected the Company's results of operations. The Company experienced
weakness in sales and margins in both fleece and jersey fabrics. Competition
from imports increased as global sourcing patterns continued to shift between
the Far East and the West. Unstable, often faltering economies in the Far East
forced many textile and apparel manufacturers in the region to offer products to
U.S. markets at reduced prices. These low prices were made even more attractive
to U.S. retailers by significant and prolonged currency devaluations in several
countries. The duration of these market conditions, evidenced by additional, if
not an excessive, supply of low-priced imports is uncertain. Nonetheless,
management of the Company believes that current conditions will continue, at a
minimum, throughout fiscal 1999. In response to these business conditions,
Dyersburg has broadened its price point offerings, reduced costs, and focused on
providing a continuous flow of value-added and differentiated products to remain
efficient and competitive.
The Company entered fiscal 1998 with many opportunities and challenges
from its recent acquisition of Alamac. Dyersburg has traditionally maintained a
focus on efficiency and profitability. The Company's business plan is to
reposition the Alamac division, which was suffering from a too large, complex
and inefficient product line in addition to an overburdened cost structure.
During 1998, management reduced costs primarily through the elimination of over
400 positions. Complexity was reduced through the elimination of several product
offerings which generated insufficient, if any, profit contributions. After
rationalizing non-profitable product lines and reducing fixed costs, the Company
believes Alamac is now better prepared to meet any potential upturn in its
business with streamlined facilities and a stronger profit potential.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales for this year totaled $417.5 million, up 66.9%
from $250.2 million for fiscal year 1997. The sales totals for 1998 includes
$215.4 million from Alamac. 1997 totals included only six weeks of Alamac sales
of $26.8 million. Without the inclusion of the Alamac sales, sales decreased by
9.5%, or $21.3 million in 1998. The decrease was driven by lower volume of sales
principally in fleece fabrics and to a lessor degree in stretch and jersey
fabrics. Sales in these categories were impacted by an increasing supply of low
priced imports.
Gross Profit. Gross profit for this year totaled $73.6 million, up
28.2% from $57.4 million for fiscal 1997. Included in gross profit was $24.2
million and $3.7 million, for fiscal 1998 and 1997, respectively, from Alamac.
Exclusive of the impact from Alamac, which has historically experienced gross
margins of 10 to 14% of sales, the Company's gross profit margins increased
slightly to 24.5% in 1998 as compared to 24.1% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales for 1998 were 9.3% compared to
11.2% for 1997. These expenses increased to $38.8 million in 1998 from $28.0
million in 1997. Excluding Alamac, these expenses decreased significantly from
$26.3 million in 1997 to $21.6 million in 1998. Lower incentive compensation,
sales bonus and profit sharing expenses as a result of the Company's reduced
profitability, combined with lower bad debt expenses, contributed to these
reduced expenses. Included within these expenses for Alamac was a non-recurring
charge in the third quarter for restructuring charges of $1.3 million. This
restructuring charge reflects severance related expenses associated with
terminated employees.
15
16
Interest and Amortization of Debt Costs. Interest and amortization of
debt costs for 1998 was $22.5 million, compared to $7.5 million in 1997. In
August 1997, in conjunction with the acquisition of Alamac, the Company issued
$125 million in senior subordinated notes due 2007 and entered into a new bank
Credit Agreement. With the issuance of the Subordinated Notes and Credit
Agreement, the interest and amortization of debt costs increased during 1998 as
expected.
Federal and State Income Taxes. Federal and state income taxes of $5.3
million for fiscal year 1998 and $8.6 million for the comparable period in 1997
were higher than the federal statutory rate due to state income taxes and the
non-deductibility of certain goodwill amortization.
Net Income. Net income for 1998 was $7.0 million, or $0.53 per share on
both a basic and diluted basis. Income for fiscal 1997, before an extraordinary
charge, totaled $13.3 million, or $1.01 per share on both a basic and diluted
basis. During the fourth quarter of 1997, the Company recorded an extraordinary
charge of $905,000, or $0.07 per share, related to the early extinguishment of
debt in connection with the acquisition of Alamac.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales for fiscal 1997 totaled $250.2 million, up 28%
from $195.9 million for fiscal year 1996. These totals include six weeks of
Alamac sales of $26.8 million. Without the inclusion of the Alamac sales, sales
increased by 14.0%, or $27.5 million. The increase was primarily driven by sales
of the Company's value-added outerwear fleece fabrics, which increased by
approximately 48%, and sales of infant blanket sleepers, which increased by
approximately 38%. These increases were partially offset by decreased sales of
activewear acrylic and activewear cotton fabrics.
Gross Profit. Gross profit in fiscal 1997 increased to 22.9% of net
sales from 21.9% in the comparable period of the prior year. Exclusive of the
impact from Alamac, which has historically experienced gross margins of 11 to
14%, the Company's gross profit increased to 24.1%. This increase resulted
primarily from the shift in the Company's product mix to higher margin,
value-added fabrics, particularly outerwear fleece fabrics, lower raw material
costs and lower production costs as a result of the Company's plant
modernization program.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales for 1997 were 11.2% compared to
11.5% for 1996. These expenses increased to $28.0 million in 1997 from $22.6
million in 1996. These increases were primarily due to a $2 million increase in
incentive compensation, profit sharing and sales bonus expense resulting from
the Company's increased profitability and a $700,000 increase in bad debt
expense resulting from increased reserves attributable to specific customer
accounts and the addition of Alamac.
Interest and Amortization of Debt Costs. Interest and amortization of
debt costs for 1997 was $7.5 million, compared to $6.2 million in 1996. In
August 1997, in conjunction with the acquisition of Alamac, the Company issued
$125 million in senior subordinated notes due 2007. With the issuance of the new
notes, the interest and amortization of debt costs increased during the last
month of the year by approximately $1.4 million.
Federal and State Income Taxes. Federal and state income taxes of $8.6
million for fiscal year 1997 and $5.9 million for the comparable period in 1996
were higher than the federal statutory rate due to state income taxes and the
non-deductibility of goodwill amortization. The effective tax rate declined to
approximately 39.4% in 1997 from 41.1% in fiscal 1996 due to a reduction in
certain state taxes. The reduction in state taxes is expected to continue into
future periods.
Net Income. Income for fiscal 1997, before an extraordinary charge,
totaled $13.3 million, or $1.01 per share on a diluted basis. During the fourth
quarter, the Company recorded an extraordinary charge of $905,000, or $0.07 per
share, related to the early extinguishment of debt in connection with the
acquisition of Alamac. Net income for fiscal 1996 was $8.4 million, or $0.61 per
share on a diluted basis.
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17
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for working capital,
debt service and capital expenditures. Management believes that cash generated
from operations, together with borrowings available under the Credit Agreement,
will be sufficient to meet the Company's working capital and capital expenditure
needs in the foreseeable future. During fiscal 1998, the Company amended its
Credit Agreement with respect to certain financial covenants in response to the
restructuring of Alamac and the effects of the economic problems in Asia on the
Company's results of operations. Management is continually reviewing its
business plan to determine whether additional modifications to the financial
covenants in its Credit Agreement may be required. The Company believes it will
be able to agree with its lenders on modifications on acceptable terms, if
necessary.
Net cash provided by operating activities for fiscal 1998, 1997 and
1996 was $25.6 million, $19.9 million and $13.6 million, respectively. These
cash flows have been supplemented primarily by borrowings under the Company's
credit facilities. The average balances outstanding and the average interest
rates paid for 1998, 1997 and 1996 were approximately $94.5 million, $46.3
million, and $50.9 million, respectively, and 8.4%, 7.5%, and 7.2%,
respectively. Based on the borrowing base computation within the Credit
Agreement and excluding the impact of additional borrowings on any financial
ratio covenants contained in the Credit Agreement, the amount of additional
borrowing available at October 3, 1998 was $45.2 million. Further reference is
made in Note 6 to the consolidated financial statements.
Working capital at October 3, 1998, was $84.6 million versus $80.5
million at October 4, 1997. The Company's current ratio was 3.0:1 and its
debt-to-capital ratio was 64.7% at October 3, 1998, compared to 2.7:1 and 66.8%
respectively, at October 4, 1997. Both ratios have been impacted by the
acquisition of Alamac.
Net accounts receivable were $71.4 million as of October 3, 1998, $3.1
million higher than October 4, 1997, due primarily to the inclusion of Alamac.
Inventories decreased from $52.2 million at October 4, 1997, to $45.1 million as
of October 3, 1998, due to reduced production related to the lower level of
sales activity in the current period.
Capital expenditures during 1998, 1997 and 1996 were $17.6 million,
$14.0 million and $11.8 million, respectively. Cash outlays for capital spending
are anticipated to approximate $17 million in 1999. The Company believes that
cash flow from operations and the existing revolving credit facility will be
sufficient to meet operating needs and fund the capital spending program.
SEASONALITY
The Company's business has a pronounced seasonal pattern with the
highest level of sales occurring during the third fiscal quarter and the lowest
level occurring during the first fiscal quarter. The following table sets forth
the net sales and percentage of net sales for the Company by fiscal quarter for
the last three fiscal years.
1998 1997(1) 1996
- ----------------------------------------------------------------------------------------------------------
(in thousands)
First Quarter $ 91,931 22.0% $ 38,793 17.4% $ 30,088 15.4%
Second Quarter 109,958 26.3% 51,038 22.8% 42,344 21.6%
Third Quarter 113,533 27.2% 68,383 30.6% 64,142 32.7%
Fourth Quarter 102,103 24.5% 65,135 29.2% 59,292 30.3%
- ----------------------------------------------------------------------------------------------------------
$ 417,525 100.0% $223,349 100.0% $195,866 100.0%
- ----------------------------------------------------------------------------------------------------------
(1) Excludes Alamac sales of $26.8 million in the fourth fiscal quarter of 1997.
17
18
Due to this seasonal pattern of the Company's sales, inventories are
lowest at the end of the fiscal year and gradually increase over the following
six months in anticipation of the peak selling period. Receivables tend to
decline during the first fiscal quarter and are at their lowest point during
December through February. The net result is increased working capital
requirements from January through late in the third quarter.
INFLATION
Similar to other textile and apparel manufacturers, the Company is
dependent on the prices and supplies of certain principal raw materials
including cotton, acrylic and polyester fibers. During 1996, raw material prices
for polyester and acrylic stabilized after significant increases in 1995 and
early 1996, while prices for cotton continued to increase. During 1998 and 1997
prices for both cotton and polyester declined. The long-term impact of
subsequent raw material price fluctuations on the Company's performance is,
however, uncertain. The Company intends to support margins through continued
efforts to improve its product mix and improve product pricing as market
conditions permit.
YEAR 2000
The Company has determined that it will need to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations.
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff. The team's activities are designed to ensure that there
is no adverse effect on the Company's core business operations and that
transactions with customers, suppliers and financial institutions are fully
supported. The Company is well underway with these efforts. The Company's
business application programs are currently compliant or will be made compliant
through the Year 2000 Project. The few remaining non-compliant programs are to
be brought into compliance by the vendors that will supply the programs or
through modifications by internal staff. The majority of the business
applications Year 2000 Project is scheduled to be completed by December 31,
1998, with a few software programs scheduled to be replaced in early 1999. The
Company continues to follow up with critical suppliers and customers concerning
their plans and progress in addressing the Year 2000 problem. The costs of the
Year 2000 Project are not expected to be material to the Company's results of
operations or financial position and are being expensed as incurred. These costs
represent the labor costs of time allocated from existing internal staff. The
costs of the project and the date on which the Company believes it will complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates
and commodity prices. To reduce such risks, the Company selectively uses
financial instruments. All such hedging transactions are authorized and executed
pursuant to clearly defined procedures, which strictly prohibit the use of
financial instruments for trading purposes.
A discussion of the Company's risk management accounting policies is
included in the Notes to the Consolidated Financial Statements.
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19
Interest Rates
At October 3, 1998, the fair value of the Company's total debt was
estimated at $171.5 million using yields obtained through independent pricing
sources for the same or similar types of borrowing arrangements and taking into
consideration the underlying terms of the debt. Such fair value is less than the
carrying value of debt at October 3, 1998 by $34.9 million. Market risk is
estimated as the potential change in fair value resulting from a hypothetical
change in interest rates. Using a yield to maturity analysis and assuming an
increase in interest rates of 10% (from October 3, 1998) the potential decrease
in fair value of total debt would be $5.9 million.
The Company had $73.5 million of variable rate debt outstanding at
October 3, 1998, with interest rate swaps in place to offset the variability of
$35 million of this balance. At this borrowing level, a hypothetical 10% adverse
change in interest rates, considering the effect of the interest rate hedge
agreements, would have approximately a $204,000 unfavorable impact on the
Company's net income and cash flows.
Commodities
The availability and price of cotton, which represents approximately
50% of raw materials, are subject to wide fluctuations due to unpredictable
factors such as weather, plantings, government farm programs and policies, and
changes in global production. To reduce price risk caused by market fluctuations
the Company from time to time will enter into long-term purchase contracts. At
October 3, 1998, the Company had commitments to purchase approximately $20
million of cotton through July 1999 representing approximately 80% of estimated
fiscal 1999 requirements.
The above risk management discussion and the estimated amounts
generated from the sensitivity analyses are forward-looking statements of market
risk assuming certain adverse market conditions occur. Actual results in the
future may differ materially from those projected due to actual developments in
the market.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements set forth below are included beginning on page 22.
Page
Report of Independent Auditors................................................................................21
Consolidated Balance Sheets as of October 3, 1998 and October 4, 1997.........................................22
Consolidated Statements of Income for the years ended October 3, 1998, October 4, 1997 and
September 28, 1996.......................................................................................23
Consolidated Statements of Shareholders' Equity for the years ended October 3, 1998, October 4, 1997
and September 28, 1996...................................................................................24
Consolidated Statements of Cash Flows for the years ended October 3, 1998, October 4, 1997 and
September 28, 1996...................................................................................... 25
Notes to Consolidated Financial Statements....................................................................26
Schedules:
Schedule II - Valuation and Qualifying Accounts............................................................. 38
All other financial statement schedules are omitted as the information is not
required or because the required information is presented in the financial
statements or the notes thereto.
20
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Dyersburg Corporation
We have audited the accompanying consolidated balance sheets of
Dyersburg Corporation as of October 3, 1998 and October 4, 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended October 3, 1998. Our audits also included
the financial statement schedule listed in the index for Item 8. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dyersburg Corporation at October 3, 1998 and October 4, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended October 3, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
November 2, 1998
21
22
Dyersburg Corporation
Consolidated Balance Sheets
OCTOBER 3, OCTOBER 4,
1998 1997
-------- --------
(in thousands, except share data)
ASSETS
Current assets:
Cash ................................................................................. $ 265 $ 948
Accounts receivable, net of allowance for doubtful
accounts of $2,899 in 1998 and $2,075 in 1997 ..................................... 71,359 68,290
Inventories .......................................................................... 45,147 52,222
Deferred income taxes and other ...................................................... 9,845 6,597
-------- --------
Total current assets ..................................................................... 126,616 128,057
Property, plant and equipment, net ....................................................... 136,613 152,523
Goodwill, net ............................................................................ 93,752 78,277
Deferred debt costs and other, net ....................................................... 6,153 7,957
-------- --------
$363,134 $366,814
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................................................... $ 19,833 $ 23,721
Accrued expenses ..................................................................... 14,706 14,758
Income taxes payable ................................................................. -- 1,564
Current portion of long-term obligations ............................................. 7,500 7,500
-------- --------
Total current liabilities ................................................................ 42,039 47,543
Long-term obligations .................................................................... 198,900 203,450
Deferred income taxes .................................................................... 10,242 8,459
Other liabilities ........................................................................ 3,582 6,258
Commitments and contingencies
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued
Common stock, $.01 par value,
authorized 40,000,000 shares;
issued and outstanding shares--
13,337,066 in 1998 and 13,280,032 in 1997 ......................................... 133 133
Additional paid-in capital ........................................................... 42,752 41,985
Retained earnings .................................................................... 65,486 58,986
-------- --------
Total shareholders' equity ............................................................... 108,371 101,104
-------- --------
$363,134 $366,814
======== ========
See accompanying notes.
22
23
Dyersburg Corporation
Consolidated Statements of Income
YEAR ENDED
---------------------------------------------
OCTOBER 3, OCTOBER 4, SEPTEMBER 28,
1998 1997 1996
---------------------------------------------
(in thousands, except per share data)
Net sales .......................................................... $ 417,525 $ 250,193 $195,866
Cost of sales ...................................................... 343,901 192,802 152,884
Selling, general and administrative expenses ....................... 38,788 28,008 22,564
Interest and amortization of debt costs ............................ 22,490 7,483 6,164
--------- --------- --------
405,179 228,293 181,612
--------- --------- --------
Income before income taxes and
extraordinary loss ............................................. 12,346 21,900 14,254
Federal and state income taxes ..................................... 5,313 8,634 5,854
--------- --------- --------
Income before extraordinary loss ................................... 7,033 13,266 8,400
Extraordinary loss, net of tax benefit ............................. -- (905) --
--------- --------- --------
Net income ......................................................... $ 7,033 $ 12,361 $ 8,400
========= ========= ========
Weighted average shares
outstanding:
Basic ......................................................... 13,326 13,155 13,643
Diluted ....................................................... 13,336 13,210 13,681
========= ========= ========
Basic earnings per share:
Income before extraordinary loss ................................ $ .53 $ 1.01 $ .62
Extraordinary loss -- (0.07) --
--------- --------- --------
Net income ...................................................... $ .53 $ 0.94 $ .62
========= ========= ========
Diluted earnings per share:
Income before extraordinary loss ................................ $ .53 $ 1.01 $ .61
Extraordinary loss -- (0.07) --
--------- --------- --------
Net income ...................................................... $ .53 $ 0.94 $ .61
========= ========= ========
See accompanying notes.
23
24
Dyersburg Corporation
Consolidated Statements of Shareholders' Equity
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- -----
(in thousands, except share data)
Balance at September 30, 1995 ................................ $ 142 $ 46,821 $ 39,295 $ 86,258
Net income ............................................... -- -- 8,400 8,400
Cash dividends paid ($.04 per share) ..................... -- -- (545) (545)
Acquisition and retirement of
1,051,275 shares of common stock ....................... (10) (5,404) -- (5,414)
Exercise of 9,555 stock options .......................... 43 -- 43
----- -------- -------- ---------
Balance at September 28, 1996 ................................ 132 41,460 47,150 88,742
Net income ............................................... -- -- 12,361 12,361
Cash dividends paid ($.04 per share) ..................... -- -- (525) (525)
Acquisition and retirement of 27,000
shares of common stock ................................ -- (160) -- (160)
Exercise of 152,525 stock options ........................ 1 685 -- 686
----- -------- -------- ---------
Balance at October 4, 1997 ................................... 133 41,985 58,986 101,104
Net income ............................................... -- 7,033 7,033
Cash dividends paid ($.04 per share) ..................... -- (533) (533)
Stock issued of 1,383 shares and
exercise of 55,651 stock options,
including tax benefit ................................. -- 767 -- 767
----- -------- -------- ---------
Balance at October 3, 1998 ................................... $ 133 $ 42,752 $ 65,486 $ 108,371
===== ======== ======== =========
See accompanying notes.
24
25
Dyersburg Corporation
Consolidated Statements of Cash Flows
YEAR ENDED
---------------------------------------------------
OCTOBER 3, OCTOBER 4, SEPTEMBER 28,
1998 1997 1996
--------- --------- -------------
(in thousands)
OPERATING ACTIVITIES
Net income ......................................................... $ 7,033 $ 12,361 $ 8,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss, net of tax benefit .......................... -- 905 --
Depreciation .................................................... 15,721 11,742 9,573
Amortization .................................................... 3,971 2,136 2,029
Deferred income taxes and other ................................. 1,845 847 554
Changes in operating assets and liabilities:
Accounts receivable ......................................... (3,069) (25,821) (5,507)
Inventories ................................................. 7,075 4,487 (1,010)
Trade accounts payable and other current
liabilities ............................................... (8,108) 13,287 (758)
Other ....................................................... 1,124 (30) 288
--------- --------- --------
Net cash provided by operating activities .......................... 25,592 19,914 13,569
INVESTING ACTIVITIES
Purchases of property, plant and equipment ......................... (17,564) (14,041) (11,778)
Purchase of Alamac Sub Holdings, Inc. .............................. (4,272) (127,679) --
Other .............................................................. 88 -- 187
--------- --------- --------
Net cash used in investing activities .............................. (21,748) (141,720) (11,591)
FINANCING ACTIVITIES
Net (payments) borrowings on long-term
obligations .................................................... (4,550) 128,662 4,150
Deferred financing costs ........................................... -- (6,697) --
Dividends paid ..................................................... (533) (525) (545)
Exercise of stock options including related
tax benefit .................................................... 767 686 43
Acquisition of common stock ........................................ -- (160) (5,414)
Other .............................................................. (211) (195) (203)
--------- --------- --------
Net cash (used in) provided by financing
activities ..................................................... (4,527) 121,771 (1,969)
--------- --------- --------
Net (decrease) increase in cash .................................... (683) (35) 9
Cash at beginning of year .......................................... 948 983 974
--------- --------- --------
Cash at end of year ................................................ $ 265 $ 948 $ 983
========= ========= ========
See accompanying notes.
25
26
Notes To Consolidated Financial Statements
Dyersburg Corporation 1998 Annual Report
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Dyersburg Corporation and its wholly-owned subsidiaries (the Company).
Investments in affiliates in which the Company owns 20 to 50 percent of the
voting stock are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates and assumptions.
OPERATIONS
The Company is a textile manufacturer of knit fabrics with customers
concentrated in the domestic apparel industry. The Company does not require
collateral for accounts receivable. One customer, Garan Incorporated, accounted
for more than 10% (approximately $46.4 million) of the Company's net sales for
the year ended October 3, 1998. No customer accounted for 10% or more of sales
in fiscal 1997 or 1996.
CASH AND CASH EQUIVALENTS
The Company considers cash equivalents to be temporary cash investments
with a maturity of three months or less when purchased.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
computed on the straight-line basis over the estimated useful lives of the
assets: buildings - 25 to 40 years; machinery and equipment - 5 to 15 years.
INTANGIBLE ASSETS
Goodwill, which consists of costs in excess of net assets acquired, is
amortized by the straight-line method over forty years. Deferred debt costs are
amortized by the interest method over the life of the related debt. Goodwill is
net of accumulated amortization of $20,034,000 and $17,100,000 and deferred debt
costs and other is net of accumulated amortization of $1,226,000 and $256,000 at
October 3, 1998 and October 4, 1997, respectively. The carrying value of
goodwill is reviewed if the facts and circumstances suggest that it may be
impaired. If this review indicated that goodwill was not recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the Company's carrying value of the
goodwill would be reduced by the estimated shortfall of discounted cash flows.
INCOME TAXES
The Company provides income taxes under the liability method. Accordingly,
deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes.
26
27
1. ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the market value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees and, accordingly,
has recognized no compensation expense for stock option grants.
EARNINGS PER COMMON SHARE
In the first quarter of 1998, the Company adopted the provisions of
SFAS No.128, Earnings per Share, and accordingly, all prior period earnings per
share data have been restated. Under the provisions of SFAS No. 128, basic
earnings per common share is computed using the weighted average number of
common shares outstanding during each period. Diluted earnings per common share
is computed using the weighted average number of common shares outstanding
during each period, including common stock equivalents, consisting of stock
options calculated using the treasury stock method, when dilutive.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income. The Statement establishes
standards for the reporting and display of comprehensive income and its
components. The Statement requires that all items that are income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The Company does not expect the effect of adoption of
Statement No. 130 to be material to the consolidated financial statements when
adopted effective in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Statement changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. The adoption of
the statement will affect only disclosures provided and will have no impact on
the Company's consolidated balance sheets or results of operations. The Company
will adopt SFAS No. 131 effective October 2, 1999.
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is required to be adopted
in years beginning after June 15, 1999. The Company expects to adopt the new
Statement effective October 3, 1999. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company cannot predict what the effect of adoption
of Statement No. 133 will be on the earnings and financial position of the
Company.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
27
28
2. BUSINESS COMBINATION
In August 1997, the Company acquired all the outstanding common stock
of Alamac Sub Holdings, Inc. (Alamac), a wholly-owned subsidiary of West Point
Stevens, Inc. and a manufacturer of knit fabrics sold primarily to domestic
apparel producers. The acquisition was accounted for using the purchase method
of accounting. The purchase price was $131,973,000. Under its previous financing
arrangements, Alamac sold its accounts receivable and, as a result, the Company
did not acquire Alamac's accounts receivable. Accordingly, the Company financed
approximately $40,000,000 of additional working capital following the closing of
the acquisition. The Company used the net proceeds from the Senior Subordinated
Notes (see Note 6), together with borrowings under the Credit Agreement, to
finance the purchase price and working capital needs, repay amounts outstanding
under the Company's existing credit facility and certain other indebtedness, and
pay related fees and expenses. During 1998, the Company finalized estimation of
the fair market value of certain Alamac fixed assets resulting in a reduction of
$17.5 million in property, plant and equipment, a reduction in pension
liabilities of $3.1 million and additional cash paid to the seller of $4.1
million. The total purchase price has been allocated as follows to the assets
acquired and liabilities assumed (in thousands):
Working capital $ 22,699
Property, plant and equipment 66,589
Goodwill 38,497
Other assets 6,140
Pension obligation (1,952)
---------
$ 131,973
=========
The operating results of Alamac are included in the Company's
consolidated statements of income from August 27, 1997, the acquisition date.
The following unaudited pro forma results of operations assume the Alamac
acquisition and related financing transactions occurred at the beginning of the
period presented. The pro forma results of operations do not purport to
represent what the Company's results would have been had such transactions in
fact occurred at the beginning of the years presented or to project the
Company's results of operations in any future period.
Year ended Year ended
October 4, September 28,
1997 1996
-----------------------------------------------
(in thousands, except per share data)
(unaudited)
Pro forma:
Net sales $ 468,556 $ 417,885
Income before extraordinary loss 14,182 2,944
Net income 13,277 2,944
Earnings per share:
Income before extraordinary loss $ 1.07 $ .22
Net income 1.00 .22
28
29
3. INVENTORIES
Inventories consist of the following:
OCTOBER 3, OCTOBER 4,
1998 1997
-------------------------------------------
(in thousands)
Raw materials $15,071 $ 18,243
Work in process 15,218 14,011
Finished goods 12,039 17,180
Supplies and other 2,819 2,788
------- --------
$45,147 $ 52,222
======= ========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 3, OCTOBER 4,
1998 1997
-------------------------------------------
(in thousands)
Land $ 2,279 $ 2,378
Buildings 63,165 68,884
Machinery and equipment 151,005 145,678
-------- ---------
216,449 216,940
Less: accumulated depreciation 79,836 64,417
-------- ---------
$136,613 $ 152,523
======== =========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
OCTOBER 3, OCTOBER 4,
1998 1997
-------------------------------------------
(in thousands)
Accrued bonuses and commissions $ 746 $ 5,565
Accrued profit sharing 2,426 599
Workers' compensation 2,459 1,957
Other 9,075 6,637
------- --------
$14,706 $ 14,758
======= ========
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6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
OCTOBER 3, OCTOBER 4,
1998 1997
-----------------------------------------
(in thousands)
Senior subordinated notes $ 125,000 $ 125,000
Credit Agreement 73,500 78,050
Industrial revenue bonds 7,900 7,900
---------- ----------
206,400 210,950
Less current portion 7,500 7,500
---------- ----------
$ 198,900 $ 203,450
========== ==========
In August 1997, the Company issued $125,000,000 principal amount of
9.75% Senior Subordinated Notes due September 1, 2007 (the "Subordinated
Notes"). These Subordinated Notes are unsecured senior subordinated obligations
and are subordinated in right of payment to the prior payment in full of all
senior indebtedness, including the indebtedness under the Credit Facility and
the Industrial Revenue Bonds. The proceeds of the Subordinated Notes, together
with borrowings under the Credit Facility, were used to acquire the common stock
of Alamac and retire outstanding Senior Notes (see Note 2).
On August 27, 1997, the Company entered into a Credit Agreement,
replacing its existing credit facility, consisting of a five-year $110,000,000
Revolver and a five-year $50,000,000 Term Loan. Borrowings under the Credit
Agreement bear interest at either LIBOR plus a specified margin between 0.75%
and 2.75%, or at the lender's adjusted base rate, at the Company's option (8.46%
at October 3, 1998 and 8.23% at October 4, 1997). The balance under the Revolver
is limited at all times, through maturity, to a receivables and inventory
borrowing base. The amount available for borrowing at October 3, 1998 was
$45,162,000. Up to $12,000,000 of the amount available under the Revolver may be
used for the issuance of letters of credit. The Term Loan provides for scheduled
quarterly amortization such that $7,500,000 is repaid in each of the first two
years, $10,000,000 during the third year, and $12,500,000 during each of the
fourth and fifth years. Borrowings under the Credit Agreement are secured by
substantially all assets of the Company. The Company is required to maintain
compliance with certain financial covenants under the Credit Agreement,
including covenants relating to minimum net worth and interest ratio coverage.
The credit facility also restricts the payment of dividends. At October 3, 1998
and October 4, 1997, the amount of retained earnings available for the payment
of dividends was $12,026,000 and $8,277,000, respectively.
The Industrial Revenue Bonds bear interest at adjustable rates (4.15%
at October 3, 1998 and 3.85% at October 4, 1997) and mature November 1, 2002.
The bonds are secured by a letter of credit issued under the Revolver.
The 6.78% Senior Notes that were due 2002 were retired concurrent with
the Subordinated Notes offering which resulted in an extraordinary loss of
$905,000, net of a $591,000 tax benefit.
The schedule of debt maturities presented below assumes borrowings
under the Revolver are outstanding until maturity (in thousands):
YEAR AMOUNT
---- ------
1999 $ 7,500
2000 10,000
2001 12,500
2002 43,500
2003 7,900
Thereafter 125,000
--------
Total $206,400
========
Total interest paid was $22,794,000 in 1998, $6,185,000 in 1997, and
$5,930,000 in 1996.
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6. LONG-TERM OBLIGATIONS (CONTINUED)
The Company is a holding company with no assets other than its
investment in its subsidiaries. The guarantor subsidiaries are wholly-owned
subsidiaries of the Company and have fully and unconditionally guaranteed the
Subordinated Notes due September 1, 2007 on a joint and several basis. The
guarantor subsidiaries comprise all of the direct and indirect subsidiaries of
the Company. As of October 3, 1998, there is no restriction on the payment of
dividends from subsidiaries to the parent company under the terms of the
Subordinated Notes. The Company has not presented separate financial statements
and other disclosures concerning each guarantor subsidiary because management
has determined that such information is not material to investors.
The Company has letters of credit outstanding of $9,294,000 at October
3, 1998. The Company has four interest rate swap agreements to reduce the impact
of changes in interest rates on the borrowings under the Credit Agreement. The
four interest rate swap agreements have a total notional principal amount of
$35,000,000. The differential paid or received is recognized as an adjustment to
interest expense. The Company agreed to make interest payments based on a fixed
rate of 7.06%, 6.17%, 5.85% and 5.58% on $10,000,000, $10,000,000, $10,000,000
and $5,000,000 notional principal, respectively, in exchange for payments based
on a floating rate of three-month LIBOR. The agreements terminate April 26,
2002, June 9, 2002, April 8, 2003 and September 4, 2001, respectively. The
Company also has one interest rate collar on $10,000,000 notional principal
whereby the Company agrees to make payments if the three-month LIBOR falls below
5.00% in exchange for receiving payments if the three-month LIBOR rises above
7.00%. The interest rate collar terminates effective February 19, 2003. The fair
value of the swap agreements and the collar at October 3, 1998 is a loss of
$2,075,000 and is not recognized in the financial statements.
The fair value of long-term obligations is estimated using yields
obtained through independent pricing sources for the same or similar types of
borrowing arrangements. The fair value of long-term obligations, excluding
interest rate swaps and collars, at October 3, 1998 was estimated at $171.5
million, or approximately $34.9 million less than the carrying value at that
date. The carrying value of long-term obligations approximated fair value at
October 4, 1997. For all other financial instruments, the carrying amounts
approximate fair value due to their short maturities.
7. SHAREHOLDERS' EQUITY
On October 4, 1995, the Company approved a plan to repurchase up to
2,000,000 shares of Dyersburg Corporation common stock. Purchases were made at
the discretion of the Company as warranted based on market pricing. During the
year ended October 4, 1997 and September 28, 1996, a total of 27,000 and
1,051,275 shares, respectively, were purchased under the repurchase plan at an
aggregate cost of approximately $160,000 and $5,414,000, respectively. The
Company does not presently anticipate further purchases under the plan.
The Company's Stock Option Plans (the "Option Plans") provide for the
granting of stock options to management, key employees and outside directors.
Options are subject to terms and conditions determined by the Compensation
Committee of the Board of Directors, and generally are exercisable in increments
of 20% per year beginning one year from date of grant and expire 10 years from
date of grant.
In 1996, the Company repriced certain stock options through the
cancellation of approximately 737,000 outstanding options and the simultaneous
granting of 367,000 options at a reduced exercise price equal to market at the
date of repricing. Except for the repricing, no other terms of the stock options
were changed.
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32
7. SHAREHOLDERS' EQUITY (CONTINUED)
Option Plan activity is summarized in the table below.
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
-----------------------------------------------
(in thousands, except exercise price)
757 $ 8.16
Balance at September 30, 1995
Options granted 392 4.54
Options exercised (10) 4.50
Options canceled (740) 8.16
------- -------
Balance at September 28, 1996 399 4.70
------- -------
Options granted 47 7.57
Options exercised (153) 4.50
Options canceled (26) 4.50
------- -------
Balance at October 4, 1997 267 5.34
------- -------
Options granted 195 10.67
Options exercised (55) 4.73
Options canceled (4) 9.20
------- -------
Balance at October 3, 1998 403 $ 7.97
======= =======
Options outstanding at October 3, 1998 are summarized in the table
below:
OUTSTANDING EXERCISABLE
------------------------------------------- -----------------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICE OPTIONS PRICE LIFE(YEARS) OPTIONS PRICE
- -------------------------------------------------------------------------------------------------------
(in thousands, except exercise price and contractual life)
$4.00 - 6.00 191 4.78 6.11 171 4.68
$6.01 - 11.25 212 10.84 6.83 57 10.08
--- ---
Total 403 228
=== ===
There were 228,000 and 247,000 options exercisable and 779,000 and
970,000 shares reserved for future grants at October 3, 1998 and October 4,
1997, respectively.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.78%; volatility of the expected market
price of the common stock of 0.387; expected life of the options of 9.0 years;
and an expected dividend yield of 1%. Since compensation expense from stock
options is recognized over the future years' vesting period, and additional
awards generally are made from time to time, pro forma amounts for 1998 may not
be representative of future years' amounts. During 1998, 195,500 options were
granted with weighted average grant date fair value of $ 5.58.
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33
7. SHAREHOLDERS' EQUITY (CONTINUED)
For purpose of the following pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
OCTOBER 3, OCTOBER 4, SEPTEMBER 30,
1998 1997 1996
--------------------------------------------------------
(in thousands, except share data)
Net income:
As reported $7,033 $12,361 $8,400
Pro forma 6,861 12,245 8,310
Net income per share - diluted:
As reported $ 0.53 $ 0.94 $0.61
Pro forma 0.51 0.93 0.61
The Company has adopted the Financial Accounting Standards Board (FASB)
Statement No. 128, Earnings per Share, and accordingly, the prior period
presentation has been restated. The table below sets forth the computations of
basic and diluted earnings per share:
Year Ended
---------------------------------------------------------
OCTOBER 3, October 4, September 28,
1998 1997 1996
------------- ------------ -------------
(in thousands, except per share data)
Numerator for basic and diluted
earnings per share:
Income before extraordinary loss.. $ 7,033 $ 13,266 $ 8,400
Extraordinary loss................... -- (905) --
--------- -------- ------
Net income........................... $ 7,033 $ 12,361 $ 8,400
========= ======== =======
Denominator:
Denominator for basic earnings
per share--weighted average
shares outstanding.................. 13,326 13,155 13,643
Effect of dilutive securities:
Employee stock options........ 10 55 38
-------- ------- -------
Denominator for diluted
earnings per share--adjusted
weighted average shares outstanding 13,336 13,210 13,681
======== ======== =======
Basic earnings per share:
Income before extraordinary loss.. $ .53 $ 1.01 $ .62
Extraordinary loss................... -- (.07) --
-------- -------- -------
Net income........................... .53 $ .94 $ .62
======== ======== =======
Diluted earnings per share:
Income before extraordinary loss.. $ .53 $ 1.01 $ .61
Extraordinary loss................... -- (.07) --
Net income........................... -------- -------- -------
$ .53 $ .94 $ .61
======== ======== =======
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34
8. INCOME TAXES
Significant components of the Company's deferred tax liabilities and
assets are as follows:
OCTOBER 3, OCTOBER 4,
1998 1997
-------------------------------------------
(in thousands)
Deferred tax liabilities:
Depreciation $ 8,582 $ 8,006
Other 2,415 2,599
--------- ----------
Total deferred tax liabilities 10,997 10,605
Deferred tax assets:
Non-deductible reserves 4,184 4,065
Deferred compensation 1,439 2,096
Other 518 549
--------- ----------
Total deferred tax assets 6,141 6,710
--------- ----------
Net deferred tax liabilities $ 4,856 $ 3,895
========= ==========
Significant components of the provision for income taxes are as
follows:
YEAR ENDED
-----------------------------------------------------
OCTOBER 3, OCTOBER 4, SEPTEMBER 28,
1998 1997 1996
-----------------------------------------------------
(in thousands)
Current:
Federal $ 2,199 $ 9,014 $ 5,240
State 258 249 154
Deferred, primarily federal 2,856 (629) 460
-------- -------- --------
$ 5,313 $ 8,634 $ 5,854
======== ======== ========
The provision for income taxes differed from the amount computed by
applying the statutory federal income tax rate of 35% to income before income
taxes due to the following:
YEAR ENDED
-----------------------------------------------------------
OCTOBER 3, OCTOBER 4, SEPTEMBER 28,
1998 1997 1996
-----------------------------------------------------------
(in thousands)
Computed federal tax expense at statutory
rate $ 4,321 $ 7,665 $ 4,989
State taxes, net of federal income tax
benefit 167 162 100
Effect of nondeductibility of amortization
of goodwill 751 655 650
Other 74 152 115
--------- -------- --------
$ 5,313 $ 8,634 $ 5,854
========= ======== ========
Income tax payments were $6,622,000, $7,154,000, and $4,885,000 for
fiscal years 1998, 1997, and 1996, respectively. A tax benefit was realized for
the exercise of stock options in the amount of $504,000, and such amount was
recognized as additional paid in capital for the year ended October 3, 1998.
34
35
9. EMPLOYEE BENEFIT PLANS
The Company has two separate defined contribution plans that,
collectively, cover substantially all employees, excluding Alamac employees.
Contributions to one plan equal 7.5% of adjusted income, as defined, plus
additional amounts which the Board of Directors may authorize. Contributions to
the other plan are at the discretion of the Board of Directors. The contribution
for either plan shall not exceed the maximum amount deductible for federal
income tax purposes. Profit-sharing expense was $2,544,000, $2,599,000, and
$1,875,000 for fiscal years 1998, 1997, and 1996, respectively.
The Company provided defined benefit pension plans (the Pension Plans)
to substantially all full-time active employees of Alamac whose employment
transferred to the Company upon acquisition. The terms of the plans were
substantially identical, with respect to the classes of employees covered under
the plans and eligibility, to the terms provided by the seller prior to the
purchase of Alamac. Benefits under the existing plans were based on years of
service and compensation and become vested after five years of service.
Substantially all benefits were vested at the valuation date. The Company funds
the plans in accordance with the Employee Retirement Income Security Act of
1974.
The following summarizes information including the plans' funded
status:
YEAR ENDED
---------------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---- ----
(in thousands)
CHANGE IN PENSION OBLIGATION
Pension obligation at beginning of year $ 14,711 $ --
Obligation assumed at acquisition -- 14,711
Service cost 759 --
Interest cost 868 --
Actuarial loss 3,089 --
Benefits paid (734) --
-------- --------
Pension obligation at end of year $ 18,693 $ 14,711
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 12,759 $ --
Plan assets transferred at acquisition -- 12,759
Actual return on plan assets 1,392 --
Company contributions 375 --
Benefits paid (734) --
-------- --------
Fair value of plan assets at end of year $ 13,792 $ 12,759
-------- --------
Funded status of the plan (underfunded) $ (4,901) $ (1,952)
Unrecognized net actuarial loss on PBO 2,628 --
-------- --------
Accrued pension cost at end of year $ (2,273) $ (1,952)
======== ========
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9. EMPLOYEE BENEFIT PLANS (CONTINUED)
YEAR ENDED
------------------------------
OCTOBER 3, OCTOBER 4,
1998 1997
---- ----
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 7.25% 7.50%
Expected return on plan assets 9.75% 9.75%
Rate of compensation increase (salaried only) 3.50% 3.50%
COMPONENTS OF NET PERIODIC PENSION COST (in thousands)
Service cost $ 759 --
Interest cost 868 --
Actual return on plan assets (1,392) --
Net amortization and deferral 461 --
------- ----
Net pension cost $ 696 --
======= ====
Plan assets are invested primarily in United States Government or
corporate debt securities and equity securities. The salaried plan and hourly
plan projected benefit obligation was $12,736,000 and $5,957,000, respectively,
at October 3, 1998. The plan assets of the salaried and hourly plans were
$7,783,000 and $6,009,000, respectively, at October 3, 1998.
10. COMMITMENTS
The Company leases certain equipment and office space under
noncancelable operating leases. Most of these leases include renewal options and
some include purchase options. Rent expense was $7,690,000 in 1998, $4,123,000
in 1997, and $3,050,000 in 1996.
Future minimum payments under these leases are as follows:
FISCAL YEAR AMOUNT
------
(in thousands)
1999 $ 7,808
2000 6,295
2001 5,262
2002 3,408
2003 3,398
Thereafter 5,951
--------
Total aggregate future minimum lease payments $ 32,122
========
The Company routinely enters into forward purchase commitments to
secure the purchase price and availability of cotton, a significant raw material
utilized in its manufacturing process. At October 3, 1998, the Company has
outstanding commitments to purchase approximately $20 million in cotton through
July 1999.
36
37
11. CONTINGENCIES
In connection with the acquisition of Alamac, the Company conducted an
environmental investigation of Alamac's facilities and identified environmental
contamination at certain facilities that will require remediation activities.
The Company estimates that the cost of such remediation activities will range
from approximately $3,500,000 to $5,000,000. As the Company continues to study
and evaluate necessary remediation activity, these estimates could change.
Pursuant to the Acquisition Agreement, WestPoint Stevens, Inc. agreed to pay 75%
of any losses occurring within three years of the closing of the acquisition for
matters identified in the Company's environmental investigation or arising as a
result of a breach of WestPoint Stevens' representations and warranties in
respect of environmental matters up to $10,000,000 and 67% of such losses in
excess of $10,000,000 and up to $20,000,000. WestPoint Stevens will not be
obligated to indemnify the Company for any such losses in excess of $20,000,000.
In addition, WestPoint Stevens agreed to indemnify the Company without regard to
time or dollar limitation for losses resulting from third-party claims relating
to the identified environmental contamination. Management believes that
WestPoint Stevens has the financial capability to honor this indemnity. As a
part of the acquisition of Alamac, the Company recorded an accrual of
approximately $875,000 for the estimated cost of remediation not covered by the
West Point indemnity. As of October 3, 1998, the balance remaining in this
accrual was $802,000.
The Company is involved in various legal actions and claims arising in
the ordinary course of business. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect to the
Company's financial position or results of operations.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1998
FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Net sales $91,931 $109,958 $113,533 $102,103
Gross profit 15,233 19,301 21,382 17,708
Net income 983 1,343 3,023 1,684
Net income per share:
Basic 0.07 0.10 0.23 0.13
Fully diluted 0.07 0.10 0.23 0.13
Market prices of common stock:
High 14.00 12.00 8.25 6.00
Low 11.00 7.69 5.06 3.50
1997
FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
Net sales $38,793 $51,038 $ 68,383 $ 91,979(a)
Gross profit 8,443 11,130 17,964 19,854
Income before extraordinary loss 684 1,979 5,283 5,320
Net income 684 1,979 5,283 4,415(b)
Income per share before extraordinary loss 0.05 0.15 0.40 0.41
Net income per share:
Basic 0.05 0.15 0.40 0.34
Fully diluted 0.05 0.15 0.40 0.34
Market prices of common stock:
High 7.25 7.50 8.63 3.44
Low 5.38 6.50 7.00 8.25
(a) Fourth quarter includes $26,844 of Alamac sales.
(b) Fourth quarter includes $905, or $0.07 per share, extraordinary loss for
early extinquishment of debt.
37
38
DYERSBURG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
- ---------------------------------------- --------------- --------------- --------------- ---------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- --------------- --------------- --------------- ---------------
Additions
Balance at Charged to Balance
Beginning of Costs and Deductions(1) at end of
Description Period Expenses Describe Period
--------------- --------------- --------------- ---------------
Year ended October 3, 1998
Allowance for doubtful accounts $ 2,075 $ 1,464 $ 640 $ 2,899
=============== =============== =============== ===============
Year ended October 4, 1997
Allowance for doubtful accounts $ 1,500 $ 2,184 $ 1,609 $ 2,075
=============== =============== =============== ===============
Year ended September 28, 1996
Allowance for doubtful accounts $ 1,170 $ 1,057 $ 727 $ 1,500
=============== =============== =============== ===============
(1) Write-offs, net of recoveries.
38
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3), information with respect to
directors of the Company is included in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held January 27, 1999 (the "Proxy
Statement") under the caption "Proposal One - Election of Directors," which
information is herein incorporated by reference.
Information with respect to executive officers of the Company is
included in Part I of this Form 10-K under the caption "Executive Officers of
the Registrant."
Information with respect to Section 16(a) of the Securities Exchange
Act of 1934, as amended, beneficial ownership reporting compliance is included
in the Company's Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Requirements," which information is herein incorporated by
reference.
ITEM 11 . EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the
Proxy Statement under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain
beneficial owners and management is included in the Proxy Statement under the
caption "Security Ownership of Management and Certain Beneficial Owners," which
information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions is included in the Proxy Statement under the caption "Certain
Transactions," which information is herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(l) Financial Statements. See Item 8.
(a)(2) Supplemental Schedules Supporting Financial Statements.
See Item 8.
(a)(3) Exhibits. See Index to Exhibits, page 41.
(b) There were no reports filed on Form 8-K for the fiscal
quarter ending October 3, 1998.
39
40
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.
DYERSBURG CORPORATION
Date: December 18, 1998 /s/ T. Eugene McBride
-----------------------------
T. Eugene McBride
Chief Executive Officer
(Principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on December 18, 1998.
/s/ T. Eugene McBride /s/ Marvin B. Crow
- --------------------------------------------- -----------------------------------------
T. Eugene McBride Marvin B. Crow
Chairman Director
/s /Mickey Ganot /s/ John D. Howard
- --------------------------------------------- -----------------------------------------
Mickey Ganot John D. Howard
Director Director
/s/ L. R. Jalenak, Jr. /s/ Julius Lasnick
- --------------------------------------------- -----------------------------------------
L. R. Jalenak, Jr. Julius Lasnick
Director Director
/s/ P. Manohar /s/ Jerome M. Wiggins
- --------------------------------------------- -----------------------------------------
P. Manohar Jerome M. Wiggins
Director President, Chief Operating Officer
and Director
/s/ Ravi Shankar /s/ William S. Shropshire, Jr.
- --------------------------------------------- -----------------------------------------
Ravi Shankar William S. Shropshire, Jr.
Director Executive Vice President,
Chief Financial Officer and
Secretary - Treasurer
(Principal financial officer)
/s/ Paul L. Hallock
- ---------------------------------------------
Paul L. Hallock
Vice President - Finance and
Assistant Secretary - Treasurer
(Principal accounting officer)
41
INDEX TO EXHIBITS
Exhibit
No. Description
- ------------- -----------------------------------------------------------
2.1 Stock Purchase Agreement, dated as of July 15, 1997, by and
among Dyersburg Corporation, Alamac Sub Holdings, Inc., AIH
Inc. and WestPoint Stevens Inc. (incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 18, 1997).
3.1 Amended and Restated Charter of Dyersburg Corporation
(incorporated by reference to Exhibit 3(a) to the
Registration Statement on Form S-1 (Registration No.
33-46331)).
3.2 Bylaws of Dyersburg Corporation (incorporated by reference
to Exhibit 3(b) to the Registration Statement on Form S-1
(Registration No. 33-46331)).
3.3 Amended and Restated Bylaws of Dyersburg Corporation
(incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed with the Securities and Exchange
Commission on April 17, 1997).
10.1 Loan Agreement between The Industrial Revenue Board of the
City of Trenton, Tennessee and Dyersburg Fabrics Inc. dated
as of July 1, 1990 (incorporated by reference to Dyersburg
Fabrics Inc.'s Form 10-K for the fiscal year ended September
29, 1990).
10.2 Tax Sharing Agreement dated July 24, 1990 between Dyersburg
Fabrics Inc. and Dyersburg Corporation (incorporated by
reference to Dyersburg Fabrics Inc.'s Form 10-K for the
fiscal year ended September 29, 1990).
10.3* Dyersburg Corporation 1992 Stock Incentive Plan
(incorporated by reference to Exhibit 10(a).2 to the
Registration Statement on Form S-1 (Registration No.
33-46331)), as amended, (incorporated by reference to
Appendix A to Proxy Statement dated December 14, 1995).
10.4* Dyersburg Fabrics Inc. Deferred Compensation Plan, as
amended, (incorporated by reference to Appendix A to Proxy
Statement dated December 14, 1995).
10.5 Form of Registration Rights Agreement dated as of April 30,
1992 between the Company and each shareholder of the Company
(incorporated by reference to Exhibit 10(k) to the
Registration Statement on Form S-1 (Registration No.
33-46331)).
10.6* Dyersburg Corporation Non-qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference
to Exhibit 4(c) to the Registration Statement on Form S-8
(Registration No. 33-74350)), as amended, (incorporated by
reference to Appendix A to Proxy Statement dated December
14, 1995).
10.7* Amendment to Dyersburg Corporation 1992 Stock Incentive Plan
(incorporated by reference to a Registration Statement on
Form S-8 filed with the Securities and Exchange Commission
on March 28, 1996).
10.8 Second Amended and Restated Letter of Credit Agreement dated
as of July 1, 1990, among Dyersburg Fabrics Limited
Partnership, I, Dyersburg Fabrics Inc., Dyersburg
Corporation, DFIC, Inc., and SunTrust Bank, Atlanta,
relating to $7,900,000 The Industrial Development Board of
the City of Trenton, Tennessee Industrial Development
Revenue Bonds (Dyersburg Fabrics Inc. Project Series 1990)
(incorporated by reference to Exhibit 10.11 to the Quarterly
Report on Form 10-Q of the quarter ended March 30, 1996).
41
42
10.9 Amended and Restated Pledge and Security Agreement, dated as
of July 1, 1990, made by Dyersburg Fabrics Limited
Partnership, I, to SunTrust Bank, Atlanta (incorporated by
reference to Exhibit 10.12 to the Quarterly Report on Form
10-Q for the quarter ended March 30, 1996).
10.10 Stock Purchase Agreement, dated April 8, 1997, between
Polysindo Hong Kong Limited and the sellers named therein
(incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the Securities and Exchange
Commission on April 17, 1997).
10.11 Agreement, dated April 8, 1997, among Polysindo Hong Kong
Limited, PT. Texmaco Jaya and Dyersburg Corporation
(incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed with the Securities and Exchange
Commission on April 17, 1997).
10.12 Purchase Agreement, dated August 20, 1997, by and among
Dyersburg Corporation, Dyersburg Fabrics Inc., Dyersburg
Fabrics Limited Partnership, I, DFIC, Inc., IQUE, Inc.,
IQUEIC, Inc., IQUE Limited Partnership, I, United Knitting
Inc., UKIC, Inc., United Knitting Limited Partnership, I,
Bear, Stearns & Co., Inc. And Prudential Securities
Incorporated (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed with the Securities and
Exchange commission on September 2, 1997).
10.13 Indenture, dated as of August 27, 1997, by and among
Dyersburg Corporation, Dyersburg Fabrics Inc., Dyersburg
Fabrics Limited Partnership, I, DFIC, Inc., IQUE, Inc., IQUE
Limited Partnership, I, United Knitting Inc., UKIC, Inc.,
United Knitting Limited Partnership, I, Alamac Knit Fabrics
Inc., Alamac Enterprises Inc., AIH Inc., and State Street
Bank and Trust Company (incorporated by reference to exhibit
10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 2, 1997).
10.14 Registration Rights Agreement, dated as of August 27, 1997,
among Dyersburg Corporation, the Guarantors named therein,
Bear, Stearns & Co. Inc. and Prudential Securities
Incorporated (incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 2, 1997).
10.15 Credit Agreement and Amendment No. 1 to Credit Agreement,
dated as of August 27, 1997, among Dyersburg Corporation,
Dyersburg Fabrics Limited Partnership, I, United Knitting
Limited Partnership, I, IQUE Limited Partnership, I, Alamac
Knit Fabrics, Inc., the Lenders listed therein, SunTrust
Bank, Atlanta, as Agent, and SunTrust Bank Atlanta, as
Collateral Agent (incorporated by reference to Exhibit 10.4
to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 2, 1997).
10.16 Amendment No. 2 to Credit Agreement (incorporated by
reference to Exhibit 10 to the Quarterly Report on Form 10-Q
for the quarter ended July 4, 1998.)
10.17 Stockholders' Agreement between Dyersburg Corporation and PT
Texmaco Jaya (incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarter ended July 4,
1998.)
10.18 License Agreement between Dyersburg Corporation and PT
Texmaco Jaya (incorporated by reference to Exhibit 10 to the
Quarterly Report on Form 10-Q for the quarter ended July 4,
1998.)
10.19 Technical Services and License Agreement between Dyersburg
Corporation and PT Dyersburg Texmaco Fleece (incorporated by
reference to Exhibit 10 to the Quarterly Report on Form 10-Q
for the quarter ended July 4, 1998.)
10.20 Dyersburg Corporation Deferred Compensation Plan, as amended
in fiscal 1998
42
43
21 Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule (for SEC use only)
*Compensation Plan
43