ITEM 1. BUSINESS
General
Dyersburg Corporation, through its wholly-owned subsidiary Dyersburg Fabrics Inc. ("Fabrics") and the partnership referenced below, is one of the largest manufacturers of knit fleece fabrics sold to the domestic "cut-and-sew" apparel manufacturing industry and also produces jersey fabrics for women's and children's apparel. Dyersburg Corporation acquired United Knitting, Inc. ("UKI") in 1994 adding stretch fabrics and lightweight lining fabrics to its product line. UKI and the partnership referenced below supply fabrics to major brand name producers of bodywear, swimwear, active sportswear and intimate apparel.
Fabrics owns all of the outstanding capital stock of Dyersburg Fabrics Investment Corporation ("DFIC"), a Delaware corporation and intermediate investment corporation. DFIC owns a 99% limited partnership interest in Dyersburg Fabrics Limited Partnership ("DFLP"). The remaining 1% partnership interest in DFLP is owned by Fabrics as a general partner (unless otherwise indicated, all references herein to Fabrics include DFIC and DFLP). UKI owns all of the outstanding capital stock of United Knitting Investment Corporation ("UKIC"), a Delaware corporation and intermediate investment corporation. UKIC owns a 99% limited partnership interest in United Knitting Limited Partnership ("UKLP"). The remaining 1% limited partnership interest in UKLP is owned by UKI as a general partner (unless otherwise indicated, all references herein to UKI include UKIC and UKLP). During 1996, Fabrics formed a wholly-owned separate subsidiary, IQUE, Inc. ("IQUE"), to provide full garment sourcing through strategic contractual alliances. IQUE owns all of the outstanding capital stock of IQUE Investment Corporation ("IIC"), a Delaware corporation and intermediate investment corporation. IIC owns a 99% limited partnerhip interest in IQUE Limited Partnership ("ILP"). The remaining 1% partnership interest in ILP is owned by IQUE as a general partner (unless otherwise indicated, all references to IQUE include IIC and ILP). Unless the context otherwise requires, the term "the Company" as used herein refers to Dyersburg Corporation and its subsidiaries. The Company was formed in 1929.
Fabrics' manufacturing operation is vertically integrated, beginning with spinning yarn from fiber, combining that yarn with purchased yarns to knit fabric, dyeing and finishing that fabric, and then selling it to the "cut-and-sew" apparel industry. Fleece fabrics produced by Fabrics are used primarily in the production of children's and women's activewear (sweatshirts and sweatpants) and infant blanket sleepers. Jersey fabric produced by Fabrics is used in a broad range of children's and women's lightweight apparel, such as tops and shorts. Fabrics' outerwear fleece is designed for use in skiwear, hunting apparel and other outdoor activity products. In addition, Fabrics manufactures related knit fabrics
for certain other products, including gloves, meat stockinettes (bags used to hang hams and other meats for smoking and curing), knit orthopedic products, and knit cuffs for surgical gowns.
UKI's fabrics are knit from purchased yarns of natural and synthetic fibers combined with performance yarns, including spandex, to provide specific dynamic stretch and shrinkage characteristics. UKI also produces lightweight lining fabrics for use in swimwear and women's hosiery.
The Company does not have business operations in more than one industry segment and has no foreign manufacturing operations or significant export sales.
Products
Fleece
Fleece fabric is 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. In 1992, Fabrics introduced a new line of outerwear fleece designed for use in performance-related outdoor apparel products. In 1993, this product line was complemented by the introduction of Dyersburg E.C.O. outerwear fleece made of yarn using fibers from recycled, plastic soft drink bottles. The list of branded outerwear fleece products have grown to include Kinderfleece targeted to children's outerwear, Citifleece(TM) targeted to adult outerwear, Dyersburg E.C.O. Lite(TM), a lighter weight E.C.O. product, and Chamee(TM), a new microdenier product line. Garments manufactured from these products are primarily sold to large catalog merchants and specialty retailers.
Excluding the outerwear fleece designs, a majority of the fleece fabrics historically manufactured by Fabrics are used to produce garments for discount retailers and chain stores. Fleece fabrics sales are seasonal with peak activity during the third and fourth fiscal quarters and significantly less activity during the first and second fiscal quarters.
The principal use of Fabrics' fleece fabrics are in manufacturing children's activewear and infant blanket sleepers. Fleece fabrics sold by Fabrics to the children's activewear market, principally sweatshirts and sweatpants, are made of 100% acrylic fibers and 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.
Fabrics' other 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. Maison Fleece(TM), headlines the product offerings in the growing home furnishings market.
Jersey
Fabrics markets a line of jersey fabrics for use in a broad range of women's and children's apparel, principally tops and shorts, with the objectives of increasing penetration of Fabrics' customer base and reducing the seasonal aspects of the Company's production operations. 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. A majority of Fabrics' jersey fabric production and sales is concentrated in Fabrics' first two fiscal quarters and, therefore, tends to offset the seasonality of the Company's fleece fabric business.
Stretch
Stretch fabrics (produced at UKI's Cleveland, Tennessee facility) consist of custom formulations of cotton, spandex, nylon and other synthetic yarns designed for maximum comfort, performance and styling. To produce a variety of shades and patterns, stretch fabrics may be knit from package-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 athletic products including dancewear, swimsuits, biking and running garments 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(TM), was introduced in late 1996 aimed at revitalizing the swimwear business.
Manufacturing/Seasonality
Fabrics has two manufacturing plants in Dyersburg and one plant in Trenton, Tennessee. The original Dyersburg plant spins 100% synthetic (acrylic or polyester) and 50% polyester/50% cotton yarns. The Trenton plant 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. UKI's plant in Cleveland, Tennessee uses yarn from Fabrics as well
as purchased yarn from outside sources to knit, dye and finish stretch and lining fabrics.
The Company's revenues and earnings as well as working capital requirements fluctuate during the fiscal year due to the seasonal nature of Fabrics' and UKI's businesses. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations".
Sales and Marketing
The Company's customers negotiate their purchases from the Company through informal purchase orders that specify their anticipated fabric needs over periods as long as ten 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 cancelled orders can ordinarily be used to fill other orders. Because these informal purchase orders are cancelable, the Company has no appreciable long-term backlog.
Fabrics maintains sales offices in Chicago and New York and also generates some sales through independent sales agents. UKI utilizes a network of independent sales agents coordinated through its marketing organization in New York, New York.
The Company's largest five customers accounted for approximately 23% of total sales in 1996 with no individual customer responsible for more than 9% of total sales.
Research and Development
Fabrics' research and development activities are directed toward the development of new products (i.e., varieties of fabrics) to meet the changing needs of the market. Emphasis is placed on physical characteristics that provide competitive differentiations between fabrics including "hand" or feel, warmth, fade resistance and shrinkage reduction. Efforts are also made to enhance aesthetic qualities of certain fabrics such as the E.C.O. fabrics line's consideration of the environmental impact of production processes.
UKI's research and development activities are 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. UKI 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.
Raw Materials
Fabrics uses three primary fibers as raw material for producing yarn: acrylic, polyester and cotton. Cotton makes up approximately 35%, acrylic approximately 15%, and polyester approximately 45% 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. UKI 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 to the cut and sew trade. The Company also competes with vertically integrated manufacturers that not only produce fabric but also produce finished products from that fabric.
Regulation
The Company is subject to federal, state and local laws and regulations affecting its business, including those promulgated under the Occupational Safety and Health Act (OSHA), the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, and the rules and regulations of the Consumer Products Safety Commission. Among other things, OSHA imposes cotton dust standards and noise level standards at all of the Company's knitting facilities. Additionally, the Company must comply with industry specific legislation.
The Company's facilities generate waste water, other waste, and air emissions that are subject to local regulations and federal and state laws. The Company believes its disposition of such waste and its emissions are in substantial compliance with all applicable governmental requirements.
The Company is currently assessing the effect on its competitive position of recent developments in U.S. import-export restrictions. Although no assurances can be given in this regard, the Company does not believe that the passage of the North American Free Trade Agreement and the General Agreement on Tariffs and Trade has had or will have a material effect on the Company's competitive position or results of operations.
Employees
At September 28, 1996, the Company employed approximately 1,392 people in hourly, salaried, supervisory, management, and administrative positions. No labor union represents any of the Company's employees and the Company has not experienced a work stoppage in more than 50 years.
Forward-Looking Statements/Risk Factors
This Form 10-K contains certain forward-looking statements regarding the anticipated financial and operating results of the Company. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is including the following cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by, or on behalf of, the Company. These factors, many of which are beyond the Company's control, include 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive officers of the Company as of September 28, 1996. All positions are held with Dyersburg Corporation and Fabrics unless otherwise noted. All officers serve at the discretion of the Board of Directors.
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. He had previously been employed by Pannill Knitting Mills as Vice President-Operations since December 1986. He 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.
Mr. Herring has been President of IQUE since December 1996. Prior to becoming President of IQUE, he was President and Chief Executive Officer of UKI since January, 1994 when it was acquired by the Company. Mr. Herring was also elected as a director of the Company, Fabrics and UKI since January 1994. Mr. Herring served as President of UKI from 1983 to 1991 and as Chairman of the Board and Chief Executive Officer from 1991 until its acquisition by the Company.
Mr. Wiggins has been President - Operations since January 1996. He joined the Company in August 1989 as Vice President and Chief Financial Officer, Treasurer and Secretary. He had previously been employed by VF Corporation (a manufacturer of apparel) since 1975 and in 1982 became Vice President of Finance and Chief Financial Officer of that company.
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 on September 28, 1996. For the previous five years, he was Chief Financial Officer and Senior Vice President for Charter Bancshares, Inc.
Mr. Dauer became the Sr. Vice President - Sales in January 1996, after joining the Company as Vice President-Marketing in June 1984. He had previously been employed since 1966 by Burlington Industries (a diversified textile company) and, in 1980, became Vice President of Sales and Marketing-Women's Apparel in that company's Knitted Fabric Division.
Mr. Hallock joined the Company in April 1977. He was named Assistant Secretary in October 1978, Assistant Secretary- Treasurer in October 1981, and was named Vice President-Finance in March 1987.
Mr. Miller joined the Company in August 1993 as Director of Manufacturing and was named Vice President of Manufacturing in May 1994. Before coming to Dyersburg, he was Director of Manufacturing with Sara Lee Products, which included textiles and apparel manufacturing.
Mr. Patton joined the Company in 1966 in the production area. He was named MIS Director in May 1990. In September, 1994, he was named Vice President-MIS. Since January, 1996, Mr. Patton has been Vice President - Administration.
Ms. Schenck has been Vice President - Operations/Customer Development, UKI, since January 1994, when UKI was acquired by the Company. For more than five years prior to that time, she was Vice President - Operations/Customer Service at UKI.
ITEM 2.
ITEM 2. PROPERTIES
The Company's business is conducted primarily through facilities located in Dyersburg, Trenton and Cleveland, Tennessee. All of these facilities and the property on which they are located are owned by the Company. The Company leases selling offices in Chicago, Illinois, and New York, New York with square footage of approximately 716 and 7,364, respectively. The Company leases approximately 1,000 square feet in Cleveland, Tennessee, for its IQUE corporate offices.
The primary Dyersburg facility was built in 1929 with 275,000 square feet of floor space. After several expansions, it now contains 888,350 square feet of plant space situated on 30 acres of land. The knitting facility (completed December 1993) encompasses 155,000 square feet situated on 30 acres in the Dyersburg Industrial Park. The floor space is distributed as follows: 682,800 square feet for manufacturing, 273,300 square feet for warehousing and distribution, 27,800 square feet for offices, and 59,500 square feet for maintenance shops and boiler space.
The Trenton facility was built in the 1930's with 94,000 square feet of floor space and has been expanded to 187,919 square feet. The floor space is distributed as follows: 97,881 square feet for manufacturing, 61,296 square feet for warehousing, 23,837 square feet for office space, and 4,905 square feet for maintenance and boiler space.
The Cleveland facility was built in 1986 with 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.
ITEM 3.
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.
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 the fiscal year ended September 28, 1996.
PART II
ITEM 5.
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 years are presented below:
Holders
As of December 3, 1996, the Company had approximately 2,700 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 1996 and fiscal 1995, the Company declared and paid regular quarterly cash dividends of $.01 per share of Common Stock.
The documents relating to the Company's primary credit facility and institutional notes permit dividends and certain other payments, including stock repurchases, by the Company provided that, after such payments, the Company is in compliance with certain financial covenants. As of September 28, 1996, 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA DYERSBURG CORPORATION 1996 ANNUAL REPORT
(1)Includes operations of United Knitting, Inc., effective January 19, 1994. (2)Fifty-three weeks. (3)Includes a pre-tax write-down of fixed assets of $2,153. (4)This represents a one-time dividend paid prior to the initial public offering and does not reflect the future intent of the Company with respect to dividends. (5)Income before extraordinary item divided by quarterly average of shareholders' equity. (6)Cost of goods sold divided by monthly average inventory. (7)Net sales divided by monthly average net accounts receivable. (8)Net income before interest, taxes and extraordinary item divided by the sum of annual interest and amortization of debt costs.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
The Company's fiscal year ends on the Saturday closest to September 30. Results for 1994 include the operations of Dyersburg Fabrics Inc. ("Fabrics") and those of United Knitting, Inc. ("UKI") from January 19, 1994, the date of its acquisition by the Company.
1996 As Compared With 1995
Net income increased to $.62 per share for 1996, as compared to $.46 per share in the prior year. Results for the year ended September 30, 1995, included an after-tax charge of $1.5 million, or $0.11 per share, principally related to the replacement of certain manufacturing equipment. Driving this increase in earnings per share was an increase in the gross margin to 21.9% in 1996, as compared to 20.1% in 1995. Margin increases were the result of a product shift to higher margin fabrics in 1996. This increase in gross margins more than offset a modest decline in net sales dollars for the current year. Net sales approximated $196 million in 1996. The decline from 1995's peak of $199 million was primarily due to a decreased demand for jersey and sleeper fabrics.
The Company's successful marketing initiative to produce and sell new products was supported by significant investments in capital expenditures. Purchased and leased equipment during the previous five years have approximated $67 million. These expenditures included an expanded distribution facility, a separate knitting facility, expanded finishing and dyeing facilities and installing modern, high-efficiency yarn manufacturing equipment. These expenditures for manufacturing equipment allow the Company to produce more technically complex fabrics, which in turn provide higher gross margins. Higher customer satisfaction and lower production costs also have resulted from improvements in delivery and the quality of production.
In addition to the Company's investment in manufacturing equipment, the Company undertook a significant investment in an expanded marketing program. The expansion of the marketing staff, and to a lesser degree increased promotions, contributed to an increase in selling, general and administrative costs to $20,707,000, or 10.6% of sales in 1996 versus 8.7% in 1995. The return on the investment in additional marketing initiatives already has been reflected in our fourth quarter sales, which increased by 11%, to $59 million. These initiatives will continue into 1997 as the Company calls on new customers offering new products.
Interest and debt amortization expense for 1996 was unchanged from 1995 at $6.2 million. Average outstanding debt and interest rates were substantially level for 1995 and 1996.
The provisions for income taxes of $5.9 million for 1996 and $6.0 million for 1995 were higher than the federal statutory rate due to state income taxes and the nondeductibility of amortization of goodwill. The effective tax rate declined from 47.7% in 1995 to 41.1% in 1996, primarily due to a legal restructuring implemented by the Company at mid- year which resulted in a reduction in certain state taxes. The lower effective tax rate should continue into future periods.
1995 As Compared With 1994
Net sales increased 10.5% in 1995 compared to 1994. A majority of the increase was due to a shift in sales toward higher priced cotton and outerwear fleece products. The remainder of the increase was primarily attributable to the inclusion of UKI for the full 12-month period in 1995. Gross margins declined from 22.6% in 1994 to 20.1% in 1995. The decline in gross margins resulted from significant increases in raw material costs which the Company was unable to fully recover through price increases.
Selling, general and administrative costs decreased as a percent of sales to 8.7% in 1995 versus 9.0% in 1994. The decline relative to sales resulted from reduced incentive compensation payments and a lower contribution to the Company's profit sharing plans, which was partially offset by higher commissions and sales-related expenses.
During the fourth quarter of 1995, the Company committed to replace certain yarn manufacturing equipment with more modern and efficient machinery. The write-down of the book value of existing equipment, net of proceeds from its sale, resulted in an after-tax charge to operations of $1.5 million, or $0.11 per share.
Interest and debt amortization expense for 1995 was $6.2 million compared with $5.0 million in 1994. This increase resulted primarily from 1995's higher interest rates. The average balance on long-term debt outstanding for 1995 approximated that of 1994.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated from the Company's operations are the major source of liquidity. Net cash provided by operating activities totaled $13.6 million, $23.3 million, and $15.2 million in 1996, 1995 and 1994, respectively. These cash flows are supplemented primarily by borrowings, including a bank-funded revolving line of credit of $80 million maturing on July 16, 1998. Amounts outstanding on this credit facility bear interest at variable rates. The average balances outstanding and the average interest rates paid for 1996,
1995 and 1994 were approximately $50,884,000, $51,731,000, and $46,783,000, respectively, and 7.2%, 7.1% and 5.4%, respectively. At September 28, 1996, the Company had unused revolving credit of $23.8 million. Further reference is made to Note 4 to the consolidated financial statements beginning on page 27.
Working capital at September 28, 1996 was $52.1 million versus $45.2 million at September 30, 1995. The Company's current ratio was 4.4:1 and its debt-to-capital ratio was 48% at September 28, 1996, compared to 3.8:1 and 47%, respectively, at September 30, 1995.
Net accounts receivable were $5.5 million higher at September 28, 1996 than September 30, 1995, due primarily to higher sales volume in the fourth quarter of 1996. Inventories increased slightly from $22.2 million at September 30, 1995 to $23.2 million at September 28, 1996, principally as a result of higher per-unit costs due to shifts in product mix.
The Company's business has a pronounced seasonal pattern with the majority of sales occurring during the third and fourth fiscal quarters. 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.
(a) Includes the following UKI sales (in thousands): $8,358, second quarter; $10,828, third quarter and $10,341, fourth quarter.
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 fourth quarter.
On October 4, 1995, the Company approved a plan to repurchase up to 2,000,000 shares of Dyersburg Corporation common stock. During 1996, the Company repurchased 1,051,275 shares at a total cost of $5.4 million.
Capital expenditures during 1996, 1995 and 1994 were $11.8 million, $12.8 million and $14.3 million, respectively. Capital spending is anticipated to approximate $11.5 million in 1997. 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 and stock repurchase program.
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 1996, while prices for cotton continued to increase. Heretofore in 1997, there has been a reduction in raw material prices. 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 the product mix and improve product pricing as market conditions permit.
Quarterly Financial Information (Unaudited)
(a) Includes pre-tax write-down of fixed assets of $2,153.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements set forth below are included on pages 19-33.
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 September 28, 1996 and September 30, 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 28, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dyersburg Corporation at September 28, 1996 and September 30, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 28, 1996, 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 October 22, 1996
Dyersburg Corporation
Consolidated Balance Sheets
See accompanying notes.
Dyersburg Corporation
Consolidated Statements of Income
See accompanying notes.
Dyersburg Corporation
Consolidated Statements of ShareholdersG Equity
See accompanying notes.
Dyersburg Corporation Consolidated Statements of Cash Flows
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Dyersburg Corporation and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated.
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 and is partially insured on certain customer balances. The level of insurance varies by customer based upon third party credit ratings.
USE OF ESTIMATES
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.
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 $15,193,000 and $13,336,000 and deferred debt costs and other is net of accumulated amortization of $672,000 and $500,000, at September 28, 1996 and September 30, 1995, 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 cash flows.
1. ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Cotton raw material inventory and the cotton component of work in process and finished goods inventory are valued at the lower of average cost or market. Other 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 years, machinery and equipment - 5 to 15 years.
INCOME TAXES
The Company has provided for 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 the amounts used for income tax purposes.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair 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, recognizes no compensation expense for the stock option grants.
EARNINGS PER COMMON SHARE
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.
1. ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of 1997 and, based on current circumstances, does not believe the effect of adoption will be material. The write-down of fixed assets in 1995 would not have been materially different had the Company adopted Statement 121.
RECLASSIFICATIONS
Certain amounts in the 1994 and 1995 financial statements have been reclassified to conform with the 1996 financial statement presentation. Such reclassifications had no effect on net income as previously reported.
2. INVENTORIES
Inventories consist of the following:
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
In 1995, the Company committed to replace certain spinning and drawing machinery with leased equipment. Concurrently, the Company wrote down machinery and equipment with original cost of $11,760,000 and accumulated depreciation of $9,468,000. The write-down, less the proceeds from the sale of the assets, resulted in a loss of $2,153,000.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
4. LONG-TERM OBLIGATIONS (CONTINUED)
The Company has a revolving line of credit (the Revolver) with current availability of $80,000,000, declining to $70,000,000 on April 1, 1997, and maturing on July 16, 1998. Amounts outstanding under the Revolver bear interest at variable rates (approximately 6.5% at September 28, 1996 and 6.9% at September 30, 1995). In addition, the Company is required to pay a commitment fee of 1/4% on the average unused portion of the Revolver and a letter of credit fee of approximately 1% on average outstanding letters of credit. Letters of credit outstanding under the Revolver are $8,122,000 at September 28, 1996 and September 30, 1995. The unused portion of the Revolver is $23,828,000 at September 28, 1996. All amounts outstanding under the Revolver are unsecured, except for the letters of credit which are secured by real property and equipment with a carrying value of approximately $3,704,000 at September 28, 1996. Pursuant to the terms of the Revolver, the Company is required to maintain certain financial ratios, minimum shareholders' equity and working capital levels.
The Industrial Revenue Bonds bear interest at adjustable rates (4.0% at September 28, 1996 and 3.9% at September 30, 1995) and mature November 1, 2002. The bonds are secured by a letter of credit of $8,057,000 issued under the Revolver.
The Senior Notes bear interest at 6.78% and require annual principal payments of $3,125,000 from 1998 to 2005. The Senior Note agreement requires the Company to maintain certain financial ratios and limits the payment of dividends. At September 28, 1996, the amount of retained earnings available for the payment of dividends was approximately $12,306,000.
The schedule of debt maturities presented below assumes borrowings under the Revolver are outstanding until maturity:
4. LONG-TERM OBLIGATIONS (CONTINUED)
Total interest paid was $5,930,000 in 1996, $5,777,000 in 1995 and $4,431,000 in 1994.
The Company has additional letters of credit outstanding of $2,066,000 for workers' compensation insurance.
In 1995, the Company entered into two interest rate swap agreements to reduce the impact of changes in interest rates on the Revolver. The two interest rate swap agreements have a total notional principal amount of $20,000,000. 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% and 6.17% on $10,000,000 and $10,000,000 notional principal, respectively, in exchange for payments based on a floating rate of three-month LIBOR. The agreements terminate April 26, 2002 and June 9, 2002, respectively. The fair values of the swap agreements are not recognized in the financial statements.
The fair value of long-term obligations is estimated using discounted cash flow analyses based on the CompanyGs current incremental borrowing rate. The carrying value and fair value of long-term obligations at September 28, 1996, is $80,950,000 and $79,483,000, respectively, and at September 30, 1995 was $76,800,000 and $75,343,000, respectively. The fair value of the CompanyGs interest rate swaps was based on pricing models and formulas using current assumptions. The fair value of the CompanyGs interest rate swaps was $24,000 and $(312,000) at September 28, 1996 and September 30, 1995, respectively. For all other financial instruments, the carrying amounts approximate fair value due to their short maturities.
5. SHAREHOLDERSG EQUITY
The Company has 5,000,000 authorized shares of no par value preferred stock. The preferences and rights of the Preferred Stock will be fixed at the discretion of the Board of Directors upon issuance.
On October 4, 1995, the Company approved a plan to repurchase up to 2,000,000 shares of Dyersburg Corporation common stock. Purchases are made at the discretion of the Company as warranted based on market pricing. As of September 28, 1996, a total of
5. SHAREHOLDERS' EQUITY (CONTINUED)
1,051,275 shares had been purchased under the repurchase plan at an aggregate cost of approximately $5,414,000.
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. Shares reserved for future grants under the Option Plans were approximately 277,000 and 143,000 at September 28, 1996 and September 30, 1995, respectively.
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.
Information pertaining to the Option Plans summarized in the table below is in thousands except per share amounts:
At September 28, 1996, 250,829 of these options were exercisable.
6. PROFIT SHARING PLANS
The Company has two separate defined contribution plans that, collectively, cover substantially all of its 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 $1,875,000, $1,902,000 and $2,171,000 for fiscal years 1996, 1995 and 1994, respectively.
7. INCOME TAXES
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are as follows:
Significant components of the provision for income taxes are as follows:
7. INCOME TAXES (CONTINUED)
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:
Income tax payments were $4,885,000, $5,996,000 and $7,853,000 for fiscal years 1996, 1995, and 1994, respectively.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
9. LEASES
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 $3,050,000 in 1996, $2,089,000 in 1995 and $1,930,000 in 1994.
Future minimum payments under these leases are as follows at September 28, 1996: $3,212,000 in 1997, $2,978,000 in 1998, $3,004,000 in 1999, $2,398,000 in 2000, $1,906,000 in 2001 and $5,080,000 thereafter. Total aggregate future minimum lease payments are $18,578,000.
10. PURCHASE OF UNITED KNITTING, INC.
On January 19, 1994, the Company acquired all of the outstanding capital stock of United Knitting, Inc. for $5,426,000 in cash and approximately $5,000,000 of common stock (623,536 shares) in a transaction accounted for under the purchase method. Goodwill resulting from the transaction was approximately $16,800,000. United Knitting, Inc. is a textile manufacturer which produces stretch fabrics.
On a pro forma basis, net sales, net income and net income per share would have been $192,691,000, $10,437,000, and $0.74, respectively, for the year ended October 1,1994, assuming the acquisition occurred at the beginning of such fiscal year.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) DYERSBURG CORPORATION
1) Write-offs, net of recoveries. 2) Allowance for doubtful accounts of United Knitting, Inc. at acquisition_
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 22, 1997, (the "Proxy Statement") under the caption "Proposal One: Election of Class II Directors," which information is herein incorporated by reference.
Pursuant to General Instruction G(3), information concerning executive officers of the Company is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the executive compensation is included in the Proxy Statement under the caption "Executive Compensation," which information is herein incorporated by reference.
ITEM 12.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None. PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See Item 8. (a)(2) Supplemental Schedules Supporting Financial Statements. See Item 8. (a)(3) Exhibits. See Index to Exhibits, page 37. (b) Reports on Form 8-K. None (c) Exhibits. See Index to Exhibits, page 37. (d) Financial Statement Schedules. See Item 8.
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 duly authorized.
DYERSBURG CORPORATION
Date: December 16, 1996 /s/ T. Eugene McBride ----------------------------- T. Eugene McBride President and 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 16, 1996.
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS
*Compensatory Plan.