-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FjjLIQVadgu2rI+vCgYsUZ2NwiDjrSLBWj09s3iZt0dVWIKpJbwpGgSNd/fyFKpw t1aafv5fXRJhS8uwbnO5QA== 0000950168-97-000814.txt : 19970401 0000950168-97-000814.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950168-97-000814 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALBA WALDENSIAN INC CENTRAL INDEX KEY: 0000003292 STANDARD INDUSTRIAL CLASSIFICATION: KNITTING MILLS [2250] IRS NUMBER: 560359780 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06150 FILM NUMBER: 97570715 BUSINESS ADDRESS: STREET 1: 201 ST GERMAIN AVE SW STREET 2: P O BOX 100 CITY: VALDESE STATE: NC ZIP: 28601 BUSINESS PHONE: 7048796503 MAIL ADDRESS: STREET 1: P O BOX 100 CITY: VALDESE STATE: NC ZIP: 28601 10-K 1 ALBA-WALDENSIAN, INC. 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------------------------- FORM 10-K {x} ANNUAL REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 {TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from.................... to ......................... Commission file number 001-06150 ALBA - WALDENSIAN, INC. (Exact name of registrant as specified in its charter) DELAWARE 56-0359780 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 St. Germain Avenue, S.W. P.O. Box 100 Valdese, North Carolina 28690 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 704-874-2191 Securities registered pursuant to Section 12 (b) of the Act: COMMON STOCK ($2.50 PAR VALUE) AMERICAN STOCK EXCHANGE ( Title of class) (Name of exchange on which registered) Securities registered pursuant to Section 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 (ss..229.405 of this chapter) 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. { } State the aggregate market value of the voting stock held by the non-affiliates of the registrant: APPROXIMATELY $4,915,588 AS OF MARCH 15, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 1,867,403 SHARES OF COMMON STOCK ($2.50 PAR VALUE) AS OF MARCH 15, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report for the fiscal year ended December 31, 1996 are incorporated by reference into Parts I, II and IV. Portions of the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Parts I and III. Page 1 of 25 pages (including exhibits) The Exhibit Index is located on page 23. PART I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF BUSINESS Alba-Waldensian, Inc., (the "Company") manufactures a variety of knitted apparel and health care products at three plants in Valdese, North Carolina and one plant in Rockwood, TN and markets the products through four divisions, the Consumer Products Division, the Health Products Division, the Alba Direct Division and the Byford Apparel Division. On March 6, 1995 the Company purchased Balfour Health Products, a manufacturer of various knit products for the Healthcare industry, from Kayser-Roth Corporation. The purchase consisted primarily of a manufacturing facility, in Rockwood, TN., machinery, inventory and certain brand names. In 1993, the Company developed a process to knit a seamless bra which was introduced to the market in 1994 and received a patent for the process in 1996. This same process is used to manufacture tank tops and body suits which were introduced in 1995. In 1995 the Company underwent a major restructuring. The purchase of Balfour Health Products early in 1995 gave the Company a manufacturing facility in Rockwood, Tennessee. The Company consolidated its Health Products manufacturing and distribution, which was located in three plants in Valdese, North Carolina, at the Rockwood, Tennessee facility. As a result of the Health Products consolidation, the Company was able to restructure its manufacturing of consumer products in Valdese, North Carolina, thereby closing two production facilities. One of the facilities (the Main Street Plant) was sold in September 1995 and the Company plans to sell or lease the other facility at some point in the future. 2 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company is in a single line of business: the manufacturing, processing, importing and selling of knitted products, which consists of several classes. Accordingly, no segment information is presented. PRINCIPAL PRODUCTS The principal products of the Company's four Divisions are described below. For additional discussion of the current status of each Division and its products, please see the Company's 1996 Annual Report to Shareholders, which contains information expressly incorporated herein by reference. CONSUMER PRODUCTS DIVISION Products manufactured and sold by this Division include women's intimate apparel and women's hosiery products. Intimate apparel includes stretch bikinis, briefs and bodywear, as well as specially designed briefs for maternity wear. Women's hosiery products include sheer stockings, pantyhose, and trouser socks, primarily for large-size women and the maternity market. The Company has developed a process which makes it possible to knit bras, tank tops and body suits on seamless knitting equipment. This design technology, which is patented for the knit bra, has allowed the Company to significantly broaden its product offerings. The seamless knit bra was introduced in 1994 and the tank tops and body suits were introduced in 1995. The Company uses state of the art computer-controlled circular-knitting technology. Such equipment produces apparel that management believes is better fitting and therefore more comfortable. 3 The Company did not renew the license after 1994 acquired from Kayser-Roth Corporation in 1990 for No-Nonsense (R), or the license acquired from Leslie Fay Company in 1992 for the Leslie Fay(R) name, both used in connection with women's hosiery products. Management's decision to terminate both license agreements was based on the fact that the licenses no longer provided value for the Company and that both agreements had a high minimum royalty payment. Instead, the Company is searching for new brand licenses that will position the Company in various types of trade. The Company has also placed renewed emphasis on placing its All Day Long(R) brand in department stores. HEALTH PRODUCTS DIVISION Products manufactured and sold by this Division are designed to assist in healthcare. They include anti-embolism stockings and pulsitate anti-embolism systems, an intermittent pneumatic compression device, both of which are designed to improve circulation and reduce the incidence of deep vein thrombosis; sterile wound dressings such as pre-saturated gauze, petrolatum and xeroform gauze, non-adhering dressings and gauze strips and XX-Span(R) dressing retainers, an extensible net tubing designed to hold dressings in place without the use of adhesive tape. All dressing products are used in wound care therapy, particularly for the treatment of burns. In addition, this Division manufactures a knitted stockinette in a variety of sizes which is used under fracture casts or is sterile packaged for use as a supplemental drape in surgical procedures. Heel and elbow pads are XX-Span(R) sleeves with an inner soft foam pad used to reduce pressure and the incidence of decubitus ulcers. 4 Other products include slip-resistant patient treads, which are knitted soft patient footwear with slip resistant soles to help prevent patient falls while keeping feet warm even while in bed; knitted arm sleeves, which provide protection to the skin of patients with poor circulation; oversize socks for diabetic patients; baby caps to retain body temperature; and knitted cuffs for use on surgical gowns. BYFORD APPAREL DIVISION The Byford Division imports and markets a broad range of quality men's hosiery and sweaters. For the most part, Byford's socks are imported from the Byford mill in Leicester, England and supplemented with domestic and South American sources. Sourcing for Byford sweaters comes from Coats Viyella mills in the United Kingdom, mills in the Far East, and domestic sweater producers. The men's hosiery incorporates fully reciprocated and reinforced heels and toes. ALBA DIRECT DIVISION Alba Direct distributes products from the Consumer Products Division, Byford Apparel Division, and Health Products Division to the independent specialty retail class of trade via telemarketing. Alba Direct has developed export customers in Japan and Turkey and is the primary group responsible for developing the Company's Consumer export business. 5 METHODS OF DISTRIBUTION The Company's products are sold throughout the United States through salaried and commissioned salesmen. The Consumer Products Division markets its products directly to chain store organizations, which sell them under their own labels, and to several companies that market nationally advertised brands. Byford products are marketed primarily through men's specialty stores, both chains and independents. Products of the Health Products Division for use in hospitals are marketed to major distributors by the Company's sales representatives. These products are sold both under private label and under the Company's own Life Span(R) Label. Alba Direct distributes branded Consumer Products and Health Products to the independent retail trade through telemarketing. Sales offices are located in Valdese, North Carolina and in New York City. Total expenses for marketing and selling of all products from the Company's continuing operations was 9.7% of sales in 1996 and 10.0% of sales in 1995. (See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's Annual Report to Shareholders, which is incorporated herein by reference.) MANUFACTURING All Health Products manufacturing and distribution is located at the Rockwood, Tennessee plant. The Rockwood plant is a 246,000 square foot building, with space and available labor market for growth. All products are knitted on circular knitting equipment. Most of this equipment has been purchased in the past ten years. Automated seaming, printing and packaging are used in the finishing process. 6 Consumer Products manufacturing and distribution is located at three plants in Valdese, North Carolina. Products are knitted on circular knitting equipment. Most of the circular knitting equipment is the latest equipment available. Greige seaming and finishing are manual or automated, depending on product and size of product. A major improvement during 1995 was the purchase of new automatic hosiery packaging equipment, which will reduce labor costs and improve quality. The Company continues to replace older equipment and automate where possible. The Company expects capital expenditures for 1997 to be approximately $2,100,000. The capital expenditures in 1997 will be for purchasing equipment, upgrading remaining older equipment and computer systems, automating, and renovating and improving plant facilities. FINANCIAL INFORMATION ABOUT CLASSES OF SIMILAR PRODUCTS The Company is in a single line of business: manufacturing, processing and selling knitted products, consisting of several classes. The table below illustrates sales as a percentage of net dollar volume from continuing operations for each product class for each of the Company's last three years: 1996 1995 1994 ---- ----- ---- Women's Intimate Apparel 28.6% 28.3% 40.2% Men's Wear 1.8 2.6 4.3 Women's Hosiery Products 13.8 15.5 17.4 Men's Hosiery 6.2 6.2 7.9 Health Products 49.6 47.4 30.2 ---- ---- ---- 100.0% 100.0% 100.0% 7 o Women's intimate apparel consists of regular size bras, briefs and bodywear as well as maternity and plus size briefs. o Mens wear consists of Byford Sweaters. o Women's hosiery products consist of regular, maternity and plus-size panty hose, as well as trouser socks and thigh high hose. o Men's hosiery consist of Byford socks and Consumer Product's Toesies(R). o Health products consist of stockinettes, treads, arm sleeves, mesh panties, anti-embolism stockings, PAS(R), sterile wound dressings, heel pads, elbow pads, oversize socks, baby caps, and knitted cuffs. Discontinued products are eliminated for the purpose of this table. The remaining sales percentages of each class were restated after this elimination to represent sales of each class as a percentage of net dollar volume from continuing product lines. NEW PRODUCTS The Company maintains an active research and development department that continually evaluates new products and process. Management also evaluates new products, business opportunities, and acquisitions on an on-going basis and could encounter an opportunity which would require substantial investment in the future. Such investments occurred in 1994 with the acquisition of the pulsitate anti-embolism business from Baxter Healthcare Corporation and in 1995 with the acquisition of the Balfour Health Products Division from Kayser-Roth Corporation. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders.) 8 SOURCES AND AVAILABILITY OF RAW MATERIALS The principal raw materials used by the Company in its manufacturing processes include various types of yarn, chemicals for dyeing and finishing and for impregnating medical products and packaging materials for all products. The Company acquires these materials from a number of sources and is not dependent on any one source for a significant amount of its raw materials. The Company anticipates no material change in either the availability or the cost of its raw materials. PATENTS AND TRADEMARKS The only material patents held by the Company are (1) for a device used to warm wet dressings, which expires in 2002; (2) for a process covering the manufacture of dressings, which expires in 2002, and (3) for a process which makes it possible to knit bras on seamless knitting equipment, which expires in 2014. Also, the Company acquired a exclusive License Agreement for a patented process which makes it possible to knit briefs. The agreement is for the life of the patent, which expires in 2012. The material trademarks held by the Company are: Alba(R), All Day Long(R), ComfortKnit(R), SomeBody(R), While You Wait(R), Comfort Zone(R), Lady Alba(R), Occasionals(R), Ultimates(R), XX-Span(R), Speed-Roll(R), Life Span(R), Coplex(R), PAS(R), Baby Bogan(R), Balfour(R), Care-Steps(R) and Castmate(R). The Company or its subsidiary, Pilot Research Corporation, holds numerous other patents and trademarks that, because of obsolescence or other reasons, are not material to the Company's current operations. 9 SEASONALITY Sales tend to be fairly even throughout the year. For a tabular presentation of unaudited summary financial information on a quarterly basis, see the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. WORKING CAPITAL Differences resulting from seasonal fluctuations have not materially affected the Company's working capital requirements. The Company sells merchandise on consignment only on a limited basis. Although returns are permitted when the quality of merchandise sold is below acceptable standards or when an error in completing an order occurs, the number and amounts of returns did not have a material effect on working capital of the Company during fiscal 1996 or 1995. Due to the various approaches to manufacturing and distribution used by the industry, the Company is not aware of any industry-wide norms relating to sale and delivery requirements. In 1995 the Company's working capital was adversely affected as current maturities of long-term debt increased, due to the financing of the Balfour Health Products acquisition. SIGNIFICANT CUSTOMERS Allegiance Healthcare Corporation (formerly Baxter Healthcare Corporation) is the only customer that represents ten percent or greater of the Company's sales volume for the years ended in 1996, 1995 and 1994. 10 1996 1995 1994 ---- ---- ---- Allegiance Healthcare Corporation $15,932,382 $16,601,252 $12,902,722 (formerly Baxter Healthcare Corporation) Percentage of sales 24.2% 26.1% 22.8% While the loss of Allegiance Healthcare Corporation would have a material adverse effect on the business of the Company, management believes that, because of the number of departments within Allegiance to which the Company sells, the likelihood of a material amount of sales loss is reduced. BACKLOG The Company's backlog of firm orders at December 31, 1996 and 1995 was $2,867,901 and $3,651,398 respectively. A majority of the Company's orders are for delivery within 5 to 60 days; therefore, backlogs are not normally indicative of orders for the remainder of the year. COMPETITION The Company encounters substantial competition in the sale of its products from numerous competitors, a few of which are known to have larger sales and capital resources than the Company. Management is unable to estimate the number of the Company's competitors or its relative position among them. Management believes that the principal methods of competition in the markets in which the Company competes include price, delivery, performance, service and the ability to bring to the market innovative products. Management believes that the Company is competitive with respect to these factors but is unable to identify specific positive and negative aspects of the Company's business 11 pertaining to such factors. (See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Shareholders.) RESEARCH AND DEVELOPMENT The Company estimates that in 1996 it spent $474,330 on Company-sponsored research and development projects through the Company's Research and Development Department and its wholly owned subsidiary, Pilot Research Corporation. This compares to $490,824 in 1995 and $376,008 in 1994. ENVIRONMENTAL REGULATIONS In the opinion of management, the Company and its subsidiaries are in substantial compliance with present federal, state and local regulations regarding the discharge of materials into the environment. Capital expenditures required to be made in order to achieve such compliance have had no material effect upon the earnings or competitive position of the Company or its subsidiaries. Management believes that continued compliance will require no material expenditures. GOVERNMENT REGULATION The Company is subject to various regulations relating to the maintenance of safe working conditions and manufacturing practices. In addition, certain of the products manufactured by the Health Products 12 Division are subject to the requirements of the Food and Drug Administration with respect to environmentally controlled facilities. Management believes that it is currently in compliance with all such regulations. EMPLOYEES The Company had 663 employees as of December 31, 1996. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be excellent. ITEM 2. PROPERTIES. The Company's principal physical properties are listed below: Approximate Square Name Location Footage Use - ---- -------- ----------- --- Alba Valdese, NC 157,000 Yarn Processing (Consumer Products) Alba Valdese, NC 18,000 Not in Use Annex John Louis Valdese, NC 178,300 Finishing (Consumer Products) Pineburr Valdese, NC 81,000 Knitting (Consumer Products) 13 Rockwood Rockwood, TN 245,940 Knitting, Yarn Processing & Finishing (Health Products) Office Valdese, NC 52,000 Corporate headquarters Offices New York City 2,488 Leased Sales Offices $80,000 Annually Expires May 1997 AWI Retail Branson, MO 1,760 Leased Retail Store (Not in Use) $32,560 Annually Expires March 1999 During 1995 the Company restructured its Valdese, North Carolina manufacturing operations. As a result the Company only utilizes approximately 8% of its Alba Plant for a yarn covering operation and leases approximately 11%. The Company plans to sell or lease the Alba Plant and will move its yarn covering operation when a suitable purchaser or tenant is found. All plants are of brick and steel construction, and most areas have been air conditioned. All have been maintained in working condition. The Company leases its New York City office and its Branson, Missouri retail store. The rest of the Company's physical properties are held in fee simple, subject to encumbrances that are described in Note 4 and 5 of Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS. LITIGATION There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries or which any of its properties are subject. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information called for by this item appears beneath the heading "Stock Prices and Dividend Information" in the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. The Company's $2.50 par value Common Stock is registered and traded on the American Stock Exchange under the symbol "AWS". The Board of Directors has no formal policy with respect to the payment of dividends and no such dividends have been declared or paid during the past three fiscal years. ITEM 6. SELECTED FINANCIAL DATA. The information called for by this item appears beneath the heading "Five-Year Selected Financial Data" in the Company's 1996 Annual Report to Shareholders , which information is incorporated herein by reference. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATIONS The information called for by this item appears beneath the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information called for by this item appears in the Company's 1996 Annual Report to Shareholders, which information is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding Directors called for by this item appears beneath the heading "Information about Directors and Nominees for Director" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders, which information is incorporated herein by reference. Such Proxy Statement 16 will be filed with the Securities and Exchange Commission not later than 120 days after the Company's fiscal year end. EXECUTIVE OFFICERS The following table sets forth certain information about the Company's executive officers: Name Position with the Company - ---- ------------------------- Lee N. Mortenson 61 President and Chief Executive Officer Donald R. Denne, Sr. 60 Senior Vice President and President of the Health Products Division Thomas I. Nail 49 Treasurer, Secretary and Chief Financial Officer Dixon R. Johnston 55 Vice President and President of the Consumer Products Division James Douglas Dickson 40 Assistant Secretary Warren R. Nesbit 44 Vice President The following paragraphs set forth information concerning each executive officer's business experience: Mr. Lee N. Mortenson has been a director of Alba-Waldensian since 1984 and was elected President and Chief Executive Officer of the Company in February 1997. He currently serves as President, Chief Operating Officer and Director of Sunstates Corporation (formerly Acton Corporation). He has been President, Chief Operating Officer and Director of Telco Capital Corporation since 1984. Mr. Mortenson previously served as Group Vice President of Gould, Inc. from 1980 to 1982. Prior to this, he was a Group Vice President with Becton Dickinson, Inc. Mr. Mortenson holds a BS Degree and Masters Degree in Engineering from UCLA. Mr. Donald R. Denne, Sr. joined the Company in 1987 as a Corporate Vice President and President of the Health Products Division. Prior to joining the Company, Mr. Denne served as Vice President of Marketing for General Medical Corporation, Vice President of Health Products for Work Wear Corporation, and Vice President for Business Planning for American Hospital Supply. Mr. Denne has a B.A. degree from Duke University. 17 Mr. Thomas I. Nail joined the Company as Chief Financial Officer in March of 1994. He was elected as Secretary and Treasurer of the Corporation in May of 1994. Prior to joining the Company, Mr. Nail served as Vice President of Finance and as a member of the Board of Directors of Burke Mills, Inc. for approximately six years. Mr. Nail served as Controller of Intercomp Wire and Cable, a subsidiary of Insilco, Inc. from 1985 to 1987. Mr. Nail has a degree in Business from Auburn University. Mr. Dixon R. Johnston was elected Vice President of the Company and President of the Consumer Products Division on February 22, 1996. Prior to joining the Company, Mr. Johnston served as Executive Vice President of Gem-Dandy, Inc. from 1995 - 1996. Mr. Johnston served as Director of Motorsports & New Ventures for Sky Box International from 1993 to 1995. He served as Executive Vice President of Trone Advertising from 1989-1993. Mr. Johnston was president and part owner of Milpak Graphics from 1986 to 1989. From 1982 to 1986 he was President of No-nonsense Fashions, Inc., a division of Kayser-Roth Hosiery. Mr. Johnston has a degree in economics from Northwestern University and an MBA from the University of California, Berkeley. Mr. James Douglas Dickson joined the Company in 1994 as Corporate Controller. He was elected Assistant Secretary on December 15, 1994. Prior to joining the Company, Mr. Dickson served as Controller of Hickorycraft, Inc., a division of Masco Corporation, from 1987 to 1994 and as Division Controller of Sealed Air Corporation from 1982 to 1987. Mr. Dickson holds a B.B.A. from the University of Georgia and is a Certified Management Accountant. Mr. Warren Nesbit joined the Company in December, 1985 as Director of Human Resources. He was named Vice President of Human Resources in 1990 and elected to serve as a Corporate Vice President in 1993. Mr. Nesbit served as Vice President of Industrial Relations with Marion Manufacturing, in Marion, North Carolina prior to joining the Company. He held various manufacturing and human resource responsibilities with Burlington Industries from 1978 to 1984. Mr. Nesbit is a graduate of the University of North Carolina. The Company's officers are elected for a one year term at the annual meeting of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION. The information called for by this item appears under the heading "Executive Compensation" in the Proxy Statement for the Company's 1997 Annual Meeting of Shareholders, which information is incorporated by reference. 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this item appears under the heading "Voting Securities and Principal Security Holders" in the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS. The information called for by this item appears under the heading "Information About Directors and Nominees for Directors" in the Proxy Statement for the Company's 1997 Annual Meeting of Shareholders, which information is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following are filed as a part of this report: (1) Financial statements filed: (i) The following consolidated financial statements of the Company and its subsidiaries included in the Company's 1996 Annual Report to shareholders are incorporated herein by reference to the Annual Report as indicated Consolidated Balance Sheets--December 31, 1996 and 1995. Consolidated Statements of Operations--Years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Stockholders' Equity--Years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995, and 1994. Summary of Significant Accounting Policies Notes to Consolidated Financial Statements. 19 (2) Financial Statement Schedules filed: Report of Independent Certified Public Accountants on Financial Statement Schedule (page S-1 of this report) Schedule II (Valuation and Qualifying Accounts) (page S-2 of this report) All other schedules are omitted as the required information is inapplicable or is present in the financial statements or related notes thereto. (3) Exhibits filed: 3.1 Certificate of Incorporation, as amended, which is incorporated herein by reference to Exhibit 3.1 of the Company's 1986 Annual Report on Form 10-K. 3.1.1 Amendment to Certificate of Incorporation adopted by shareholders which is incorporated herein by reference to Exhibit 3.1 of the Company's 1987 Annual Report on Form 10-K. 3.2 Bylaws, which are incorporated herein by reference to Exhibit 3.2 of the Company's 1986 Annual Report on form 10-K. 4.1 Specimen certificate of common stock, which is incorporated herein by reference to Exhibit 4 of the Company's Registration Statement on Form S-2 (No. 2-83186). 4.3 Undertaking of the Company to file exhibits pursuant to Item 601 (b) (4) (iii) (A) of Regulation S-K, which is incorporated herein by reference to Exhibit 28 of the Company's 1986 Annual Report on Form 10-K. 10.5 Office Lease dated March 16, 1982 between the Company and Empire State Building Company, which is incorporated by reference to Exhibit 10.25 of the Company's Registration Statement on Form S-2 (No. 2-83186) *10.6 Deferred Compensation Agreement between the Company and William D. Schubert dated April 1, 1976, which is incorporated by reference to Exhibit 10.30 of the Company's Registration Statement on Form S-2 (No. 2-83186). *10.7 Deferred Compensation Agreement between the Company and William D. Schubert dated December 18, 1984, which is incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1984. *10.8 1983 Key Employee Incentive Stock Option Plan which is incorporated herein by reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1983. *10.9 Management Incentive Plan, which is incorporated herein by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1984. *10.10 1989 Non-Qualified Deferred Compensation Plan, which is incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1988. *10.11 1989 Management Incentive Plan which is incorporated herein by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 20 *10.12 1992 Non-Qualified Stock Option Plan for Non-Employee Directors, which is incorporated herein by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. *10.13 1993 Long Term Performance Plan, which is incorporated herein by reference to Exhibit 10.13 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.14 Asset Purchase Agreement dated as of March 6, 1995 between the Registrant and Kayser-Roth Corporation, which is incorporated herein by reference to Exhibit 2 of the Company's 8-K report dated March 20, 1995. 13 1996 Annual Report to Shareholders . 21 List of Subsidiaries of the Company 23.2 Consent of Independent Certified Public Accountants, BDO Seidman LLP 27 Financial Data Schedule (filed in electronic format only). This schedule is furnished for the information of the Commission and is not deemed to be "filed". * Identifies compensation plans. b. Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1996. 21 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. ALBA-WALDENSIAN, INC. Date : March 28, 1997 By /s/ Lee N. Mortenson Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated /s/ . /s/ Paul H. Albritton, Jr., Director William M. Cousins, Jr., Director March 28, 1997 March 28, 1997 /s/ /s/ C. Alan Forbes, Director Clyde Wm. Engle, Chairman of the March 28, 1997 Board of Directors March 28, 1997 /s/ /s/ James M. Fawcett, Jr. , Director Glenn J. Kennedy, Director March 28, 1997 March 28, 1997 /s/ /s/ Joseph C. Minio, Director Lee N. Mortenson , Director and March 28, 1997 Chief Executive Officer (Principal Executive Officer) March 28, 1997 /s/ Thomas I. Nail Treasurer and Secretary (Chief Financial and Accounting Officer) March 28, 1997 22 ALBA-WALDENSIAN, INC. INDEX TO EXHIBITS Annual Report on Form 10-K for the Fiscal Year Commission File No. 1-6150 ended December 31, 1996. Exhibit Number Exhibit - -------------- ------- 13 Annual Report to Shareholders 21 Subsidiaries of the Company as of December 31, 1996 23.2 Consent of Independent Certified Public Accountants, BDO Seidman LLP 27 Financial Data schedule (filed in electronic format only) 23 Schedule II Alba-Waldensian, Inc. and Subsidiaries Valdese, North Carolina Valuation and Qualifying Accounts
Balance at Charged to Reduction Balance Description/ Beginning of Cost and of at End Fiscal Year Ended Period Expenses Allowance of Period Year Ended December 31, 1996 Accounts Receivable - Allowance 250,000 109,868 84,868 275,000 for uncollectible accounts Notes Receivable - Allowance for 0 uncollectible accounts Inventory - Reserve for markdowns 610,504 754,106 641,969 722,641 Year Ended December 1, 1995 Accounts Receivable - Allowance 180,000 145,199 75,199 250,000 for uncollectible accounts Notes Receivable - Allowance for 0 uncollectible accounts Inventory - Reserve for markdowns 385,200 1,619,013 1,393,709 610,504 Year Ended December 31, 1994 Accounts Receivable - Allowance 194,000 74,933 88,933 180,000 for uncollectible accounts Notes Receivable - Allowance for 0 uncollectible accounts Inventory - Reserve for markdowns 149,000 579,997 343,797 385,200
EX-13 2 EXHIBIT 13 (Bar graph appears here with the following plot points, along with a background logo for Alba-Waldensian) 91 92 93 94 95 96 39.7 40.6 50.9 56.5 63.7 65.8 Net Sales ALBA-WALDENSIAN 1996 ANNUAL REPORT ALBA-WALDENSIAN HISTORY Headquartered in Valdese, North Carolina, Alba-Waldensian, Inc. was founded in 1901 by Waldensians who had immigrated from Italy in the late 1800's to start new lives in the foothills of the Blue Ridge Mountains. From this modest beginning Alba-Waldensian, Inc. has grown over the last 96 years into a multi-facility company manufacturing a variety of very innovative products for domestic as well as international markets. The current Company's ancestor, Waldensian Hosiery Mills, first began operations in a 40 x 80 foot building using timber from local farms. The Company was a long-time producer of full fashioned women's knit hosiery until the 1950's when they brought their innovative spirit into play and learned to knit women's stretch panties on their original knitting equipment. Today, the Company uses the most modern, state-of-the-art computerized knitting technology, to produce a wide variety of stretch panties, bras, body suits, panty hose and medical specialty products. In 1961 Waldensian Hosiery Mills merged with Alba Hosiery Mills to form the current Alba-Waldensian, Inc. The Company then went public in 1969 with its stock listed on the American Stock Exchange (AWS). The Company introduced its first low-tech, consumable medical specialty products in 1974 utilizing its considerable knitting expertise. The health products business has grown steadily and today the Alba Health Division is a leading manufacturing and marketer of products used in hospitals, nursing homes, physician offices and extended care facilities throughout the world. Alba-Waldensian continued to diversify in 1992 with its acquisition of Byford Apparel, a leading marketer of high-quality English men's socks and sweaters. In 1996 Byford acquired the license to market Greg Norman socks, a major department store and golf shop men's brand. The Health Products Division continued to grow in 1994 by acquiring the Pulsatile Anti-Embolism System (PAS(R)) thereby doubling its vascular care business. In early 1995 the Company acquired the Balfour Healthcare Division thereby doubling the size of its healthcare business. During 1995 and 1996 the Company consolidated all health products manufacturing into the Rockwood, Tennessee facility that was part of the Balfour acquisition. At the same time, the Valdese facilities were dedicated to consumer products manufacturing. The highly innovative spirit that has been the trade-mark of Alba-Waldensian for close to a century continues today to be our "secret weapon" that enables us to continue to develop and market highly unique products and be extremely competitive throughout the world. It is with a keen sense of heritage that Alba-Waldensian commits itself to the future. To Our Shareholders - ------------------------------------------------------------------------------- I was named President and Chief Executive Officer of Alba-Waldensian on February 20, 1997, replacing Tom Schuster, who served as Chief Executive Officer from May 1992 to February 1997, and who resigned to pursue other business interests. Although I am new to the job, I am certainly no stranger to Alba, having spent twelve years as a member of the Board of Directors. Over these years I've served on several committees of the Board of Directors including the MIS Committee, the Stock Option and Executive Compensation Committee and the Strategic Planning Committee, giving me a good insight into the Company's operations. Some of my other business experiences include serving as President and Chief Operating Officer of Sunstates Corporation and Group Vice President with Gould Inc. and Becton Dickinson and Company. Alba-Waldensian realized significant growth during 1995 as a result of the Balfour acquisition, but 1995 earnings suffered due to the assimilation of the Balfour acquisition and a 14.6% decline in Consumer Products sales. This led to our loss of $1.66 million for 1995. I'm happy to report the Company made great strides during 1996 in resolving many of these issues. While 1996 results were certainly an improvement over 1995, they were still a disappointment to us. Sales for 1996 increased 3.3% to $65,815,000, a record high for the Company. At the same time, our profits went from a loss of $1,656,000 last year to a profit this year of $320,000. While this level of profitability is far from acceptable, it does represent a turn-around in the bottom line of nearly $2,000,000 and is an indication that the many changes made are having a positive effect. Productivity, as measured by sales per employee, grew by 12.3% to a new record of $80,066. Looking at the Company on a divisional basis, the Health Products Division had another good year with sales up 8% and operating income up 47%. The division is now 50% of total Company sales vs 28% in 1994 prior to our acquisitions of the Balfour and Baxter PAS(R) businesses. The Health Products management team continues to face a very rapidly changing market place as consolidation continues at all levels -- among hospitals, distributors and suppliers. In an attempt to stay ahead of the rate of change in their industry, they are taking steps that will lead to faster and more innovative research and development efforts, better grouping and cross-selling of their products and an overall emphasis on being more competitive to increase their market share. Helping these efforts, in late December, the FDA gave the Health Products Division approval for a significant new product for their PAS(R) business. In February 1996, Dixon Johnston joined Alba as the new president of the Consumer Products Division. He has over 29 years of experience in consumer marketing. While sales for the year for the Consumer Products Division were basically flat, their operating loss was significantly reduced. Dixon has brought much better focus to the division and they are now concentrating on two product categories -- seamless intimate apparel and queensize hosiery. The division has placed increased emphasis on inventory control and it's having very positive results. Their average inventories are down 20% and their turns are up 30%. The Alba Direct Division has stabilized sales while reducing their overhead expense level. During the year, several independent sales representatives were engaged to assist in selling product. In addition, the division participated in a Department of Commerce study on the Japanese marketplace to aid them in rebuilding sales in that very key marketplace. The Byford Division exited the fashion sweater business during the year. While this resulted in a loss of sweater sales volume, it also eliminated significant losses associated with product close-outs. Overall, the Division had nearly flat sales, as increases in their sock volume replaced most of the lost sweater sales. At mid-year, the Division acquired the license for Greg Norman socks and initial results for this new line have been very promising. Toward year end, the Company executed a reorganization of manufacturing operations in Valdese. We hope that this will significantly reduce manufacturing overhead and serve us well as we go forward. After an extensive search by the Company, Mr. Ron Harrison joined Alba-Waldensian in March 1997 as Vice President of Operations. He brings over 25 years of experience in apparel manufacturing to the Company. While 1996 returned Alba to a state of profitability, the results were by no means satisfactory. The plan we have put together for 1997 shows modest sales growth but improved growth in the corporation's profitability and we're all looking forward to executing this plan properly and in a timely manner. I want to thank everyone at Alba for a lot of hard work. We're looking forward as a team to improvements in our operating results and shareholder value in 1997. Sincerely, /s/ Lee N. Mortenson Lee N. Mortenson President and Chief Executive Officer Net Sales $ in millions (Bar graph appears here with the following plot points) 92 93 94 95 96 40.6 50.9 56.5 63.7 65.8 Sales Per Employee Thousands (Bar graph appears here with the following plot points) 92 93 94 95 96 51 58 67 71 80 Health Products Division - -------------------------------------------------------------------------------- The key to success in today's ever-changing healthcare market is delivering great products with great value. albahealth(TM) is constantly listening to its customers to manufacture and deliver products that not only meet their needs, but exceed their expectations. Despite continued emphasis on reducing costs in the healthcare industry, albahealth(TM) experienced the largest sales year in its 22 year history. With over 500 customers, a broad based product line and manufacturing efficiencies, albahealth(TM) is well positioned to compete long term in the cost-conscious healthcare marketplace. albahealth(TM) is now the market leader in three different product groups. Our diverse offering of slip-resistant footwear continues to be the mainstay of the product line, with a market share in excess of 50%. albahealth(TM) continues to be the market leader in stockinette with sales increasing over 14% in 1996. Our extensive line of products, including non-sterile, sterile, and "pre-treated" stockinette for custom pack put-ups in a large variety of sizes allows us to meet any and all customer needs. It is estimated albahealth(TM) now manufactures over 80% of the cuffs used for disposable surgeons gowns. Cuff sales increased over 26% in 1996, the largest sales increase of any of our product groups. In December 1996, albahealth(TM) was granted FDA approval for its new PulStar(TM) system. PulStar(TM) combines the clinically proven efficiencies of the PAS(R) System with an easier to apply wrap feature. The addition to PulStar(TM) with PAS(R), C.A.R.E.(R), and Life-Span(R) anti-embolism stockings provides a complete vascular product system. The 1995 acquisition of Balfour and subsequent consolidation of all health products manufacturing in Rockwood, Tennessee has created a more efficient and lower cost operating environment. With the manufacturing and customer service team now in place, albahealth's(TM) future is the brightest its ever been. albahealth's(TM) ultimate strength is our people. Empowered to do what's best for our customers, they responded with breakthroughs in product design, cost reduction, quality improvement, manufacturing efficiency and overall productivity. We enter 1997 with high expectations for continued profitable growth. Consumer Products - -------------------------------------------------------------------------------- Consumer Products in 1996 experienced a slight gain in dollar sales and a significant gain in margins (9.7% to 14.0%) as the division spent much of the year refocusing and solidifying the business; many of these efforts will further pay in 1997. The focus of the division has been sharpened against full-figure and maternity hosiery and (Two photos appear on this page) 2 intimates plus regular sized seamless intimate apparel. All of these are large and growing markets. Full-figure apparel, which we define as size 16 and over, is worn by over one-third of all women now....projected to be forty-two percent by 2002 according to the National Center for Health Statistics. Seamless intimates, a recent technical development pioneered and patented by Alba, are experiencing double digit growth. As women discover the fit, comfort, and fashion attributes of seamless intimates we expect this growth to continue, supporting the wisdom of our investment in this equipment over the past few years (we believe Alba had more seamless equipment that any other manufacturer at the end of '96). In 1996 we placed new queen size hosiery knitting machines in operation. These provide a better fit and improved comfort for the full-figured customer. In fact, over one-third of all women cannot comfortably wear pantyhose made on "regular" knitting machines; they can be comfortably fit with Alba's new wider cylinder machines! The maternity market, which is benefiting from the mini baby boom, is very important to Alba. Management believes we have the leading share of market in maternity pantyhose and panties. Our circular knit products, with their 360 degree stretch, are particularly well suited for the always changing physical needs of the expectant mother. The Company continues to invest in and build its brands, All Day Long(R) and BBW(R) in department and specialty stores and While You Wait(R) maternity products. We have recently put renewed emphasis on obtaining licenses. We are close to being able to announce a couple of licensed properties which should generate increased margins and open additional distribution opportunities to our products. In addition, we are the exclusive resource for Calvin Klein seamless panties and bras which will begin shipping in early 1997. The sales and marketing functions of the Company have been strengthened by the creation of dedicated teams specializing in our key accounts, organized by areas of the country. These teams contain experts from within the Company in various disciplines who work directly with the sales managers in the field and are in constant contact with our customers. Thus, we have taken the concept of "brand management" a step further to working partnerships with major retailers and catalogue houses. R&D efforts have been significant. In addition to obtaining additional patents on our seamless brassieres, we have developed a line of shapewear, and new hosiery styles incorporating the latest yarns and patterns in pantyhose, trouser socks, and tights. We have also developed additional applications of our wider cylinder hosiery machinery for full-figure and maternity customers. Significantly, we have incorporated a new fiber, Tencel(R) (a natural fiber, the first new fiber in thirty years), into a line of intimate apparel that has received very positive early marketplace reception. (Two photos appear on this page) 3 Alba will be the first intimate apparel company to market with this new natural fiber. In manufacturing we have placed the above referenced emphasis on our new hosiery equipment, getting the new machines on line and producing superior hosiery for the full-figured consumer. We have developed new applications of our seamless technology resulting in improved brassieres, panties and shapewear. Further, we have continued the automation of hosiery sewing and packaging that was begun last year. All of these efforts have coincided with a conscious effort to reduce our inventory (which is now down by 15% resulting in a 30% increase in turns). Further efficiencies are expected as a result of our success in reducing SKU's, down one-third in 1996, and another third in 1997. We are pleased with the turnaround accomplished in '96 and are extremely excited about the potential for 1997. Byford - ------------------------------------------------------------------------------- In 1996 Byford signed exciting license agreements with the Smithsonian Institution and with Greg Norman. This has resulted in opening new accounts and significant new channels of distribution such as golf shops, catalogue houses, and department stores. These licensed brands will compliment and enhance the Byford brand. We have begun an aggressive cost reduction program by seeking out domestic and other resources that will enable us to reduce our reliance on high cost production in the UK. Byford is being integrated into the Consumer Products Division to give the Byford brands increased marketing focus, participation in the sales-marketing-customer partnership team approach, and to fully utilize a new designer for the Byford team. Alba-Direct - -------------------------------------------------------------------------------- The Alba-Direct telemarketing people give us efficient access to the many small independent specialty stores in this country. This domestic telemarketing effort has been augmented by the addition of commissioned reps in key markets plus new marketing programs offering close-out and irregulars to these accounts. Alba-Direct is also our main export sales arm. We have narrowed our export focus to a select few distributors in Japan, based on guidance from a recent Department of Commerce Study, and three other Far Eastern markets: Australia, Taiwan, and Korea. 4 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents............................................................................ $ 294,447 $ 56,009 Accounts receivable (net of allowance for uncollectible accounts of $275,000 in 1996 and $250,000 in 1995 (Notes 4 and 5)............................................................................... 9,712,667 9,412,841 Refundable income taxes.............................................................................. -- 437,453 Inventories (Notes 2 and 5).......................................................................... 12,342,658 15,157,970 Deferred income tax asset (Note 8)................................................................... 452,091 400,850 Prepaid expenses and other........................................................................... 303,142 379,373 Total current assets................................................................................. 23,105,005 25,844,496 PROPERTY AND EQUIPMENT (Notes 3, 4, and 5): Land................................................................................................. 259,744 259,744 Buildings............................................................................................ 8,366,494 8,257,176 Machinery and equipment.............................................................................. 22,733,414 21,462,652 Total property and equipment......................................................................... 31,359,652 29,979,572 Less accumulated depreciation and amortization....................................................... (17,821,356) (16,204,174) Net property and equipment........................................................................... 13,538,296 13,775,398 OTHER ASSETS: Notes receivable..................................................................................... 47,920 60,421 Trademarks and patents............................................................................... 445,510 281,082 Excess of cost over net assets acquired (Note 1)..................................................... 8,062,580 8,957,001 Cash surrender value of life insurance (net of loans against policies of $107,842 in 1995)........... -- 331,617 Total other assets................................................................................... 8,556,010 9,630,121 Total assets......................................................................................... $ 45,199,311 $ 49,250,015 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings and lines of credit (Note 4)................................................... $ -- $ 1,267,600 Current maturities of long-term debt (Note 5)........................................................ 2,350,000 2,350,000 Current maturities of capital lease obligations (Note 3)............................................. -- 58,069 Accounts payable..................................................................................... 1,900,024 2,773,542 Accrued Expenses: Payroll and profit-sharing......................................................................... 605,372 517,286 Property and payroll taxes......................................................................... 169,554 247,453 Group health claims................................................................................ 241,872 188,143 Income taxes payable............................................................................... 169,324 -- Other.............................................................................................. 356,080 481,801 Total current liabilities............................................................................ 5,792,226 7,883,894 LONG-TERM DEBT (Note 5).............................................................................. 9,912,500 12,262,500 DEFERRED COMPENSATION................................................................................ 232,160 330,086 DEFERRED INCOME TAX LIABILITY (Note 8)............................................................... 1,474,014 1,305,019 Total liabilities.................................................................................... 17,410,900 21,781,499 Commitments (Notes 3 and 9) STOCKHOLDERS' EQUITY (Notes 4, 5 and 6): Common stock -- authorized 3,000,000 shares, $2.50 par value; issued: 1,886,580 shares in 1996 and 1995; outstanding; 1,867,403 shares in 1996 and 1995............................................... 4,716,450 4,716,450 Additional paid-in capital........................................................................... 9,182,158 9,182,158 Retained earnings.................................................................................... 14,026,439 13,706,544 Total................................................................................................ 27,925,047 27,605,152 Less treasury stock -- at cost (19,177 shares)....................................................... (136,636) (136,636) Total stockholders' equity........................................................................... 27,788,411 27,468,516 Total liabilities and stockholders' equity........................................................... $ 45,199,311 $ 49,250,015
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 NET SALES (Note 7)...................................................................... $65,814,594 $63,717,716 $56,506,566 COST OF SALES........................................................................... 50,623,565 51,675,498 42,252,186 GROSS MARGIN............................................................................ 15,191,029 12,042,218 14,254,380 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................................ 13,392,356 13,139,788 11,007,734 OPERATING INCOME (LOSS)................................................................. 1,798,673 (1,097,570) 3,246,646 OTHER INCOME (EXPENSE): Interest expense........................................................................ (1,286,110) (1,246,540) (274,739) Interest income......................................................................... 21,164 25,423 57,863 Gain (loss) on sale of property and equipment........................................... (8,921) (109,809) 27,992 Other................................................................................... (20,792) (41,019) 91,781 Total other income (expense), net....................................................... (1,294,659) (1,371,945) (97,103) INCOME (LOSS) BEFORE INCOME TAXES....................................................... 504,014 (2,469,515) 3,149,543 PROVISION (BENEFIT) FOR INCOME TAXES (Note 8)........................................... 184,119 (813,671) 1,203,667 NET INCOME (LOSS)....................................................................... $ 319,895 $(1,655,844) $ 1,945,876 NET INCOME (LOSS) PER COMMON SHARE...................................................... $ .17 $ (.89) $ 1.05
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK SHARES* AMOUNT CAPITAL EARNINGS SHARES AMOUNT BALANCE AT JANUARY 1, 1994...................... 1,886,580 $4,716,450 $9,182,158 $13,426,272 (48,052) $(344,367) Net income...................................... -- -- -- 1,945,876 -- -- Exercise of stock options....................... -- -- -- (10,385) 24,625 177,450 BALANCE AT DECEMBER 31, 1994.................... 1,886,580 4,716,450 9,182,158 15,361,763 (23,427) (166,917) Net loss........................................ -- -- -- (1,655,844) -- -- Exercise of stock options....................... -- -- -- 625 4,250 30,281 BALANCE AT DECEMBER 31, 1995.................... 1,886,580 4,716,450 9,182,158 13,706,544 (19,177) (136,636) Net income...................................... -- -- -- 319,895 -- -- BALANCE AT DECEMBER 31, 1996.................... 1,886,580 $4,716,450 $9,182,158 $14,026,439 (19,177) $(136,636) TOTAL BALANCE AT JANUARY 1, 1994...................... $26,980,513 Net income...................................... 1,945,876 Exercise of stock options....................... 167,065 BALANCE AT DECEMBER 31, 1994.................... 29,093,454 Net loss........................................ (1,655,844) Exercise of stock options....................... 30,906 BALANCE AT DECEMBER 31, 1995.................... 27,468,516 Net income...................................... 319,895 BALANCE AT DECEMBER 31, 1996.................... $27,788,411
*DENOTES SHARES ISSUED. SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 OPERATING ACTIVITIES: Net income (loss)........................................................................ $ 319,895 $(1,655,844) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................................................... 2,352,258 2,303,874 Provision for bad debts................................................................ 109,868 145,199 Loss (gain) on sale of property and equipment.......................................... 8,921 109,809 Increase (decrease) in deferred income taxes........................................... 117,754 (496,190) Provision for inventory obsolescence................................................... 754,106 1,619,013 Changes in operating assets and liabilities providing (using) cash: Accounts receivable................................................................. (407,776) (153,403) Refundable income taxes............................................................. 437,453 (310,059) Inventories......................................................................... 2,061,206 2,010,308 Prepaid expenses and other.......................................................... (142,082) (239,429) Accounts payable.................................................................... (873,518) 185,667 Accrued expenses and other liabilities.............................................. 441,782 (38,227) Deferred compensation............................................................... (97,926) (14,305) Net cash provided by operating activities................................................ 5,081,941 3,466,413 INVESTING ACTIVITIES: Proceeds from surrender of life insurance policies....................................... 327,855 -- Capital expenditures..................................................................... (1,524,893) (1,609,840) Proceeds from sale of property and equipment............................................. 7,500 271,830 Proceeds from notes receivable........................................................... 21,704 25,950 Purchase of Balfour Healthcare........................................................... -- (15,321,714) Net cash used in investing activities.................................................... (1,167,834) (16,633,774) FINANCING ACTIVITIES: Proceeds from borrowings under line of credit agreement, net............................. (1,267,600) 89,538 Proceeds from issuance of long-term debt................................................. -- 15,000,000 Principal payments on long-term debt and leases.......................................... (2,408,069) (2,001,026) Cash proceeds from exercise of stock options............................................. -- 30,906 Net cash provided by (used in) financing activities...................................... (3,675,669) 13,119,418 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 238,438 (47,943) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................... 56,009 103,952 CASH AND CASH EQUIVALENTS AT END OF YEAR................................................. $ 294,447 $ 56,009 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the year for: Interest............................................................................... $ 1,280,976 $ 1,204,386 Income taxes, net of refunds received.................................................. $ 528 $ 25,934 1994 OPERATING ACTIVITIES: Net income (loss)........................................................................ $ 1,945,876 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................................................... 1,736,576 Provision for bad debts................................................................ 74,933 Loss (gain) on sale of property and equipment.......................................... (27,992) Increase (decrease) in deferred income taxes........................................... 455,000 Provision for inventory obsolescence................................................... 579,997 Changes in operating assets and liabilities providing (using) cash: Accounts receivable................................................................. (303,611) Refundable income taxes............................................................. (51,260) Inventories......................................................................... (3,695,551) Prepaid expenses and other.......................................................... (14,967) Accounts payable.................................................................... (175,772) Accrued expenses and other liabilities.............................................. (21,088) Deferred compensation............................................................... (105,974) Net cash provided by operating activities................................................ 396,167 INVESTING ACTIVITIES: Proceeds from surrender of life insurance policies....................................... -- Capital expenditures..................................................................... (1,918,638) Proceeds from sale of property and equipment............................................. 4,250 Proceeds from notes receivable........................................................... 31,530 Purchase of Balfour Healthcare........................................................... -- Net cash used in investing activities.................................................... (1,882,858) FINANCING ACTIVITIES: Proceeds from borrowings under line of credit agreement, net............................. 1,178,062 Proceeds from issuance of long-term debt................................................. -- Principal payments on long-term debt and leases.......................................... (715,000) Cash proceeds from exercise of stock options............................................. 167,065 Net cash provided by (used in) financing activities...................................... 630,127 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (856,564) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................... 960,516 CASH AND CASH EQUIVALENTS AT END OF YEAR................................................. $ 103,952 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the year for: Interest............................................................................... $ 259,222 Income taxes, net of refunds received.................................................. $ 801,917
SEE ACCOMPANYING SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 OPERATIONS -- Alba-Waldensian, Inc. (the Company) manufactures and sells an extensive line of knitted apparel products as well as a variety of surgical products for the health care industry. The Company's principal market for both apparel and surgical products is the United States. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Pilot Research Corp., Alba-Waldensian Export Corp., and AWI Retail, Inc. All significant intercompany accounts and transactions have been eliminated. ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company writes down close-out and irregular inventory on an ongoing basis based on market conditions. Inventories reflect valuation allowances necessary to reduce inventories to their net realizable value. It is reasonably possible that these estimates could change in 1997. CASH AND CASH EQUIVALENTS -- The Company considers short-term investments with original maturities of less than three months to be equivalent to cash. INVENTORIES -- Inventories are stated at the lower of cost (first-in, first-out "FIFO" basis) or market. PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION -- Property and equipment are stated at cost. Betterments are capitalized. Maintenance and repairs are expensed as incurred. The provision for depreciation is primarily based on the straight-line method calculated to extinguish the costs of the respective assets over their estimated useful lives which range from seven to forty years for buildings and improvements and three to twenty years for furniture, fixtures, machinery and equipment. Depreciation expense amounted to approximately $1,700,000, $1,789,000, and $1,693,000 in 1996, 1995 and 1994, respectively. The Company follows the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of " (SFAS 121), in assessing the carrying value of property and equipment. The provisions of this statement were adopted in 1996 and there was no effect on the financial statements. Assets under capital leases are amortized in accordance with the Company's normal depreciation policy for owned assets or over the lease term if shorter. INTANGIBLE ASSETS -- The costs of acquired trademarks and patents are amortized using the straight-line method over their estimated useful lives of approximately seventeen years. Excess of cost of a company acquired over the fair value of its net assets at dates of acquisition (goodwill) is being amortized on the straight-line method over 15 years. Amortization expense charged to operations was $608,497 in 1996 and $471,421 in 1995. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company measures the potential impairment of recorded goodwill by the undiscounted value of expected future operating cash flows in relation to its net capital investment. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. REVENUE RECOGNITION -- The Company recognizes revenue when goods are shipped. ADVERTISING COSTS -- Advertising costs are charged to operations when incurred. The Company spent approximately $408,000, $384,000, and $522,000 for advertising in 1996, 1995 and 1994, respectively. RESEARCH AND DEVELOPMENT -- The Company sponsors research and development projects through its research and development department and its wholly owned subsidiary, Pilot Research Corporation. Expenditures for research and development are expensed as incurred. The 8 Company spent approximately $474,000, $490,000, and $376,000 for research and development in 1996, 1995 and 1994, respectively. INCOME TAXES -- The Company calculates income taxes using the asset and liability method specified by Statement of Financial Accounting Standards No. 109. CONCENTRATION OF CREDIT RISK -- Financial instruments which potentially subject the Company to concentrations of credit risk consist of trade receivables. Any such risk is limited due to the Company's large number of customers and their geographic dispersion, except as discussed in Note 7. NET INCOME PER COMMON SHARE -- Net income per common share is calculated on the weighted average number of shares of common stock outstanding (1,867,403 in 1996, 1,864,618 in 1995, and 1,848,671 in 1994). When dilutive, outstanding options to purchase common stock are considered. The effects on earnings per share of dilutive stock options were not material for 1994 and 1996. For 1995, such options were antidilutive. DEFERRED COMPENSATION -- The Company has agreements with several of its officers providing for the deferral of a portion of their annual compensation until their retirement from the Company. The agreements allow for payment of the deferred amounts over a ten-year period beginning on the retirement date. Compensation expense is being recognized in the year it is earned. The liability represents the present value of future payments earned as of December 31, 1996 and 1995. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments of the Company include long-term debt and line of credit agreements. Based upon the current borrowing rates available to the Company, estimated fair values of these financial instruments approximate their recorded carrying amounts. At December 31, 1996, the fair value of the Company's swap agreements were not material. INTEREST RATE SWAPS -- Interest rate swap agreements are entered into primarily as a hedge against interest exposure of variable-rate debt. The difference to be paid or received on swap agreements is included in interest expense as payments are made or received. GROUP HEALTH INSURANCE -- The Company is self-insured as to group health insurance for its employees. The Company accrues an amount for estimated claims incurred but not reported. PROFIT-SHARING PLAN -- The Company sponsors a profit-sharing plan which covers substantially all employees. Contributions to the plan are funded annually (see Note 9). RECLASSIFICATION -- Certain 1994 and 1995 amounts have been reclassified to conform with 1996 classifications. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. ACQUISITION On March 6, 1995, the Company purchased the Balfour Health Care Division and manufacturing facility in Rockwood, Tennessee ("Balfour"), a manufacturer of knitted medical products, from Kayser-Roth Corporation for approximately $15.3 million. The Company financed 100% of the acquisition price with a revolving loan agreement provided by a bank (see Note 5). The acquisition has been accounted for using the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net assets acquired (goodwill) of $9.142 million is amortized on a straight line basis over 15 years. 2. INVENTORIES Inventories at December 31, 1996 and 1995 include:
1996 1995 Materials and supplies............. $ 2,877,822 $ 3,171,091 Work-in-process.................... 4,168,965 4,749,829 Finished goods..................... 5,295,871 7,237,050 Total.............................. $12,342,658 $15,157,970
3. LEASES The Company leased certain computer equipment under capital leases. Such equipment is included in property and equipment as of December 31, 1996 and 1995 and is summarized as follows:
1996 1995 Machinery and equipment.................... $447,080 $447,080 Less accumulated amortization.............. 447,080 426,389 Net equipment under capital leases......... $ -- $ 20,691
The future minimum lease payments under equipment operating leases having initial or remaining noncancellable lease terms in excess of one year are summarized as follows:
YEAR 1997................................................ $ 450,000 1998................................................ 221,000 1999................................................ 130,000 2000................................................ 119,000 2001................................................ 94,000 Thereafter.......................................... 49,000 Total minimum lease payments........................ $1,063,000
Total rental expense for all operating leases was $543,000 in 1996, $398,000 in 1995, and $241,000 in 1994. 4. SHORT-TERM BORROWINGS AND LINES OF CREDIT The Company has an agreement with a bank which provides a seasonal line of credit of up to $5,000,000, all of which was unused at December 31, 1996, with interest at the LIBOR rate plus 1.75% (7.41% at December 31, 1996) or as low as 1.25% if certain net worth targets are met. The line of credit commitment will be automatically reduced by $1,000,000 on both May 31, 1998 and March 31, 1999. Indebtedness under this agreement is collateralized by equipment and accounts receivable. The loan agreement contains covenants including, but not limited to, restrictions related to indebtedness, tangible net worth (not less than $18,160,000 at December 31, 1996), dividends, capital expenditures and cash flow. At December 31, 1996, after giving effect to a waiver granted by the bank relating to cash flow, the Company is in compliance with the provisions of the agreement. The following relates to aggregate short-term borrowings in 1996, 1995 and 1994:
1996 1995 1994 Amount outstanding at December 31........................... $ -- $1,267,600 $1,178,062 Maximum amount outstanding at any month end................ $2,555,000 $1,466,000 $1,178,062 Average amount outstanding (based on weighted daily average balances)............ $1,065,784 $ 672,478 $ 59,326 Weighted average interest rate during the year.............. 7.40% 7.51% 6.98% Weighted average interest rate at December 31............... 7.41% 7.44% 7.00%
The weighted average interest rate during the year was computed by dividing total short-term interest expense for the year by the weighted average amount outstanding during the year. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. LONG-TERM DEBT Long-term debt at December 31, 1996 and 1995 is comprised of the following:
1996 1995 Variable Rate Term Loan, due $462,500 quarterly through December 31, 1997 and $587,500 quarterly from March 1, 1998 through December 31, 1999, with $5,212,500 due March 31, 2000 plus interest at LIBOR rate plus 2.0% (7.7% at December 31, 1996) or as low as 1.5% if certain net worth targets are met...................... $11,762,500 $13,612,500 Equipment Term Loan, due $125,000 quarterly through December 31, 1997 plus interest at 6.30%............... 500,000 1,000,000 Total................................. 12,262,500 14,612,500 Less current maturities............... 2,350,000 2,350,000 Long-term debt........................ $ 9,912,500 $12,262,500
In March 1995, in connection with the acquisition of Balfour, the Company entered into an agreement with a bank to provide a $15,000,000 variable rate term loan. The loan agreement contains covenants including, but not limited to, indebtedness, tangible net worth (not less than $18,160,000 at December 31, 1996), dividends, capital expenditures and cash flow. At December 31, 1996, after giving effect to a waiver granted by the bank relating to cash flow, the Company is in compliance with the provisions of the agreement. At December 31, 1996 and 1995, the Company had outstanding interest rate swap agreements under which the Company receives a variable rate based on LIBOR and pays a fixed rate ranging from 7.95% to 8.03% on a notional amount of $3,342,806 and $3,868,561, respectively, as determined in one month intervals through November 30, 1998. These transactions effectively change a portion of the Company's interest rate exposure from a variable rate to a fixed rate. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the counterparties. All of the Company's property and equipment, inventories and accounts receivable are pledged as collateral for the long-term debt. Maturities of long-term debt over the next four years are as follows:
YEAR 1997............................................... $ 2,350,000 1998............................................... 2,350,000 1999............................................... 2,350,000 2000............................................... 5,212,500 Total.............................................. $12,262,500
6. COMMON STOCK AND EMPLOYEE INCENTIVE PLANS In June, 1993, the Company adopted the 1993 Long Term Performance Plan (the 1993 Plan), which includes both qualified and nonqualified option provisions and stock appreciation rights and restricted, performance and other stock-based awards. Under the 1993 Plan, the Compensation Committee of the Board of Directors is authorized to grant stock awards to purchase up to 250,000 shares of the Company's common stock at prices equal to the fair value of the stock on the dates of grant. The 1993 Plan options are exercisable over a period determined by the Compensation Committee at the date of grant, beginning five months after the date of grant. The Company adopted the 1992 Nonqualified Stock Option Plan for Nonemployee Directors (the 1992 Plan). Under the 1992 Plan, each nonemployee director was granted options to purchase 2,000 shares of the Company's common stock at prices equal to the fair value of the stock on the dates of grant. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Transactions involving the Plans are summarized as follows:
WEIGHTED AVERAGE OPTION SHARES SHARES EXERCISE PRICE Outstanding at January 1, 1994...................... 138,250 $ 7.75 Granted............................... 50,000 10.81 Exercised............................. (24,625) 6.87 Expired and/or cancelled.............. (19,125) 7.47 Outstanding at December 31, 1994.................... 144,500 8.99 Granted............................... 7,250 8.13 Exercised............................. (4,250) 7.27 Expired and/or cancelled.............. (500) 7.75 Outstanding at December 31, 1995.................... 147,000 9.01 Granted............................... 9,250 6.92 Expired and/or cancelled.............. (28,000) 9.27 Outstanding at December 31, 1996.................... 128,250 $8.79
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING WEIGHTED WEIGHTED NUMBER OUTSTANDING AVERAGE REMAINING AVERAGE AT DECEMBER 31, 1996 CONTRACT LIFE EXERCISE PRICE 39,000......................... .5 $ 7.68 34,750......................... 2.0 8.50 38,000......................... 2.9 10.79 16,500......................... 4.2 7.46 128,250........................ 2.1 $ 8.79
OPTIONS EXERCISABLE NUMBER EXERCISABLE WEIGHTED-AVERAGE AT DECEMBER 31, 1996 EXERCISE PRICE 39,000........................................ $ 7.69 30,063........................................ 8.46 19,000........................................ 10.79 1,813......................................... 8.13 89,876........................................ $ 8.61
The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," effective January 1, 1996. In accordance with the provisions of SFAS No. 123, the Company continues to apply APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, has not recognized compensation cost. If the Company had elected to recognize compensation cost based on fair value of the options granted at the grant date as prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated in the table below (in thousands, except per share amounts):
1996 1995 Net income (loss) -- as reported.............. $319.9 $ (1655.8) Net income (loss) -- pro forma................ 308.0 (1667.3) Earnings per share -- as reported............. .17 (.89) Earnings per share -- pro forma............... .16 (.89)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
1996 1995 Expected dividend yield........................ 0.00% 0.00% Expected stock price volatility................ 18.26% 18.59% Risk-free interest rate........................ 5.67% 5.40% Expected life of options....................... 5 years 5 years
The weighted average fair value of options granted during 1996 and 1995 was $2.03 and $2.36, respectively. 7. MAJOR CUSTOMERS The Company's single line of business is considered to be the manufacture, processing and sale of knitted products. The Company has only one customer representing 10% or more of net sales. Sales to Allegiance Healthcare Corporation (formerly known as Baxter Healthcare Corporation) totaled $15,932,382, $16,601,252 and $12,902,722, in 1996, 1995 and 1994, respectively. While the loss of Allegiance Healthcare Corporation would have a material adverse effect on the business of the Company, management believes that, because of the number of departments within Allegiance to which the Company sells, the likelihood of a material amount of sales loss is reduced. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. INCOME TAXES In prior years, the Company was subject to alternative minimum tax. These amounts are allowed as credits against regular income tax in future years when the regular tax liability exceeds the alternative minimum tax liability. During 1996 and 1994, the Company utilized approximately $27,000 and $117,000, respectively, of these alternative minimum tax credits to reduce income taxes. In addition, general business tax credits totaling approximately $182,000 were also used to reduce 1994 federal income taxes. In 1995 the net operating loss (NOL) for federal income tax purposes of $2,005,000 was carried back pursuant to federal statutes and fully utilized. As a result of the carryback of the NOL, approximately $392,000 of alternative minimum tax credit carryovers became available to offset future federal income taxes. The Company also has approximately $1,800,000 of state net operating loss carryforwards available for reduction of future state taxable income. These carryovers begin to expire in 2001. The Company has not provided valuation allowances for the deferred tax assets as no conditions exist that require such allowances. Components of the income tax provision (benefit) for 1996, 1995 and 1994 included:
1996 1995 1994 Current: Federal........................ $ 66,365 $(317,481) $ 632,667 State.......................... -- -- 116,000 Total current................... 66,365 (317,481) 748,667 Deferred: Federal........................ 101,897 (411,810) 438,000 State.......................... 15,857 (84,380) 17,000 Total deferred.................. 117,754 (496,190) 455,000 Total provision (benefit) for income taxes................... $ 184,119 $(813,671) $1,203,667
The approximate tax effect of temporary differences and carryforwards that gave rise to the Company's deferred income tax assets and liabilities for 1996 and 1995 are as follows:
1996 ASSETS LIABILITIES TOTAL Current: Receivables.............. $ 100,741 $ -- $ 100,741 Inventories.............. 351,350 -- 351,350 Total current............. 452,091 -- 452,091 Noncurrent: Property................. -- (2,124,927) (2,124,927) Deferred compensation.... 127,079 -- 127,079 Insurance reserve........ 88,606 -- 88,606 Deferred revenue......... -- (2,529) (2,529) Benefit of state net operating loss carryforward............ 72,370 -- 72,370 Alternative minimum tax credit carryforward..... 365,387 -- 365,387 Total noncurrent.......... 653,442 (2,127,456) (1,474,014) Total current and noncurrent............... $1,105,533 $(2,127,456) $(1,021,923)
1995 ASSETS LIABILITIES TOTAL Current: Receivables.............. $ 75,455 $ -- $ 75,455 Inventories.............. 322,970 -- 322,970 Other.................... 2,425 -- 2,425 Total current............. 400,850 400,850 Noncurrent: Property................. -- (1,981,011) (1,981,011) Deferred compensation.... 154,720 -- 154,720 Insurance reserve........ 54,950 -- 54,950 Deferred revenue......... -- (13,678) (13,678) Benefit of state net operating loss carryforward............ 80,000 -- 80,000 Alternative minimum tax credit carryforward..... 400,000 -- 400,000 Total noncurrent.......... 689,670 (1,994,689) (1,305,019) Total current and noncurrent............... $1,090,520 $(1,994,689) $ (904,169)
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 The income tax provision differs from the amount computed by applying the federal statutory income tax rate of 34% to pre-tax income. The computed amount is reconciled to total income tax expense as follows:
1996 1995 1994 Federal income tax at statutory rate (benefit)...... $ 171,020 $(839,635) $1,070,845 State income taxes, net of federal benefit (cost)........ 10,466 (55,691) 87,780 Change, net of premiums paid and proceeds, in officers' life insurance values......... (1,396) (4,196) (6,323) Expenses which are not deductible for income tax purposes.................. 21,491 32,684 22,923 All other...................... (17,462) 53,167 28,442 Total provision (benefit) for income taxes.................. $ 184,119 $(813,671) $1,203,667
9. EMPLOYEE BENEFITS The Company has an employee salary deferral plan covering substantially all employees which allows participants to defer from 2% to 20% of their salaries, or the maximum allowable under the Internal Revenue Code, with the Company contributing 40% of the participant's contribution up to 4%. Contribution expenses related to this plan for the years ended December 31, 1996, 1995 and 1994 were $149,000, $164,000, and $171,000, respectively. 14 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Alba-Waldensian, Inc. is responsible for the accuracy and consistency of all the information contained in the annual report, including all accompanying consolidated financial statements. The statements have been prepared to conform with generally accepted accounting principles and include amounts based on management's estimates and judgments. Alba-Waldensian, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance that financial records are accurate, Company assets are safeguarded, and financial statements present fairly the consolidated financial position of the Company. The Audit Committee of the Board of Directors, composed solely of outside directors, reviews the scope of audits and the findings of the independent certified public accountants. The auditors meet regularly with the Audit Committee to discuss audit and financial issues. BDO Seidman, LLP, the Company's independent certified public accountants, has audited the financial statements prepared by management. Their opinion on the financial statements is presented as follows. LEE N. MORTENSON THOMAS I. NAIL President and Chief Executive Officer Chief Financial Officer
15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Alba-Waldensian, Inc. Valdese, North Carolina We have audited the accompanying consolidated balance sheets of Alba-Waldensian, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial position of Alba-Waldensian, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Greensboro, North Carolina February 6, 1997 16 STOCK PRICES AND DIVIDEND INFORMATION
SALES PRICE OF COMMON SHARES SALES PRICE OF COMMON SHARES HIGH 1996 LOW HIGH 1995 LOW First Quarter......................... 7 7/8 6 5/8 11 1/8 9 7/8 Second Quarter........................ 8 1/4 6 5/8 10 1/4 8 3/8 Third Quarter......................... 8 6 1/4 9 1/8 8 3/4 Fourth Quarter........................ 6 5/8 5 3/8 9 1/8 7 1/2 DIVIDENDS PER SHARE 1996 1995 First Quarter......................... $ -- $ -- Second Quarter........................ $ -- $ -- Third Quarter......................... $ -- $ -- Fourth Quarter........................ $ -- $ --
SEE NOTES 4 AND 5 TO THE CONSOLIDATED FINANCIAL STATEMENTS CONCERNING RESTRICTIONS ON THE PAYMENT OF DIVIDENDS. CLASSES OF PRODUCTS
YEARS WOMEN'S WOMEN'S MEN'S ENDED HOSIERY INTIMATE HOSIERY HEALTH DECEMBER 31, PRODUCTS PRODUCTS PRODUCTS MEN'S WEAR PRODUCTS 1992 19.1% 43.8% 1.0% -- 36.1% 1993 19.2% 37.4% 7.3% 5.5% 30.6% 1994 17.4% 40.2% 7.9% 4.3% 30.2% 1995 15.5% 28.3% 6.2% 2.6% 47.4% 1996 13.8% 28.6% 6.2% 1.8% 49.6%
NOTE: AMOUNTS REPRESENT PERCENTAGES OF ANNUAL NET SALES. FIVE-YEAR SELECTED FINANCIAL DATA
IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS 1996 1995 1994 1993 SELECTED FINANCIAL DATA: Net sales...................................................................... $65,815 $63,718 $56,507 $50,855 Gross margin................................................................... 15,191 12,042 14,254 13,479 Income (loss) before income taxes and cumulative effect of a change in accounting principle......................................................... 504 (2,470) 3,150 1,435 Provision (benefit) for income taxes........................................... 184 (814) 1,204 451 Income (loss) before cumulative effect of a change in accounting principle..... 320 (1,656) 1,946 984 Cumulative effect on prior years of a change in accounting for income taxes................................................................. -- -- -- -- Net income (loss).............................................................. 320 (1,656) 1,946 984 Income (loss) per common share: Income (loss) before cumulative effect of a change in accounting principle... .17 (.89) 1.05 .54 Cumulative effect on prior years of a change in accounting for income taxes.............................................................. -- -- -- -- Net income (loss) per common share........................................... .17 (.89) 1.05 .54 Weighted average number of shares of common stock outstanding................ 1,867 1,865 1,849 1,826 At Year End: Total assets................................................................. $45,199 $49,250 $37,730 $35,224 Long-term debt and capital lease obligations................................. 9,913 12,263 1,058 1,777 SELECTED SUPPLEMENTARY FINANCIAL DATA Property and equipment: Net investment............................................................... $13,538 $13,775 $11,605 $11,474 Current additions............................................................ 1,525 1,610 1,919 1,719 Depreciation................................................................. 1,700 1,789 1,693 1,688 Other: Working capital.............................................................. $17,313 $17,960 $19,866 $18,293 Stockholders' equity......................................................... 27,788 27,469 29,093 26,981 Stockholders' equity per common share........................................ 14.88 14.71 15.62 14.68 SELECTED FINANCIAL DATA: Net sales...................................................................... $40,567 Gross margin................................................................... 10,187 Income (loss) before income taxes and cumulative effect of a change in accounting principle......................................................... 2,068 Provision (benefit) for income taxes........................................... 727 Income (loss) before cumulative effect of a change in accounting principle..... 1,341 Cumulative effect on prior years of a change in accounting for income taxes................................................................. 226 Net income (loss).............................................................. 1,567 Income (loss) per common share: Income (loss) before cumulative effect of a change in accounting principle... .74 Cumulative effect on prior years of a change in accounting for income taxes.............................................................. .12 Net income (loss) per common share........................................... .86 Weighted average number of shares of common stock outstanding................ 1,819 At Year End: Total assets................................................................. $30,586 Long-term debt and capital lease obligations................................. 505 SELECTED SUPPLEMENTARY FINANCIAL DATA Property and equipment: Net investment............................................................... $11,475 Current additions............................................................ 1,326 Depreciation................................................................. 1,614 Other: Working capital.............................................................. $15,922 Stockholders' equity......................................................... 25,887 Stockholders' equity per common share........................................ 14.20
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN THIS REPORT FOR A DISCUSSION OF CERTAIN FACTORS WHICH AFFECT THE COMPARABILITY OF THE INFORMATION REFLECTED ABOVE. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table details the items in the Consolidated Statements of Operations as a percentage of sales for 1996, 1995 and 1994.
PERCENTAGE OF SALES YEAR ENDED DECEMBER 31, 1996 1995 1994 Net Sales............................. 100.0% 100.0% 100.0% Cost of Sales......................... 76.9 81.1 74.8 Gross Margin.......................... 23.1 18.9 25.2 Selling, General and Administrative... 20.4 20.6 19.5 Operating Income/(Loss)............... 2.7 (1.7 ) 5.7 Other Income (Expense), Net........... (1.9) (2.2 ) (.2) Income (Loss) Before Income Taxes..... .8 (3.9 ) 5.5 Provision (Benefit) for Income Taxes............................... .3 (1.3 ) 2.1 Net Income (Loss)..................... .5% (2.6%) 3.4 %
DISCUSSION OF 1996 COMPARED TO 1995 Net Sales by Division for 1996 as compared to 1995 are set forth in the following table:
IN THOUSANDS OF DOLLARS DEC. 31 DEC. 31 INCREASE/ % INCREASE/ 1996 1995 (DECREASE) (DECREASE) Consumer Products........ $26,120 $25,853 $ 267 1.0% Health Products... 32,640 30,203 2,437 8.1% Alba Direct....... 1,749 2,034 (285) (14.0%) Byford............ 5,291 5,548 (257) (4.6%) AWI Retail........ 15 80 (65) (81.3%) Total............. $65,815 $63,718 $ 2,097 3.3%
Net sales, as shown in the table above, increased by $2,096,878 or 3.3%. Consumer Products sales increased as a result of sales to a new customer. Health Products sales increased as a result of the Balfour acquisition in March 1995 (See Note 1 to Consolidated Financial Statements). The Health Products Division's sales represent a full twelve months of Balfour sales in 1996, as compared to approximately ten months in 1995. Alba Direct declined as a result of weaker sales to its domestic and Japanese customers. Byford sales decreased as a result of weaker basic sweater sales and the Company's decision to discontinue the fashion sweater line. Byford's sock sales increased as a result of shipments made in the fourth quarter under the newly acquired GREG NORMAN license. Gross profits increased in 1996 to 23.1% of net sales, as compared to 18.9% in 1995. There were four major factors that contributed to the increase in gross margin. First, the increase in sales in the Health Products Division carries higher gross margins. Second, manufacturing costs were lower, due to cost improvement programs initiated during the year. Third, an additional inventory markdown of $1,200,000 was taken in 1995 (during third quarter). Such additional markdowns above normal markdowns, did not occur in 1996. Fourth, the Company completed the consolidation of its Health Products Division to Rockwood, TN in 1996 and did not incur the amount of moving and training costs incurred in 1995. Selling, General and Administrative Expenses decreased slightly as a percentage of sales to 20.4% from 20.6% in 1995. Although SG&A expenses decreased as a percentage of sales due to higher sales volume, actual costs increased by $252,568. This increase was primarily due to an increase in commissions, contract programming cost, a full year of goodwill amortization for the Balfour purchase and an increase in distribution cost caused by shipments of smaller orders, partially offset by savings in other areas. Interest expense was $1,286,110 in 1996 as compared to $1,246,540 in 1995. Average borrowings under the Short Term revolver were $1,066,000 with an average interest rate of 7.40% compared to average borrowings of $672,000 with an average interest rate of 7.51% in 1995. Additionally, the long-term debt issued to finance the Balfour acquisition was outstanding for all of 1996, adding to overall interest incurred in 1996 (See Note 5 to Consolidated Financial Statements). Other Income (Expense), (exclusive of Interest Income and Expense) for 1996 reflected net other expense of $29,713 compared to net other expense in 1995 of $150,828. Net Other Expense in 1995 included a loss of $90,000 on the sale of the Main Street Plant and a return to a licensee of $60,000 for the overpayment of royalties from previous years. DISCUSSION OF 1995 COMPARED TO 1994 Net Sales by Division for 1995 as compared to 1994 are set forth in the following table:
IN THOUSANDS OF DOLLARS DEC. 31 DEC. 31 INCREASE/ % INCREASE/ 1995 1994 (DECREASE) (DECREASE) Consumer Products........ $25,853 $30,254 $(4,401) (14.6%) Health Products... 30,203 15,895 14,308 90.0% Alba Direct....... 2,034 4,002 (1,968) (49.2%) Byford............ 5,548 6,353 (805) (12.7%) AWI Retail........ 80 3 77 2,566.7% Total............. $63,718 $56,507 $ 7,211 12.8%
Net sales for 1995 increased $7,211,150 or 12.8% as compared to 1994. The net sales increase as shown in the table above was attributed to the increase in sales of the Health Products Division, which includes the newly acquired Balfour Health Products Division (See Note 1 to Consolidated Financial Statements). During the year, the Company began to consolidate customers and products that were common to both Balfour and Alba-Waldensian. It is estimated that 84% of the 90% sales increase in the Health Products Division was due to the Balfour acquisition and the remainder was due to an increase in other business. The decrease in Consumer Products sales was the result of the prevailing weakness in the nation's retail sector and increased competition for the retailers' limited dollars. The decline in Alba Direct sales was attributed to the Company's termination of two of its seven Japanese dealers, weakness in the Japanese markets, and a weakness in the domestic consumer retail sector. The Byford Division's sales decline was primarily 18 MANAGEMENT'S DISCUSSION CONTINUED due to the softness in the sweater market, resulting from a warmer winter in 1994, causing retailers to carryover inventory to 1995, and the growing popularity of fleece and polartec as a substitute for sweaters. Gross profits declined in 1995 to 18.9% of net sales, as compared to 25.2% in 1994. During 1995 the Company recorded an additional $1,200,000 write-down of inventory. The Company writes down close-out and irregular inventory on a on-going basis, but due to the fact that Consumer Products sales volume had been soft for the last year and prices were being depressed by other manufacturers closing out excess inventory throughout the market place, the Company believed additional write-downs were necessary. The decline in sales in the Consumer Products and Alba Direct Divisions caused an increase in manufacturing cost per dozen, as manufacturing overhead cost could not be reduced in proportion to the decrease in sales. In March of 1995 the Company purchased Balfour Health Products, including a manufacturing facility in Rockwood, TN. The Company consolidated substantially all of its health products manufacturing, which was located in Valdese, NC, into the Rockwood facility. This consolidation caused the Company to incur duplicate expenses, as it phased the manufacturing out of Valdese, NC and into Rockwood, TN. In addition, the Company experienced additional training costs in Valdese, NC and Rockwood, TN as senior employees in Valdese, NC moved to new jobs and as new employees were hired in Rockwood, TN. The Byford Division's gross margins declined to 21.9% of net sales, as compared to 23.5% in 1994. Byford continued to sell excess sweater inventory which was marked down to market value in 1994. Selling, General and Administrative expenses increased as a percentage of net sales to 20.6% from 19.5% in 1994. In 1995 goodwill amortization of $471,421 was experienced as a result of the Balfour Health Products acquisition. Also contributing to the increase were additional distribution costs and selling expenses related to the Balfour business. Interest expense was $1,246,540 in 1995, as compared to $274,739 in 1994. Short term interest rates averaged 7.51% for 1995, as compared to 6.98% in 1994. Average borrowings under the short term revolver were $672,000 in 1995, as compared to $59,000 in 1994. Borrowing under the short term revolver did not occur in 1994 until November 30, at which time the Company used its line of credit to finance the $2,040,000 purchase of the Baxter Healthcare Systems PAS(Register mark) inventory. In March 1995 the Company incurred $15.0 million in long-term debt to finance the Balfour Health Products acquisition (See Note 5 to Consolidated Financial Statements). Other Income (Expense), exclusive of interest income and expense) for 1995 reflected net other expense of $150,828, as compared to a net income of $119,773 in 1994. Net other expense in 1995 included $90,000 loss on sale of the Main Street Plant and a return to a licensee of $60,000 for over-payment of royalties from previous years. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs are primarily related to working capital required to support necessary increases in inventories, receivables and capital expenditures for plant and equipment, renovations and expansion. These needs are being met by cash on hand, cash flow and a short term line of credit of $5,000,000 (See Note 4 to Consolidated Financial Statements). Working capital decreased by $647,823 from 1995. The decrease from 1995 was primarily due to payments on long-term debt and payments for capital expenditures in excess of current year net income and depreciation. Cash provided by operating activities was $5,081,941 in 1996, compared to $3,466,413 in 1995 and $396,167 in 1994. The cash provided in 1996 was mainly the result of an increase in net income and a reduction in inventories. Net cash used in investing activities was $1,167,834 compared to $16,633,774 in 1995 and $1,882,858 in 1994. The cash used in 1996 and 1994 was primarily for capital expenditures to expand capacities, and to replace and update plant and equipment. Cash used in 1995 reflects the purchase of Balfour Health Products. Net cash used by financing activities was $3,675,669 in 1996 compared to net cash provided of $13,119,418 in 1995 and $630,127 in 1994. Net cash used in 1996 was primarily for principal payments on long-term debt and payments to reduce the borrowings under the line of credit. Net cash provided in 1995 was primarily due to proceeds from issuance of long-term debt for the acquisition of Balfour Health Products (See Note 5 to Consolidated Financial Statements). Cash was provided in 1994 by short-term debt and was used to finance the PAS~ inventory purchased from Baxter Healthcare Corporation. The short term line of credit and long-term debt required the Company to comply with certain restrictive convenants. The convenants permit the Company to finance capital expenditure at an adequate level to support current and future operations. Anticipated capital expenditures for 1997 will be approximately $2,100,000 for existing business. Capital expenditures will be made to renovate existing plant and equipment and to purchase new, more effficient knitting equipment. It is expected that cash required for capital expenditures will be provided by operations, supplemented by the Company's short term line of credit. DERIVATIVES At December 31, 1996, the Company had outstanding interest rate swap agreements under which the Company receives a variable rate based on LIBOR and pays a fixed rate of 7.95% and 8.03% on notional amounts of $3,342,806 and $3,342,806 respectively, as determined under one month intervals through November 30, 1998. The transactions effectively change a portion of the Company's interest rate exposure from a variable rate to a fixed rate. The Company is exposed to a credit loss in the event of nonperformance by the other party to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties. 19 QUARTERLY DATA (UNAUDITED)
QUARTERS ENDED (EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 DECEMBER 31 SEPTEMBER 29 JUNE 30 MARCH 31 DECEMBER 31 OCTOBER 1 JULY 2 APRIL 2 Net Sales......................... $15,861 $ 16,279 $16,296 $17,379 $16,319 $16,769 $16,252 $14,378 Gross Margin...................... 3,582 3,694 3,792 4,123 2,718 2,343 3,866 3,115 Net Income (Loss)................. 191 23 5 101 (1,018) (728) 64 26 Income (Loss) Per Share........... .10 .01 .01 .05 (0.54) (0.39) 0.03 0.01 Weighted Average Number of Shares of Common Stock Outstanding..... 1,867 1,867 1,867 1,867 1,865 1,864 1,864 1,863
1995 NOTE: SIGNIFICANT THIRD QUARTER ADJUSTMENTS IN 1995 INCLUDED $1,200 IN INVENTORY WRITE-OFF ($744 NET OF INCOME TAXES). 20 Corporate Management Lee N. Mortenson CEO and President Clyde Wm. Engle Chariman of the Board Donald R. Denne Senior Vice President Dixon R. Johnson Vice President James Douglas Dickson, Jr. Assistant Secretary Corporate Controller Thomas I. Nail Secretary-Treasurer and CFO Warren R. Nesbit Vice President Corporate Directors Term Expiring May 1997 William M. Cousins, Jr. Management Consultant Jupiter, Florida Glenn J. Kennedy Executive Vice President Sunstates Corporation Raleigh, North Carolina Paul H. Albritton, Jr. Vice President and Chief Financial Officer C-Phone Corporation Wilmington, North Carolina Term Expiring May 1998 Clyde Wm. Engle Chairman of the Board and Chief Executive Officer of Telco Capital Corporation Chicago, Illinois Joseph C. Minio President Belle Haven Management Ltd. Greenwich, Connecticut Term Expiring May 1999 C. Alan Forbes Management Consultant Charlotte, North Carolina James M. Fawcett, Jr. Registered Representative and Agent Equitable Financial Companies Chicago, Illinois Lee N. Mortenson President and Chief Executive Officer Corporate Information Principal Market The Company's Common Stock is listed on the American Stock Exchange Transfer Agent - Registrar First Union National Bank of North Carolina Charlotte, North Carolina Number of Shareholders The Number of holders of record of Alba's Common Stock on March 13, 1997 was approximately 342. Annual Meeting May 14, 1997 Corporate Headquarters Alba-Waldensian, Inc. Box 100 201 St. Germain Ave., S.W. Valdese, North Carolina 28690 Auditor BDO Seidman, LLP Greensboro, North Carolina Offer to Furnish Form 10-K Upon written request of a shareholder, the Company will provide, without charge, a copy of its Annual Report on Form 10-K for the fiscal year 1996, including financial statements and schedules thereto required to be filed with the Securities and Exchange Commission. Requests should be directed to James Douglas Dickson, Jr., Alba-Waldensian, Inc., Post Office Box 100, Valdese, North Carolina, 28690 (Background of Alba-Waldensian, Inc.'s logo) Alba-Waldensian, Inc. PO Box 100, 201 St. Germain Avenue, S.W. Valdese, NC 28690 EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT As of December 31, 1996 Percentage of Name Jurisdiction Stock Owned - ---- ------------ ------------- AWI Retail, Inc. North Carolina 100% Pilot Research Corp. North Carolina 100% Alba Export Corp. North Carolina 100% 24 EX-23 4 EXHIBIT 23.2 Exhibit 23.2 Consent of Independent Certified Public Accountants Alba-Waldensian, Inc. Valdese, NC North Carolina We hereby consent to the incorporation by reference in the Registration Statement No. 33-15833 on Form S-8 of our reports dated February 6, 1997, relating to the consolidated financial statements and schedules of Alba-Waldensian, Inc. incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Greensboro, North Carolina BDO Seidman, LLP March 28, 1997 25 EX-27 5 EXHIBIT 27
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 294,447 0 9,987,667 275,000 12,342,658 23,105,005 31,359,652 17,821,356 45,199,311 5,792,226 0 0 0 4,716,450 0 45,119,311 65,814,594 65,835,758 50,623,565 64,015,921 29,713 0 1,286,110 504,014 184,119 0 0 0 0 319,895 .17 .17
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