-----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, KZ+vGp6aQF16vs5pCBnEg43yNCW/phaelcTwl94Vs2jQwAWI2njOIKVkHS3GZ5av jwn7Pu4AW8qPAw65U0gsIg== 0000950168-98-000964.txt : 19980401 0000950168-98-000964.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950168-98-000964 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-06150 FILM NUMBER: 98580716 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 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, 1997 { }TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from................... to ................ Commission file number 1-6150 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: 704-879-6500 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 $4,381,000 as of March 16, 1998. 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 16, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report for the fiscal year ended December 31, 1997 are incorporated by reference into Parts I, II and IV. Portions of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference into Parts I and III. THIS ANNUAL REPORT ON FORM 1O-K, INCLUDING ANY INFORMATION INCORPORTATED THEREIN BY REFERENCE, MAY CONTAIN, IN ADDITION TO HISTORICAL INFORMATION, CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENT'S BELIEF AS WELL AS ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO, MANAGEMENT PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT USUALLY WILL INCLUDE WORDS SUCH AS "THE COMPANY BELIEVES"; OR; "EXPECTS"; OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE ALSO FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING CAPITAL EXPENDITURES, EARNINGS, SALES, LIQUIDITY AND CAPITAL RESOURCES, AND ACCOUNTING MATTERS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN ITEM 1 - DESCRIPTION OF BUSINESS; AND ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM 1O-K FOR THE YEAR ENDED DECEMBER 31, 1997, OR IN INFORMATION INCORPORATED THERIN BY REFERENCE, AS WELL AS FACTORS SUCH AS FUTURE ECONOMIC CONDITIONS, ACCEPTANCE BY CUSTOMERS OF THE COMPANY'S PRODUCTS, CHANGES IN CUSTOMER DEMAND, LEGISLATIVE, REGULATORY AND COMPETITIVE DEVELOPMENTS IN MARKETS IN WHICH THE COMPANY OPERATES AND OTHER CIRCUMSTANCES AFFECTING ANTICIPATED REVENUES AND COSTS. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULT OF ANY REVISIONS TO THESE FORWARD LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS ANNUAL REPORT ON FORM 1O-K OR TO REFLECT THE OCCURRENCE OF OTHER ANTICIPATED EVENTS. 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 two plants in Valdese, North Carolina and one plant in Rockwood, TN and markets the products through three divisions, the Consumer Products Division, the Health Products Division and the Alba Direct Division. During 1997, the Company determined that it was able to obtain certain covered yarn from outside suppliers at a quality level and cost such that producing such yarn was no longer justified. Accordingly, the Company was able to close its yarn production facilities and sell most of its yarn covering machinery. The Company intends to sell or lease the idled production facilities (the Alba plant). In order to focus its efforts in the seamless intimate apparel arena, the Company in 1997 discontinued the production of the "old technology" full fashion product line and severely curtailed production of the circular knit panty. This strategic move resulted in a loss of approximately $600,000, representing the write-off of the full fashion manufacturing equipment and certain raw materials and production supplies. Since its acquisition in 1992, the Byford menswear distribution business had been unable to generate the volumes necessary to justify the Company's investment of capital and management time. Accordingly, in 1997 the Company discontinued the Byford business and began disposing of all remaining Byford inventories. In order to maintain its competitive position, in 1997 the Company established an outsourcing program in Mexico. The Company began importing hosiery in late December and plans to gradually increase hosiery imports in 1998 with the addition of certain intimate apparel products in late 1998. 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 three Divisions are described below. For additional discussion of the current status of each Division and its products, please see the Company's 1997 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 brassieres, 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 that makes it possible to knit bras, briefs, tank tops and body suits on seamless knitting equipment. This design technology, which is patented for the knit bra and various knit-in features for all seamless products, 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. HEALTH PRODUCTS DIVISION Products manufactured and sold by this Division are designed to assist in healthcare. They include anti-embolism stockings and compression therapy 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. 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. ALBA DIRECT DIVISION Alba Direct distributes products from the Consumer 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 exporting business. 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. 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 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 were 8.2% of sales in 1997 and 9.7% of sales in 1996. (See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's 1997 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. Consumer Products manufacturing and distribution is located at two 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 is manual or automated, depending on product and size of product. The Company has an ongoing program for the outsourcing of production to augment certain of its internal production capacities. Domestically, the Company obtains manual sewing from outside contractors. In 1997, the Company established a Mexican source for the production and finishing of women's sheer hosiery, with the first imports being received in late December. The Company intends to increase its Mexican imports of hosiery in 1998 with the addition of certain intimate apparel styles in late 1998. The Company continues to replace older equipment and automate where possible. The Company expects capital expenditures for 1998 to be approximately $3,700,000. The capital expenditures in 1998 will be for purchasing new and used equipment, upgrading remaining older equipment and computer systems, automating, renovating and improving plant facilities. Based upon anticipated increased demand for the Company's seamless products in 1998, it may be necessary to significantly increase expenditures for seamless knitting equipment. The Company anticipates that it will be able to obtain adequate financing to allow for any such increased capital expenditures. 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: 1997 1996 1995 ---- ------ ---- Women's Intimate Apparel 29.3% 31.1% 30.7% Women's Hosiery Products 16.1 15.0 17.3 Health Products 54.6 53.9 52.0 --------- ---- ----- 100.0% 100.0% 100.0% Women's intimate apparel consists of regular size bras, briefs and bodywear as well as maternity and plus size briefs. Women's hosiery products consist of regular, maternity and plus-size panty hose, as well as trouser socks and tights. Health products consist of stockinettes, treads, arm sleeves, anti-embolism stockings, PAS(R), s 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 processes. Management also evaluates new products, business opportunities, and acquisitions on an on-going basis and could encounter an opportunity that would require substantial investment in the future. Such investments occurred 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 1997 Annual Report to Shareholders.) 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) a variety of patents for processes which makes it possible to knit bras and various functional features in bras and panties on seamless knitting equipment, which expire in 2014. Also, the Company acquired a co-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), Case Sox(R), Body Makeup(R), Fashion Tread(R), Figure Perfect(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. 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 1997 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 1997 or 1996. 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. 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 1997, 1996 and 1995.
1997 1996 1995 ---- ---- ---- Allegiance Healthcare Corporation $13,937,424 $15,932,382 $16,601,252 (formerly Baxter Healthcare Corporation) Percentage of sales 23.3% 24.2% 26.1%
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, 1997 and 1996 was $3,825,000 and $2,867,901 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 pertaining to such factors. (See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Shareholders.) RESEARCH AND DEVELOPMENT The Company estimates that in 1997 it spent $512,900 on Company-sponsored research and development projects through the Company's Research and Development Department. This compares to $474,330 in 1996 and $490,824 in 1995. 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 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 692 employees as of December 31, 1997. 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 Not in Use (held for sale or lease) John Louis Valdese, NC 178,300 Finishing (Consumer Products) Pineburr Valdese, NC 81,000 Knitting (Consumer Products) Rockwood Rockwood, TN 245,940 Knitting, Yarn Processing & Finishing (Health Products) Office Valdese, NC 52,000 Corporate headquarters Offices New York City 3,200 Leased Sales Offices and $86,400 Annually Showroom Expires April 2000
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. 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 1997 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. 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 1997 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 1997 Annual Report to Shareholders, which information is incorporated herein by reference. 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 1997 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 1997 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 and Executive Officers called for by this item appears beneath the heading "Information about Directors and Nominees for Director" and "Executive Officers" in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which information is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the Company's fiscal year end. 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 1998 Annual Meeting of Shareholders, which information is incorporated by reference. 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 1998 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 1998 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 1997 Annual Report to shareholders are incorporated herein by reference to the Annual Report as indicated: Consolidated Balance Sheets - December 31, 1997 and 1996. Consolidated Statements of Operations - Years ended December 31, 1997, 1996, and 1995. Consolidated Statements of Stockholders' Equity- Years ended December 31, 1997, 1996, and 1995. Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995. Summary of Significant Accounting Policies Notes to Consolidated Financial Statements. (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. *10.10 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. *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. 13 1997 Annual Report to Shareholders 23.1 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, 1997. 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 30, 1998 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 30, 1998 March 30, 1998 /s/ /s/ - -------------------------------- --------------------------------- Clyde Wm. Engle, Director C. Alan Forbes, Director March 30, 1998 March 30, 1998 /s/ /s/ - -------------------------------- --------------------------------- James M. Fawcett, Jr., Director Glenn J. Kennedy, Director and March 30, 1998 Chief Financial Officer (Chief Accounting Officer) March 30, 1998 /s/ /s/ - -------------------------------- --------------------------------- Joseph C. Minio, Director Lee N. Mortenson , Director and March 30, 1998 Chief Executive Officer (Principal Executive Officer) March 30, 1998 ALBA-WALDENSIAN, INC. INDEX TO EXHIBITS Annual Report on Form 10-K for the Fiscal Year ended Commission File No. December 31, 1997. 1-6150 Exhibit Number Exhibit - -------------- ------- 13 Annual Report to Shareholders 23.1 Consent of Independent Certified Public Accountants, BDO Seidman, LLP 27 Financial Data schedule (filed in electronic format only) EX-13 2 EXHIBIT 13 [LOGO OF ALBA-WALDENSIAN APPEARS HERE] ANNUAL REPORT 1997 CONSUMER PRODUCTS [PHOTOS OF VARIOUS PRODUCTS APPEARS HERE] ALL DAY LONG CALVIN KLEIN SEAMLESS COMFORTS DIAHANN CARROLL SURGICAL DRESSINGS HEEL/ELBOW PROTECTORS ANTI-EMBOLISM STOCKING IMPERVIOUS STOCKINETTE 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 97 years into a multi-facility company manufacturing a variety of very innovative knitted 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 manufacturer and marketer of products used in hospitals, nursing homes, physician offices and extended care facilities throughout the world. 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. 1 TO OUR SHAREHOLDERS The Company's loss in 1997 reflects the short-term cost of several important strategic decisions that were necessary to ensure the Company's profitable growth. Seamless intimate apparel was recognized as a future growth category of the Company's consumer products business. In order to focus our efforts on that goal, production of "old technology" full fashion products was discontinued, production of circular knit panties was reduced over 50% and distribution of the Byford line of menswear was discontinued. In order for our ladies' hosiery line to remain competitive, the decision was made to acquire a portion of our hosiery production from outside the United States. Key management changes coupled with expansion of the Company's seamless knitting capacity rounded out the strategic changes of 1997. As consumers discover the fit, comfort and figure flattering attributes of seamless goods: we expect that demand for seamless products will continue to expand. As one of only four major companies in the world with significant seamless capacity, we were able in 1997 to sell seamless products to major accounts such as Sears, JC Penney, Target, Victoria's Secret, Nordstrom's, Talbot's and others. We are making a major commitment to the further expansion of our seamless knitting capacity and it is anticipated that our seamless knitting capacity could increase by 50% or more in 1998. As we develop new applications of the technology, we see further expansion of our volumes and profit margins. To further focus our efforts in the seamless arena, we discontinued the production of the "old technology" full fashion product line and severely curtailed production of the circular knit panty. This strategic move resulted in a loss of approximately $600,000, representing the write-off of our full fashion manufacturing equipment and certain raw materials and production supplies. Since its acquisition in 1992, we had been unable to generate the volumes necessary to bring profits on the Byford menswear distribution business up to a level that justified the Company's investment of capital and management time. Accordingly, the decision was made to discontinue the business and dispose of all remaining Byford inventories, resulting in sales declining by $1,207,000 with inventory write-downs approximating $175,000. Hosiery volume remained flat in 1997 due to continued softness in the industry while competitive pressures and production problems combined to result in margins declining by 3 points in 1997. To recover lost margins and meet competition, we established an outsourcing program in Mexico. The first production from Mexico was received in the fourth quarter with shipments to customers to begin in the first quarter of 1998. The Company plans to gradually increase its outsourcing of hosiery production over the next three years. Our Health Products business is facing significant challenges due to the rapidly changing face of the healthcare industry. Consolidation of both healthcare providers and suppliers is being fueled by extreme pressure from both the government and the general public to reduce the cost of providing health services. Product line consolidation by a major distributor caused a loss of a portion of our dressing business. The Company experienced problems with its new pulStar(R) wrap system in 1997 resulting in its re-design and delayed market-place penetration. The newly re-designed pulStar(R) wrap system is currently receiving excellent initial acceptance. Sales of our Health Products division declined $2,113,000 or [BAR CHARTS APPEARS BELOW WITH THE FOLLOWING INFORMATION:] NET SALES $ IN MILLIONS '92 '93 '94 '95 '96 '97 - --- --- --- --- --- --- 41 51 57 64 66 60 SALES PER EMPLOYEE THOUSANDS '92 '93 '94 '95 '96 '97 - --- --- --- --- --- --- 51 58 67 71 80 80 2 6.5% in 1997, due primarily to the problems with the introduction of the new pulStar(R) wrap system and the loss of a portion of our dressing business. These problems also resulted in gross margins declining 4.4 points in 1997. We were able to increase sales in our two major product lines: knitted footwear and surgeon gown cuffs; both areas in which we are market leaders. For 1998 we expect that the revitalized pulStar(R) product will allow us to return to a pattern of growing sales and increasing margins. A net loss of $376,654 or $0.20 per common share was realized in 1997. This compares with net earnings of $319,895 or $0.17 per common share in the prior year. Net sales declined by 9% to $59,911,868, primarily due to the decision to stop production of full fashion products and curtail production of circular knit intimates in favor of the newly emerging seamless product lines and the discontinuation of the Byford menswear line. Softness in the hosiery industry coupled with increased consolidation and contraction of healthcare customers also combined to result in lower sales in 1997. Gross margins improved in our consumer products business by 1.8 points as the switch from full fashion and circular knits to the higher margin seamless products yielded a 4.3 point increase in intimate apparel margins. Lower margins in hosiery (down 3 points) highlighted the need for moving to lower cost outsourcing of production. Gross margins in our healthcare business fell 4.4 points as problems with our new pulStar(R) product combined with cost reduction pressures within the industry to lower our profit margins. The Company was successful in controlling spending in 1997. Selling, general and administrative expenses declined from 20.4% of net sales in 1996 to 19.7% in 1997. This decline was achieved through tight cost controls in the face of declining sales and in spite of over $400,000 of one-time costs incurred in connection with the severance arrangement with the Company's former President and CEO. Our Company's management team was strengthened in 1997 with twelve key personnel changes having been made in the top 18 management positions. Ron Harrison became Vice President of Operations in February 1997, bringing over 25 years of experience in apparel manufacturing to the Company and has been instrumental in implementation of our outsourcing program and the expansion of our seamless production capacity. Glenn Kennedy joined Alba in June of 1997 as chief financial officer after serving on Alba's Board of Directors since 1991. Glenn brings over 22 years of financial experience in both public accounting and as chief financial officer of both private and public companies, including Alba's parent, Sunstates Corporation. I joined the Company as President and Chief Executive Officer in February 1997 after having spent twelve years as a member of the Company's Board of Directors and having served as Chief Operating Officer of Sunstates Corporation and Group Vice President with Gould, Inc. and Becton Dickinson and Company. I believe that we now have a strong management team committed to the growth of Alba. 1997 was a year of repositioning for Alba and I believe that many important steps were taken to enable Alba to go forward into 1998 with renewed growth and increased profitability. We are excited about our future and believe that a return to profitability and increased shareholder value lie ahead. I want to thank you and our valued employees for your continued support. Sincerely, /s/ Lee N. Mortenson Lee N. Mortenson President and Chief Executive Officer 3 CONSUMER PRODUCTS DIVISION Sales of the Division's products fell $2.6 million, all in full fashion and circular knit panties. Gross margin was up 1.8 points (+4.3 points in intimates, - -3.4 points in hosiery). The margin gain in intimates reflects the shift to higher margin seamless styles from the "old technology" full fashion (all full fashion manufacturing was discontinued early in 1997) and circular knit. [PHOTO APPEARS HERE] The margin decline in hosiery was the result of quality problems and startup expenses related to the installation of new knitting equipment in late 1996. These problems are now behind us and these new machines, designed to give greater fit and comfort to the full-figure consumer, are now producing efficiently. While hosiery margins are still under pressure from Lycra price increases and retailer resistance to price increases due to the soft market, we expect to increase our margins in 1998 by: a) sales of higher margin, value added, products such as tights and trouser socks; b) the branded JONES WEAR program; and, c) selected sourcing from Mexico. 1997 WAS A YEAR OF "CONSOLIDATION" AND "VALIDATION." CONSOLIDATION: We were able to consolidate styles and products, while offering the consumer a better line. We reduced SKU's by over 1/3, eliminated the inefficient full fashion production and reduced our circular knit production by over 50% to focus on our core hosiery styles, new higher margin tights and trouser socks plus the emerging seamless intimates market. [PHOTO APPEARS HERE] 4 VALIDATION: We were able to validate our commitment to seamless intimates. We sold seamless products to major accounts such as Sears, JC Penney, Target, Victoria's Secret, Nordstrom's, Talbot's and others, plus, importantly, we are becoming a major vendor to branded marketers who want to sell a seamless line. 1998 PLANS We are poised for continued growth in 1998. Our order backlog at the end of January was over $3.9 million, approximately five times what it was a year before. Most of our growth will come from SEAMLESS INTIMATES. Alba is one of only four major companies in the world with significant capacity for seamless goods. As consumers discover the fit and comfort, plus figure flattering attributes of seamless goods, and we develop new applications of the technology, the future looks very encouraging. 1998 plans for seamless growth include continued momentum in current styles and customers plus expansion into new customers and new product categories that benefit from the attributes only seamless can provide. In addition we will see growth in current and new LICENSED BUSINESSES. 1. We expect to see a major expansion of the JONES WEAR program introduced in 1997, 2. We will introduce a line under the DIAHANN CARROLL license, and 3. We continue to seek other strategically focused licenses. To increase our sale of licensed products we have formed the Alba Design Group, based in our New York Office headed by Mr. William Bell. Bill formerly ran the licensee of GIORGIO ARMANI and brings a wealth of experience and contacts to Alba. ALBA DIRECT Alba-Direct is approximately 50% export (mostly to Japan) and 50% telemarketing to US women's specialty retailers and maternity shops. Sales in 1997 were essentially the same as 1996, with margins up 3 points to 24%. Alba-Direct's 1998 plans are: a) to develop additional export markets, to lessen the impact of the current economic conditions in Asia; b) continue to sell to maternity shops and specialty stores, and, importantly; c) develop the Internet as a marketing tool for both wholesale and retail (consumer) markets. Visit us at "Alba1.com" and see how it will work!. [PHOTO APPEARS HERE 5 HEALTH PRODUCTS DIVISION As expected, 1997 was a year of continued consolidation within the healthcare industry, which resulted in a reduction in sales revenue compared to 1996. A re-design and re-introduction of our new pulStar(R) wrap system also contributed to the lower volumes in 1997. Although consolidation within the industry is expected to continue in 1998, the Company believes that consolidation presents opportunities for growth in addition to the challenges of maintaining market share. The Company can not predict the effect that such consolidations may have in 1998. [PHOTO APPEARS HERE] Increased sales were achieved in ALBAhealth's two major product lines: knitted footwear and surgeon gown cuffs. We are market share leaders in both of these categories. The decision of a major customer of our dressings to consolidate their product offering did adversely affect our sales, but a portion of this business is being retained by sales to other distributors. Also, the re-design of our new pulStar(R) wrap system resulted in the writing off of certain parts of our PAS(R) product line further reducing our profit margins. However, this decision clears the way for the re-introduction of our new pulStar(R) wrap system that has received excellent initial acceptance. While consolidation and contraction of customers and product lines has made it more difficult to sell in our industry, ALBAhealth did increase sales to McKesson General Medical by 23% and Bergen Brunswig by over 20%. Both these companies made significant efforts to expand their distribution position to U.S. healthcare providers. Likewise, our sales increased with Owens & Minor, Burrows, Dr. Leonard's, and PHS in addition to many other regional dealers. Our O.E.M. business grew via increases with Kimberly-Clark on gown cuffs and American Threshold on face mask ties. We also established a network of dealers in South America and Mexico that should add significant new volume in 1998. [PHOTO APPEARS HERE] Finally, for the third straight year our sales force was awarded the "Best Field Sales Support" award by Allegiance Healthcare, the nations largest distributor to U.S. hospitals. 1997 was a transition year for ALBAhealth and our plans for 1998 call for a return to sales and profit growth. 6 CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 ($000's except share amounts)
1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash $ 2,416 $ 294 Accounts receivable (net of allowance for uncollectible accounts of $260 in 1997 and $275 in 1996) 7,823 9,713 Inventories 11,309 12,343 Deferred income tax asset 707 524 Prepaid expenses and other 127 303 - -------------------------------------------------------------------------------------------------------------------------------- Total current assets 22,382 23,177 - -------------------------------------------------------------------------------------------------------------------------------- Net Property and Equipment 13,254 13,538 - -------------------------------------------------------------------------------------------------------------------------------- Other Assets: Notes receivable 17 48 Trademarks and patents 492 445 Excess of cost over net assets acquired 7,474 8,063 - -------------------------------------------------------------------------------------------------------------------------------- Total other assets 7,983 8,556 - -------------------------------------------------------------------------------------------------------------------------------- Total assets $ 43,619 $ 45,271 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 2,350 $ 2,350 Accounts payable 3,118 1,900 Accrued expenses 1,542 1,439 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 7,010 5,689 Long-Term Debt 7,452 9,913 Deferred Compensation -- 232 Deferred Income Tax Liability 1,746 1,649 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 16,208 17,483 - -------------------------------------------------------------------------------------------------------------------------------- Commitments Stockholders' Equity: Common stock - authorized 3,000,000 shares, $2.50 par value; 1,886,580 shares issued; 1,867,403 shares outstanding 4,716 4,716 Additional paid-in capital 9,182 9,182 Retained earnings 13,650 14,027 - -------------------------------------------------------------------------------------------------------------------------------- Total 27,548 27,925 Less treasury stock - at cost (19,177 shares) (137) (137) - -------------------------------------------------------------------------------------------------------------------------------- Total stockholders'equity 27,411 27,788 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders'equity $ 43,619 $ 45,271 - --------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. 7 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1997, 1996 and 1995 ($000's except share amounts)
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- NET SALES $ 59,912 $ 65,815 $ 63,718 COST OF SALES 47,690 50,624 51,676 - -------------------------------------------------------------------------------------------------------------------------------- GROSS MARGIN 12,222 15,191 12,042 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,809 13,392 13,140 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 413 1,799 (1,098) - -------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest expense (1,020) (1,286) (1,246) Interest income 79 21 25 Loss on sale of property and equipment (77) (9) (110) Other 14 (21) (41) - -------------------------------------------------------------------------------------------------------------------------------- Total other income (expense), net (1,004) (1,295) (1,372) - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (591) 504 (2,470) PROVISION (BENEFIT) FOR INCOME TAXES (214) 184 (814) - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (377) $ 320 $ (1,656) - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (.20) $ .17 $ (.89) - --------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of significant accounting policies and notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995 ($000's except share amounts)
Additional Common Paid-In Retained Treasury Stock Shares* Amount Capital Earnings Shares Amount Total - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1995 1,886,580 $ 4,716 $ 9,182 $ 15,362 (23,427) $ (167) $ 29,093 Net loss -- -- -- (1,656) -- -- (1,656) Exercise of stock options -- -- -- 1 4,250 30 31 - ------------------------------ ----------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 1,886,580 4,716 9,182 13,707 (19,177) (137) 27,468 Net income -- -- -- 320 -- -- 320 - ------------------------------- ----------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 1,886,580 4,716 9,182 14,027 (19,177) (137) 27,788 Net loss -- -- -- (377) -- -- (377) - ------------------------------- ----------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 1,886,580 $ 4,716 $ 9,182 $ 13,650 (19,177) $ (137) $ 27,411 - ------------------------------- -----------------------------------------------------------------------------------
*Denotes shares issued. See accompanying summary of significant accounting policies and notes to consolidated financial statements. 8 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 ($000's)
1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ (377) $ 320 $ (1,656) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,421 2,352 2,304 Provision for bad debts 103 110 145 Loss on sale of property and equipment 77 9 110 Increase (decrease) in deferred income taxes (86) 118 (496) Provision for inventory obsolescence 1,388 754 1,619 Changes in operating assets and liabilities providing (using) cash: Accounts receivable 1,767 (408) (153) Refundable income taxes -- 437 (310) Inventories (354) 2,061 2,010 Prepaid expenses and other 65 (142) (240) Accounts payable 1,218 (873) 186 Accrued expenses and other liabilities 102 442 (38) Deferred compensation (232) (98) (14) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,092 5,082 3,467 - -------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from surrender of life insurance policies -- 328 -- Capital expenditures (1,869) (1,525) (1,610) Proceeds from sale of property and equipment 233 7 272 Proceeds from collection of notes receivable 127 22 26 Purchase of Balfour Healthcare -- -- (15,322) - -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,509) (1,168) (16,634) - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds from borrowings under line of credit agreement, net -- (1,268) 89 Proceeds from issuance of long-term debt -- -- 15,000 Principal payments on long-term debt and leases (2,461) (2,408) (2,001) Cash proceeds from exercise of stock options -- -- 31 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (2,461) (3,676) 13,119 - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,122 238 (48) CASH, BEGINNING OF YEAR 294 56 104 - -------------------------------------------------------------------------------------------------------------------------------- CASH, END OF YEAR $ 2,416 $ 294 $ 56 - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 979 $ 1,281 $ 1,204 Income taxes, net of refunds received $ (54) $ 1 $ 26
9 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Years Ended December 31, 1997, 1996 and 1995 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. 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. Cash -- The Company considers short-term investments with original maturities of less than three months to be cash equivalents and presents such investments as cash in the accompanying financial statements. Inventories -- Inventories are stated at the lower of cost (first-in, first-out "FIFO" basis) or market. 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 possible that these estimates could change in 1998. 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 $1,768,000, $1,700,000, and $1,789,000 in 1997, 1996 and 1995, 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 no significant impairment losses have been incurred through December 31, 1997. 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 or developed 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 approximately $588,000, $608,000 and $471,000 in 1997, 1996, and 1995, respectively. 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. 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. Advertising Costs -- Advertising costs are charged to operations when incurred. The Company spent approximately $329,000, $408,000, and $384,000 for advertising in 1997, 1996 and 1995, respectively. Research and Development -- The Company sponsors research and development projects through its research and development department. Expenditures for research and development are expensed as incurred. The Company spent approximately $513,000, $474,000, and $490,000 for research and development in 1997, 1996 and 1995, respectively. Income Taxes -- The Company calculates income taxes using the asset and liability method specified by Statement of Financial Accounting Standards No. 109. Net Income Per Common Share -- In February 1997, the Financial Accounting Standards Board issued SFAS 128, 10 "Earnings per Share," which established new standards for computations of earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share on the face of the income statement. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average shares of outstanding common stock (1,867,403 in 1997 and 1996, and 1,864,618 in 1995). The calculation of diluted earnings per share is similar to basic earnings per share except the denominator includes dilutive common stock equivalents such as stock options and warrants. There was no effect on earnings per share with respect to dilutive stock options for 1996. For 1997 and 1995, such options were anti-dilutive. The calculation of earnings per share under SFAS 128 was not different than the previous calculation of earnings per share. Deferred Compensation -- The Company allows certain key employees and officers to defer a portion of their annual compensation until their retirement from the Company. The agreements allow for deferred amounts to earn interest at the current prime rate and provide for payment of the accumulated amounts over a ten-year period beginning on the retirement date. Compensation expense is being recognized in the year the deferred salary is earned. Interest expense in recorded as accrued and the reported liability represents the accumulated value (including interest) of all previously deferred amounts. 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, 1997, the fair values 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. 401-K Retirement Plan -- The Company sponsors a 401-K retirement plan that covers substantially all employees. Contributions to the plan are at the discretion of the Company's Board of Directors and are funded annually (see Note 9). Reclassification -- Certain 1995 and 1996 amounts have been reclassified to conform to 1997 classification. New Accounting Pronouncements -- In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Management will implement SFAS 130 in 1998 and will report comprehensive income when applicable. Results of operations and financial position, however, will be unaffected by implementations of this standard. Also in June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise". SFAS 131 establishes standards for the way that public companies report information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief decision makers in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Management will adopt this standard in 1998 and believes that additional disclosure will be required to disclose separately certain information about the profit or loss and the assets of the healthcare and consumer products divisions. Results of operations and financial position, however, will be unaffected by implementation of this standard. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 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, 1997 and 1996 include ($000's): 1997 1996 - --------------------------------------------------------------- Materials and supplies $ 2,554 $ 2,878 Work-in-process 5,045 4,169 Finished goods. 3,710 5,296 - --------------------------------------------------------------- Total $ 11,309 $12,343 - --------------------------------------------------------------- 3. PROPERTY AND EQUIPMENT The Company's property and equipment at December 31, 1997 and 1996 include ($000's): 1997 1996 - --------------------------------------------------------------- Land $ 256 $ 260 Buildings 8,274 8,366 Machinery and equipment 22,581 22,733 - --------------------------------------------------------------- Total property and equipment 31,111 31,359 Less: accumulated depreciation and amortization (17,857) (17,821) - --------------------------------------------------------------- Net property and equipment $ 13,254 $ 13,538 - --------------------------------------------------------------- 4. SHORT-TERM BORROWINGS AND LINES OF CREDIT The Company has an agreement with a bank that provides a seasonal line of credit of up to $3,000,000, all of which was unused at December 31, 1997. The line of credit bears interest at the LIBOR rate plus 2.75% (8.72% at December 31, 1997) and expires June 30, 1998. Indebtedness under this agreement is collateralized by equipment, inventories and accounts receivable. The loan agreement contains covenants including, but not limited to, restrictions related to indebtedness, tangible net worth (not less than $18,363,000 at December 31, 1997), dividends, capital expenditures and cash flow. (See Note 5) The following relates to aggregate short-term borrowings in 1997, 1996 and 1995 ($000's): 1997 1996 1995 - -------------------------------------------------------------- Amount outstanding at December 31. $ -- $ -- $ 1,268 Maximum amount outstanding at any month end $ 764 $ 2,555 $ 1,466 Average amount outstanding (based on weighted daily average balances) $ 71 $ 1,066 $ 672 Weighted average interest rate during the year 8.65% 7.40% 7.51% Weighted average interest RATE AT DECEMBER 31. 8.72% 7.41% 7.44% - -------------------------------------------------------------- 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. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 5. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 is comprised of the following ($000's): 1997 1996 - -------------------------------------------------------------- Variable Rate Term Loan, due $463 quarterly through December 31, 1997 and $588 quarterly from March 31, 1998 through December 31, 1998, with $7,452 due January 5, 1999 plus interest at LIBOR rate plus 2.75% (8.72% at December 31, 1997) $ 9,802 $ 11,763 Equipment Term Loan, due $125 quarterly through December 31, 1997 plus interest at 6.30%. --- 500 - -------------------------------------------------------------- Total 9,802 12,263 Less current maturities 2,350 2,350 - -------------------------------------------------------------- Long-term debt $ 7,452 $ 9,913 - -------------------------------------------------------------- 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 $18,363,000 at December 31, 1997), dividends, capital expenditures and cash flow. At December 31, 1997, 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, 1997 and 1996, the Company had outstanding two 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 $2,817,052 each, 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 under the existing agreements over the next two years are as follows ($000's): Year - -------------------------------------------------------------- 1998 $ 2,350 1999 7,452 - -------------------------------------------------------------- TOTAL $ 9,802 - -------------------------------------------------------------- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 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 (usually 5 years). The Company adopted the 1992 Nonqualified Stock Option Plan for Non-employee Directors (the 1992 Plan). Under the 1992 Plan, each non-employee 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. The 1992 Plan expired on December 17, 1997, and was replaced with a new 1997 Nonqualified Stock Option Plan for Directors (subject to shareholder ratification) which provides for all directors to immediately receive 2,000 shares plus 500 shares in each succeeding year of the Plan. Transactions involving the Plans are summarized as follows: Weighted Average Option Shares Shares Exercise Price - -------------------------------------------------------------- Outstanding at January 1, 1995 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 Granted 131,750 4.98 Expired and/or cancelled (93,000) 8.72 - -------------------------------------------------------------- Outstanding at December 31, 1997 167,000 $ 5.00 - -------------------------------------------------------------- During 1997, 35,250 options previously issued were modified to an exercise price of $5.00 with no change to the original contract life. In addition, 131,750 options were issued with a range of exercise prices from $4.88 to $5.50 and a contract life of 5.0 years. At December 31, 1997, these 167,000 outstanding options had a range of exercise prices of $4.88 to $5.50, a weighted-average exercise price of $5.00 and a weighted-average remaining contract life of 4.5 years. Of the 167,000 options outstanding, 21,438 were exercisable at December 31, 1997, with a weighted-average exercise price of $5.00 and a weighted-average remaining contract life of 4.5 years. The Company has adopted Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective January 1, 1996. In accordance with the provisions of SFAS 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 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated in the table below ($000's, except per share amounts): 1997 1996 1995 - -------------------------------------------------------------- Net income (loss)-- as reported $ (377) $ 320 $(1,656) Net income (loss)-- pro forma (427) 308 (1,667) Earnings per share-- as reported (.20) .17 (.89) Earnings per share-- pro forma (.23) .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: 1997 1996 1995 - -------------------------------------------------------------- Expected dividend yield 0.00% 0.00% 0.00% Expected stock price volatility 18.00% 18.26% 18.59% Risk-free interest rate 6.21% 5.67% 5.40% Expected life of options 5 years 5 years 5 years The weighted average fair values of options granted during 1997, 1996 and 1995 were $1.51, $2.03 and $2.36, respectively. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 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 $13,937,424, $15,932,382, and $16,601,252, in 1997, 1996 and 1995, 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. 8. INCOME TAXES The Company has approximately $2,140,000 of state net operating loss carryforwards available for reduction of future state taxable income. The Company also has approximately $264,000 of alternative minimum tax credit carryover. These carryover amounts begin to expire in 2001. Components of the income tax provision (benefit) for 1997, 1996 and 1995 included ($000's): 1997 1996 1995 - --------------------------------------------------------------- Current: Federal $ -- $ 66 $ (318) State -- -- -- - --------------------------------------------------------------- Total current -- 66 (318) - --------------------------------------------------------------- Deferred: Federal (182) 102 (412) State (32) 16 (84) - --------------------------------------------------------------- TOTAL DEFERRED (214) 118 (496) - --------------------------------------------------------------- Total provision (benefit) for income taxes $ (214) $ 184 $ (814) - --------------------------------------------------------------- The approximate tax effect of temporary differences and carryforwards that gave rise to the Company's deferred income tax assets and liabilities for 1997 and 1996 are as follows $(000's): 1997 Assets Liabilities Total - ---------------------------------------------------------------- Current: Receivables $ 95 $ -- $ 95 Inventories 610 -- 610 Other 2 -- 2 - ---------------------------------------------------------------- Total current 707 -- 707 - ---------------------------------------------------------------- NONCURRENT: Property -- (2,129) (2,129) Deferred compensation 44 -- 44 Insurance reserve 93 -- 93 Benefit of state net operating loss carryforward 85 -- 85 Alternative minimum tax credit carryforward 264 -- 264 All other -- (103) (103) - ---------------------------------------------------------------- Total noncurrent 486 (2,232) (1,746) - ---------------------------------------------------------------- Total current and noncurrent $1,193 $(2,232) $(1,039) - ---------------------------------------------------------------- 1996 Assets Liabilities Total - ---------------------------------------------------------------- CURRENT: Receivables $ 101 $ -- $ 101 Inventories 351 -- 351 Benefit of state net operating loss carryforward 72 -- 72 - ---------------------------------------------------------------- Total current 524 -- 524 - ---------------------------------------------------------------- Noncurrent: Property -- (2,125) (2,125) Deferred compensation 127 -- 127 Insurance reserve 89 -- 89 Deferred revenue -- (2) (2) Alternative minimum tax credit carryforward 365 -- 365 All other -- (103) (103) - ---------------------------------------------------------------- Total noncurrent 581 (2,230) (1,649) - ---------------------------------------------------------------- TOTAL CURRENT AND Noncurrent $1,105 $(2,230) $(1,125) - ---------------------------------------------------------------- 15 The Company has not provided valuation allowances for the deferred tax assets as no conditions exist that require such allowances. 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: 1997 1996 1995 - --------------------------------------------------------------- Federal income tax at statutory rate (benefit) $(201) $ 171 $ (840) State income taxes, net of federal benefit (cost) (21) 10 (56) Change, net of premiums paid and proceeds, in officers' life insurance values -- (1) (4) Expenses which are not deductible for income tax purposes 15 21 33 All other (7) (17) 53 - --------------------------------------------------------------- Total provision (benefit) for income taxes $(214) $ 184 $ (814) - --------------------------------------------------------------- 9. EMPLOYEE 401-K RETIREMENT PLAN The Company has a 401-k retirement 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. The Company's matching contribution, if any, is discretionary on an annual basis and may not exceed 6% of participants' compensation. For the three years ended december 31, 1997, the Company has contributed 40% of the participant's contributions up to 4% of their compensation. Contribution expenses related to this plan for the years ended December 31, 1997, 1996 and 1995 were $132,000, $149,000, and $164,000, respectively. 10. LEASES 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 ($000's): Year - --------------------------------------------------------------- 1998 $ 284 1999 231 2000 146 2001 103 2002 56 Thereafter -- - --------------------------------------------------------------- Total minimum lease payments $ 820 - --------------------------------------------------------------- Total rental expense for all operating leases was $515,000 in 1997, $543,000 in 1996, and $398,000 in 1995. 16 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 GLENN J. KENNEDY President and Chief Executive Chief Financial Officer 17 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Greensboro, North Carolina February 6, 1998, except for Note 5 which is as of March 26, 1998 18 STOCK PRICES AND DIVIDEND INFORMATION
Sales Price of Common Shares Sales Price of Common Shares 1997 1996 ----------------------------- ------------------------------ High Low High Low - ---------------------------------------------------------------------------------------- First Quarter 6 1/4 5 7 7/8 6 5/8 Second Quarter 5 1/4 4 7/8 8 1/4 6 5/8 Third Quarter 5 1/4 4 13/16 8 6 1/4 Fourth Quarter 5 3/4 4 5/8 6 5/8 5 3/8
The Company has not paid dividends on its common stock during the two years ended December 31, 1997. See notes 4 and 5 to the consolidated financial statements concerning restrictions on the payment of dividends. CLASSES OF PRODUCTS Year Women's Women's Men's Ended Hosiery Intimate Hosiery Health December 31, Products Products Products Men's Wear Products - --------------------------------------------------------------------------- 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% 1997 15.0% 27.3% 6.0% 0.8% 50.9% Note: Amounts represent percentages of annual net sales. FIVE YEAR SELECTED FINANCIAL DATA
$000's Except for Per Share Amounts ----------------------------------------------------------------- 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Selected Financial Data: Net sales $ 59,912 $ 65,815 $63,718 $ 56,507 $ 50,855 Gross margin 12,222 15,191 12,042 14,254 13,479 Income (loss) before income taxes (591) 504 (2,470) 3,150 1,435 Provision (benefit) for income taxes (214) 184 (814) 1,204 451 Net income (loss) (377) 320 (1,656) 1,946 984 Income (loss) per common share: Net income (loss) per common share - basic and diluted (.20) .17 (.89) 1.05 .54 Weighted average number of shares of common stock outstanding 1,867 1,867 1,865 1,849 1,826 At Year End: Total assets $ 43,619 $ 45,271 $49,250 $ 37,730 $ 35,224 Long-term debt and capital lease obligations 7,452 9,913 12,263 1,058 1,777 Selected Supplementary Financial Data Property and equipment: Net investment $ 13,254 $ 13,538 $13,775 $ 11,605 $ 11,474 Current additions 1,869 1,525 1,610 1,919 1,719 Depreciation 1,768 1,700 1,789 1,693 1,688 Other: Working capital $ 15,372 $17,488 $17,960 $ 19,866 $ 18,293 Stockholders' equity 27,411 27,788 27,469 29,093 26,981 Stockholders' equity per common share 14.68 14.88 14.71 15.62 14.68
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. 19 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 1997, 1996 and 1995. Percentage of Sales Year ended December 31, 1997 1996 1995 - ------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of Sales 79.6 76.9 81.1 - ------------------------------------------------------------- Gross Margin 20.4 23.1 18.9 Selling, General and Administrative 19.7 20.4 20.6 - ------------------------------------------------------------- Operating Income/(Loss) 0.7 2.7 (1.7) Other Income (Expense), Net (1.7) (1.9) (2.2) - ------------------------------------------------------------- Income (Loss) Before Income Taxes (1.0) 0.8 (3.9) Provision (Benefit) for IncomeTaxes (0.4) 0.3 (1.3) - ------------------------------------------------------------- Net Income (Loss) (0.6) 0.5 (2.6) DISCUSSION OF 1997 COMPARED TO 1996 Net Sales by Division for 1997 as compared to 1996 are set forth in the following table: $(000's) --------------------------------------------------- Dec. 31 Dec. 31 Increase/ % Increase/ 1997 1996 (Decrease) (Decrease) - ------------------------------------------------------------------------- Health Products $30,527 $ 32,640 $(2,113) (6.5%) CONSUMER Products 23,548 26,120 (2,572) (9.8%) Alba Direct 1,753 1,749 4 0.0% Byford 4,084 5,291 (1,207) (22.8%) AWI Retail -- 15 (15) (100%) - ------------------------------------------------------------------------- Total $59,912 $ 65,815 $(5,903) (9.0%) Net sales, as shown in the table above, decreased by $5,903,000 or 9.0%. Health Products business is down primarily due to problems encountered with its P.A.S.(R) anti-embolism compression system. The Company was able to redesign the product and re-introduce its new pulStar(R) wrap system in late 1997. Consolidation of product lines by a major distributor resulted in the loss of significant dressing sales in the second half of 1997. These declines were partially offset by increased sales of tread, footwear, gown, cuffs and specialty products. The decline in the Consumer Products sales was due to the decision in early 1997 to discontinue the "old technology" full fashion panty production and the loss of circular knit business to lower priced imports. The full fashion loss was offset in part by converting customers to the new seamless panty line. Ladies hosiery volume remained relatively flat with 1996. Due to marginal profitability, the Company decided to no longer be a distributor for the Byford product line. Byford sales in 1998 will only represent the disposal of remaining inventories and are not anticipated to exceed approximately $300,000. AWI Retail, the Branson, Mo. factory outlet store, was closed in 1996. Gross profits decreased in 1997 to 20.4% of net sales, as compared to 23.1% in 1996. Health Products' margins declined 4.4% in 1997 due to problems with its high margin P.A.S.(R) anti-embolism stocking system, cost reduction pressures within the healthcare industry and the loss of dressing business to foreign competition. Consumer Products' margins increased by 1.8% in 1997 reflecting a 4.3 point increase in intimate apparel margins due to a shift to higher margin seamless products from the "old technology" full fashion and circular knit lines. This increase in margins was partially offset by a 3-point decline in hosiery margins resulting from quality problems and startup expenses related to the installation of new knitting equipment in late 1996. The discontinuation of the Byford business resulted in the disposition of inventories at substantially less than normal margins. Selling, General and Administrative Expenses decreased as a percentage of sales to 19.7% from 20.4% in 1996. Strong spending controls resulted in the lower expense percentage in the face of the decline in net sales and in spite of the one-time costs of approximately $400,000 in connection with the severance arrangement with the Company's former President and CEO. Interest expense was $1,020,000 in 1997 as compared to $1,286,000 in 1996. Average borrowings under the Short-Term Revolver were $71,000 with an average interest rate of 8.65% compared to average borrowings of $1,066,000 with an average interest rate of 7.40% in 1996. Additionally, the Company's long-term debt has continued to decline in 1997, reflecting normal quarterly principal reductions as well as a special one-time principal reduction of $111,000 in connection with the sale a substantial portion of the Byford inventories. 20 MANAGEMENT'S DISCUSSION CONTINUED DISCUSSION OF 1996 COMPARED TO 1995 Net Sales by Division for 1996 as compared to 1995 are set forth in the following table: $(000's) -------------------------------------------- Dec. 31 Dec. 31 Increase/ % Increase/ 1996 1995 (Decrease) (Decrease) - ----------------------------------------------------------------- Health Products. $32,640 $ 30,203 $ 2,437 8.1% Consumer Products 26,120 25,853 267 1.0% ALBA DIRECT 1,749 2,034 (285) (14%) 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 $2,097,000 or 3.3%. 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. Consumer Products sales increased as a result of sales to a new customer. 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 $253,000. 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 $1,286,000 in 1996 as compared to $1,247,000 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 $30,000 compared to net other expense in 1995 of $151,000. 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. LIQUIDITY AND CAPITAL RESOURCES Although the Company's working capital has decreased by $2,116,000 since December 31, 1996, the available working capital continues to be adequate to support the Company's operations. The working capital decline is primarily reflected in higher accounts payable and higher accrued expenses. On December 31, 1997, the Company had current working capital of $15,372,000 with a ratio of 3.19 to 1. This is comparable to $17,488,000 or 4.07 to 1 at December 31, 1996. The decrease in the amount of working capital reflects the Company's concerted efforts to reduce receivables and inventory levels, which have declined to a combined total of $19,132,000 at December 31, 1997, from $22,056,000 at December 31, 1996. Liquidity needs are primarily affected by and related to capital expenditures and changes in the Company's business volume. These needs are adequately being met through available working capital, and are supplemented by a short-term line of credit of $3,000,000, to cover fluctuations. Capital expenditures for 1997 totaled $1,869,000, reflecting renovations to existing plants and the purchase of new, more efficient knitting equipment. This level of capital expenditures compares to $1,525,000 for the 1996 year. The Company has both a seasonal line of credit and long-term debt agreements with a major bank. On March 26, 1998, the Company renegotiated the terms of these 21 agreements wherein the $3,000,000 seasonal line of credit will expire June 30, 1998 and the long-term debt will mature on January 5, 1999. As the result of significant changes in financing markets, the Company has been able to obtain very favorable proposals from asset-based lenders who would provide the Company with significantly more financing availability at significantly lower costs than its current bank agreement. Accordingly, the Company has obtained loan proposals from major financial institutions to provide the Company with up to a $26 million (based upon available collateral) five-year facility encompassing both a revolving line and a term loan for fixed assets and future capital expenditures. The Company anticipates that the new financing will be in place in the second quarter of 1998. Cash provided by operating activities was $6,092,000 in 1997 as compared to $5,082,000 in 1996, and $3,467,000 in 1995. The increase in cash provided in 1997 was primarily due to reductions in accounts receivable and increases in accounts payable. The 1996 cash provided from operations was higher than 1996 mainly as the result of an increase in net income and a reduction in inventories. Net cash used in investing activities was $1,509,000 in 1997 compared to $1,168,000 and $16,634,000 in 1995. The cash used in 1997 and 1996 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 $2,461,000 in 1997 as compared to $3,676,000 in 1996 and net cash provided of $13,119,000 in 1995. Net cash used in 1997 and 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). Anticipated capital expenditures for 1998 will be approximately $3,700,000. Capital expenditures will be made to renovate existing plant and equipment and to purchase new, more efficient knitting equipment. Based upon anticipated increased demand for the Company's seamless products in 1998, it may be necessary to significantly increase expenditures for seamless knitting equipment. The Company's new financing facility is anticipated to adequately provide funds necessary to allow the Company to meet possible expansion needs. DERIVATIVES At December 31, 1997, the Company had two 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 $2,817,000 each, 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. YEAR 2000 COMPLIANCE During 1996, for operational reasons the Company made the decision to upgrade the Company's main manufacturing and financial reporting hardware and software systems. New IBM AS/400 hardware was acquired in 1996 and the new software was acquired in 1997. The Company is currently engaged in training and hardware upgrades necessary to have the new system operational by the end of 1998. The new hardware and software is Year 2000 Compliant and thereby will eliminate a major area of concern for the Company. However, there are other computer-based systems within the Company (eg. telephone answering system, etc.) which may require upgrading to ensure operational continuity beyond December 31, 1999. The Company has substantially completed identification of such systems and believes that all significant systems will be compliant in time to ensure no disruption to the Company's operations. The cost of bringing these minor systems into compliance is not anticipated to be material. EFFECTS OF INFLATION Management believes that inflation has not had a material effect on the Company's operations for the years ended December 31, 1997 and 1996. NEW ACCOUNTING PRONOUNCEMENTS See "Summary of Significant Accounting Policies -- New Accounting Pronouncements" in the consolidated financial statements for a discussion of new accounting pronouncements that will become effective in 1998. 22 QUARTERLY DATA (UNAUDITED)
Quarters Ended ($000's Except per Share Amounts) 1997 1996 ------------------------------------------------------------ ---------------------------------------- December 31 September 28 June 29 March 30 December 31 September 29 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------------------------ Net Sales $ 14,710 $15,390 $15,872 $13,940 $ 15,861 $16,279 $ 16,296 $ 17,379 Gross Margin 2,533 3,185 3,500 3,004 3,582 3,694 3,792 4,123 Net Income (Loss) (97) 162 243 (685) 191 23 5 101 Income (Loss) Per Share -- Basic and Diluted (.05) .09 .13 (.37) .10 .01 .01 0.05 Weighted Average Number of Shares of Common Stock Outstanding 1,867 1,867 1,867 1,867 1,867 1,867 1,867 1,867
23 Corporate Management Clyde Wm. Engle Chairman of the Board Lee N. Mortenson President and CEO Donald R. Denne Senior Vice President Health Products Dixon R. Johnston Vice President Consumer Products Glenn J. Kennedy Vice President, Treasurer, Secretary and CFO Ronald J. Harrison Vice President Operations Warren R. Nesbit, II Vice President Human Resources James Douglas Dickson, Jr. Controller and Assistant Secretary Corporate Directors Term Expiring May 1998 Clyde Wm. Engle Chairman of the Board 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 Term Expiring May 2000 William M. Cousins, Jr. Management Consultant Jupiter, Florida Glenn J. Kennedy Vice-President, Treasurer, Secretary and Chief Financial Officer Paul H. Albritton, Jr. Vice President and Chief Financial Officer C-Phone Corporation Wilmington, North Carolina Corporate Information Principal Market The Company's Common Stock (AWS) is listed on the American Stock Exchange Transfer Agent - Registrar First Union National Bank Charlotte, North Carolina Number of Shareholders The Number of holders of record of Alba's Common Stock on March 9, 1998, was 316. Annual Meeting May 13, 1998 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 1997, 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., Assistant Secretary, Alba-Waldensian, Inc., Post Office Box 100, Valdese, North Carolina, 28690 24 CONSUMER PRODUCTS [PHOTOS OF VARIOUS PRODUCTS APPEARS HERE] SIMPLY MORE JONESWEAR WHILE YOU WAIT BLOOMINGDALE'S XX-SPAN NON-SKID SLIPPERS BABY BOGGANS PULSTAR ALBA-WALDENSIAN, INC. P.O. BOX 100, 201 ST. GEMAIN AVENUE, S.W. VALDESE, NC 28690 EX-23 3 EXHIBIT 23.1 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, 1998, except for Note 5 which is as of March 26, 1998, 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, 1997. Greensboro, North Carolina BDO Seidman, LLP March 30, 1998 (S-1) Report of Independent Certified Public Accountants on Financial Statement Schedule Alba-Waldensian, Inc. Valdese, North Carolina The audits referred to in our report dated February 6, 1998, except for Note 5 which is as of March 26, 1998, relating to the consolidated financial statements of Alba-Waldensian, Inc. and subsidiaries, which is incorporated in Item 8 of the Form 10-K by reference to the annual report to shareholders for the year ended December 31, 1997, included the audits of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedui1es based upon our audits. In our opinion, the financial statement schedules present fairly, in all material respects, the information set forth therein. Greensboro, North Carolina BDO Seidman, LLP February 6, 1998 (S-2) 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, 1997 Accounts Receivable - Allowance $275,000 102,877 117,877 $260,000 for uncollectible accounts Inventory - Reserve for markdowns $722,641 1,387,734 415,082 $1,695,293 YEAR ENDED DECEMBER 31, 1996 Accounts Receivable - Allowance $250,000 109,868 84,868 $275,000 for uncollectible accounts Inventory - Reserve for markdowns $610,504 754,106 641,969 $722,641 YEAR ENDED DECEMBER 31, 1995 Accounts Receivable - Allowance $180,000 145,199 75,199 $250,000 for uncollectible accounts Inventory - Reserve for markdowns $385,200 1,619,013 1,393,709 $610,504
EX-27 4 FDS -- ALBA
5 1,000 YEAR DEC-31-1997 DEC-31-1997 2,416 0 8,083 260 11,309 22,382 31,111 17,857 43,619 7,010 0 0 0 4,716 0 43,619 59,912 59,912 47,690 59,499 (16) 0 1,020 (591) (214) (377) 0 0 0 (377) (0.20) (0.20)
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