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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0535180
(State of Incorporation) (I.R.S. Employer
Identification No.)
233 N. Main Street, Hammond Square, Suite 200
Greenville, South Carolina 29601
(Address of principal executive offices) (Zip code)
864/232-8301
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to be best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-
affiliates of the registrant as of September 23, 1997 was :
Common Stock, $.01 par value - $89,579,852
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of September 23, 1997 was:
Common Stock, par value $.01 24,572,742
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's
Annual Report to shareholders for the fiscal year ended June 28,
1997 are incorporated by reference into Parts I and II.
Portions of the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A for the annual shareholders' meeting
to be held on November 6, 1997 are incorporated by reference into
Part III.
Item 1 BUSINESS
General
Delta Woodside Industries, Inc. ("Delta Woodside" or the
"Company") is a South Carolina corporation with its principal
executive offices located at 233 North Main Street, Suite 200,
Greenville, South Carolina 29601 (telephone number: 864-232-
8301). All references herein to Delta Woodside or the Company
refer to Delta Woodside Industries, Inc. and its subsidiaries.
The Company manufactures and markets woven and knitted
fabrics and apparel. The Company's textile segment produces a
range of cotton, synthetic and blended finished and unfinished
fabrics, woven and knit, which are sold for the ultimate
production of apparel, home furnishings and other products. The
Company's apparel segment produces woven and knit apparel,
including the "Duck Head" (Reg. trademark) line of casualwear
marketed primarily in the Southeastern United States to
department stores and specialty apparel retailers. The Company
also operates 31 retail apparel outlet stores that sell primarily
closeout and irregular "Duck Head" products and other woven and
knit casualwear produced by the "Duck Head" division and other
manufacturers. The Company also manufactures and distributes
physical fitness equipment under the "Nautilus" (Reg. trademark)
name. The Company has operations in 13 states, Costa Rica and
Honduras, and employs approximately 7,400 employees.
Delta Woodside Industries, Inc. is the successor by merger
to Delta Woodside Industries, Inc., a Delaware corporation that
was incorporated in 1986 and whose subsidiaries' businesses were
acquired beginning in 1984. The corporation that is now Delta
Woodside Industries, Inc. was incorporated in 1972.
Products, Marketing and Manufacturing
The Company conducts its textile fabrics operations through
the Delta Mills Marketing (woven fabrics) and Stevcoknit (knitted
fabrics) divisions. It conducts its branded and non-branded
apparel operations through the "Duck Head" and "Delta Apparel"
(Reg. trademarks) divisions, respectively. The Company also
manufactures and sells fitness equipment through the "Nautilus"
(Reg. trademark) division, and licenses the use of both the "Duck
Head" and "Nautilus" trademarks through International Apparel
Marketing Corporation (70% owned). Each division has its own
management and employees and operates independently of the other
divisions under the overall direction of the Company's executive
officers. Intersegment sales accounted for no more than
approximately 4% of total sales for fiscal 1997, 1996 and 1995.
Fabrics produced by the Company are either woven or knitted
and are manufactured from cotton, wool or synthetic fibers or
from synthetic filament yarns. Cotton and wool are purchased from
numerous suppliers. Synthetic fibers and synthetic filament yarns
are purchased from a smaller number of competitive suppliers. The
Company spins the major portion of the yarns used in its weaving
and knitting operations. In manufacturing these yarns, the cotton
and synthetic fiber, either separately or in blends, are carded
(fibers straightened and oriented) and then spun into yarn. The
Company combs (removing short fibers) some cotton fiber to make
higher quality
Item 1 (Continued)
yarns. In other fabrics, filament yarns are used. The spun or
filament yarn is then woven into fabric on looms or knitted into
fabric on knitting machines. The unfinished fabric at this stage
is referred to as greige goods. Finished fabric refers to fabric
that has been treated by washing, bleaching, dyeing and applying
certain chemical finishes. Finished fabrics generally have
significantly higher margins than greige goods.
The Company sells its woven fabrics primarily to numerous
apparel manufacturers and apparel resellers. The Company's
knitted fabrics are sold for production of apparel to other
branded and private label manufacturers. Apparel products are
sold primarily to department and specialty retailers under the
Company's "Duck Head" label, to private label apparel resellers,
to distributors and to screen printers.
Textile Segment
The Company sells a broad range of fabrics primarily to
branded apparel manufacturers and resellers, including Levi
Strauss, Haggar Corp., the Wrangler(R) and Lee(R) divisions of
V.F. Corporation, Farah Incorporated, Kellwood Company and Liz
Claiborne, Inc., and private label apparel manufacturers for J.C.
Penney Company, Inc., Sears, Roebuck & Co. and other retailers.
The Company believes that it is a leading producer of cotton
pants-weight woven fabric used in the manufacture of casual
slacks such as Levi Strauss' Dockers(R) and Haggar Corp.'s
Wrinkle-Free(R). Other apparel items manufactured with the
Company's woven fabrics include women's chinos pants, women's
blazers, career apparel (uniforms) and battle dress camouflage
military uniforms. Apparel items manufactured with the Company's
knitted fabrics include polo-type or golf shirts, career apparel,
children's apparel, specialty athletic wear and ladies' tops.
Net sales of woven fabrics were $336 million, $294 million
and $291 million and net sales of knitted fabrics were $98
million, $83 million and $103 million, during fiscal 1997, 1996
and 1995, respectively.
The woven fabrics division began a capital improvement
program during fiscal year 1992 that was designed to modernize
certain fiber opening, carding, spinning, weaving and fabric
finishing processes to focus on the production of heavier-weight,
higher-margin goods. By the end of fiscal year 1997, expenditures
for this six-year program totaled $112.8 million. As a result,
the division has reduced its manufacturing square footage by
approximately 18% and the number of employees by 26%. In the
modernization program, the woven fabrics division reduced its
capacity to produce lower price greige goods but increased its
capacity to finish fabrics. As a consequence, the woven fabrics
division has increased its outside purchases of greige goods. The
Company believes that these changes provide it with the
opportunity to increase its overall sales levels and to expand
its operating margins.
The knitted fabrics division began a consolidation and
modernization project in fiscal year 1992 to consolidate the
number of its manufacturing facilities from four spinning, two
knitting and two finishing plants to two spinning, one knitting
and one finishing plant. During the past
Item 1 (Continued)
five fiscal years, capital expenditures for the program totaled
$42.1 million. Simultaneously, certain knitting, dyeing and
finishing processes were modernized. With the successful
completion of this project, manufacturing square footage was
reduced by 37% and the number of employees was reduced by 26%,
with no material change in total knitted fabric capacity.
These initiatives have resulted in a significant reduction
in the costs in the textile segment.
Delta Mills Marketing Company (Woven Fabrics).
The woven fabrics division produces finished and unfinished
woven fabrics used in the production of apparel, home furnishings
and other products. Finished apparel fabric is ready to be cut
and sewn into garments. Greige goods are typically sold to
converters who enhance the fabric through finishing techniques
and sell it to manufacturers of apparel, home furnishings and
other products.
Finished woven fabrics produced by the division are
primarily sold directly to major apparel manufacturers. The
woven fabrics division has focused its marketing efforts on
building close relationships with major apparel companies that
have broad distribution channels and that the Company believes
have positioned themselves for long-term growth. The division's
marketing efforts focus on four primary apparel manufacturing
groups: women's apparel, including fashion apparel; men's
apparel; career apparel and uniforms; and military and other
government uniforms and apparel. The woven fabrics division sells
and distributes its fabrics through a marketing office based in
New York City (which serves the United States, Canadian and
Mexican markets), with sales agents also operating from Atlanta,
Chicago, Dallas, Los Angeles and San Francisco. The division also
has international sales agents in the United Kingdom and Hong
Kong.
Approximately 70% of the division's finished woven fabric
sales are of fabrics made from cotton or cotton/synthetic blends,
while approximately 30% of such sales are of fabrics made from
spun synthetics and other natural fibers, including various
blends of rayon, polyester and wool. During fiscal year 1997, the
woven fabrics division sold finished fabrics at a cost of $239.6
million and unfinished fabrics at a cost of $31.6 million. Woven
fabrics are generally produced and shipped pursuant to specific
purchase orders, which minimizes the Company's uncommitted
inventory levels. The division's production of cotton and
cotton/synthetic blend finished woven fabrics is largely
vertically integrated, with the division performing most of its
own spinning, weaving and finishing. The production of spun
synthetic finished woven fabrics is fully vertically integrated,
with various plants in the division performing spinning, weaving
and finishing operations. In the production of military fabrics,
the Company purchases a portion of its greige goods needs and
finishes this fabric to specifications. The woven fabrics
division is currently operating its manufacturing facilities at
near full capacity.
Item 1 (Continued)
The division also produces a variety of unfinished
light-weight woven fabrics that are ultimately used in the
manufacture of apparel (including blouses, dresses and suit
linings), home furnishings (including shower curtains) and
medical tape. Fabrics include filament acetate, textured
polyester and other "semi-fancy" fabrics of more complicated
construction.
Stevcoknit (Knitted Fabrics).
The knitted fabrics division spins yarn and knits and
finishes a wide range of circular knit fabrics for use in the
manufacture of knit apparel. The division also provides yarn to
the Company's apparel segment.
The knitted fabric division's marketing resources are
focused on the following segments: (i) major apparel companies
that market casual wear such as knit polo-type shirts, (ii)
children's wear manufacturers and (iii) career apparel. The
knitted fabric division's products are marketed to numerous
apparel manufacturers through marketing staffs employed by the
Company in New York City and Los Angeles, with sales personnel
also located in North Carolina, Georgia and Texas. To promote
further the sales of the knitted fabrics division's fabrics to
apparel manufacturers, the marketing staff of the division also
contacts major retailers of products manufactured from the
division's knitted fabrics. Discussions with these retailers
provide information relating to fabric quality and trends in
style and color. In addition to its sales to apparel
manufacturers, the division also sells prepared for print fabrics
to converters and printers principally through a single broker.
The Company believes that, because of the competitive brokerage
environment, the loss of this broker would not have a material
adverse effect on the Company. There can be no assurance,
however, that this would be the case.
The operations within the knitted fabrics division are
largely vertically integrated. Various plants are equipped to
perform all stages of the manufacturing process, from carding and
spinning the raw fiber stock to knitting, dyeing and finishing
the final fabric product. The fabrics produced by this division
are manufactured primarily by using 100% cotton and
polyester/cotton blends. Knitting and finishing of the fabrics
are performed to specific customer orders in the case of orders
representing the majority of the dollar volume of this division.
The knitted fabrics division is currently operating its
manufacturing facilities at near full capacity.
Raw Materials
The textile segment's principal raw material is cotton,
although it also spins polyester, wool, linen fiber, acrylic,
nylon and rayon fibers and weaves filament acetate and textured
polyester. Polyester is obtained primarily from three major
suppliers, all of whom provide competitive prices. Polyester and
rayon are currently at the lowest prices the Company has paid
since fiscal year 1993. There can be no assurance, however, that
this trend will continue. During fiscal year 1997, the Company's
average delivered price per pound of cotton purchased and
consumed (including freight, carrying costs and costs for the
relatively high amount of premium
Item 1 (Continued)
cotton that the Company uses) was $.833, as compared to $.944 in
fiscal year 1996 and $.817 in fiscal year 1995. In fiscal year
1998, the Company expects to use approximately 92 million pounds
of cotton (including approximately 17 million pounds of premium
cotton) and 23 million pounds of polyester in its manufacture of
yarn for woven and knitted textiles. The Company has contracted
to purchase, at average delivered prices lower than in the
preceding fiscal year, about 71% of its expected cotton
requirements for fiscal year 1998 and 14% of its expected cotton
requirements for fiscal year 1999. The percentage of the
Company's cotton requirements that the Company fixes each year
varies depending upon the Company's forecast of future cotton
prices. The Company believes that recent cotton prices have
enabled it to contract for cotton at prices that will permit it
to be competitive with other companies in the United States
textile industry when the cotton purchased for future use is put
into production. To the extent that cotton prices decrease before
the Company uses these future purchases, the Company could be
materially and adversely affected. In addition, to the extent
that cotton prices increase, the Company may be materially and
adversely affected as there can be no assurance that it would be
able to pass along these increased costs to its customers.
Apparel Segment
The apparel segment produces and markets both woven apparel
and knitted apparel. The segment's products include branded
apparel marketed under the "Duck Head" line of men's and boys'
casualwear, which includes pants, shorts and shirts. Knitted
apparel for printing includes T-shirts, polo-type shirts and
sweatshirts which are sold under the labels of "Duck Head",
"Delta Apparel", and various private labels.
"Duck Head" Apparel. The division produces collections of
men's and boys' casual apparel, sold under the "Duck Head" label,
including pants, shorts, shirts and accessories. This division
also sells a relatively small amount of men's and boys' woven
uniform, sportswear and casualwear under the private labels of
its customers. The division also licenses various other
categories of apparel and accessories, through an affiliated
company.
"Duck Head" labeled products are primarily marketed by
employed sales staff to regional and national retailers. The
"Duck Head" trademark has been associated with apparel since 1865
and has been historically distributed in the Southeastern United
States. The company acquired the brand in February 1989. The
company has recently capitalized on the rise in popularity of the
brand and expanded its marketing efforts in department stores
nationwide. The division opened its first in-store Duck Head Shop
in April 1997 and now has installed over 200 men's and 150 boys'
shops in major department stores. The "shop" display format of
the entire Duck Head line utilizes dedicated retail floorspace in
the sportswear department positioned with other prominent
national brands. Gross sales of "Duck Head" labeled products were
approximately $90 million, $79 million and $81 million during
fiscal 1997, 1996, and 1995, respectively.
Item 1 (Continued)
"Duck Head" Apparel operates a total of 5 facilities located
in Georgia and Costa Rica. The division purchases the fabrics
used in its products from a number of producers. "Duck Head"
currently acquires less than one-half of its finished products
from other companies throughout the
world. This outside production takes the form of sewing fabric
parts cut at "Duck Head" facilities, cutting and sewing with
fabric and patterns supplied by "Duck Head", or providing
finished garments made to "Duck Head" specifications. The
division maintains a staff of quality specialists who
consistently monitor work in process at outside companies. The
Company believes that there is ample capacity among outside
contractors worldwide to meet its future production requirements.
All of the products are warehoused in the division's facilities.
"Duck Head" labeled apparel items are generally required to
be inventoried to permit quick shipment and to level production
schedules. Customer private label apparel items are generally
made only to order. The division's products are manufactured
primarily from 100% cotton. The division's marketing office is
based in Winder, Georgia with regional sales managers and sales
personnel located throughout the country.
The "Duck Head" division has 31 outlet stores in 10 states
that sell principally closeout and irregular "Duck Head"
products. These stores also sell a small amount of apparel items
manufactured by Duck Head licensees.
"Delta Apparel". "Delta Apparel", which is headquartered in
Duluth, Georgia, operates a total of 5 facilities and produces
knitted T-shirts, polo-type shirts and sweatshirts. The division
markets its products primarily to companies that screen print
shirts for resale and to distributors. Net sales in this
division were $112 million, $123 million and $102 million during
fiscal 1997, 1996, and 1995, respectively.
The division's knit apparel marketing is performed by
employed sales personnel located throughout the country. Sales
personnel call directly on the retail trade, contacting
department stores, distributors, screen printing companies and
the mass marketers such as discount houses. This operation also
utilizes independent sales representatives to sell to
distributors and screen printing companies. Most knit apparel
items are inventoried to permit quick shipment and to level
production schedules. Special fashion knit apparel items and
customer private label knit apparel styles generally are made
only to order.
Of the yarn used by the Company's knit apparel
operation, approximately one-half is produced by Stevcoknit with
the remainder purchased from outside vendors; the knit apparel
operation is otherwise largely vertically integrated. The
business manufactures its own knitted fabrics, utilizing
knitting, dyeing and finishing processes, and cuts and sews its
finished knitted fabrics into apparel. The fabrics used by the
division are either polyester/cotton blends or 100% cotton.
Item 1 (Continued)
Fitness Equipment
"Nautilus" Fitness Equipment. Nautilus manufactures
strength-training and aerobic exercise equipment for commercial
club, institutional facility and home-use fitness markets. The
newest strength product line is called "2ST" and consists of
machines intended for the commercial club market. The previous
model "Next Generation" product line is currently still
available. Nautilus also produces a line of weight resistance
machines for women called "Nautilus for Women", and the Power
Plus and Free Weight line of equipment. As a supplement to the
weight resistance line, Nautilus produces multi-station machines
that serve those markets that have space and budget limitations.
Nautilus also produces aerobic machines for the institutional
market, including recumbent bikes, stairclimbers, treadmills
and a skate machine. Home products include a multi-station
"Personal Circuit" and lower priced bike and stepper machines.
Nautilus' historical strength has been in the
commercial/institutional market where it targets health clubs,
YMCAs, medical rehabilitation, and corporate facilities. The
manufacturing operations at Nautilus are vertically integrated,
including metal fabrication, metal preparation/painting
facilities, fabrication, and plastic vacuum forming operations.
Fabrication is predominately made-to-stock with customer orders
painted and filled on an assembly-to-order basis. The Company
believes that the manufacturing operation is currently operating
at approximately 75% of capacity.
Competition
The cyclical nature of the textile and apparel industries,
characterized by rapid shifts in fashion, consumer demand and
competitive pressures, results in both price and demand
volatility.
The demand for any particular product varies from time to time
based largely upon changes in consumer preferences and general
economic conditions affecting the textile and apparel industries,
such as consumer expenditures for nondurables. The textile and
apparel industries are also cyclical because the supply of
particular products changes as competitors enter or leave the
market.
The Company sells textiles primarily to domestic apparel
manufacturers, many of which operate offshore sewing operations
and it sells to apparel customers in the domestic market. The
Company competes with numerous domestic and foreign
manufacturers, including companies larger in size and having
greater financial resources than the Company. The principal
competitive factors are price, service, delivery time, quality
and flexibility, with the relative importance of each factor
depending upon the needs of particular customers and the specific
product offering
The woven fabrics division's competitive position varies by
product line. There are several major domestic competitors in the
finished cotton and cotton/polyester blend woven fabrics
Item 1 (Continued)
business, none of which dominates the market. The Company
believes, however, that it has a strong competitive position in
the all cotton pants-weight fabrics business, as well as the spun
synthetic slack-weight and skirt-weight woven fabrics businesses.
In addition, the Company is one of several major domestic
suppliers of acetate unfinished fabric used in apparel linings
and surgical tapes. Additional competitive strengths of the woven
fabrics division include: knowledge of its customers' business
needs; its ability to produce special fabrics such as textured
blends; state-of-the-art spinning, weaving and fabric finishing
equipment at most of its facilities; substantial vertical
integration; and its ability to communicate electronically with
its customers.
The United States knitted fabrics industry is highly
decentralized and is characterized by fierce competition among
many companies. Recently, however, Dyersburg Corporation and West
Point-Stevens, Inc. announced the proposed acquisition by
Dyersburg Corporation of the Alamac (knitted fabrics) division of
West Point-Stevens, Inc. If this acquisition were consummated,
the Company believes that the combined entity would be the
largest circular knitted fabrics manufacturer in the United
States with substantially greater resources than the Company's
knitted fabrics division. This may have a material adverse effect
upon the Company. There can be no assurance that there will not
be further consolidation in this industry. The significant
vertical integration of the knitted fabrics division's
manufacturing operations, its modern production facilities and
its experience in performing the more complicated manufacturing
techniques required in the production of 100% cotton fabrics
enable the Company to compete in the knitted fabric market.
Foreign competition is a significant factor in the United
States fabric market. The Company believes that its relatively
small manual labor component, highly-automated manufacturing
processes and domestic manufacturing base allow the Company to
compete on a price basis and to respond more quickly than foreign
producers to changing fashion trends and to its domestic
customers' delivery schedules. In addition, the Company benefits
from protections afforded to apparel manufacturers based in
certain Latin American and Caribbean countries that ship finished
garments into the United States. NAFTA has effectively eliminated
or substantially reduced tariffs on goods imported from Mexico if
such goods are made from fabric originating in Canada, Mexico or
the United States. Section 807 provides for the duty-free
treatment of United States origin components used in the assembly
of imported articles. The result is that duty is assessed only on
the value of any foreign components that may be present and the
labor costs incurred offshore in the assembly of apparel using
United States origin fabric components. Because Section 807
creates an incentive to use fabric manufactured in the United
States, it is beneficial to the Company and other domestic
producers of apparel fabrics. In addition, pursuant to Section
807A, apparel articles assembled in a Caribbean country, in which
all fabric components have been wholly formed and cut in the
United States, are subject to preferential quotas with respect to
access into the United States for such qualifying apparel, in
addition to the significant tariff reduction pursuant to Section
807. A similar program, enacted as a result of NAFTA and referred
to as the Special Regime Program, provides even greater benefits
(complete duty-free, quota-free treatment) for apparel assembled
in Mexico from fabric components formed and cut in the United
States. In contrast, apparel not meeting the criteria of Section
807, Section
Item 1 (Continued)
807A, or the Special Regime Program, is subject to quotas and/or
relatively higher tariffs. If Section 807, Section 807A or the
Special Regime Program were repealed or altered in whole or in
part, the Company believes that it could be at a serious
competitive disadvantage relative to textile manufacturers in
other parts of the world seeking to enter the United States
market, which would have a material and adverse effect on the
Company. Moreover, there can be no assurance that the current
favorable regulatory environment will continue or that other
geographic areas will not be afforded similar regulatory
advantages.
The apparel segment competes with numerous domestic and
foreign manufacturers of branded and private label apparel.
Foreign competition has been an increasingly significant factor
in the apparel manufacturing industry, particularly with respect
to items that require labor-
intensive production, such as shirts and jackets, and high cost
luxury items. Although domestic apparel companies must compete
to some extent on a price basis with foreign competition, the
Company's management believes that domestic apparel companies can
best compete by selling branded products, by manufacturing off-
shore, by offering product flexibility, by responding quickly to
changes in consumer demand and by providing more timely
deliveries. The latter characteristics permit retailers to
reduce their inventory costs and lower the risk that product
availability will not match consumer demand. The Company's
operations are oriented toward providing its apparel segment and
the customers of its textile segment with all or some of these
competitive advantages. The Company believes that it and its
domestic customers can address quality control problems more
easily than can manufacturers and distributors of foreign
products.
Furthermore, the customers of foreign suppliers generally face
letter of credit fees, and occasionally face delivery delays and
claims resolution difficulties.
The Company believes that several aspects of its operations
may mitigate some of the problems posed by competition within the
domestic textile and apparel industries. The variety of the
Company's products offers some degree of protection against the
cyclical nature of the business of individual products.
Management of the Company believes that the percentage of its
production cost attributable to labor is comparable to that of
its domestic competitors. Other competitive strengths include:
the modern equipment in several of its plants; and the Company's
achievement of substantial vertical integration in its various
divisions.
Nautilus competes in the institutional fitness market which
is fragmented and highly competitive. The fitness equipment
industry generally competes for business on price, quality,
specifications and service. Management of the Company believes
that Nautilus has a strong
competitive position because of its high name recognition in
markets and its reputation for high quality and durable
equipment.
Item 1 (Continued)
Employees
The Company has approximately 7,400 employees. The
Company's employees are not represented by unions. The Company
believes that its relations with its employees are good.
Environmental and Regulatory Matters
Delta Woodside is subject to various federal, state and
local environmental laws and regulations concerning, among other
things, wastewater discharges, storm water flows, air emissions,
ozone depletion and solid waste disposal. Delta Woodside's
plants generate very small quantities of hazardous waste which
are either recycled or disposed of off-site. Most of its plants
are required to possess one or more discharge permits.
The information contained under the subheading
"Environmental Matters" under the heading "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" incorporated into item 7 of this form 10-K is
incorporated herein for reference.
Generally, the environmental rules applicable to the Company
are becoming increasingly stringent. The Company incurs capital
and other expenditures in each year that are aimed at achieving
compliance with current and future environmental standards.
The Company does not expect that the amount of such
expenditures in the future will have a material adverse effect on
its operations or financial condition. There can be no
assurance, however, that future changes in federal, state or
local regulations, interpretations of existing regulations or the
discovery of currently unknown problems or conditions will not
require substantial additional expenditures. Similarly, the
extent of Delta Woodside's liability, if any, for past failures
to comply with laws, regulations and permits applicable to its
operations cannot be determined.
Industry Segment Information
Segment information made part of Note G of the Company's
consolidated financial statements for the fiscal year ended June
28, 1997 is incorporated herein by reference.
Other
Information concerning order backlogs in "Management's
Discussion and Analysis of Results of Operations and Financial
Condition, Consolidated Company Results, Fiscal 1997 Versus
Fiscal 1996" incorporated into Item 7 of this Form 10-K is
incorporated herein by reference.
Item 2. PROPERTIES
The following table provides a description of Delta
Woodside's principal production and warehouse facilities.
Approximate
Square Approximate
Location Utilization Footage Acreage
Greenville, SC Admin. Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC knit/dye/finish/cut 390,000 (2)
Furman Plant, Fountain Inn, SC weave 136,000 (2)
Estes Plant, Piedmont, SC spin/weave 332,000 (2)
Delta 3 Plant, Wallace, SC dye/finish 555,000 (2)
Cypress Plant, Pamplico, SC spin 144,000 (2)
Pamplico Plant, Pamplico, SC spin/weave 275,000 (2)
Delta 2 Plant, Wallace, SC dye/finish 347,000 (2)
Catawba Plant, Maiden, NC spin 115,000 Owned
Greer, SC Admin. Offices 12,000 Owned
Carter Plant, Wallace, NC dye/finish 485,000 Owned
Holly Plant, Wallace, NC knit/finish 224,000 Owned
Rainsford Plant, Edgefield, SC spin 296,000 Owned
Mickel Plant, Spartanburg, SC spin 207,000 Owned
Apparel Segment
Duluth, GA Admin. Offices 40,244 Leased
Maiden Plant, Maiden, NC knit/dye/finish/cut 305,000 Owned
Washington Plant, Washington, GA sew 129,800 Owned
Distribution Center, Knoxville, TN distribution 550,000 Owned
Decatur Plant, Decatur, TN sew 75,000 Owned(4)
Honduras Plant, San Pedro Sula,
Honduras sew 70,000 Leased(3)
Monroe #3, Monroe, GA cut 52,000 Owned
Monroe #2, Monroe, GA pressing 93,000 Owned
Harmony Plant, San Jose, Costa Rica sew 14,000 Owned
San Jose Plant, San Jose, Costa Rica sew 60,000 Leased(3)
316 Distribution Center, Winder, GA warehouse 200,000 Owned
Various (5) stores
Fitness Equipment Division
Independence, VA manufacturing 251,000 Owned
Item 2. PROPERTIES
(1) Lease expires in 1998 with the right to renew for two
additional five year periods.
(2) Titles to these facilities and substantially all of the
equipment located in such facilities are held by three South
Carolina counties under a fee-in-lieu-of-taxes arrangement,
which has the effect of substantially reducing the Company's
property taxes in South Carolina. Although the Company can
reacquire such property at a nominal price, this would
currently cause a significant increase in the amount of
property taxes paid by the Company.
(3) The Honduras plant has a lease that expires in November
2000. The San Jose plant is leased on a month-to-month
basis.
(4) The "Duck Head " Outlet Stores lease a portion of the
facility for retail sales.
(5) The "Duck head" Outlet Stores Operation leases 31
facilities in 10 states, which leased
space is approximately 173,000 square feet. These leases
expire at various dates through 2005.
Except as noted above all of the above facilities are owned
by Delta Woodside or one of its subsidiaries, subject in certain
cases to various outstanding mortgages and security interests.
Delta Woodside leases corporate offices in Greenville, South
Carolina. The lease on the corporate offices expires December
1997. Sales offices are leased in or near Charlotte, New York,
Chicago, Newport Beach, San Francisco, Dallas and Los Angeles
with leases expiring through December 2004.
At the date of execution of this Form 10-K, the Company
believes that its weaving and knitting plants are operating near
full production capacity. Various factors affect the relative use
by the Company's apparel segment of its own facilities and
outside contractors in the various apparel production phases.
This segment is currently using the majority of its internal
production capacity. The fitness equipment operation is
operating at approximately 75% of its production capacity.
The Company believes that its equipment and facilities are
generally adequate to allow it to remain competitive with its
principal competitors.
The Company's accounts receivable and inventory, and certain
other intangible property (including the capital stock of the
Company's major united states subsidiaries), secure the company's
credit facility or the credit facility of the company's indirect
wholly owned subsidiary, Delta Mills, Inc.
Item 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries are
defendants in legal actions involving claims arising in the
normal course of its business, including product liability
claims. The Company believes that, as a result of its legal
defenses, insurance arrangements and indemnification provisions
with financially capable parties, none of these actions is
reasonably likely to have a material adverse effect on its
results of operations or financial condition taken as a whole.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's 1997 fiscal year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The material under the heading "Common Stock Market Prices
and Dividends" on the inside front cover of the Company's annual
shareholders' report for the year ended June 28, 1997 is
incorporated herein by reference.
The following table shows the issuances by the Company
during fiscal 1997 of its shares of common stock that were not
registered under the Securities Act of 1933, as amended, and were
not previously reported by the Company in a Form 10-Q.
Amount of Class of Nature of
Date of Issuance Common Stock Persons Transaction
August 27, 1996 350 Employees Service Awards
September 16,1996 50 Employees Service Awards
March 26, 1996 50 Employees Service Awards
January 9,1997 100 Employees Service Awards
January 10, 1997 100 Employees Service Awards
January 14, 1997 200 Employees Service Awards
January 28, 1997 700 Employees Service Awards
February 11, 1997 200 Employees Service Awards
February 19,1997 100 Employees Service Awards
February 20, 1997 100 Employees Service Awards
February 24, 1997 100 Employees Service Awards
February 28, 1997 200 Employees Service Awards
June 17, 1997 550 Employees Service Awards
The Company believes these issuances are exempt from
registration under the Securities Act of 1933 by reason of
Section 4(2) of the Securities Act of 1933 and as not
constituting a "sale".
Item 6. SELECTED FINANCIAL DATA
The material under the heading "Selected Financial Data" on
page 1 of the Company's annual shareholders' report for the year
ended June 28, 1997 is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The material under the heading "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on
pages 4 through 9 (exclusive of graphs) of the Company's annual
shareholders' report for the year ended June 28, 1997 is
incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements included on pages 14
through 20 of the Company's annual shareholders' report for the
year ended June 28, 1997 are 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 required by this Item is incorporated herein
by reference from the portions of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the headings "Election of Directors" and "Executive
Officers".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference from the portions of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the headings "Management Compensation" and "Compensation
Committee Interlocks and Insider Participation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein
by reference from the portion of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the heading "Stock Ownership of Principal Shareholders and
Management".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference from the portion of the definitive Proxy Statement
to be filed with the Securities and Exchange Commission on or
prior to 120 days following the end of the Company's fiscal year
under the heading "Related Party Transactions".
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) and (2) Financial Statements and Financial Statement
Schedules
The response to this portion of Item 14 is set
forth on page F-2 included herein, which response is
incorporated herein by reference.
(3) Listing of Exhibits:*
3.1 Articles of Incorporation of the
Company, as amended through February 5, 1989:
Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 of RSI
Corporation and Porter Brothers, Inc., File No. 33-
30247 (the "Form S-4").
3.1.1 Articles of Amendment to Articles of
Incorporation of the Company: Incorporated by
reference to Exhibit 3.1.2 to the Form S-4.
3.1.2 Articles of Merger of Harper Brothers,
Inc. into RSI Corporation: Incorporated by
reference to Exhibit 4.1.1 to the Registration
Statement of the Company on Form S-8, File No. 33-
33116 (the "1990 Form S-8").
3.1.3 Articles of Merger of Delta Woodside
Industries, Inc., a Delaware corporation, into RSI
Corporation: Incorporated by reference to Exhibit
4.1.2 to the 1990 Form S-8.
3.1.4 Articles of Merger of Duncan Office
Supplies, Inc., into Delta Woodside Industries,
Inc.: Incorporated by reference to Exhibit 3.1 to
the Company's Form 10-Q for the quarterly period
ended December 29, 1990 (the "December 1990 10-
Q").
3.1.5 Articles of Amendment to the Articles of
Incorporation of Delta Woodside Industries, Inc.,
filed with the South Carolina Secretary of State
on November 15, 1991: Incorporated by reference
to Exhibit 4.6 to the Form 10-Q of the Company for
the quarterly period ended December 28, 1991.
3.2 By-laws of the Company, as amended:
Incorporated by reference to Exhibit 3.1.1 to the
Form S-4.
Item 14 (Continued)
3.2.1 Amendments to By-laws of the Company:
Incorporated by reference to Exhibit 3.2 to the
December 1990 10-Q.
3.2.2 Amendment to By-laws of the Company,
adopted as of June 29, 1992: Incorporated by
reference to Exhibit 3.2.2 to the Company's Form
10-K for the fiscal year ended June 27, 1992 (the
"1992 10-K").
4.1 See Exhibits 3.1, 3.1.1, 3.1.2, 3.1.3,
3.1.4, 3.1.5, 3.2, 3.2.1. and 3.2.2.
4.1.1 Specimen of Certificate for the
Company's Common Stock: Incorporated by reference
to Exhibit 4.7 to the Company's Registration
Statement on Form S-3, File No. 33-42710 (the
"Form S-3").
4.2 Amended and Restated Credit Agreement
dated as of March 15, 1996 among Delta Woodside
Industries, Inc., the Lenders named therein, and
NationsBank, N.A. as Agent (with exhibits and
schedules omitted) together with forms of
Promissory Notes,
Subsidiary Guaranty, Borrower Security
Agreement, Subsidiaries Security Agreement and
certain other documents: Incorporated by
reference to Exhibit 4.4 to the Form 10-Q of the
Company for the quarterly period ended March 30,
1996. The Company agrees to furnish
supplementally to the Securities and Exchange
Commission a copy of any omitted schedules or
exhibits to such agreement upon request of the
Commission.
4.2.1 Amendment and Waiver Agreement dated as
of May 20, 1996, by and among Delta Woodside
Industries, Inc., the guarantors identified on the
signature pages attached thereto and the lenders
and agents thereto: Incorporated by reference to
Exhibit 4.4.1 to the Form 8-K of the Company with
date of May 28, 1996 (the "May 1996 8-K"). The
Company agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any
omitted schedules or exhibits to such agreement
upon request of the Commission.
4.2.2 Pledge Agreement dated as of May 20,
1996 by and among Delta Woodside Industries, Inc.,
the guarantors from time to time party thereto and
NationsBank, N.A., in its capacity as agent for
the lenders from time to time party to the Credit
Agreement described therein: Incorporated by
reference to Exhibit 4.4.2 to the May 1996 8-K.
The Company agrees to furnish supplementally to
the Securities and Exchange Commission a copy of
any omitted schedules or exhibits to such
agreement upon request of the Commission.
Item 14 (Continued)
4.2.3 Second Amendment and Waiver Agreement dated
as of December 20, 1996, among Delta Woodside
Industries, Inc., the guarantors identified as such on
the signature pages attached, the lenders and agents,
together with forms of certain real estate lien documents:
Incorporated by reference to Exhibit to the Form 10-Q
of the Company for the quarterly period ended
December 28, 1996. The Company agrees to furnish
supplementally to the securities and Exchange Commission a
copy of any omitted schedules or exhibits to such agreement upon
request of the Commission.
4.2.4 Credit Agreement dated as of August 25, 1997
among Delta Mills,Inc., as Borrower, certain
subsidiaries of the Borrower from time to time party
thereto, as guarantors, the several lenders from time to time
party thereto, NationsBank, N.A., as Administrative Agent, and
BNY Financial Corporation, as Collateral Agent,
together with forms of certain related instruments,
agreements and documents (excluding schedules):
Incorporated by reference to Exhibit 4.2.4 to Form 8-K/A of the
Company with date of September 25, 1997. The Company
agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any
omitted schedules to such agreement upon request of the
Commission.
4.2.5 Credit Agreement dated as of
August 25, 1997 among Delta Woodside Industries,
Inc., as Borrower, certain subsidiaries of the Borrower from
time to time party thereto, as guarantors, the several Lenders
from time to time party thereto and NationsBank,
N. A. as Agent , together with forms of certain
related instruments, agreements and documents (excluding
schedules): Incorporated by reference to Exhibit 4.2.5 to Form 8-
K/A of the Company with date of September 25, 1997.
The Company agrees to furnish supplementally to
the Securities and Exchange Commission a copy of any
omitted schedules to such agreement upon request of the
Commission.
4.2.6 Indenture, dated as of August 25, 1997 with
respect to Delta Mills, Inc. $150,000,000 Series
A and Series B 9 5/8% Senior Notes due 2007, with
The Bank of New York, as Trustee, together with forms of certain
related instruments, agreements and documents:
Incorporated by reference to Exhibit 4.2.6 to
Form 8-K/A of the Company with date of September 25,
1997.
Item 14 (Continued)
4.3 The Company hereby agrees to furnish to
the Commission upon request of the Commission a
copy of any instrument with respect to long-term
debt not being registered in a principal amount
less than 10% of the total assets of the Company
and its subsidiaries on a consolidated basis.
10.1 Lease, dated December 27, 1987 by and
between Hammond Square, Ltd. and the Company:
Incorporated by reference to Exhibit 10.10 to
Registration Statement No. 33-22563 on Form S-4 of
Delta Woodside Industries, Inc., a Delaware
corporation ("Registration Statement No. 33-
22563").
10.2** Delta Woodside Deferred Compensation
Plan for Key Employees: Incorporated by reference
to Exhibit 10.6 to the Form 10-Q of the Company
for the quarterly period ended December 30, 1989.
10.3** Incentive Stock Award Plan effective
July 1, 1990: Incorporated by reference to
Exhibit 10.1 to the Form 10-Q of the Company for
the fiscal quarter ended March 31, 1990.
10.3.1** 1995 Amendment to the Incentive Stock Award
Plan effective as of November 9, 1995:
Incorporated by reference to Exhibit 10.3.1 to the
Form 10-Q of the Company for the quarterly period
ended December 30, 1995 (the "December 1995 10-
Q").
10.4.1** Stock Option Plan effective as of July 1,
1990: Incorporated by reference to Exhibit 10.11
to the Company's Form 10-K for the fiscal year
ended June 30, 1990.
10.4.2** Amendment No. 1 to Stock Option Plan:
Incorporated by reference to Exhibit 10.1 to the
December 1990 10-Q.
10.4.3** Amendment to Stock Option Plan: Incorporated
by reference to Exhibit 10.9.2 to the Company's
Form 10-K for the fiscal year ended June 29, 1991
(the "1991 10-K").
10.4.4** 1995 Amendment to the Stock Option Plan
effective as of November 9, 1995: Incorporated by
reference to Exhibit 10.4.4 to the December 1995
10-Q.
10.5 Stock Transfer Restrictions and Right of
First Refusal Agreement between the Company and E.
Erwin Maddrey, II: Incorporated by reference to
Exhibit 10.2 to the December 1990 10-Q.
Item 14 (Continued)
10.6 Stock Transfer Restrictions and Right of
First Refusal Agreement between the Company and
Bettis C. Rainsford: Incorporated by reference to
Exhibit 10.3 to the December 1990 10-Q.
10.7** Summary of Delta Woodside Industries,
Inc., Director Charitable Giving Program:
Incorporated by reference to Exhibit 10.11 to the
1992 10-K.
10.7.1** Resolution to amend Directors' Charitable
Giving Program dated February 2, 1995:
Incorporated by reference to Exhibit 10.7.1 to the
March 1995 10-Q.
10.8.1** Directors Stock Acquisition Plan:
Incorporated by reference to Exhibit 10.14 to the
1991 10-K.
10.8.2** Amendment of Director Stock Acquisition Plan,
dated April 30, 1992: Incorporated by reference
to Exhibit 10.12.2 to the 1992 10-K.
10.9 See Exhibits 4.2, 4.2.1, 4.2.2, 4.2.3,
4.2.4, 4.2.5, and 4.2.6.
13 Annual Report to Shareholders of the
Company for the fiscal year ended June 28, 1997.
21 Subsidiaries of the Company.
23.1 Report on Schedule and Independent
Auditors' Consent for the years ended June 28,
1997, June 29, 1996 and July 1, 1995.
27 Financial Data Schedule (electronic
filing only).
* All reports previously filed by the Company
with the Commission pursuant to the Exchange Act,
and the rules and regulations promulgated
thereunder, exhibits of which are incorporated to this
Report by reference thereto, were filed under
Commission File Number 1-10095.
** This is a management contract or
compensatory plan or arrangement.
Item 14 (Continued)
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter
ended June 28, 1997.
(c) Exhibits
The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is
submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DELTA WOODSIDE INDUSTRIES,INC.
9/26/97 /s/ E. ErwinMaddrey, II
Date E. Erwin Maddrey, II
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ C. C. Guy 9/26/97 /s/ E. Erwin Maddrey 9/26/97
C. C. Guy Date E.Erwin Maddrey, II Date
Director President, Chief Executive Officer
and Director
/s/ James F. Kane 9/26/97 /s/ Bettis C.Rainsford 9/26/97
James F. Kane Date Bettis C. Rainsford Date
Director Executive Vice President,
Chief Financial Officer, Treasurer
and Director
/s/ Max Lennon 9/24/97 /s/ Douglas J. Stevens 9/26/97
Max Lennon Date Douglas J.Stevens Date
Director Controller and Assistant
Secretary
/s/ Buck A. Mickel 9/26/97
Buck A. Mickel Date
Director
/s/ Buck Mickel 9/26/97
Buck Mickel Date
Director
EXHIBIT INDEX
13 Annual Report to Shareholders of the Company for the fiscal
year ended June 28, 1997.
21 Subsidiaries of the Company.
23.1 Report on Schedule and Independent Auditor's Consent for
the years ended June 28, 1997, June 29, 1996 and July 1, 1995.
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JUNE 28, 1997
DELTA WOODSIDE INDUSTRIES, INC.
GREENVILLE, SOUTH CAROLINA
F-1
FORM 10-K--ITEM 14(a)(1) AND (2)
DELTA WOODSIDE INDUSTRIES, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Delta Woodside
Industries, Inc. and subsidiaries included in the Annual Report of the
Registrant to its shareholders for the Year ended June 28, 1997 are
incorporated by reference in Item 8:
Consolidated balance sheets_June 28, 1997 and June 29, 1996.
Consolidated statements of operations--Years ended June 28, 1997,
June 29, 1996, and July 1, 1995.
Consolidated statements of shareholders' equity--Years ended June
28, 1997, June 29, 1996, and July 1, 1995.
Consolidated statements of cash flows--Years ended June 28, 1997
June 29, 1996, and July 1, 1995.
Notes to consolidated financial statements.
The following consolidated financial statement schedule of Delta
Woodside Industries, Inc. is included in Item 14(d):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted. Columns omitted from schedules filed
have been omitted because the information is not applicable.
F-2
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA WOODSIDE INDUSTRIES, INC.
COL. A COL. B COL. C COL. D COL. E
Balance at
DESCRIPTION Beginning (1) (2) Deductions Balance at End
of Period Charged to Costs Charged to Other Describe of Period
and Expenses Accounts-Describe
Deducted from asset accounts
Allowance for doubtful accounts:
Year ended June 28, 1997 $ 6,258,000 $ 1,215,000 $ (171,000)(2) $ 1,944,000(1) $5,358,000
Year ended June 29, 1996 $ 5,634,000 $ 2,577,000 $ 695,000(2) $ 2,648,000(1) $6,258,000
Year ended July 1, 1995 $ 3,275,000 $ 3,311,000 $ 36,000(2) $ 988,000(1) $5,634,000
Inventory reserves:
Year Ended June 28, 1997 $40,879,000 $16,415,000(3) $24,464,000
Year ended June 29, 1996 $14,052,000 $26,827,000 $40,879,000
NOTES:
(1) Uncollectible accounts written off.
(2) Net change in sales allowances charged to income as a reduction of sales.
(3) Deducted from costs and expenses.