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9
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 27, 1998
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 333-37617
DELTA MILLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
(State of Incorporation) (I.R.S. Employer Identification No.)
233 N. Main Street, 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
None
Not Applicable
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 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 - 0
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of June 27, 1998 was:
Common Stock, par value $.01 100
PART I
Item 1 BUSINESS
General
Delta Mills, Inc. ("Delta Mills" or the "Company") is a
Delaware corporation with its principal executive offices located
at 233 North Main Street, Suite [200], Greenville, South Carolina
29601 (telephone number: 864-232-8301). The Company is a wholly-
owned subsidiary of Delta Woodside Industries, Inc., a South
Carolina corporation, the common stock of which is listed on the
New York Stock Exchange. Unless the context otherwise requires,
all references herein to "Delta Mills" or the "Company" refer to
Delta Mills, Inc. and any of its existing and future
subsidiaries.
Effective for the year ended June 27, 1998, the Company has
adopted the segment reporting provisions of Financial Accounting
Standard 131. This standard requires the Company to report
segment information for divisions whose operating results are
regularly reviewed by the chief operating officer. During fiscal
1998, the Company made the decision to exit the knit textile
market by closing its Stevcoknit Fabrics Company operating
division. Stevcoknit Fabrics Company has been reclassified and
reported as discontinued operations. The Company has one segment
in continuing operations: Delta Mills Marketing Company.
The Company is a leading manufacturer and marketer of woven
finished and unfinished (or greige) cotton, synthetic and blended
fabrics, which are sold for the ultimate production of apparel,
home furnishings and other products. The company sells a broad
range of fabrics primarily to branded apparel manufacturers and
resellers, including Levi Strauss, Haggar Corp. the Wrangler r
and Leer 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., Wal Mart Stores, Inc. 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' Dockersr and Haggar Corp.'s Wrinkle-freer.
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. The
Company generated net sales of $364 million, $358 million, and
$317million respectively during fiscal years 1998, 1997 and 1996.
The Company was incorporated in Delaware in 1971.
Products, Marketing and Manufacturing
The Company produces its woven fabrics through the Delta
Mills Marketing Company division. The woven fabrics and yarn
sales operation each has its own management and employees and
operates independently under the overall direction of the
Company's executive officers.
Woven fabrics 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 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 yarn. In other fabrics,
filament yarns are used. The spun or filament yarn is then woven
into fabric on looms. 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 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.
Item 1 (Continued)
Products, Marketing and Manufacturing (Continued)
The Company 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 Company sells its woven fabrics primarily to numerous apparel
manufacturers and apparel resellers. The Company sells its
fabrics through Delta Mills Marketing Inc., a wholly owned
subsidiary with a marketing office based in New York City (which
serves the United States, Canadian and Mexican markets), with
sales agents also operating in Atlanta, Chicago, Dallas, Los
Angeles, San Francisco and Mexico.
For fiscal year 1998, sales to Levi Strauss, VF Jeanswear,
and sales to the Company's top five non-affiliated customers
accounted for 18%, 11% and 47% respectively, of the Company's
total sales for continuing operations. In fiscal year 1997,
sales to Levi Strauss and sales to the Company's top five non-
affiliated customers accounted for 22% and 49% respectively, of
the Company's total sales for continuing operations. Consistent
with industry practice, the Company does not operate under a
supply contract with Levi-Strauss or any of its other major
customers. In addition, during fiscal years 1998, 1997 and 1996,
sales of military fabrics accounted for 12%, 11%, and 16%,
respectively, of the Company's total sales. The loss of Levi
Strauss or other major customers could have a material adverse
effect upon the Company.
Approximately 70% of the Company'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. Woven fabrics are generally
produced and shipped pursuant to specific purchase orders, which
minimizes the Company's uncommitted inventory levels. The
Company's production of cotton and cotton/synthetic blend and
spun synthetic finished woven fabrics is largely vertically
integrated, with the company performing most of its own spinning,
weaving and finishing. In the production of military fabrics, the
Company purchases a portion of its greige goods needs and
finishes this fabric to specifications. The woven finished
fabrics plants are currently operating at near full capacity.
The Company 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. The unfinished woven fabric plant is operating at
less than full capacity.
Raw Materials
The company'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. The Company's average price per pound of cotton
purchased and consumed (including freight, carrying cost and cost
for the relatively high amount of premium cotton the Company
uses) was $.817 in fiscal year 1998 as compared to $.833 in
fiscal year 1997, and, as compared to $.944 in fiscal year 1996.
In fiscal year 1999 the company expects to use approximately 98
million pounds of cotton (including approximately 28 million
pounds of premium cotton) and 12 million pounds of polyester in
its manufacture of yarn. The company has contracted to purchase
about 64% 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 has 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, as there
can be no assurance that it would be able to pass along these
increased costs to its customers.
Item 1 (Continued)
Competition
The Company sells primarily to domestic apparel
manufactures, many of which operate offshore sewing operations.
The Company competes with numerous domestic and foreign fabric
manufacturers, including companies larger in size and having
greater financial resources than the Company. The principal
competitive factors in both the woven and knitted fabrics markets
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.
Management believes that the Company maintains its ability to
compete effectively by providing its customers with a broad array
of high-quality fabrics at competitive prices on a timely basis.
The Company's competitive position varies by product line.
There are several major domestic competitors in the finished
cotton and cotton/polyester blend woven fabrics 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 Company 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.
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 cost 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 of
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 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
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.
Employees
The Company has approximately 2,700 employees. The
Company's employees are not represented by unions. The Company
believes that its relations with its employees are good.
Item 1 (Continued)
Environmental and Regulatory Matters
The Company 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. The Company'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 the Company's
liability, if any, for past failures to comply with laws,
regulations and permits applicable to its operations cannot be
determined.
Discontinued Operations
Information concerning discontinued operations in note F,
"Notes To Consolidated Financial Statements" incorporated into
Item 8 of this Form 10K 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 1998 Verses
Fiscal 1997" incorporated into Item 7 of this Form 10K is
incorporated herein by reference.
Item 2. PROPERTIES
The following table provides a description of Delta Mills,
Inc. principal production and warehouse facilities.
Approximate
Square
Location Utilization Footage Owned/Leased
Greenville, SC Admin. Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC spin/weave 390,000 Owned (2)
Furman Plant, Fountain Inn, SC weave 155,000 Owned (2)
Estes Plant, Piedmont, SC spin/weave 332,000 Owned (2)
Delta 3 Plant, Wallace, SC dye/finish 555,000 Owned (2)
Cypress Plant, Pamplico, SC spin 144,000 Owned (2)
Pamplico Plant, Pamplico, SC spin/weave 275,000 Owned (2)
Delta 2 Plant, Wallace, SC dye/finish 347,000 Owned (2)
Catawba Plant, Maiden, NC spin 115,000 Owned
Rainsford Plant, Edgefield, SC spin 296,000 Owned
Discontinued Operations
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
(1) Lease expires in December 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.
Except as noted above all of the above facilities are owned
by Delta Mills, Inc.
Delta Mills, Inc. leases sales offices in New York, NY. The
lease on the sales offices expires December 2004. A small sales
office is leased in Dallas on a month to month basis. The Dallas
lease is currently being negotiated for a longer term agreement.
At the date of execution of this Form 10-K, the Company
believes that the finished fabrics plants are operating near full
capacity. The unfinished fabrics plant is operating at less than
full 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 secure the company's credit facility.
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 1998 fiscal year.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Not applicable
ITEM 6
SELECTED FINANCIAL DATA
In Thousands, Except Ratios
Fiscal Year (1)
Statements of Operations Data:(1)
1998 1997 1996 1995 1994
Net Sales $364,395 $358,204 $317,446 $308,526 $303,278
Cost of Goods Sold 300,556 293,145 283,776 272,413 256,784
Gross Profit 63,839 65,059 33,670 36,113 46,494
Selling, general and administrat 17,585 16,323 13,624 14,388 13,851
Restructuring charges 1,596
Other income(expense) 146 1,553 (908) 197 118
Operating Profit 46,400 50,289 17,542 21,528 32,525
Interest expense 19,324 14,212 14,026 12,211 10,664
Interest (income) (152) 0 (19)
Income from Continuing Operations
Before Income Tax 27,228 36,077 3,535 9,317 21,861
Income taxes 10,743 14,187 1,361 6,309 8,631
Income from Continuing Operation 16,485 21,890 2,174 3,008 13,230
Loss from Discontinued Operation (25,909) (5,337) (26,973) 2,045 (8,375)
Net Income(Loss) ($9,424) $16,553 ($24,799) $5,053 $4,855
Other Data:(1)
Depreciation and amortization $14,127 $13,840 $12,238 $10,444 $10,616
Capital expenditures 4,065 14,122 43,378 35,704 7,089
EBITDA (2) 60,375 64,129 29,761 31,972 43,141
Ratio of EBITDA to interest expe 3.1 4.5 2.1 3.0 3.4
Balance Sheet Data: (1)
Working Capital (deficit) $107,423 ($7,525) $16,010 $50,421 $59,320
Total assets 290,290 345,010 333,577 336,672 318,468
Total debt and other long-term
obligations (3) 176,635 268,658 289,587 252,750 249,530
Shareholder's equity (deficit) 40,078 7,844 (8,709) 16,090 11,122
NOTES TO SELECTED FINANCIAL DATA
(1) The amounts presented above for prior years have been restated to conform to the fiscal 1998 presentation of
operations. The Stevcoknit knitted fabrics business is presented as part of discontinued operations.
(2) "EBITDA" is defined herein as income (loss) before income taxes, plus depreciation and amortization expense
expense, plus impairment and restructuring charges (credits). While EBITDA should not be construed as an a
operating earnings (loss) or net income(loss), or as an indicator of operating performance or liquidity, th
that the ratio of EBITDA to interest expense is a measure that is commonly used to evaluate a company's abi
debt.
(3) Total debt and other long-term obligations, on an historical basis consist of the long-term debt due to affi
payable to affiliate and the noninterest-bearing payable affiliates. See Notes C and E to the Consolidated
Item 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain "forward-
looking statements". All statements, other than statements of
historical fact, that address activities, events or
developments that the Company expects or anticipates will or
may occur in the future, including such matters as future
revenues, future cost savings, future capital expenditures,
business strategy, competitive strengths, goals, plans,
references to future success and other such information are
forward-looking statements. The words "estimate", "project",
"anticipate", "expect", "intend", "believe" and similar
expressions are intended to identify forward-looking
statements.
The forward-looking statements in this Annual Report are
based on the Company's expectations and are subject to a
number of business risks and uncertainties, any of which could
cause actual results to differ materially from those set forth
in or implied by the forward-looking statements. These risks
and uncertainties include, among others, changes in the retail
demand for apparel products, the cost of raw materials,
competitive conditions in the apparel and textile industries
and the relative strength of the United States dollar as
against other currencies and the discovery of unknown
conditions (such as with respect to environmental matters,
Year 2000 readiness and similar items). The Company does not
undertake publicly to update or revise the forward-looking
statements even if it becomes clear that any projected results
will not be realized.
Year Ended June 27, 1998 Compared to Year Ended June 28,
1997
Net Sales. Consolidated net sales for the year ended
June 27,1998 totaled $364.4 million, as compared to $358.2
million for the year ended June 28,1997, an increase of 1.7%
resulting from a increase in unit sales. The increase came
from the sales of finished fabric to commercial and
government accounts due to increased demand. These increases
were chiefly offset by a sharp, 32% decline in unfinished
greige fabric sold to converters due to decreased demand.
Gross Profit. Consolidated gross profit margin for the
year ended June 27,1998 was 17.5 %, as compared to 18.2% for
the year ended June 28,1997, a decrease of .7 %. This decline
was due principally to the decline in the unfinished woven
fabrics market due to volume, price, and manufacturing degree
of operations.
Selling General and Administrative Expenses. During the
year ended June 27,1998, selling, general and administrative
expenses were $17.6 million, as compared to $ 15.9 million
during the year ended June 28,1997, an increase of
$1.7million or 10.7%. For the year ended June 27, 1998,
expenses in this category were 4.83% of net sales as compared
to 4.44% of net sales for the year ended June 28, 1997. The
increase was due to distribution cost related to sales volume
increases, fixed administrative services cost and one time
cost associated with information technology system studies.
Management believes it has effectively controlled its selling,
general and administrative expenses as a percentage of net
sales.
Operating Earnings. Operating earnings for the year ended
June 27, 1998 were $46.4 million, as compared to $50.6 million
for the year ended June 28, 1997. The decline in operating
earnings was due to the factors described above.
Net Interest Expense. For the year ended June 27, 1998,
net interest expense was $19.2 million, as compared to $14.2
million for the year ended June 28, 1997. The increase in
interest expense was primarily a result of the higher interest
rates on the senior notes (9.625%) compared to intercompany
debt at lower rates in the 1997 fiscal year.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Year Ended June 27, 1998 Compared to Year Ended June 28, 1997
(Continued)
Taxes. The effective tax rate of 39.5% year ended June
27, 1998 is approximately the same as the effective tax rate
for the year ended June 28, 1997.
Net Income. Net income for the year ended June 27, 1998
was $16.5 million, as compared to $22.0 million for the year
ended June 28, 1997. The decrease was due to the factors
described above.
Order Backlog. The Company's order backlog at June 27,
1998 was $106.6 million, a 11.1% decrease from the $119.9
million order backlog at June 28, 1997. The majority of this
decrease was attributable to a 76% decline in the unfinished
woven fabrics order backlog and a 33% decrease in the finished
woven government fabrics order backlog. Both decreases were
due to market conditions in these businesses. The Company
believes that backlog orders are generally indicative of
future sales.
Year Ended June 28, 1997 Compared to Year Ended June 29, 1996
Net Sales. Consolidated net sales for fiscal year 1997
totaled $358.2 million, as compared to
$317.4 million for fiscal year 1996, an increase of 12.8%
resulting from an increase in unit sales and
unit prices. Sales to commercial accounts increased due both
to increased demand and to additional
finishing capacity resulting from recent capital expenditures.
This increase more than offset a decrease
in sales of woven fabrics to the government due to a slowdown
in procurement activity.
Gross Profit. Gross profit margin in fiscal year 1997 was
18.2%, as compared to 10.6% in fiscal
year 1996, an increase of 71.2%. During fiscal year 1997,
this improvement was due principally to higher sales, lower
raw material costs and improved efficiencies resulting from
the modernization project at the Beattie spinning and weaving
plant.
Selling, General and Administrative Expenses. During
fiscal year 1997, selling, general and
administrative expenses were $17.6 million, as compared to
$16.3 million during fiscal year 1996, An
increase of 7.7%. Although expenses in this category increased
on an absolute basis, (due to increased sales), selling,
general and administrative expenses for fiscal year 1997 were
approximately the same as in
1996 as a percent of net sales.
Operating Earnings. Operating earnings for fiscal year
1997 were $50.3 million, as compared to
$17.5 million in fiscal year 1996, an improvement of $32.8
million. This improvement was due to higher
sales, lower raw material cost and improved efficiencies.
Net Interest Expense. During fiscal year 1997, net
interest expense was $14.2 million, as
compared to $14.0 million in fiscal year 1996, due principally
to higher rates of interest.
Taxes. The estimated effective tax rate for fiscal year
1997 was 39.3%, as compared to an
effective tax benefit rate of 38.5% for fiscal year 1996. The
lower tax rate in fiscal year 1996 is
primarily the result of the effect of nondeductible permanent
differences on pretax losses in fiscal year 1996 compared to
pretax earnings in fiscal year 1997.
Net Income. During fiscal year 1997, net income was $21.9
million, as compared to $2.2
million in fiscal year 1996. This significant improvement is
due to the factors described above.
Order Backlog. The Company's order backlog at June 28,
1997 was $119.9 million, a 60% increase from the $74.9
million order backlog at June 29, 1996. This increase was
attributable to a 116% increase in finished woven fabrics for
commercial customers and was somewhat offset by a 42% decrease
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Year Ended June 28, 1997 Compared to Year Ended June 29, 1996
(Continued)
in the unfinished woven fabrics order backlog. These changes
in the order backlog was due to improved market conditions and
increased capacity associated with the modernization project
at the Beattie spinning and weaving plant. The Company
believes that backlog orders are generally indicative of
future sales.
LIQUIDITY AND SOURCES OF CAPITAL
During fiscal 1998, the Company financed its
capital expenditures primarily through cash
generated from operations. Increases in inventory were
offset by reductions in accounts receivable, other operating
assets, and increases in certain operating liabilities.
The Company generated operating cash flows of
$32.1, $34.8, and $22.6 million for the 1998,
1997,and 1996 fiscal years, respectively. The Company
generated cash from investing activities of $6.6 million in
fiscal year 1998 but used $13.4, and $44.4 million in fiscal
years 1997 and 1996 respectively
primarily to finance capital expenditures, including equipment
purchases. Cash generated in 1998 from investing activities
was primarily from the disposal of discontinued assets.
On August 25, 1997 the Company issued $150 million
of unsecured ten-year senior notes at an
interest rate of 9.625%, and obtained a secured five-year $100
million revolving line of credit. The Interest rate on the
revolving credit facility at June 27, 1998 was 7.4%. The
revolving line of credit is secured by accounts receivable and
inventory with a net book value of approximately $155 million.
After borrowings as described above, the Company had
$ 63 million and $42 million available
under the revolving credit agreement, on June 27, 1998 and
August 25, 1997 respectively.
The new credit facility and the senior notes contain
restrictive covenants which include minimum
tangible net worth and certain other minimum financial ratios.
The agreement also restricts additional indebtedness,
dividends and capital expenditures.
During fiscal 1998, the Company had capital
expenditures of approximately $4.1 million primarily
for capital improvements, new equipment, and computer system
upgrades. During fiscal 1999, the
Company plans to spend approximately $10 million for capital
improvements, new equipment, and
computer system upgrades. With the exception of certain
discontinued facilities , the Company believes
that its equipment and facilities are generally adequate to
allow it to remain competitive with its principal
competitors.
We have considered the impact of Year 2000 issues
on our computer systems and applications and
developed a remediation plan. Conversion activities are in
process and we expect conversion and testing to be completed
during fiscal 1999. Expenditures in fiscal 1998 for the Year
2000 project amounted to $21,000 and we expect that completion
of the various projects will result in additional expenditures
of approximately $200,000.
The carryback of the net losses for fiscal 1996
resulted in a refund of approximately $8.5 million in
early part of fiscal year 1997.
The Company believes that cash flow generated by
its operations and funds available under its
new credit lines should be sufficient to service its bank
debt, to satisfy its day-to-day working capital needs, and to
fund its planned capital expenditures.
Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
ENVIRONMENTAL AND REGULATORY MATTERS
Two of the Company's South Carolina plants, the textile
segment's Delta 2 and 3 finishing plants, have been unable to
comply with certain toxicity and other permit-related limits
contained in a National
Pollutant Discharge Elimination system ("NPDES") permit held
by the Company. The Company is working with the appropriate
state agency to address these issues. To attempt to achieve
compliance, the
Company has completed the upgrades at a cost of approximately
$2.3 million and believes that the required effluent limits
will be achieved by November 1, 1998. Although there is no
assurance that the Company will be successful, and it could
face additional administrative penalties if it is not, the
Company does not currently believe that these matters will
have a material adverse impact on the Company.
The Company is currently assessing certain wastewater
treatment system basins of a North Carolina plant that is no
longer in operation but was a likely source of groundwater
contamination. The company currently has no plans to
remediate any groundwater contamination. Although no
assurance can be provided, The Company does not currently
believe that this matter will have a material adverse impact
on the Company.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET
RISK
Commodity Risk Sensitivity
As a part of Delta Woodside's business of converting
fiber to finished fabric, the Company makes raw cotton
purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile
manufacturers. Daily price fluctuations are minimal, yet long-
term trends in price movement can result in unfavorable
pricing of cotton for the Company. Before fixing prices, the
Company looks at supply and demand fundamentals, recent price
trends and other factors that affect cotton prices. The
Company also reviews the backlog of orders from customers as
well as the level of fixed price cotton commitments in the
industry in general.
Carrying Amount Fair Value
(In thousands)
Cotton in inventory $2,443 $2,456
Fiscal year 1999 fixed price
purchase commitments $48,288 $51,437
Fiscal year 2000 fixed price
purchase commitments $ 7,345 $ 7,441
Interest Rate Sensitivity
The following debt obligations are
sensitive to changes in interest rates:
$150 million of unsecured ten year senior notes due
2007 at a fixed rate of 9.625%.
$100 million of secured five year revolving credit
facility expiring 2002 with interest of 7.4% at
June 27, 1998. Interest is based on LIBOR.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of KPMG Peat Marwick LLP............................................F2
Consolidated Balance Sheets as of June 27, 1998 and June 28, 1997..........F3
Consolidated Statements of Operations for the fiscal years
ended June 27, 1998. June 28, 1997, and June 29, 1996......................F4
Consolidated Statements of Shareholder's Equity for the fiscal years
ended June 27, 1998, June 28, 1997, June 29, 1996, and July 1, 1995........F5
Consolidated Statements of Cash Flows for the fiscal years
ended June 27, 1998, June 28, 1997, June 29, 1996.. .......................F6
Notes to Consolidated Finanacial Statements................................F7
F1
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
Delta Mills, Inc.
We have audited the accompanying consolidated balance sheets
of Delta Mills, Inc.as of June 27, 1998 and June 28, 1997 and
the related consolidated statements of operations,
shareholder's equity, and cash flows for each of the years in
the three-year period ended June 27, 1998. These
consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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 Delta Mills, Inc. at June 27, 1998 and
June 28, 1997, and the results of their operations and their
cash flows for each of the years in the three-year period
ended June 27,1998, in conformity with generally accepted
accounting principles.
Greenville, South Carolina
August 14, 1998
CONSOLIDATED BALANCE SHEETS
Delta Mills Inc.
(In Thousands)
June 27, 1998June 28, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $544 $1,095
Accounts receivable:
Factor and other 82,454 84,041
Affiliates 6,783 2,953
89,237 86,994
Less allowances for doubtful accounts and ret 246 128
88,991 86,866
Inventories
Finished goods 10,427 7,178
Work in process 37,000 39,619
Raw materials and supplies 8,412 8,806
55,839 55,603
Current assets of discontinued operations 15,484 40,431
Deferred income taxes and other assets 2,567 3,463
TOTAL CURRENT ASSE 163,425 187,458
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements 2,892 2,816
Buildings 47,225 46,675
Machinery and equipment 145,038 144,122
Furniture and fixtures 2,089 2,201
Construction in progress 4,643 872
201,887 196,686
Less accumulated depreciation 80,257 61,167
121,630 135,519
DEFERRED LOAN COSTS
less accumulated amortization of $ 58 5,223
NONCURRENT ASSETS OF DISCONTINUED
OPERATIONS 12 22,033
$290,290 $345,010
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $23,890 $31,597
Payable to Affiliates 4,493 148,658
Accrued employee compensation 4,937 5,932
Accrued and sundry liabilities 16,042 8,796
Restructuring accruals 6,640
TOTAL CURRENT LIABILITIES 56,002 194,983
LONG-TERM DEBT 176,635
LOAN PAYABLE TO AFFILIATE 120,000
DEFERRED INCOME TAXES 7,431 16,547
OTHER LIABILITIES AND DEFERRED CREDITS 10,144 5,636
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized
3000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 2,134
Retained earnings(deficit) (11,714) 5,710
40,078 7,844
COMMITMENTS AND CONTINGENCIES
$290,290 $345,010
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 27, 1998 June 28, 1997 June 29, 1996
Net Sales $364,395 $358,204 $317,446
Cost of goods sold 300,556 293,145 283,776
Gross profit 63,839 65,059 33,670
Selling, general and administrative
expenses 17,585 16,323 13,624
Restructuring and impairment charge 0 0 1,596
Other income (expense) 146 1,553 (908)
OPERATING PROFIT 46,400 50,289 17,542
Other (expense) income:
Interest expense (17,160) (413) (312)
Interest income 152 19
Affiliate interest exp (2,164) (13,799) (13,714)
(19,172) (14,212) (14,007)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 27,228 36,077 3,535
Income tax expense 10,743 14,187 1,361
INCOME FROM CONTINUING
OPERATIONS 16,485 21,890 2,174
(Loss) on disposal of discontinued operations less
applicable income taxes (21,079)
(Loss) from operations of discontinued businesses less
applicable income taxes (4,830) (5,337) (26,973)
(Loss) from discontinued operations (25,909) (5,337) (26,973)
NET INCOME (LOSS) ($9,424) $16,553 ($24,799)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills Inc.
(In Thousands) Additional Total
Common Stock Paid-In Retained Shareholder's
Shares Amount Capital Earnings Equity
Balance at July 1, 1995 100 $0 $2,134 $13,956 16,090
Net loss (24,799) (24,799)
Balance at June 29, 1996 100 0 2,134 (10,843) (8,709)
Net income 16,553 16,553
Balance at June 28, 1997 100 0 2,134 5,710 7,844
Net (loss) (9,424) (9,424)
Cash dividends paid (8,000) (8,000)
Capital Contribution 49,658 49,658
Balance at June 27, 1998 100 $0 $51,792 ($11,714) $40,078
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 27, 1998June 28, 1997June 29, 1996
OPERATING ACTIVITIES
Net income (loss) ($9,424) $16,553 ($24,799)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 14,095 13,910 12,249
Amortization 32 (70) (11)
Discontinued operations 41,080 (1,788) 27,504
Write-down of property and equipment 996
Provision for losses on accounts receivable 468
Provision for deferred income taxes (8,261) 3,152 (2,201)
Losses (gains) on disposition of property
and equipment (6) (1,504) 20
Deferred compensation 638 605 428
Changes in operating assets and liabilities:
Accounts receivable 1,895 (14,092) (1,305)
Inventories (236) 4,667 9,603
Other current assets 41 (349) 91
Accounts payable and accrued expenses (8,244) 13,680 (22)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 32,078 34,764 22,553
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (4,065) (14,122) (43,378)
Proceeds of dispositions 13 2,275 2,480
Investing activities of discontinued operations 10,686 (1,597) (3,521)
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES 6,634 (13,444) (44,419)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 137,000
Repayments on revolving lines of credit (110,365)
Scheduled principal payments of long-term debt (50,000)
Net proceeds/(repayments) of loan from parent co (202,093) 29,731 21,865
Proceeds from issuance of long-term debt 145,688
Dividends paid (8,000)
Other (1,493)
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (39,263) (20,269) 21,865
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS... (551) 1,051 (1)
Cash and cash equivalents at beginning of year 1,095 44 45
CASH AND CASH EQUIVALENTS
AT END OF YEAR $544 $1,095 $44
See notes to consolidated financial statements.
F2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A-DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Description of Business: The Company manufactures woven
fabrics which are sold through a separate sales subsidiary.
The Company's operations, all within the textile industry, are
considered a single business segment.
Basis of Presentation: The consolidated financial statements
include the accounts of Delta Mills, Inc. and the Delta Mills
Marketing, Inc., (collectively, the "Company"). All
significant intercompany balances and transactions have been
eliminated. Delta Mills, Inc. and Delta Mills Marketing ,
Inc. are wholly-owned subsidiaries of Alchem Capital
Corporation, which is a wholly-owned subsidiary of Delta
Woodside Industries, Inc. ("DWI"). The Company has one
segment that is presented as a discontinued operation,
Stevcoknit Fabrics Company, which manufactures and sells
knitted fabrics. Certain amounts for the 1997 and 1996 fiscal
years have been reclassified to conform to the 1998
presentation of discontinued operations.
Cash Equivalents: The Company considers all highly liquid
investments having maturities of three months or less when
purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of the cost
or market determined using the first-in , first-out (FIFO)
method.
Property, Plant and Equipment: Property, plant and equipment
is stated on the basis of cost. Depreciation is computed by
the straight-line method for financial reporting based on
estimated useful lives of three to thirty-two years, but
predominantly over seven to ten years, and by accelerated
methods for income tax reporting.
Impairment of Long-Lived Assets: When required by
circumstances, the Company evaluated the recoverability of its
long-lived assets by comparing estimated future undiscounted
cash flows with the asset's carrying amount to determine if a
write-down to market value is required. This policy was
formally adopted by the Company in fiscal year 1996.
Revenue Recognition: Sales are recorded upon shipment or
designation of specific goods for later shipment at customers'
request with related risk of ownership passing to such
customers.
Deferred Loan Costs: Deferred loan costs are being amortized
over periods of five and ten years based on maturity of
related debt.
Income Taxes: Deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Environmental Costs: Environmental compliance cost including
ongoing maintenance, monitoring and similar costs, are
expensed as incurred. Environmental remediation costs are
accrued, except to the extent costs can be capitalized, when
remedial efforts are probable, and the cost can be reasonably
estimated.
Cotton Procurement: The Company contracts to buy cotton with
future delivery dates at fixed prices in order to reduce the
effects of fluctuations in the prices of cotton used in the
manufacture of its products. These contracts permit
settlement by delivery and are not used for trading purposes.
The Company commits to fixed prices on a percentage of its
cotton requirements up to eighteen months in the future. If
market prices for cotton fall below the Company's committed
fixed costs and are not recoverable, the differential is
charged to income at that time.
NOTE A-(CONTINUED)
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.
Fiscal Year: The Company's operations are based on a fifty-
two or fifty-three week fiscal year ending on Saturday closest
to June 30. Fiscal years 1996, 1997, and 1998 each consist of
52 weeks.
NOTE B-ACCOUNTS RECEIVABLE
The Company assigns a substantial portion of its trade
accounts receivable to a bank under a factor agreement. The
assignment of these receivables is primarily without recourse,
provided that customer orders are approved by the bank prior
to shipment of goods, up to a maximum for each individual
account.
The Company operates within the textile industry, and its
operations are affected by the relative strength or weakness
of the textile markets. The Company has one major customer
who accounted for 18%, 22%, and 16% of total net sales of
continuing operations for fiscal years 1998, 1997, and 1996,
respectively. Another major customer accounted for 11% of
sales of continuing operations in fiscal year 1998.
The Company's accounts receivable are due from many companies
that produce apparel, home furnishings and other products
located throughout the United States. The many companies
represented in the Company's accounts receivable, limits to a
certain extent, the concentration of credit risk. The Company
generally does not require collateral for its accounts
receivable.
NOTE C-LONG-TERM DEBT AND LEASES
On August 25, 1997 the Company issued $150 million of
unsecured ten-year senior notes at an interest rate of 9.625%,
and obtained a secured five-year $100 million revolving line
of credit subject to borrowing base limitations. The net
proceeds of the senior notes, the initial borrowings under the
new revolving line of credit and a capital contribution of the
remainder of the intercompany debt were used to repay the long-
term debt and current amounts payable to affiliate. At June
27, 1998, the interest rate on the $100 million revolving line
of credit was 7.4% based on LIBOR. At June 27, 1998, accounts
receivable and inventory with a net book value of
approximately $138 million, served as collateral for the $100
million revolving line of credit. Immediately after the
borrowing as described above, the Company had $63 million
available under the revolving line of credit on June 27, 1998.
The new credit facility and the senior notes contain
restrictive covenants, which include restrictions on
additional indebtedness, transactions which affiliates,
payment of dividends, minimum tangible net worth, and certain
other minimum financial ratios and maximum capital
expenditures.
The carrying value of the Company's revolving credit
agreements approximate fair value since the rates are tied to
floating rates. At June 27, 1998 the carrying value of the
senior notes was $150,000,000 and the fair value, based on
quoted market prices was $150,375,000.
Total interest expense incurred and paid by the Company was
$13,563,000, $14,264,000 and $14,261,000 for fiscal years
1998, 1997, and 1996, respectively, of which $302,000 and
$523,000 were capitalized during fiscal years 1997, and 1996
respectively.
Rent expense relating to operating leases was approximately
$3,821,000, $2,759,000 and $ 1,309,000 million for fiscal
years 1998, 1997 and 1996 respectively.
NOTE C-(CONTINUED)
Aggregate principal maturities of all long-term debt and
minimum payments under operating leases are as follows:
Fiscal Long-term Operating
Year Debt Leases
1999 $3,363,000
2000 3,355,000
2001 3,352,000
2002 1,932,000
2003 $26,635,000 452,000
Later Years 150,000,000 555,000
$176,635,000 $13,009,000
NOTE D-EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries,
Inc. retirement and 40l(k) plans.
On September 27, 1997 the Delta Woodside Industries Employee
Retirement Plan ("Retirement Plan") merged into the Delta
Woodside Employee Savings and Investment Plan ("401(k) Plan").
Future contributions to the 401(k) Plan in lieu of a
contribution to the Retirement Plan will be made in cash and
not in stock. In the 401(k) Plan employees may elect to
convert DWI stock to other funds, but may not increase the
amount of stock in their account. Each participant has the
right to direct the trustee as to the manner in which shares
held are to be voted. The Retirement Plan qualified as an
Employee Stock Ownership Plan ("ESOP") under the Internal
Revenue Code as a defined contribution plan. Contributions of
$236,000 and $270,000 were allocated to participants for
fiscal 1997 and 1996, respectively. During fiscal 1998, 1997
and 1996, the Company contributed $455,000 $480,000 and
$398,000, respectively, to the 401(k) plan.
The Company also participates in a 501(c)(9) trust, the Delta
Woodside Employee Benefit Plan and Trust ("Trust"). The Trust
collects both employer and employee contributions from the
Company and makes disbursements for health claims and other
qualified benefits.
The Company participates in a Deferred Compensation Plan,
managed by DWI, which permits certain management employees to
defer a portion of their compensation. Deferred compensation
accounts are credited with interest and are distributed after
retirement, disability or employment termination. As of June
27, 1998 and June 28, 1997, the Company's liability was
$5,722,000 and $5,086,000 respectively.
The Company also participates in the Delta Woodside
Industries, Inc. Incentive Stock Award Plan and Stock Option
Plan. Including associated tax assistance, under the
Incentive Stock Award Plan, the Company recognized expense of
$404,000 $245,000, and $325,000 for fiscal years 1998, 1997
and 1996, respectively. Under the Stock Option Plan, the
Company recognized expense of $104,000, $87,000 and $61,000
for fiscal years 1998, 1997 and 1996, respectively.
NOTE E-AFFILIATED PARTY TRANSACTIONS
The Company participated in a cash management system
maintained by Delta Woodside Industries, Inc. until August 25,
1997. Under this system excess cash was forwarded to DWI each
day, reducing the current loan payable to affiliate.
Likewise, cash requirements were funded daily by DWI,
increasing loan payable to affiliate. Interest was charged on
loan payable to affiliate balances based on the weighted
NOTE E-(CONTINUED)
average cost of DWI's borrowings. Accounts receivable due from
affiliates include $1.7 million at June 28, 1997 for
anticipated refunds of income taxes from Delta Woodside
Industries, Inc.
Receivables from affiliates also include $5.0 million and $1.2
million at June 27, 1998 and June 28, 1997, respectively,
resulting from sales to Delta Apparel, an affiliate.
Current payable to affiliates bears no interest and includes
(1) $40.5 million at June 28, 1997, payable to DWI resulting
from previous mergers, (2) interest payable of $10.2 million
owed Alchem Capital Corporation at June 28, 1997 and (3) other
amounts payable to DWI for current activity as described in
the following paragraphs.
Affiliated party transactions included in the statements of
operations result from a variety of services provided and
goods transferred as shown in the following table:
1998 1997 1996
Textile and yarn sales $19,385,000 $29,870,000 $25,600,000
Corporate services expense 2,838,000 3,302,000 3,123,000
Income tax payments (refunds) 88,000 6,261,000 (1,852,000
Payroll taxes,
insurance and
employee related expenses 45,223,000 42,578,000 25,549,000
Printing services expense 220,000 505,000 407,000
Interest expense 2,193,000 13,679,000 13,627,000
Rental income 95,000 93,000 141,000
As of March 29, 1997, the Company sells textiles and yarn to
an affiliate at prices which approximate market. Prior to
March 29, 1997, the Company sold textiles and yarn to an
affiliate at prices which approximate cost. Corporate
services include management, treasury, computer, purchasing,
benefits, payroll, auditing, accounting and tax services.
For these services, DWI charges actual cost based on relative
usage and other factors. Actual cost is charged for payroll
taxes, insurance and employee related expenses which are
managed by DWI as a corporate service. Printing services are
charged at market prices. Interest was charged based on fixed
rates for long-term debt. Interest on loan payable to
affiliates was charged based on DWI `s weighted average
interest rate. The Company charges affiliates for rent based
on estimated cost and space utilized.
NOTE F-DISCONTINUED OPERATIONS AND RESTRUCTURING CHARGES
In the third quarter of fiscal year 1998, the Company has
adopted the segment reporting provisions of Financial
Accounting Standard 131. This standard requires the Company
to report segment information for divisions which engage in
business activity, whose operating results are regularly
reviewed by the chief operating officer. The Company has one
segment in continuing operations: Delta Mills Marketing
Company which manufactures and sells woven fabrics for apparel
and home furnishings. The Company's other operations include
yarn sales to Delta Apparel, a segment of the parent company,
Delta Woodside Industries, Inc. Operating profit does not
include interest expense or interest income. The Company also
has one segment which is presented as a discontinued
operation: Stevcoknit Fabrics Company which manufactured and
sold knitted fabrics.
On March 3, 1998, the Company made the decision to close
Stevcoknit Fabrics. Accordingly, operating results for this
segment have been reclassified and reported as discontinued
operations. On June 27, 1998 the Company had sold most of the
assets of Stevcoknit Fabrics, and expects to complete
disposition of this business during calendar year 1998.
In connection with the decision to discontinue this business,
the Company recognized a loss on disposal of discontinued
operations of $21 million including an income tax benefit of
$14 million. The Company
NOTE F- (CONTINUED)
believes that it will recover the net book value of the assets
of the Stevcoknit division. At June 27, 1998, the Company had
outstanding approximately $11 million in accrued restructuring
charges and reserves relating to discontinued operations.
These amounts consist of $6.6 million and $4.4 million which
are presented as current and noncurrent liabilities,
respectively. In fiscal year 1996, the Company also
recognized restructuring charges of $1.6 million for plant
closings in the woven textile operation. Of the $1.6 million,
$1.0 million is for the write-down of property, plant and
equipment, and the remainder is for expenses, which were
incurred in connection with the plant closings.
The assets of discontinued operations at June 27, 1998 and
June 28, 1997 are as follows:
(in thousands) June 27, 1998 June 28, 1997
Accounts Receivable $ 13,893 $ 18,749
Inventory 1,529 21,592
Other current assets 62 90
Total current assets 15,484 40,431
Property, plant and equipment
net accumulated depreciation 12 22,033
Total Assets $ 15,496 $ 62,464
Summarized results of operations for the discontinued
business are as follows:
(in thousands) June 27, 1998 June 28, 1997 June 29, 1996
Net Sales $91,153 $106,344 $85,015
Cost and expense 112,899 115,213 127,052
(Loss) before income tax (21,746) (8,869) (42,037)
Income tax (benefit) (16,916) (3,532) (15,064)
(Loss) from
operations of
discontinued operations $(4,830) $(5,337) $(26,973
)
NOTE G-INCOME TAXES
The Company reports federal income taxes in the consolidated
return of its parent Delta Woodside Industries, Inc. (DWI) and
had taxable income of $7.7 million which will be reported in
the fiscal 1998 consolidated Federal income tax return of its
parent, DWI. The consolidated group had a tax loss of $27
million, which will be carried forward to offset future
taxable income. The Federal income tax obligation or refund
that is allocated to the Company is determined as if the
Company were filing a separate Federal income tax return. The
Company's Federal tax liability or receivable is paid to or is
a receivable from the parent company.
The Company had a Federal net operating loss carryforward of
$1.9 million which expired unused at the end of fiscal 1996.
The Company utilized its state NOL carryovers of approximately
$ 9 million and $18 million for 1998 and 1997 respectively.
The Company's gross deferred tax assets are reduced by a
valuation allowance to net deferred tax assets considered by
management to be more likely than not realizable. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in
which those temporary differences become deductible. Deferred
income taxes reflect the net tax effects of temporary
differences between the financial statement amounts and
amounts reported for income tax purposes. There was no change
in the valuation allowance from 1997 to 1998.
NOTE G-(Continued)
Significant components of the Company's deferred tax assets
and liabilities are as follows:
1998 1997
Assets
Restructuring reserves $3,708,000
Deferred compensation 2,203,000 $1,958,000
Net operating loss carryforwards 131,000 81,000
Accrued and sundry liabilities 2,410,000 2,315,000
Inventory 557,000 744,000
Allowance for doubtful accounts & sales returns 573,000 184,000
Subtotal 9,582,000 5,282,000
Valuation allowance (37,000) (37,000)
Deferred tax assets 9,545,000 5,245,000
Liabilities:
Depreciation 13,434,000 18,549,000
Other 1,343,000 189,000
Deferred tax liabilities 14,777,000 18,738,000
Net deferred tax liabilities $5,232,000 $13,493,000
Significant components of the provision for income taxes are
as follows:
1998 1997 1996
Current:
Federal income taxes $2,014,000 $ 7,352,000 $(11,583,000)
State income taxes 74,000 150,000 81,000
Total current $2,088,000 $ 7,502,000 $(11,502,000)
Deferred:
Federal income taxes (benefits) ($7,060,000) $2,710,000 $(1,886,000)
State income taxes (benefits) (1,201,000) 442,000 (315,000)
Total Deferred (8,261,000) 3,152,000 ( 2,201,000)
Total provision ($6,173,000) $10,654,000 $ (13,703,000)
The reconciliation of income tax expense (benefit) computed at
the Federal statutory tax rate:
1998 1997 1996
Income tax expense (benefit)
at statutory rates $(5,459,000) $9,523,000 $(13,476,000)
State taxes (benefits) net
of federal benefit (733,000) 385,000 (152,000)
Other 19,000 746,000 (75,000)
($6,173,000) $10,654,000 $ (13,703,000)
The Company made tax payments of $110,000 and $6,261,000
during fiscal years 1998 and 1997 respectively. During fiscal
1996, the Company received tax refunds of $1,852,000.
NOTE H-SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (the "Guarantor") does not
comprise a material portion of the Company's assets or
operations. The Guarantor is a wholly-owned subsidiary of the
Company and has fully and unconditionally guaranteed, (the
"Guarantee") the Company's payment of principal, premium,
interest and certain liquidated damages, if any, on the
Company's senior notes (the "Notes"). The Guarantor's
liability under the Guarantee is limited to such amount, the
payment of which would not have left the guarantor insolvent
or with unreasonably small capital at the time its Guarantee
is entered into, after giving effect to the incurrance of
existing indebtedness immediately prior to such time.
The Guarantor is the sole subsidiary of the Company. All
future subsidiaries of the Company will provide guarantees
identical to the one described in the preceding paragraph
unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such
additional guarantees will be joint and several with the
Guarantee of the Guarantor.
The Company has not presented separate financial statements or
other disclosures concerning the Guarantor because Company
management has determined that such information is not
material to investors.
Summarized financial information for the Guarantor is as
follows (in thousands):
June 27, 1998 June 28, 1997
Current assets 1,301 2,507
Noncurrent assets 412 163
Current Liabilities 1,428 1,630
Noncurrent 1,260 1,035
liabilities
Stockholders' (975) 5
equity (deficit)
Summarized results of operations for the Guarantor are as
follows (in thousands):
Twelve Months
Ended
June June June 29,
27, 28,
1998 1997 1996
Net sales -intercompany $6,177 $6,041 $5,294
commissions
Cost and expenses 5,346 5,104 4,253
Income from continuing
operations 468 513 585
(Loss) from discontinued
operations (1,450) (1,006) (802)
Net (loss) (982) (498) (217)
NOTE I-COMMITMENTS AND CONTINGENCIES
During fiscal year 1999, the Company plans to spend
approximately $10 million for capital improvements. The
Company has entered into agreements, and has fixed prices,
to purchase cotton for the use in its manufacturing
operations. At June 27, 1998 minimum payments under these
contracts with non-cancelable contract terms were $30
million in fiscal year 1999 and $4.4 million in fiscal
year 2000.
Two of the Company's South Carolina plants, the textile
segment's Delta 2 and 3 finishing plants, have been unable to
comply with certain toxicity and other permit-related limits
contained in a National
NOTE I-(CONTINUED)
Pollutant Discharge Elimination system ("NPDES") permit held
by the Company. The Company is working with the appropriate
state agency to address these issues. To attempt to achieve
compliance, the Company has completed the upgrades at a cost
of approximately $2.3 million and believes that the required
effluent limits will be achieved by November 1, 1998.
Although there is no assurance that the Company will be
successful, and it could face additional administrative
penalties if it is not, the Company does not currently believe
that these matters will have a material adverse impact on the
Company.
The Company is currently assessing certain wastewater
treatment system basins of a North Carolina plant that is no
longer in operation but was a likely source of groundwater
contamination. The company currently has no plans to
remediate any groundwater contamination. Although no
assurance can be provided, The Company does not currently
believe that this matter will have a material adverse impact
on the Company.
NOTE J-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results
of operations for the years ended June 27, 1998 and June 28,
1997.
Quarter Ended
September 27 December 27 March 28 June 27
(In thousands)
Net sales $92,383 $89,285 $81,071 $101,656
Gross profit 17,025 15,006 14,497 17,311
Income from continuing operations 5,303 3,632 3,048 4,502
Net income (loss) 3,666 1,907 (19,499) 4,502
September 28 December 28 March 29 June 28
(In thousands)
1997
Net sales $99,939 $119,220 $115,078 $130,311
Gross profit 13,188 15,695 16,489 19,798
Income from continuing operations 3,793 5,197 5,378 7,522
Net income (loss) 2,512 4,129 4,062 5,850
During the third quarter of fiscal year 1998, the Company
recognized restructuring and impairment charges
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10-13 to be filed by amendment.
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:*
(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 MILLS, INC.
9/25/98 /s/ E.
Erwin Maddrey, 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 9/25/98
/s/ E. Erwin Maddrey, II 9/25/98
C. C. Guy Date E. Erwin
Maddrey, II Date
Director President, Chief
Executive Officer
and Director
/s/ Buck A. Mickel 9/25/98
/s/ Bettis C. Rainsford 9/25/98
Buck A. Mickel Date Bettis C.
Rainsford Date
Director Executive Vice President,
Chief Financial Officer, Treasurer
and Director
/s/ Robert W. Humpherys 9/25/98
Robert W. Humphreys Date
Vice President-Finance and
Assistant
Secretary
FORM 10-K--ITEM 14(a)(1) AND (2)
DELTA MILLS, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Delta Mills, Inc.
and for the Year ended June 27, 1998 are incorporated by reference in
Item 8:
Consolidated balance sheets-June 27, 1998 and June 28, 1997.
Consolidated statements of operations--Years ended June 27, 1998
and June 28, 1997, and June 29,1996.
Consolidated statements of shareholders' equity-- Years ended
June 27, 1998 and June 28, 1997, and June 29,1996.
Consolidated statements of cash flows-- Years ended June
27, 1998 and June 28, 1997, and June 29,1996.
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.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA MILLS, INC.
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Balance at
DESCRIPTION Beginning (1) (2) Deductions Balance at End
of Period of Period
Charged to Costs Charged to Other Describe
and Expenses Accounts-Describe
Deducted from asset accounts
Allowance for doubtful accounts:
Year ended June 27, 1998 $128,000 $246,000
Year ended June 28, 1997 $99,000 $128,000
Year ended June 29, 1996 $160,000 $99,000
Inventory reserves:
Year Ended June 27, 1998 $2,638,000 $3,452,000
Year ended June 28, 1997 $5,322,000 $2,638,000
Year ended June 29, 1996 $5,452,000 $5,322,000
August 14, 1998
EXHIBIT INDEX
21 Subsidiaries of the Company.
23.1 Independent Auditors' Report, June 27, 1998