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 29, 2002
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
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DELTA MILLS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
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(State of Incorporation) (I.R.S. Employer Identification No.)
PO Box 6126
100 Augusta Street
Greenville, South Carolina 29606
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(Address of principal executive offices) (Zip code)
864/255-4122
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(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
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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None
1
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 _____
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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 the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ].
The aggregate market value of the common equity stock held by non-affiliates of
the registrant as of September 27, 2002 was:
Common Stock, $.01 par value - 0
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of September 27, 2002 was:
Common Stock, par value $.01 100
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
2
FOR THE FISCAL YEAR ENDED JUNE 29, 2002
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 4
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 17
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
3
PART I.
ITEM I. BUSINESS
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The following discussion contains various "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 are forward-looking statements. Examples are statements that
concern future revenues, future costs, future capital expenditures, business
strategy, competitive strengths, competitive weaknesses, goals, plans,
references to future success or difficulties and other similar information. The
words "estimate", "project", "forecast", "anticipate", "expect", "intend",
"believe" and similar expressions, and discussions of strategy or intentions,
are intended to identify forward-looking statements.
The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also 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, the relative strength of the
United States dollar as against other currencies, changes in United States trade
regulations and the discovery of unknown conditions (such as with respect to
environmental matters and similar items). Accordingly, any forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
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.
GENERAL
Delta Mills, Inc. ("Delta Mills" or the "Company") is a Delaware corporation
with its principal executive offices located at 100 Augusta Street, PO Box 6126,
Greenville, South Carolina 29606 (telephone number: 864-255-4122). 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 under the symbol "DLW". 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.
The Company is a leading manufacturer and marketer of woven finished cotton,
synthetic and blended fabrics, which are sold for the ultimate production of
apparel. The Company sells a broad range of finished apparel fabrics primarily
to branded apparel manufacturers and resellers. These manufacturers and
resellers include Levi Strauss, Haggar Corp., the Wrangler (R) and Lee(R)
divisions of V.F. Corporation, The Gap, 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' Dockers(R) and Haggar Corp.'s
Wrinkle-free(R). Other apparel items manufactured with the Company's woven
fabrics include women's chino pants, women's blazers, career apparel (uniforms),
and battle dress camouflage military uniforms. During fiscal year 2000 the
Company also produced a variety of unfinished lightweight woven fabrics that
were sold to converters of finished products. Due to import pressure, the
unfinished fabrics business was discontinued and replaced with more profitable
product lines. This move away from the unfinished fabric production was
completed in the first half of fiscal 2000.
The Company was incorporated in Delaware in 1971 and acquired by a predecessor
of Delta Woodside Industries, Inc. in 1986.
4
PRODUCTS, MARKETING AND MANUFACTURING
The Company produces woven textile fabrics 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 spun yarns used in its weaving operations. In manufacturing
these yarns, the cotton and synthetic fibers, 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 high quality
yarns. 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.
The Company produces finished woven fabrics used in the production of apparel.
Finished apparel fabric is ready to be cut and sewn into garments.
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 also sells camouflage fabric and other fabrics used in
apparel sold to the United States Department of Defense. These fabrics account
for more than 10% of net sales for fiscal year 2002. 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,
Dallas, San Francisco and Mexico.
For fiscal year 2002, the Company had two customers, Levi Strauss and V.F.
Corporation, that each exceeded 10% of consolidated net sales. The Company's
sales to these customers totaled $63 million in fiscal 2002. For fiscal year
2001 and fiscal year 2000, the Company had three customers, Levi Strauss, Haggar
Corp., and V.F. Corporation, which each exceeded 10% of consolidated net sales.
The Company's aggregate sales to these customers were $90 million and $109
million for fiscal 2001and for fiscal 2000, respectively. The loss of any of
these accounts could have a material adverse effect on the results of the
Company.
During fiscal years 2002, 2001 and 2000, approximately 83%, 82% and 83%,
respectively, of the Company's finished woven fabric sales were of fabrics made
from cotton or cotton/synthetic blends, while approximately 17%, 18%, and 17%,
respectively, of such sales were 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 Company's woven finished fabrics plants are
currently operating at less than full capacity.
5
RAW MATERIALS
The Company's principal raw material is cotton, although it also spins
polyester, wool, linen fiber, acrylic, lyocell, nylon and rayon fibers and
weaves textured polyester filament. Polyester is obtained primarily from three
major suppliers, all of whom provide competitive prices. Polyester prices for
fiscal year 2002 were unchanged from fiscal year 2001. The Company's average
price per pound of cotton purchased and consumed, including freight and carrying
costs, was $.594 in fiscal year 2002 as compared to $.659 in fiscal year 2001,
and $.661 in fiscal year 2000. As of June 29, 2002, the Company had contracted
to purchase 100% and had fixed the price for approximately 92% of its expected
cotton requirements for fiscal year 2003. 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, as there can be no assurance
that it would be able to pass along its higher costs to its customers. In
addition, to the extent that cotton prices increase and the Company has not
provided for its requirements with fixed price contracts, 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.
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 non-durable goods. 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 primarily to domestic apparel manufacturers, 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 the woven 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. In addition, the Company believes that it is one
of only two finishers successful in printing camouflage for sale to apparel
suppliers of the U.S. Government and the only supplier that is vertically
integrated for camouflage production. 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.
6
COMPETITION - CONTINUED
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. The North American Free
Trade Agreement (often referred to as "NAFTA") entered into force on January 1,
1994. NAFTA has effectively eliminated all tariffs and quotas on goods imported
from Mexico if such goods are made from fabric originating in Canada, Mexico, or
the United States. The Caribbean Basin Trade Partnership Act (often referred to
as "CBTPA") became effective on October 1, 2000. CBTPA has effectively
eliminated tariffs and quotas on apparel products imported from participating
Caribbean and Central American nations if such products are made from fabric
woven in the United States of U.S. yarn. Because NAFTA and CBTPA create an
incentive to use fabric manufactured in the United States, they are beneficial
to the Company and other domestic producers of apparel fabrics. In contrast,
apparel not meeting the criteria of NAFTA or CBTPA is subject to quotas and/or
relatively higher tariffs. If NAFTA or CBTPA 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.
The World Trade Organization (often referred to as the "WTO"), a multilateral
trade organization, was formed in January 1995 and is the successor to the
General Agreement on Tariffs and Trade or "GATT". This multilateral trade
organization has set forth mechanisms by which world trade in clothing is being
progressively liberalized by phasing-out quotas and reducing duties over a
period of time that began in January of 1995. As it implements the WTO
mechanisms, the U.S. government is negotiating bilateral trade agreements with
developing countries (which are generally exporters of textile and apparel
products) that are members of the WTO to get them to reduce their tariffs on
imports of textiles and apparel in exchange for reductions by the United States
in tariffs on imports of textiles and apparel. The elimination of quotas and the
reduction of tariffs under the WTO may result in increased imports of certain
textile and apparel products into North America. These factors could make the
Company's products less competitive against low cost imports from developing
countries.
A Free Trade Area of the Americas agreement (often referred to as "FTAA") is
being negotiated, with expected implementation in the year 2005. FTAA will be a
NAFTA-like agreement among most of the nations in the Americas. While the
agreement language is not final, the rules of origin will likely allow apparel
to be imported into the United States without tariff or quota provided the yarns
and fabrics are formed in any participating country. This agreement would create
an incentive for apparel manufacturers to use fabric from the Americas region
rather than other parts of the world, which could be beneficial to the Company
and other domestic textile manufacturers. Conversely, this agreement may result
in an increase in the production and use of regional fabrics formed outside the
U.S., which would be a disadvantage to the Company.
EMPLOYEES
The Company has approximately 1,800 employees. The Company's employees are not
represented by unions. The Company believes that its relations with its
employees are good.
7
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 Financial Condition and Results
of Operations " included in Item 7 of this Form 10-K is incorporated herein by
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" included in Item 8 of this Form 10-K is incorporated
herein by reference.
8
ITEM 2 PROPERTIES
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The following table provides a description of Delta Mills, Inc.'s principal
facilities.
Approximate
Square
Location Utilization Footage Owned/Leased
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Greenville, SC Admin Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC spin/weave 390,000 (2)
Estes Plant, Piedmont, SC spin/weave 332,000 (2)
Delta 3 Plant, Wallace, SC dye/finish 555,000 (2)
Pamplico and Cypress Plants, Pamplico, SC spin/weave 419,000 (2)
Delta 2 Plant, Wallace, SC dye/finish 347,000 (2)
Catawba Plant, Maiden, NC spin 115,000 Owned
(1) Lease expires in December 2003 with the right to renew for one
additional five-year period.
(2) Title to these facilities and substantially all of the equipment
located in these facilities is 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., subject in certain cases to various outstanding liens.
Delta Mills Marketing, Inc. leases sales offices in New York, NY. The
lease on the sales offices expires in December 2004.
At the date of execution of this Form 10-K, the Company believes that
its plants are operating at less than full production capacity.
At the date of execution of this Form 10-K, the Company has closed and
plans to dispose of its Furman facility in Fountain Inn, SC. The Company expects
to complete the sale of this facility in fiscal year 2003.
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.
9
ITEM 3. LEGAL PROCEEDINGS
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All litigation to which the Company is a party is ordinary routine product
liability litigation, contract breach litigation, or employment litigation
incident to its business that does not depart from the normal kind of such
actions. The Company believes that none of these actions, if adversely decided,
would 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
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No matter was submitted to a vote of security holders during the fourth quarter
of the Company's 2002 fiscal year.
PART II.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company is a wholly-owned subsidiary of Delta Woodside Industries, Inc.
Accordingly, there is no established public trading market for the Company's
common stock.
During 2001, the Company declared dividends of $2,900,000. The Company declared
no dividends for fiscal year 2002 or fiscal year 2000. The information
concerning limitations on cash distributions contained under the subheading
"Liquidity and Sources of Capital" under Item 7 is incorporated herein by
reference.
10
ITEM 6. SELECTED FINANCIAL DATA
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In Thousands, Except Ratios
Fiscal Year
(1)
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STATEMENTS OF OPERATIONS DATA:(1)
2002 2001 2000 1999 1998
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Net Sales $174,673 $212,960 $276,511 $348,955 $364,395
Cost of Goods Sold 165,266 196,692 243,254 292,914 300,556
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Gross Profit 9,407 16,268 33,257 56,041 63,839
Selling, general and administrative expenses 11,634 14,609 15,345 16,937 17,585
Impairment & restructuring expenses 8,683
Other income 476 302 446 96 146
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Operating Profit (Loss) (10,434) 1,961 18,358 39,200 46,400
Interest expense 9,090 11,064 16,095 17,414 19,324
Interest (income) (192) (547) (958) (185) (152)
Income (Loss) from Continuing Operations
Before Income Taxes and Extraordinary Item (19,332) (8,556) 3,221 21,971 27,228
Income Tax Expense (Benefit) (7,359) (3,065) 1,280 8,590 10,743
--------------- --------------- --------------- --------------- -------------
Income (Loss) from Continuing Operations
Before Extraordinary Item (11,973) (5,491) 1,941 13,381 16,485
Extraordinary gain (net of taxes) 9,911 1,585 4,659
Profit (Loss) from Discontinued Operations (174) 3,802 (25,909)
--------------- --------------- --------------- --------------- -------------
Net Income (Loss) $ (2,062) $(3,906) $6,426 $17,183 ($9,424)
=============== =============== =============== =============== =============
OTHER DATA:(1)
Depreciation and amortization $9,544 $11,310 $14,015 $14,815 $14,127
Capital expenditures 6,496 5,151 4,340 9,075 4,065
EBITDA (2) (890) 13,271 32,373 54,015 60,527
Ratio of EBITDA to interest expense (2) (0.1) 1.2 2.0 3.1 3.1
BALANCE SHEET DATA: (1)
Working Capital $37,338 $64,270 $95,158 $101,613 $107,423
Total assets 158,437 181,747 229,612 260,951 290,290
Total debt 47,819 83,815 115,078 150,000 176,635
Shareholder's equity (deficit) 47,319 49,381 56,187 49,761 40,078
NOTES TO SELECTED FINANCIAL DATA
(1) The Stevcoknit knitted fabrics business is presented as part of
discontinued operations.
(2) "EBITDA" is defined herein as operating profit or loss, plus depreciation
and amortization expense. While EBITDA should not be construed as an
alternative to operating earnings (loss) or net income (loss), or as an
indicator of operating performance or liquidity, the Company believes that
the ratio of EBITDA to interest expense is a measure that is commonly used
to evaluate a company's ability to service debt.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND
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ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains various "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 are forward-looking statements. Examples are statements that
concern future revenues, future costs, future capital expenditures, business
strategy, competitive strengths, competitive weaknesses, goals, plans,
references to future success or difficulties and other similar information. The
words "estimate", "project", "forecast", "anticipate", "expect", "intend",
"believe" and similar expressions, and discussions of strategy or intentions,
are intended to identify forward-looking statements.
The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also 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, the relative strength of the
United States dollar as against other currencies, changes in United States trade
regulations and the discovery of unknown conditions (such as with respect to
environmental matters and similar items). Accordingly, any forward-looking
statements do not purport to be predictions of future events or circumstances
and may not be realized.
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
During the year ended June 29, 2002, the Company announced the closing of its
Furman Plant, a weaving only facility located in Fountain Inn, South Carolina.
The equipment run-out schedule was completed on October 21, 2001 and the Company
is in the process of liquidating the assets associated with this facility. The
Company has transferred the current production for the closed facility to other
weaving facilities in the Company to better utilize the remaining equipment. The
Company expects to complete the sale of these assets in fiscal year 2003.
RESULTS OF OPERATIONS FISCAL 2002 VERSUS FISCAL 2001
Net Sales. Consolidated net sales for the year ended June 29, 2002 totaled
$174.7 million, as compared to $213.0 million for the year ended June 30, 2001,
a decrease of 18.0%. The average sales price decreased 2.8% in 2002 as compared
to the previous fiscal year. The decline in sales volume occurred during the
first three quarters of the year due to a weakness in market demand and some
decline in sales price. The decline was somewhat offset during the fourth
quarter as market demand increased. Compared to the previous fiscal year, sales
volume decreased 18%.
Gross Profit. Consolidated gross profit margin as a percent of sales for the
year ended June 29, 2002 was 5.4%, as compared to 7.6% for the year ended June
30, 2001. The gross profit decline occurred during the first three quarters of
the year as sales declined. This resulted in decreased running schedules in
order to control inventory and conserve cash. The decreased running schedules
resulted in increased costs associated with under absorbed manufacturing costs.
This trend was reversed in the fourth quarter of the current fiscal year. Also
contributing to the gross profit decline was downward pressure on sales price
caused by cotton garment manufacturers expanding their supplier base to gain a
more competitive price and by increased import pressure on synthetic products.
Selling, General and Administrative Expenses. During the year ended June 29,
2002, selling, general and administrative expenses were $11.6 million, as
compared to $14.6 million during the year ended June 30, 2001, a decrease of
$3.0 million or 20.4%. Expenses in this category were 6.7% of sales in fiscal
2002 as compared to 6.9% in fiscal 2001. The decrease was due to a reduction in
compensation expense and overall lower expenses in relation to lower sales
volume.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Impairment and Restructuring Expenses. During the year ended June 29, 2002, the
Company incurred impairment and restructuring expenses of $8.7 million related
to the closing of its Furman plant, a weaving only facility in Fountain Inn, SC.
There were no impairment or restructuring charges in fiscal 2001.
Operating Earnings. Operating losses for the year ended June 29, 2002 were $10.4
million, as compared to operating earnings of $2.0 million for the year ended
June 30, 2001. In addition to the decline in gross profit that was somewhat
offset by lower selling, general and administrative expenses, operating earnings
for the current year included an $8.7 million impairment and restructuring
charge that occurred in the first quarter of the fiscal year as a result of
closing the Furman plant.
Net Interest Expense. For the year ended June 29, 2002, net interest expense was
$8.9 million, as compared to $10.5 million for the year ended June 30, 2001. The
decrease in interest expense resulted from the extinguishment of $36.0 million
principal amount of debt related to the purchase of a portion of the Company's
9.625% Senior Notes.
Taxes. The effective tax rate of 36.8% on continuing operations for the year
ended June 29, 2002 is higher than the 35.8% effective tax rate on continuing
operations for the year ended June 30, 2001, primarily because of the effect of
nondeductible permanent differences on pretax income in fiscal year 2002
compared to pretax losses in 2001.
Income(Loss) from Continuing Operations. Loss from Continuing Operations for the
year ended June 29, 2002 was $12.0 million, as compared to a loss of $5.5
million for the year ended June 30, 2001. For the current fiscal year, the loss
before extraordinary items included an impairment and restructuring charge of
approximately $5.5 million on an after tax basis. There were no impairment and
restructuring charges recognized in the previous fiscal year.
Extraordinary gain, net of taxes. During fiscal 2002, the Company purchased
$36.0 million face amount of its 9.625% Senior Notes for $19.4 million,
including expenses of approximately $0.5 million. The Company recognized an
extraordinary gain of $9.9 million after tax expense of $6.2 million and the
write off of deferred loan costs of $0.5 million. During fiscal 2001, the
Company purchased $31.3 million face amount of its 9.625% Senior Notes for $28.0
million. The Company recognized an extraordinary gain of $1.6 million after tax
expense of $0.9 million and the write off of deferred loan costs of $0.8
million.
Order Backlog. The Company's order backlog at June 29, 2002 was $47.8 million, a
slight increase from the $47.2 million order backlog at June 30, 2001. Many of
the Company's customers have shortened lead times for delivery requirements, and
the apparel market continues to be soft. Consequently, management believes that
the order backlog at any given point in time may not be an indication of future
sales.
Adoption of Accounting Standards. In July 2001, the FASB issued SFAS 142,
"Goodwill and Other Intangible Assets". SFAS 142 eliminates goodwill
amortization, provides guidance and requirements for impairment testing of
goodwill, and discusses the treatment of other intangible assets. Adoption of
the standard is required for fiscal years beginning after December 15, 2001. The
adoption of this standard is not expected to materially impact the Company.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires an enterprise to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long lived-assets,
which assets result from the acquisition, construction, development and or
normal use of the assets. The enterprise also is to record a corresponding
increase to the carrying amount of the related long-lived asset (i.e. the
associated asset retirement costs) and to depreciate that cost over the life of
the asset. The liability is changed at the end of each period to reflect the
passage of time (i.e. accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. This statement is
effective for fiscal years beginning after June 15, 2002. The adoption of this
standard is not expected to materially impact the Company.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
On October 3, 2001 the FASB issued statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The FASB's
new rules on asset impairment supersede FASB statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", and provide a single accounting model for long-lived assets to be disposed
of. The Company will adopt the Statement effective for fiscal 2003. The adoption
of this standard is not expected to materially impact the Company.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145, through the rescission of Statement No.
4, will no longer require extraordinary item treatment for gains and losses from
the extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement is effective for fiscal years beginning after May 15, 2002 and will
require the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
will reclassify all extraordinary gains recognized for the early extinguishment
of debt as a component of operating income for all financial statement periods
presented.
In July 2002, the FASB issued Statement No. 146, "Accounting for Obligations
Associated with Disposal Activities". Statement No. 146 addresses financial
reporting and accounting for costs associated with exit or disposal activities.
It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". Statement 146 requires that a liability be
recognized for such costs only when the liability is incurred, which is in
contrast to EITF No. 94-3, which requires the recognition of a liability upon
the commitment to an exit plan. The Statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of Statement No. 146 will not have a material impact on its financial
statements.
RESULTS OF OPERATIONS FISCAL 2001 VERSUS FISCAL 2000
Net Sales. Consolidated net sales for the year ended June 30, 2001 totaled
$213.0 million, as compared to $276.5 million for the year ended July 1, 2000, a
decrease of 23.0%. The decline in sales was due to declines in volume and price
as retail market demand weakened over fiscal 2001. Sales of yarn from the
Rainsford plant to the Delta Apparel affiliate were $0 as compared to $26.6
million in the prior year. The Rainsford plant was sold to Delta Apparel in May
2000.
Gross Profit. Consolidated gross profit margin as a percent of sales for the
year ended June 30, 2001 was 7.6 %, as compared to 12.0% for the year ended July
1, 2000. The decline in gross profit percentage for the year was the result of
reduced volume and price along with a change in product mix. In addition to a
general market decline, these reductions were caused by cotton garment
manufacturers expanding their supplier base to gain a more competitive price and
by increased import pressure on synthetic products. Manufacturing cost increases
caused by reduced operating schedules also contributed to the decline in gross
profit.
Selling, General and Administrative Expenses. During the year ended June 30,
2001, selling, general and administrative expenses were $14.6 million, as
compared to $15.3 million during the year ended July 1, 2000, a decrease of $0.7
million or 4.6%. Expenses in this category were 6.9% of sales in fiscal 2001 as
compared to 5.5% in fiscal 2000. The decrease was due primarily to a reduction
of fixed administrative service costs.
Operating Earnings. Operating earnings for the year ended June 30, 2001 were
$2.0 million, as compared to $18.4 million for the year ended July 1, 2000. The
decline in operating earnings was due to the factors described above.
Net Interest Expense. For the year ended June 30, 2001, net interest expense was
$10.5 million, as compared to $15.1 million for the year ended July 1, 2000. The
decrease in interest expense resulted from the extinguishment of $66.2 million
of debt due to the purchases of portions of the Company's 9.625% Senior Notes in
fiscal 2001 and in fiscal 2000.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Taxes. The effective tax rate of 35.8% on continuing operations for the year
ended June 30, 2001 was lower than the 39.7% effective tax rate on continuing
operations for the year ended July 1, 2000 primarily because of the effect of
nondeductible permanent differences on pretax income in fiscal year 2000
compared to pretax losses in fiscal year 2001.
Income(Loss) from Continuing Operations. Loss from Continuing Operations for
the year ended June 30, 2001 was $5.5 million, as compared to income from
continuing operations of $1.9 million for the year ended July 1, 2000. The
decrease was due to the factors described above.
Extraordinary gain, net of taxes. During fiscal 2001, the Company purchased
$31.3 million face amount of its 9.625% Senior Notes for $28.0 million. The
Company recognized an extraordinary gain of $1.6 million after tax expense of
$0.9 million and the write off of deferred loan costs of $0.8 million. During
fiscal 2000, the Company purchased $34.9 million face amount of its 9.625%
Senior Notes for $26.6 million. The Company recognized an extraordinary gain of
$4.7 million after tax expense of $2.8 million and the write off of deferred
loan costs of $0.8 million.
Order Backlog. The Company's order backlog at June 30, 2001 was $47.2 million, a
40.2% decrease from the $78.8 million order backlog at July 1, 2000. Many of the
Company's customers have shortened lead times for delivery requirements. This
coupled with an overall softening of the apparel market accounted for the
decline in the order backlog. Management believes that the order backlog at any
given point in time may not be an indication of future sales.
LIQUIDITY AND SOURCES OF CAPITAL
Cash decreased $11.7 million in fiscal 2002. The Company generated $2.4 million
from operating activities and used $6.1 million to fund capital expenditures.
The Company used the remaining $8.0 million net of $11.4 million in borrowings
from its revolving credit facility to purchase a portion of the Company's
9.625% Senior Notes for $19.4 million, including expenses of approximately $0.5
million. The Company generated operating cash flows of $29.1 and $26.3 million
for the 2001 and 2000 fiscal years, respectively. In fiscal 2001 the Company
used cash for investing activities of $4.7 million and generated $8.7 million
from investing activities in fiscal 2000. Cash generated in fiscal year 2000
was primarily from the sale of the Rainsford Plant and associated operating
assets to the Delta Apparel affiliate for $13.6 million in May 2000.
On March 31, 2000 the Company obtained a secured four-year $50 million revolving
credit facility. Borrowings under this credit facility are based on eligible
accounts receivable and inventory of the Company, subject to a maximum $37.5
million availability limit as a result of a March 31, 2002 amendment described
below. The facility is secured by the accounts receivable, inventory and capital
stock of the Company. The interest rate on the credit facility is based on a
spread over either LIBOR or a base rate. On June 29, 2002, borrowings under this
facility were $11.4 million and approximately $24.3 million was still available
for borrowing.
The credit facility contains restrictive covenants that, among other things,
until the March 31, 2002 amendments described below, required that the
Company's Maximum Leverage Ratio, as defined therein, not exceed specified
amounts. The agreement also restricts additional indebtedness, dividends, and
capital expenditures. The payment of dividends with respect to the Company's
stock is permitted if there is no event of default and there is at least $1 of
availability under the facility. An amendment dated October 5, 2001
substantially increased the permitted leverage ratio for the four quarters
ending with the third quarter of fiscal year 2002, and slightly reduced the
permitted leverage ratio for the fourth fiscal quarter of fiscal year 2002 and
subsequent quarters. This amendment also extended the term of the Revolving
Credit Agreement to March 31,2004 and included the lender's consent to the sale
of the Company's Furman Plant. It also allowed the Company to exclude from the
calculation of the leverage ratio the closing costs and continuing costs
associated with the closing of its Furman Plant. Effective March 31, 2002, the
Company amended its $50 million credit facility, eliminating the permitted
leverage ratio covenant and adding a $12.5 million minimum availability
requirement. Under the minimum availability requirement, the Company's
availability for borrowings cannot exceed $37.5 million. During the year ended
June 29, 2002, the Company did not pay any dividends to Delta Woodside
Industries, Inc.
15
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
Loan covenants in the Senior Notes and the Company's revolving credit facility,
among other matters, limit the Company's ability to make cash distributions to
Delta Woodside. At June 29, 2002, under the most restrictive of these covenants,
no dividends were available for distribution by Delta Mills to Delta Woodside
Industries..
During the year ended June 29, 2002, the Company acquired for $19,383,000,
including expenses of approximately $500,000, a portion of its 9.625% Senior
Notes. The aggregate principal face amount of the acquired Senior Notes was
$35,996,000. The current outstanding aggregate principal amount of these Senior
Notes is $47,819,000. The future annual reduction in the Company's interest
expense because of this Senior Note repurchase will be $3,464,615.
During fiscal 2002, the Company had capital expenditures of approximately $6.5
million primarily for capital improvements, new equipment, and computer system
upgrades. During fiscal 2003, the Company plans to spend approximately $8
million for capital improvements, new equipment, and computer system upgrades.
The Company believes that its equipment and facilities are generally adequate to
allow it to remain competitive with its principal competitors.
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 29, 2002 minimum
payments under these contracts with non-cancelable contract terms were $14.9
million.
During 1998, the Company received notices from North Carolina asserting
deficiencies in state corporate income and franchise taxes for the Company's
1994 - 1997 tax years. The total additional tax proposed by the state amounts to
$1.3 million, which includes interest. The assessment has been delayed pending
an administrative review by the state of the case. The Company believes that the
ultimate outcome of the case will not result in a material impact on the
Company's consolidated results of operations or financial position.
The Company believes that the cash flow generated by its operations and funds
available under its credit line should be sufficient to service its debt, to
satisfy its day-to-day working capital needs and to fund its planned capital
expenditures.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgements and uncertainties, and potentially result in materially
different results under different assumptions and conditions.
Impairment of Long - Lived Assets: When required by circumstances, the Company
evaluates 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 fair value is required.
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. Management believes that it is more likely than not that the
gross deferred tax assets will be realized in the future. 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.
16
ENVIRONMENTAL MATTERS
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing
Plants, have experienced high nitrate levels at the spray field for these
plants. The Company is working with the South Carolina Department of Health and
Environmental Control ("DHEC") to address this issue. In addressing this issue
in the method and within the time frame required by DHEC, a report was submitted
in June 2001 to DHEC detailing four options for dealing with this groundwater
problem. At the date of this filing, DHEC has still not responded to the
Company's proposal. Although there is no assurance that the Company will be
successful and it could face administrative penalties if it is not, the Company
does not currently believe that this matter would have a material adverse impact
on the Company.
On June 11, 2001, DHEC issued a Notice of Violation ("NOV") for three alleged
violations of an air permit for the Company's Delta #2 and Delta #3 Plants. On
June 26, 2001, the Company participated in an enforcement conference with DHEC,
during which DHEC agreed to inspect the plants again on July 24, 2001. On
September 12, 2001, the Company received a proposed Consent Order from DHEC
which requires that: (1) the Company submit to DHEC a construction permit
application for a machine that was installed; (2) the Company comply with all
DHEC regulations regarding permitting; (3) the Company comply with all emission
and fuel content requirements of its operating permit; and (4) the Company pay
to DHEC the amount of $2,200.00. The Company paid this penalty on November 16,
2001 and has abided by the terms of the Consent Order. The Company believes that
the matter is now closed.
On June 30, 2000 the Company sold its Greensboro, North Carolina plant to the
City of Greensboro. The Company had been working with environmental consultants
in assessing groundwater contamination at this site. Because of these studies,
one half of the proceeds from the sale of the plant, consisting of approximately
$400,000, were placed in an interest bearing escrow account to cover expenses
related to this contamination. As of the date of this filing, approximately
$365,000 remains in this escrow account. The Company believes that this balance
is adequate to cover any remaining expenses related to this matter. The Company
recorded the sale net of estimated costs to remediate the property.
On January 10, 2000, the North Carolina Department of Environment and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous substances at a hazardous waste site known as the Glen
Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by
merger of the Company, Park Yarn Mills Company, Inc. ("Park Yarn"), owned the
Site for approximately six (6) years, from approximately 1977 to 1983 (prior to
the time the Company became a subsidiary of Delta Woodside Industries, Inc.) The
Company is aware of no evidence that Park Yarn discharged or deposited any
hazardous substance at the Site or is otherwise a "responsible party" for the
Site. Further, Park Yarn filed bankruptcy and was discharged in 1983. Although
no assurance can be provided, any liability of Park Yarn for the Site may have
been discharged by the bankruptcy order. Accordingly, the Company has denied any
responsibility at the Site, declined to undertake any activities concerning the
Site, and has not provided for any reserves for costs or liabilities
attributable to Park Yarn.
17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
COMMODITY RISK SENSITIVITY
As a part of the Company'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. Under these
contracts, nonperformance by either the buyer or the seller may result in net
cash settlement of the difference between the current market price of cotton and
the contract price. The Company has not utilized the net settlement provision in
the past, and does not anticipate using it in the future. The Company may seek
to fix prices up to 18 months in advance of delivery. 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. At June 29, 2002, a 10% decline in the market price of the cotton
covered by the Company's fixed price contracts would have a negative impact of
approximately $1.5 million on the value of the contracts. At the end of fiscal
2001, a 10% decline in the market price of the Company's fixed price contracts
would have had a negative impact of approximately $2.1 million on the value of
the contracts. The decline in the potential negative impact from 2001 to 2002 is
due principally to current cotton commitments being at significantly lower
average prices than in fiscal 2001.
INTEREST RATE SENSITIVITY
The $50 million secured four-year revolving credit facility expiring in 2004 is
sensitive to changes in interest rates. Interest is based on a spread over LIBOR
or a base rate. An interest rate increase would have a negative impact to the
extent the Company borrows against the revolving credit facility. The impact
would be dependent on the level of borrowings incurred. As of June 29, 2002, an
increase in the interest rate of 1% would have a negative impact of
approximately $114,000.
An interest rate change would not have an impact on the fixed rate ten year
Senior Notes.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------
Report of KPMG LLP F2
Consolidated Balance Sheets as of June 29, 2002 and June 30, 2001 F3
Consolidated Statements of Operations for the fiscal years ended June 29, 2002,
June 30, 2001 and July 1, 2000 F4
Consolidated Statements of Shareholder's Equity for the fiscal years
ended June 29, 2002, June 30, 2001 and July 1, 2000 F5
Consolidated Statements of Cash Flows for the fiscal years ended June 29, 2002,
June 30, 2001 and July 1, 2000 F6
Notes to Consolidated Financial Statements F7
19
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 29, 2002 and June 30, 2001 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 29,
2002. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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. as of June 29, 2002 and June 30, 2001, and the
results of its operations and its cash flows for each of the years in
the three-year period ended June 29, 2002 in conformity with accounting
principles generally accepted in the United States of America.
\s\KPMG LLP
-----------
KPMG LLP
Greenville, South Carolina
July 26, 2002
20
CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands, except share amounts)
June 29, 2002 June 30, 2001
--------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $52 $11,715
Accounts receivable:
Factor and other 49,887 37,621
Due from Affiliates 34
--------------------- ----------------------
49,887 37,655
Less allowances for returns 32 51
--------------------- ----------------------
49,855 37,604
Inventories
Finished goods 7,085 13,241
Work in process 19,878 23,195
Raw materials and supplies 5,784 6,766
--------------------- ----------------------
32,747 43,202
Deferred income taxes 1,347 1,968
Other assets 25 547
--------------------- ----------------------
TOTAL CURRENT ASSETS 84,026 95,036
Assets held for sale 3,141
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements 1,702 1,937
Buildings 32,171 36,634
Machinery and equipment 102,379 118,386
Furniture, fixtures and office equipment 9,599 6,263
Lease improvements 1,030 1,030
Construction in progress 1,025 1,976
--------------------- ----------------------
147,906 166,226
Less accumulated depreciation 77,405 81,195
--------------------- ----------------------
70,501 85,031
DEFERRED LOAN COSTS
less accumulated amortization of $ 5,324
and $4,413 in 2002 and 2001 respectively 769 1,680
--------------------- ----------------------
$158,437 $181,747
===================== ======================
21
CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands, except share amounts)
June 29, 2002 June 30, 2001
------------------ ------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $11,689 $8,571
Revolving credit facility 11,365
Payable to Affiliates 3,321
Accrued employee compensation 1,696 2,339
Accrued and sundry liabilities 18,617 19,856
------------------ ------------------
TOTAL CURRENT LIABILITIES 46,688 30,766
LONG-TERM DEBT 47,819 83,815
DEFERRED INCOME TAXES 9,340 11,186
DEFERRED COMPENSATION 7,271 6,599
SHAREHOLDER'S EQUITY
Common Stock - par value $.01 a share - authorized
3000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Retained earnings(deficit) (4,473) (2,411)
------------------ ------------------
47,319 49,381
COMMITMENTS AND CONTINGENCIES
------------------ ------------------
$158,437 $181,747
================== ==================
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 29, 2002 June 30, 2001 July 1, 2000
---------------- ---------------- -----------------
Net sales to non-affiliates $174,673 $212,960 $249,918
Net sales to affiliated parties 26,593
---------------- ---------------- -----------------
Net sales 174,673 212,960 276,511
Cost of goods sold 165,266 196,692 243,254
---------------- ---------------- -----------------
Gross profit 9,407 16,268 33,257
Selling, general and administrative expenses 11,634 14,609 15,345
Impairment and restructuring expenses 8,683
Other income 476 302 446
---------------- ---------------- -----------------
OPERATING PROFIT (LOSS) (10,434) 1,961 18,358
Other (expense) income:
Interest expense (9,090) (11,064) (16,095)
Interest income 192 547 958
---------------- ---------------- -----------------
(8,898) (10,517) (15,137)
---------------- ---------------- -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (19,332) (8,556) 3,221
Income tax expense (benefit) (7,359) (3,065) 1,280
---------------- ---------------- -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY ITEMS (11,973) (5,491) 1,941
Extraordinary gain (net of taxes) 9,911 1,585 4,659
Loss from operations of discontinued businesses (net of (174)
taxes)
---------------- ---------------- -----------------
NET INCOME (LOSS) $(2,062) $(3,906) $6,426
================ ================ =================
See notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills, Inc.
(In Thousands)
Additional Retained Total
Common Stock Paid-In Earnings Shareholder's
Shares Amount Capital (Deficit) Equity
-------------- ------------- --------------- --------------- -----------------
Balance at July 3, 1999 100 $0 $51,792 $ (2,031) $49,761
Net Income 6,426 6,426
-------------- ------------- --------------- --------------- -----------------
Balance at July 1, 2000 100 0 51,792 4,395 56,187
Net Loss (3,906) (3,906)
Cash dividends paid (2,900) (2,900)
-------------- ------------- --------------- --------------- -----------------
Balance at June 30, 2001 100 0 51,792 (2,411) 49,381
Net Loss (2,062) (2,062)
-------------- ------------- --------------- --------------- -----------------
Balance at June 29, 2002 100 $0 $51,792 $ (4,473) $47,319
============== ============= =============== =============== =================
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 29, 2002 June 30, 2001 July 1, 2000
------------------ ------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $ (2,062) $ (3,906) $6,426
Adjustments to reconcile net income(loss) to net
cash provided by operating activities:
Depreciation 9,174 10,886 13,408
Amortization 370 424 607
Decrease in deferred loan costs 541 784 1,312
Gain on early retirement of debt (16,613) (3,242) (8,307)
Discontinued operations 1,359
Provision impairment and restructuring 8,683
Change in deferred income taxes (1,225) (1,888) (3,339)
Losses (gains) on disposition of property
and equipment (356) (342) 138
Changes in operating assets and liabilities:
Accounts receivable (12,251) 33,579 11,064
Inventories 10,455 717 1,548
Other current assets 522 (80)
Deferred compensation 672 786 (227)
Accounts payable and accrued expenses 4,512 (8,668) 2,308
------------------ ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,422 29,050 26,297
INVESTING ACTIVITIES Property, plant and equipment:
Purchases (6,496) (5,151) (4,340)
Proceeds of dispositions 429 450 12,750
Investing activities of discontinued operations 333
------------------ ------------------ ------------------
NET CASH PROVIDED(USED) BY
INVESTING ACTIVITIES (6,067) (4,701) 8,743
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 44,979 3,003 15,000
Repayments on revolving lines of credit (33,614) (3,003) (15,000)
Repurchase and retirement of long term debt (19,383) (28,021) (26,615)
Dividends paid (2,900)
Other (41)
------------------ ------------------ ------------------
NET CASH USED BY FINANCING ACTIVITIES (8,018) (30,921) (26,656)
------------------ ------------------ ------------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (11,663) (6,572) 8,384
Cash and cash equivalents at beginning of year 11,715 18,287 9,903
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $52 $11,715 $18,287
================== ================== ==================
See notes to consolidated financial statements.
25
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 Delta Mills Marketing, Inc. (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. Delta Mills, Inc. and Delta Mills Marketing , Inc.
are wholly-owned subsidiaries of Delta Woodside Industries, Inc. ("DWI"). The
Company's knitted fabrics business, Stevcoknit Fabrics, is presented as a
discontinued operation through its final liquidation in fiscal 2000.
CASH EQUIVALENTS: The Company considers all highly liquid investments having
initial 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 fourteen years, and by accelerated
methods for income tax reporting.
IMPAIRMENT OF LONG-LIVED ASSETS: When required by circumstances, the Company
evaluates 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 fair value is required.
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 the life of
the related debt which is primarily ten years.
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 are
settled 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 it is estimated that the cost of cotton is not recoverable in
future sales of finished goods, the differential is charged to income at that
time. The Company's management has determined that its cotton buying contracts
meet the criteria for exclusion under the normal purchases and normal sales
exemption of SFAS 133 and its related amendments and are not considered
derivatives.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK OPTIONS: The Company participates in the Delta Woodside Industries Inc.
Stock Option Plan. The Company applies the intrinsic value-based method of
accounting for these stock options, in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. Under this method, compensation
expense is recorded on the date of the grant only if the current market price of
the underlying stock exceeded the exercise price. The Company provides pro forma
disclosures of stock option compensation recorded on a fair value basis in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS: In April 2002, the FASB issued Statement No.
145, "Rescission of FASB Statements Nos. 4 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections". Among other things, Statement No. 145,
through the rescission of Statement No. 4, will no longer require extraordinary
item treatment for gains and losses from the extinguishment of debt, unless the
debt extinguishment meets the unusual in nature and infrequency of occurrence
criteria established in APB 30. The Statement is effective for fiscal years
beginning after May 15, 2002 and will require the reclassification of prior
period items that do not meet the extraordinary item classification criteria in
APB 30. Upon adoption, the Company will reclassify all extraordinary gains
recognized for the early extinguishment of debt as a component of operating
income for all financial statement periods presented.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United Sates of America require 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 the Saturday closest to June 30. Fiscal years 2002,
2001 and 2000 each consisted of 52 weeks.
NOTE B--ACCOUNTS RECEIVABLE
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Credit LLC (the Factor) under a factor agreement. The assignment
of these receivables is primarily without recourse, provided that customer
orders are approved by the Factor prior to shipment of goods, up to a maximum
for each individual account. The assigned trade accounts receivables are
recorded on the Company's books at full value and represent amounts due to the
Company from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Company's books as
incurred as a part of General and Administrative Expense.
For fiscal year 2002, the Company had two customers, Levi Strauss and V.F.
Corporation, that each exceeded 10% of consolidated net sales. The Company's
sales to these customers totaled $63 million in fiscal 2002. For fiscal year
2001 and fiscal year 2000, the Company had three customers, Levi Strauss, Haggar
Corp., and V.F. Corporation, that each exceeded 10% of consolidated net sales.
The Company's aggregate sales to these customers were $90 million and $109
million for fiscal 2001 and for fiscal 2000, respectively. The loss of any of
these accounts could have a material adverse effect on the results of the
Company.
The Company's accounts receivable are due from many companies that produce
apparel products located throughout the United States. The many companies
represented in the Company's accounts receivable limit to a certain extent the
concentration of credit risk.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $100
million revolving line of credit was replaced by a new credit facility on March
31, 2000. This credit facility was amended on March 31, 2002. The facility is
secured by the accounts receivable, inventory and capital stock of the Company.
The interest rate on the credit facility is based on a spread over either LIBOR
or a base rate. On June 29, 2002, borrowings under this facility were $11.4
million and approximately $24.3 million was still available for borrowing.
The credit facility contains restrictive covenants that, among other things,
until the March 31, 2002 amendments described below, required that the Delta
Mills' Maximum Leverage Ratio, as defined therein, not exceed specified
amounts. The agreement also restricts additional indebtedness, dividends, and
capital expenditures. The payment of dividends with respect to the Company's
stock is permitted if there is no event of default and there is at least $1 of
availability under the facility. An amendment dated October 5, 2001
substantially increased the permitted leverage ratio for the four quarters
ending with the third quarter of fiscal year 2002, and slightly reduced the
permitted leverage ratio for the fourth fiscal quarter of fiscal year 2002 and
subsequent quarters. This amendment also extended the term of the Revolving
Credit Agreement to March 31, 2004, included the lender's consent to the sale
of Delta Mills' Furman Plant, which was announced August 22, 2001, and allowed
Delta Mills to exclude from the calculation of the leverage ratio the closing
costs and continuing costs associated with the closing of its Furman Plant.
Effective March 31, 2002, Delta Mills amended its $50 million credit facility,
eliminating the permitted leverage ratio covenant and adding a $12.5 million
minimum availability requirement. Under the minimum availability requirement,
Delta Mills' availability for borrowings cannot exceed $37.5 million. During
the year ended June 29, 2002, the Company did not pay any dividends to Delta
Woodside Industries, Inc.
At June 29, 2002 the carrying value of the Senior Notes was $47,819,000 and the
fair value, based on quoted market prices was $25,104,975. The fair value of the
revolving credit facility approximates its carrying value as of June 29, 2002
due to the variable interest rate provision of the facility.
Total interest expense incurred by the Company was $9,090,000, $11,064,000 and
$16,095,000 for fiscal years 2002, 2001, and 2000, respectively. Total interest
paid during fiscal years 2002, 2001, and 2000 was $10,252,000, $12,099,000 and
$16,343,000, respectively.
Rent expense relating to operating leases was approximately $1,733,000,
$3,165,000 and $ 3,507,000 for fiscal years 2002, 2001 and 2000 respectively.
Aggregate principal maturities of all long-term debt and minimum payments under
operating leases are as follows:
Long-term Operating
Fiscal Year Debt Leases
----------- ---- ------
2003 414,000
2004 414,000
2005 244,000
2006 74,000
2007 74,000
Later Years 47,819,000 110,000
------------ --------------
$47,819,000 $1,330,000
============ ==============
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D--EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries, Inc. 40l(k) Plan.
During fiscal 2002, 2001 and 2000, the Company contributed $574,000, $411,000,
and $453,000, respectively, to the 401(k) plan to match employee contributions.
The Company formerly participated in a 501(c)(9) trust, the Delta Woodside
Employee Benefit Plan and Trust ("Trust"). The Trust collected both employer and
employee contributions from the Company and made disbursements for health claims
and other qualified benefits. The Company made no contributions to the trust in
either fiscal 2001 or fiscal 2000. On June 13, 2001, the trust was terminated.
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 29, 2002 and
June 30, 2001, the Company's liability was $7,271,000 and $6,599,000
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 $198,000,
$0, and $176,000 for fiscal years 2002, 2001 and 2000, respectively. Under the
Stock Option Plan, the Company recognized expense of $0, $0 and $190,000 for
fiscal years 2002, 2001 and 2000, respectively. Had the Company determined
compensation cost based on the fair value at the grant date for these stock
options, pursuant to SFAS No. 123, the Company's net loss would have increased
by approximately $517,000 in each of 2002 and 2001. Net income would have been
approximately the same as that reported by the Company for fiscal 2000. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
2002 2001 2000
---- ---- ----
Risk free interest rate N/A 5.0% N/A
Expected lives for options N/A 10 years N/A
Expected volatility N/A 62% N/A
Dividend yield N/A N/A N/A
Fair value per option at grant date N/A $4.00 N/A
NOTE E--AFFILIATED PARTY TRANSACTIONS
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:
2002 2001 2000
------ ---- ----
Textile and yarn sales $0 $0 $26,593,000
Corporate services expense 2,264,000
Income tax payments 154,000
Payroll taxes, insurance and employee related expenses 20,673,000
29
NOTE E--AFFILIATED PARTY TRANSACTIONS - CONTINUED
From March 29, 1997 until mid-May 2000, the Company sold textiles and yarn to
the affiliate at prices which approximated market. This arrangement was
terminated in the fiscal 2000 fourth quarter when the Company sold its Rainsford
yarn facility and associated operating assets to the affiliate for $13.6 million
which approximated net book value.
Corporate services before fiscal 2001 included management, treasury, computer,
purchasing, benefits, payroll, auditing, accounting and tax services. For these
services, DWI charged actual cost based on relative usage and other factors.
Actual cost was charged for payroll taxes, insurance and employee related
expenses, which were managed by DWI as a corporate service.
The Company is the only operating division of DWI. Actual corporate service
costs for management, treasury, auditing, and shareholder relations are charged
to the Company as incurred. Receivable or payable to affiliates bears no
interest and includes amounts payable to or receivable from DWI for current
activity as described.
NOTE F--DISCONTINUED OPERATIONS
On March 3, 1998, the Company made the decision to close its knitted fabric
operation, Stevcoknit Fabrics. Accordingly operating results for this segment
were reclassified and reported as discontinued operations.
In connection with the decision to discontinue this business, the Company, in
fiscal 1998, recognized an estimated loss on disposal of discontinued operations
of $21 million including an income tax benefit of $14 million. In fiscal 1999,
the Company decreased the estimate of the after-tax cost to discontinue these
businesses and recognized after-tax credits of $3.8 million. Proceeds from the
liquidation of this division were used to make capital expenditures and to
reduce indebtedness.
Summarized results of operations for the discontinued business are as follows:
(in thousands) June 29, 2002 June 30, 2001 July 1, 2000
------------- ------------- ------------
Net Sales $ 0 $ 0 $ 0
Cost and expense 276
(Loss) before income tax (276)
Income tax benefit 102
----------
(Loss) from operations of
discontinued operations $ 0 $ 0 $ (174)
========== ========= ==========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 $3.1
million which will be reported in the fiscal 2002 consolidated Federal income
tax return with its parent, DWI. The consolidated tax group had regular taxable
income of $2.9 million and alternative minimum taxable income (AMT) of $1.8
million. The Federal income tax obligation or refund that is allocated to the
Company is determined as if the Company was 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.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement amounts and amounts reported for income tax
purposes. The company anticipates that the reversal of existing taxable
temporary differences will provide sufficient taxable income to realize the
remaining deferred tax assets. Accordingly, no valuation allowance has been
provided for 2002 or 2001.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2002 2001
Assets:
Deferred compensation $ 2,799,000 $ 2,542,000
Accrued and sundry liabilities 1,696,000 1,688,000
Net operating loss carryforwards 749,000 2,077,000
Inventory 589,000
Other 14,000 20,000
-------------- --------------
Subtotal 5,258,000 6,916,000
Valuation allowance
Deferred tax assets 5,258,000 6,916,000
Liabilities:
Depreciation 12,888,000 15,805,000
Inventory 363,000
Other 329,000
--------------
Deferred tax liabilities 13,251,000 16,134,000
------------- -------------
Net deferred tax liabilities ($ 7,993,000) ($ 9,218,000)
============== =============
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G--INCOME TAXES - CONTINUED
Significant components of the provision for income tax expense (benefit ) are as
follows:
2002 2001 2000
Current:
Federal income taxes $4,190,000
State income taxes 9,000 78,000 429,000
----------------------------------------------------------
Total current 9,000 78,000 4,619,000
Deferred:
Federal income taxes (benefits) (6,631,000) (2,783,000) (2,871,000)
State income taxes (benefits) (737,000) (360,000) (468,000)
----------------------------------------------------------
Total deferred (7,368,000) (3,143,000) (3,339,000)
----------------------------------------------------------
Total income tax expense (benefit) for
continuing operations (7,359,000) (3,065,000) 1,280,000
Total income tax expense (benefit):
Extraordinary Items 6,161,000 873,000 2,755,000
Discontinued Operations (103,000)
----------------------------------------------------------
Total income tax expense (benefit) ($1,198,000) ($2,192,000) $3,932,000
==========================================================
The reconciliation of total income tax expense (benefit) related to continuing
operations computed at the Federal statutory tax rates is as follows:
2002 2001 2000
----------------- ---------------- -------------
Income tax expense (benefit) at statutory rates $ (6,767,000) $ (2,995,000) $ 1,127,000
State tax expense (benefit), net of federal benefit (474,000) (230,000) 190,000
Other (118,000) 160,000 (37,000)
----------------- ---------------- -------------
$ (7,359,000) $ (3,065,000) $ 1,280,000
================= ================ =============
The Company made tax payments of $0, $48,000 and $154,000 during fiscal years
2002, 2001 and 2000, respectively.
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 was entered into, after giving effect to the
incurrence 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.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY - CONTINUED
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 29, 2002 JUNE 30, 2001
------------- -------------
Current assets 33 142
Noncurrent assets 61 88
Current Liabilities 1,902 2,036
Noncurrent liabilities 978 660
Stockholders' deficit (2,786) (2,466)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Twelve Months Ended
-------------------
June 29, 2002 June 30, 2001 July 1, 2000
------------- ------------- ------------
Net sales -intercompany commissions $3,930 $3,602 $4,106
Cost and expenses 4,250 4,155 4,744
Net loss (320) (553) (638)
NOTE I--COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 30, 2001 minimum
payments under these contracts with non-cancelable contract terms were
approximately $14.9 million.
During fiscal year 2002, the Company plans to spend approximately $ 8 million
for capital improvements and to maintain existing facilities.
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing
Plants, have experienced high nitrate levels at the spray field for these
plants. The Company is working with the South Carolina Department of Health and
Environmental Control ("DHEC") to address this issue. In addressing this issue
in the method and within the time frame required by DHEC, a report was submitted
in June 2001 to DHEC detailing four options for dealing with this groundwater
problem. At the date of this filing, DHEC has still not responded to the
Company's proposal. Although there is no assurance that the Company will be
successful and it could face administrative penalties if it is not, the Company
does not currently believe that this matter would have a material adverse impact
on the Company.
On June 30, 2000 the Company sold its Greensboro, North Carolina plant to the
City of Greensboro. The Company had been working with environmental consultants
in assessing groundwater contamination at this site. Because of these studies,
one half of the proceeds from the sale of the plant, consisting of approximately
$400,000, were placed in an interest bearing escrow account to cover expenses
related to this contamination. As of the date of this filing, approximately
$365,000 remains in this escrow account. The Company believes that this balance
is adequate to cover any remaining expenses related to this matter. The Company
recorded the sale net of estimated costs to remediate the property.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I--COMMITMENTS AND CONTINGENCIES - CONTINUED
On January 10, 2000, the North Carolina Department of Environment and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous substances at a hazardous waste site known as the Glen
Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by
merger of the Company, Park Yarn Mills Company, Inc. ("Park Yarn") owned the
Site for approximately six (6) years, from approximately 1977 to 1983 (prior to
the time the Company became a subsidiary of Delta Woodside Industries, Inc.)
Delta Mills, Inc. is aware of no evidence that Park Yarn discharged or deposited
any hazardous substance at the Site or is otherwise a "responsible party" for
the Site. Further, Park Yarn filed bankruptcy and was discharged in 1983.
Although no assurance can be provided, any liability of Park Yarn for the Site
may have been discharged by the bankruptcy order. Accordingly, the Company has
denied any responsibility at the Site, declined to undertake any activities
concerning the Site, and has not provided for any reserves for costs or
liabilities attributable to Park Yarn.
From time to time the Company is a defendant in other legal actions involving
claims arising in the normal course of business, including product liability
claims. The Company believes that, as a result of legal defenses, insurance
arrangements and indemnification provisions with parties believed to be
financially capable, none of these actions should have a material effect on its
operations or financial condition.
NOTE J--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 29, 2002 and June 30, 2001
2002 Quarter Ended
(In thousands) September 29 December 29 March 30 June 29
------------ ----------- -------- -------
Net Sales $36,977 $44,140 $41,190 $52,366
Gross profit 1,074 1,708 1,062 5,558
Income (loss) from continuing operations
Before extraordinary items (8,153) (2,402) (2,772) 1,354
Extraordinary gain net of taxes 325 9,586
Net income (loss) (8,153) (2,402) (2,447) 10,940
2001 Quarter Ended
(In thousands) September 30 December 30 March 31 June 30
------------ ----------- -------- -------
Net Sales $63,199 $59,697 $52,991 $37,073
Gross profit (loss) 9,274 5,917 2,196 (1,119)
Income (loss) from continuing operations
Before extraordinary items 2,334 (149) (2,297) (5,379)
Extraordinary gain net of taxes 639 946
Net income (loss) 2,973 797 (2,297) (5,379)
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K--EXTRAORDINARY ITEMS
During fiscal 2002, the Company purchased $35,996,000 face amount of its 9.625%
Senior Notes for $19,383,000, including expenses of approximately $500,000. The
Company recognized an extraordinary gain of $9,911,000 million after tax
expense of $6,161,000 and the write off of deferred loan costs of $541,000.
During the fiscal year 2001, the Company purchased $31,263,000 face amount of
its 9.625% Senior Notes for $28,021,000. The Company recognized an
extraordinary gain of 1,585,000 after taxes of $873,000 and the write off of
deferred loan costs of $784,000. During the fiscal year 2000, the Company
purchased $34,922,000 face amount of its 9.625% Senior Notes for $26,615,000.
The Company recognized an extraordinary gain of $4,659,000 after a tax expense
of $2,755,000 and write-off of deferred loan costs of $893,000.
NOTE L-- RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 29, 2002, the Company took an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. Pursuant to SFAS
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", the
Company recorded an $8.2 million non-cash asset write-down to reflect the
property and equipment at the Furman Plant at its estimated fair value, less
selling costs. The carrying amount of these assets was reduced to approximately
$3,923,000. The balance of the charge was approximately $.5 million of accrued
expenses for involuntary termination costs associated with the 122 employees
terminated as a result of the plant closing. Production at the Furman facility
ceased on October 21, 2001 and the Company is in the process of liquidating the
assets associated with this facility.. The Company expects to complete the sale
of these assets in fiscal year 2003.
35
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
- ------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
36
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 following consolidated financial statements of Delta Mills, Inc. as of the
Year ended June 29, 2002
Consolidated balance sheets--June 29, 2002 and June 30, 2001.
Consolidated statements of operations--Years ended June 29, 2002, June
30, 2001, and July 1,2000.
Consolidated statements of shareholder's equity-- Years ended June 29,
2002, June 30, 2001, and July 1,2000.
Consolidated statements of cash flows-- Years ended June 29, 2002,
June 30, 2001, and July 1,2000.
Notes to consolidated financial statements.
The following consolidated financial statement schedules of Delta Woodside
Industries, Inc. are included in Item 14(d):
Schedule II -- Valuation and qualifying accounts
(3) Listing of Exhibits:
-------------------
3.1 Restated and Amended Certificate of Incorporation of Delta
Mills, Inc.: Incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-4 of the Company and
Delta Mills Marketing, Inc., File
No. 333-37617 (the "S-4").
3.2 Bylaws of Delta Mills, Inc.: Incorporated by reference to
Exhibit 3.2 to the S-4.
4.1 See Exhibits 3.1 and 3.2.
4.2 Indenture, dated as of August 25, 1997, by and among the
Company, Delta Mills Marketing, Inc. and The Bank of New York,
as Trustee, with respect to the Company's Series A and Series
B 9-5/8% Senior Notes due 2007, $150,000,000 in aggregate
principal amount, together with forms of certain related
instruments, agreements and documents: Incorporated by
reference to Exhibit 4.2.6 to the Current Report on Form 8-K/A
of Delta Woodside Industries, Inc. with the date of September
25, 1997 (the "DWI 8-K/A").*
4.3.1 Revolving Credit and Security Agreement, dated as of March 31,
2000, between GMAC Commercial Credit LLC as agent and lender,
and Delta Mills, Inc. as borrower: Incorporated by reference
to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated March 31, 2000 and filed with the Securities and
Exchange Commission on April 13, 2000
4.3.1.1 Letter, dated July 28, 2000, amending Revolving Credit and
Security Agreement: Incorporated by reference to Exhibit
4.3.1.1 to Form 10-K of Delta Woodside Industries, Inc. for
the fiscal year ended June 30, 2001 (the "DWI 2000 10-K").*
4.3.2 Guarantee, dated as of March 31, 2000, of Delta Mills
Marketing, Inc. in favor of GMAC Commercial Credit LLC as
agent: Incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated March 31, 2000 and
filed with the Securities and Exchange Commission on April 13,
2000.
4.3.3 General Security Agreement, dated as of March 31, 2000,
between Delta Mills Marketing, Inc. and GMAC Commercial Credit
LLC as agent: Incorporated by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K dated March 31, 2000 and
filed with the Securities and Exchange Commission on April 13,
2000.
37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ---------------------------------------------------------------
FORM 8-K - CONTINUED
- --------------------
4.3.4 Stock Pledge and Security Agreement, dated as of March 31,
2000, by Alchem Capital Corporation in favor of GMAC
Commercial Credit LLC as agent: Incorporated by reference to
Exhibit 99.4 to the Company's Current Report on Form 8-K dated
March 31, 2000 and filed with the Securities and Exchange
Commission on April 13, 2000.
4.3.5 Stock Pledge and Security Agreement, dated as of March 31,
2000, by Delta Mills, Inc. in favor of GMAC Commercial Credit
LLC as agent: Incorporated by reference to Exhibit 99.5 to the
Company's Current Report on Form 8-K dated March 31, 2000 and
filed with the Securities and Exchange Commission on April 13,
2000
4.3.6 Stock Pledge and Security Agreement, dated as of May 11, 2000,
by Delta Woodside Industries, Inc. in favor of GMAC Commercial
Credit LLC as agent: Incorporated by reference to Exhibit
4.3.6 to the DWI 2000 10-K.*
4.4 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.
5.1** Delta Woodside Deferred Compensation Plan for Key Managers,
Amended and Restated Effective June 30, 2000: Incorporated by
reference to Exhibit 10.2 to the Delta Woodside Industries,
Inc. Report on Form 10-K dated July 1, 2000 and filed with the
Securities and Exchange Commission on September 29, 2000. *
5.2.1** Delta Woodside Industries, Inc. Incentive Stock Award
Plan effective July 1, 1990: Incorporated by reference to
Exhibit 10.1 to the Form 10-Q of Delta Woodside Industries,
Inc. for the fiscal quarter ended March 31, 1990.*
5.2.2** 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 Delta Woodside Industries, Inc. for
the quarterly period ended December 30, 1995 (the "DWI 12/95
10-Q").*
5.2.3** 1997 Amendment to the Incentive Stock Award Plan effective
as of November 6, 1997: Incorporated by reference to Exhibit
99.1 to the Registration Statement on Form S-8 of Delta
Woodside Industries, Inc. (File No. 333-45771).
5.3.1** Delta Woodside Industries, Inc. Stock Option Plan effective as
of July 1, 1990: Incorporated by reference to Exhibit 10.11
to the Form 10-K of Delta Woodside Industries, Inc.for the
fiscal year ended June 30, 1990.*
5.3.2** Amendment No. 1 to Stock Option Plan: Incorporated by
reference to Exhibit 10.1 to the Form 10-Q of Delta Woodside
Industries, Inc. for the quarterly period ended December 29,
1990 (the "DWI 12/90 10-Q").*
5.3.3** Amendment to Stock Option Plan: Incorporated by reference to
Exhibit 10.9.2 to the Form 10-K of Delta Woodside Industries,
Inc. for the fiscal year ended June 29, 1991 (the "DWI 1991
10-K").*
5.3.4** 1995 Amendment to Stock Option Plan effective as of November
9, 1995: Incorporated by reference to Exhibit 10.4.4 to the
DWI 12/95 10-Q.*
5.3.5** 1997 Amendment to Stock Option Plan effective as of November
6, 1997: Incorporated by reference to Exhibit 99.1 to the
Registration Statement on Form S-8 of Delta Woodside
Industries, Inc. (File No. 333-45767).
5.3.6** Amendment to Stock Option Plan adopted April 25, 2000:
Incorporated by reference to Exhibit 10.4.6 to Form 10-Q of
Delta Woodside Industries, Inc. for the fiscal quarter ended
April 1, 2000.*
5.3.7** Amendments to Stock Option Plan: Incorporated by reference to
Exhibit 10.4.7 to the DWI 2000 10-K.*
5.4** Form of Amendment of Certain Rights and Benefits Relating to
Stock Options and Deferred Compensation by and between the
Company and certain pre-spin-off plan participants:
Incorporated by reference to Exhibit 10.7 to the DWI 2000
10-K.*
38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
- --------------------------------------------------------------------
8-K - CONTINUED
- ---------------
5.4.1 List of directors and officers of the Company who signed the
document described in Exhibit 10.7: Incorporated by reference
to Exhibit 10.7.1 to DWI 2000 10-K.*
5.4.2** Form of Amendment of Stock Options by and between Delta
Woodside Industries, Inc. and certain pre-spin-off plan
participants. Incorporated by reference to Exhibit 10.7.2 to
DWI 2000 10-K.*
5.5.1** Directors Stock Acquisition Plan: Incorporated by reference to
Exhibit 10.14 to the DWI 1991 10-K.*
5.5.2** Amendment to Directors Stock Acquisition Plan, dated April
30, 1992: Incorporated by reference to Exhibit 10.12.2 to the
DWI 1992 10-K.*
5.6** 2000 Stock Option Plan of Delta Woodside Industries, Inc.:
Incorporated by reference to Exhibit 10.10 to the DWI 2000
10-K.*
5.6.1 Amendment of 2000 stock option plan of Delta Woodside
Industries, Inc: Incorporated by reference to Item 6(a) of the
Delta Woodside Industries, Inc. report on Form 10-Q for the
quarter ended September 30, 2000 and filed with the Securities
and Exchange Commission on November 14, 2000.
5.7** 2000 Incentive Stock Award Plan of Delta Woodside Industries,
Inc.: Incorporated by reference to Exhibit 10.11 to the DWI
2000 10-K.*
5.8** Letter dated April 22, 1999 to Robert W. Humphreys:
Incorporated by reference to Exhibit 10.12.1 to the DWI 1999
10-K.*
5.9** Letter dated June 28, 2000 to William F.Garrett: Incorporated
by reference to Exhibit 10.l4 to the DWI 2000 10-K.*
5.10 See Exhibits 4.2, 4.3.1, 4.3.2, 4.3.3, 4.3.4, 4.3.5 and 4.3.6.
23 Report on Schedule by Independent Auditors.
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by William F. Garrett, dated September
27, 2002.
99.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, signed by William H. Hardman, dated September 27,
2002.
* All reports previously filed with the Commission by Delta
Woodside Industries, Inc. pursuant to the Exchange Act and
rules and regulations promulgated thereunder, exhibits of
which are incorporated by reference into this Report, were
filed under Commission File No. 1-10095.
** This is a management contract or compensatory plan or
arrangement.
The registrant agrees to furnish supplementally to the Securities and
Exchange Commission a copy of any omitted schedule or exhibit to any of
the above filed exhibits upon request of the Commission.
(b) Reports on Form 8-K
--------------------
No reports on Form 8-K were filed during the fourth quarter of
fiscal 2002.
(c) Exhibits
The response to this portion of Item 14 is incorporated by
reference from Item 14(a)(3) above.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a
separate section of this report.
39
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.
(Registrant)
September 27, 2002 By: /s/ William F. Garrett
- -------------------------------------- ----------------------------
Date William F. Garrett
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/ E. Erwin Maddrey, II 9/27/2002 /s/ William F. Garrett 9/27/2002
- ------------------------------------- ------------ -------------------------------------------------------- ------------
E. Erwin Maddrey, II Date William F. Garrett Date
Director President, Chief Executive Officer and Director
/s/ Buck A. Mickel 9/27/2002 /s/ William H. Hardman, Jr. 9/27/2002
- ------------------------------------- ------------ -------------------------------------------------------- ------------
Buck A. Mickel Date William H. Hardman, Jr. Date
Director Vice President, Treasurer, and Chief Financial Officer
/s/ Donald C. Walker 9/27/2002
-------------------------------------------------------- ------------
Donald C. Walker Date
Vice President, Assistant Secretary, and Controller
40
CERTIFICATIONS
- --------------
I, William F. Garrett, the President and Chief Executive Officer of Delta Mills,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Delta Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 /s/ William F. Garrett
---------------------- ------------------------------
William F. Garrett
President and Chief Executive Officer
I, William H. Hardman, Jr., the Vice President, Treasurer and Chief Financial
Officer of Delta Mills, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Delta Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 /s/ William H. Hardman, Jr.
--------------------- ----------------------------------
William H. Hardman, Jr.
Vice President, Treasurer and
Chief Financial Officer
41
EXHIBIT INDEX
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
42
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 Charged to Costs Charged to Other Describe of Period
and Expenses Accounts-Describe
- ------------------------------------------------------------------------------------------------------------------------------------
Deducted from asset accounts
Allowance for Returns:
Year ended June 29, 2002 $ 51,000 $1,795,000 (1) ($1,814,000) (2) $32,000
=============== ===================== ================== ================
Year ended June 30, 2001 $173,000 $2,998,000 (1) ($3,222,000) (2) $51,000
=============== ===================== ================== ================
Year ended July 1, 2000 $291,000 $4,472,000 (1) ($4,590,000) (2) $173,000
=============== ===================== ================== ================
NOTES:
1) The change in the reserve for returns and allowances is charged to income as
a reduction of sales.
2) Deductions represent customer returns and allowances during the period.
F-2