UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
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 333-376-17
DELTA MILLS, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
P.O. 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)
(Not Applicable)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act ). Yes [ ] No [ X ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value--
100 shares as of May 12, 2003.
DELTA MILLS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 29, 2003 and June 29, 2002 3
Condensed consolidated statements of operations--
Three and nine months ended March 29, 2003 and March 30, 2002 4
Condensed consolidated statements of cash flows--
Nine months ended March 29, 2003 and March 30, 2002 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
CERTIFICATIONS 16-26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
DELTA MILLS, INC. (IN THOUSANDS, EXCEPT SHARE AMOUNTS) MARCH 29, 2003 JUNE 29, 2002
---------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 642 $ 52
Accounts receivable:
Factor and other 45,233 49,887
Less allowances for returns 28 32
---------------------- ----------------------
45,205 49,855
Inventories
Finished goods 5,597 7,085
Work in process 24,355 19,878
Raw materials and supplies 8,228 5,784
---------------------- ----------------------
38,180 32,747
Deferred income taxes 1,346 1,347
Other assets 328 25
---------------------- ----------------------
TOTAL CURRENT ASSETS 85,701 84,026
Assets held for sale 3,141 3,141
PROPERTY, PLANT AND EQUIPMENT, at cost 149,768 147,906
Less accumulated depreciation 81,869 77,405
---------------------- ----------------------
67,899 70,501
DEFERRED LOAN COSTS AND OTHER ASSETS 668 769
---------------------- ----------------------
$ 157,409 $ 158,437
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 11,970 $ 11,689
Revolving credit facility 13,403 11,365
Payable to Affiliates 3,480 3,321
Accrued employee compensation 1,364 1,696
Accrued and sundry liabilities 17,845 18,621
---------------------- ----------------------
TOTAL CURRENT LIABILITIES 48,062 46,692
LONG-TERM DEBT 44,739 47,819
DEFERRED INCOME TAXES 9,283 9,340
DEFERRED COMPENSATION 7,381 7,267
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized
3,000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Retained earnings(deficit) (3,848) (4,473)
---------------------- ----------------------
47,944 47,319
COMMITMENTS AND CONTINGENCIES
---------------------- ----------------------
$ 157,409 $ 158,437
====================== ======================
See notes to consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills Inc.
(In Thousands)
3 Mths Ended 3 Mths Ended 9 Mths Ended 9 Mths Ended
March 29, March 30, March 29, March 30,
2003 2002 2003 2002
----------------- ---------------- ---------------- -----------------
Net sales $ 46,489 $ 41,190 $ 128,521 $ 122,307
Cost of goods sold 43,649 40,128 116,441 118,458
----------------- ---------------- ---------------- -----------------
Gross profit 2,840 1,062 12,080 3,849
Selling, general and administrative expenses 2,969 3,033 8,430 8,496
Impairment and restructuring expenses 398 398 8,683
Other income 48 55 536 86
----------------- ---------------- ---------------- -----------------
OPERATING PROFIT (LOSS) (479) (1,916) 3,788 (13,244)
Other (expense) income:
Interest expense (1,326) (2,403) (4,097) (7,402)
Interest income 51 184
Gain on extinguishment of debt 500 1,303 500
----------------- ---------------- ---------------- -----------------
(1,326) (1,852) (2,794) (6,718)
----------------- ---------------- ---------------- -----------------
INCOME(LOSS) BEFORE
INCOME TAXES (1,805) (3,768) 994 (19,962)
Income tax expense (benefit) (705) (1,321) 369 (6,960)
----------------- ---------------- ---------------- -----------------
NET INCOME (LOSS) $ (1,100) $ (2,447) $ 625 $ (13,002)
================= ================ ================ =================
See notes to consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DELTA MILLS INC.
(IN THOUSANDS)
9 MONTHS ENDED 9 MONTHS ENDED
MARCH 29, MARCH 30,
2003 2002
-------------------- --------------------
OPERATING ACTIVITIES
Net income (loss) $ 625 $ (13,002)
Adjustments to reconcile net income(loss) to net
cash provided by operating activities:
Depreciation 6,874 6,836
Amortization 101 316
Gain on extiguishment of debt (1,303) (500)
Provision for impairment and restructuring 398 8,683
Change in deferred income taxes (56) (7,124)
Gains on disposition of property
and equipment (433)
Deferred compensation 113 513
Changes in operating assets and liabilities (2,148) 1,695
-------------------- --------------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,171 (2,583)
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (4,648) (5,786)
Proceeds of dispositions 807
-------------------- --------------------
NET CASH USED BY
INVESTING ACTIVITIES (3,841) (5,786)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 134,625
Repayments on revolving lines of credit (132,587)
Repurchase and retirement of long term debt (1,778) (500)
-------------------- --------------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 260 (500)
-------------------- --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 590 (8,869)
Cash and cash equivalents at beginning of year 52 11,715
-------------------- --------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 642 $ 2,846
==================== ====================
See notes to consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Delta
Mills, Inc. ("the Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended March 29, 2003 are not necessarily indicative
of the results that may be expected for the year ending June 28, 2003. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 29, 2002.
NOTE B--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (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, if any, interest and certain liquidated
damages, if any, on the Company's Senior 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 and does not comprise a
material portion of the Company's assets or operations. All future subsidiaries
of the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.
The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.
Summarized financial information for the Guarantor is as follows (in thousands):
March 29, 2003 June 29, 2002
-------------- -------------
Current assets $ 42 $ 33
Noncurrent assets 50 61
Current Liabilities 1,981 1,902
Noncurrent liabilities 991 978
Stockholders' deficit ($2,880) ($2,786)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Nine Months Ended
--------------------------------------
March 29, 2003 March 30, 2002
-------------- --------------
Net sales -intercompany commissions $ 2,888 $ 1,996
Cost and expenses 2,982 3,063
Loss from continuing operations (94) (1,067)
Net loss (94) (1,067)
6
NOTE C-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997 the Company issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
March 29, 2003, the outstanding balance of the notes was $44,739,000, a decrease
of $3,080,000 from the balance at June 29, 2002.
On March 20, 2003, the Company's $50 million credit facility with GMAC was
amended. The facility remains a $50 million committed revolving credit facility.
Among other things, the amendment removed the minimum availability requirement
of $12.5 million, added financial covenants for a maximum leverage ratio and a
minimum fixed charge coverage ratio and extended the term of the facility until
March of 2007. The amended credit facility also includes GMAC's consent to the
sale of the Company's Catawba Plant, the closing of which was announced March 5,
2003, and allows the Company to exclude from the calculation of EBITDA (for
purposes of financial covenant ratios) the restructuring charge associated with
the closing of the Catawba Plant. Borrowings under this credit facility are
based on eligible accounts receivable and inventory of the Company. 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. Borrowings under this facility were $13.4 million
and $11.4 million as of March 29, 2003 and June 29, 2002, respectively. As of
March 29, 2003, the revolver availability was approximately $34 million and the
Company was in compliance with all covenants. Management believes the
availability under the Company's credit facility is adequate for the foreseeable
future.
The Company's credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures. The payment of
dividends with respect to Delta Mills, Inc. stock is permitted if there is no
event of default and there is at least $1 of availability under the facility.
During the nine months ended March 29, 2003 and the year ended June 29, 2002,
the Company did not pay any dividends to Delta Woodside Industries, Inc.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance 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 receivable are
recorded on the Company's books at full value and represent amounts due 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.
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES
During the quarter ended March 29, 2003, the Company recorded a restructuring
charge of $0.4 million on a pre-tax basis associated with the closing of its
Catawba facility as announced on March 5, 2003. The charge was recorded pursuant
to SFAS 146, "Accounting for Obligations Associated with Disposal Activities"
and reflected employee termination costs of approximately $354,000.
During the year ended June 29, 2002, the Company recorded 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 $0.5 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 either
liquidating or transferring the assets associated with this facility.
As of March 29, 2003 and June 29, 2002 the Company had $3.1 million in assets
held for sale related to the closing of the Furman plant.
7
NOTE E - GAIN ON EXTINGUISHMENT OF DEBT
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, no longer requires 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 was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes for all financial statement
periods presented. For the nine months ended March 29, 2003, the Company
purchased $3,080,000 face amount of its 9.625% Senior Notes for $1,777,000. The
Company recognized a gain of $1,303,000 as a result of these purchases, which is
also included in income before income taxes in the accompanying statement of
operations.
NOTE F - 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. No compensation cost has been recognized for stock
based compensation in consolidated net income (loss) for the periods presented,
as all options granted under the Delta Woodside Industries Inc. Stock Option
Plan had exercise prices which were equal to the market price of the stock on
the date of the grant. If the Company had determined compensation expense at
fair value, as under SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net loss would have been as follows:
Quarter Ended Quarter Ended
March 29, 2003 March 30, 2002
------------------- ------------------
Net loss, as reported $ (1,100) $ (2,453)
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (79) (84)
------------------- ------------------
Pro forma net loss $ (1,179) $ (2,537)
------------------- ------------------
NOTE G - SUBSEQUENT EVENT
Following the end of its fiscal 2003 third quarter, the Company completed a
"Modified Dutch Auction" tender offer for a portion of its Senior Notes. The
offer commenced on March 5, 2003 and expired on April 2, 2003 as scheduled. As
of the expiration, a total principal amount of $12,798,000 of notes was tendered
by holders of the notes and accepted for payment by the Company. The "Clearing
Price" of $790 per $1,000 principal amount was paid on April 7, 2003 to all
holders who tendered their notes. The Company paid a total of $10,110,420, plus
accrued interest of $123,181, to repurchase notes. To fund this transaction, the
Company used funds borrowed under its revolving credit facility. The Company
expects to record a gain of $2.3 million in the fourth quarter related to this
transaction.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains certain "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such matters as future revenues, future cost savings,
future capital expenditures, business strategy, competitive strengths, goals,
plans, references to future success and other such information are
forward-looking statements. The words "estimate", "project", "anticipate",
"expect", "intend", "believe" and similar expressions are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward-looking statements. These risks and
uncertainties include, among others, changes in the retail demand for apparel
products, the cost of raw materials, competitive conditions in the apparel and
textile industries, 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). 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.
Delta Mills, Inc. ("the Company") sells a broad range of woven, finished apparel
fabric primarily to branded apparel manufacturers and resellers. The Company
also sells camouflage fabric and other fabrics used in apparel sold to the
United States Department of Defense.
Net sales for the three months ended March 29, 2003 were $46.5 million as
compared to $41.2 million in the same quarter of the prior fiscal year, an
increase of 12.9%. Net sales for the nine months ended March 29, 2003 were
$128.5 million an increase of 5.1% over net sales of $122.3 million for the nine
months ended March 30, 2002. The sales increases were primarily increases in
units along with a slight increase in average sales price due to changes in
product mix.
Gross profit was $2.8 million and 6.1% of sales for the third quarter of fiscal
year 2003. This compares to gross profit of $1.1 million and 2.6% of sales in
the prior year third quarter. Gross profit for the nine months ended March 29,
2003 was $12.1 million or 9.4% of sales compared to gross profit of $3.8 million
or 3.1% of sales for the nine months ended March 30, 2002. In both the current
quarter and the nine months ended March 29, 2003, the improvement in gross
profit was the result of lower product costs driven primarily by lower raw
material costs, improved operating schedules, and a shift in product categories
to products that yield higher profit margins. These improvements were partially
offset in the current quarter by dramatically higher energy costs, price
pressure on certain core products, and poor manufacturing efficiencies in the
early part of the quarter associated with changes in product mix.
Selling, general and administrative expense (SG&A) was $3.0 million and 6.4% of
net sales for the third quarter of fiscal year 2003 compared to SG&A of $3.0
million and 7.4% of net sales for the prior year third quarter. SG&A expenses
for the nine months ended March 29, 2003 were $8.4 million and 6.6% of net sales
compared to $8.5 million or 6.9% of net sales for the nine months ended March
30, 2002. The improvement in SG&A as a percent of sales is attributed to
increased sales volume.
The Company reported an operating loss of $0.5 million in the current year third
quarter compared to an operating loss of $2.0 million in the third quarter of
fiscal 2002. For the nine months ended March 29, 2003, the Company reported
operating profit of $3.8 million versus an operating loss of $13.2 million for
the nine months ended March 30, 2002. The operating loss for the current year
quarter included restructuring charges of $0.4 million related to the closing of
the Company's Catawba facility. The operating loss for the previous year nine
month period included asset impairment and restructuring charges of $8.7 million
related to the closing of the Company's Furman facility. Excluding the asset
impairment and restructuring charge during the first nine months of fiscal year
2002, the improvement in operating profit was primarily due to the improvement
in gross profit as discussed above.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Interest expense was $1.3 million for the quarter ended March 29, 2003, compared
to $2.4 million for the prior year quarter. Interest expense for the nine months
ended March 29, 2003 was $4.1 million versus $7.4 million for the nine months
ended March 30, 2002. The reduction in interest expense was primarily due to the
reduction in the balance of the Senior Notes. There was no significant interest
income in either the current or prior year quarters.
Included in other (expense) income for the quarter ended March 30, 2002 was a
$0.5 million gain resulting from the repurchase by the Company of a portion of
its 9.625% Senior Notes. Included in other (expense) income for the nine months
ended March 29, 2003 was a $1.3 million gain also resulting from Senior Notes
repurchases. There was no similar income or expense reported in this category in
the current year quarter ending March 29, 2003.
The income tax benefit for the quarter was $0.7 million. This compares to an
income tax benefit of $1.3 million in the previous year quarter. For the nine
months ended March 29, 2003 income tax expense was $369,000 versus a tax benefit
of $7.0 million for the nine months ended March 30, 2002. The effective tax rate
for the three months and nine months ended March 29, 2003 was approximately
38.5%.
The Company reported a net loss of $1.1 million for the quarter ended March 29,
2003 compared to a net loss of $2.4 million for the quarter ended March 30,
2002. Net income for the nine months ended March 29, 2003 was $0.6 million
compared to a net loss of $13.0 million for the previous year's nine months
ending March 30, 2002. Net income for the current nine month period included a
gain of $0.8 million on an after tax basis from the repurchase by the Company of
a portion of its 9.625% Senior Notes. The net loss for the nine months ended
March 30, 2002 included asset impairment and restructuring costs associated with
closed facilities of $5.6 million on an after tax basis and a gain of $0.3
million on an after tax basis from the Company's repurchase of a portion of its
9.625% Senior Notes.
For the nine months ended March 29, 2003, the Company generated $4.2 million in
cash from operations. The principal uses of cash were capital expenditures of
$3.8 million, net of $0.8 million in proceeds from the disposal of assets, and
$1.8 million for the retirement of debt. The outstanding borrowings under the
GMAC revolver increased $2.0 million and cash increased $0.6 million for the
nine months ended March 29, 2003. The Company was in compliance with all
covenants at the end of the quarter. The Company believes that the cash flow
generated by its operations combined with the availability on its revolving
credit facility will be sufficient to service its debt, to satisfy its day to
day working capital requirements and to fund its planned capital expenditures.
On November 6, 2002, the Company announced that it had started a major capital
project to modernize its Delta 3 cotton finishing plant in Wallace SC. The
Company expects that the first phase of this project will be complete by June of
2003. During fiscal years 2004 and 2005, the Company plans additional capital
expenditures for this project to make the finishing facility better prepared for
growth and improved product quality. The cost of this project makes up the
majority of the approximately $7.5 million in capital expenditures expected for
fiscal year 2003 and the majority of the approximately $8.0 million planned for
capital expenditures in each of fiscal years 2004 and 2005.
On August 25, 1997 Delta Mills issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
March 29, 2003, the outstanding balance of the notes was $44,739,000, a decrease
of $3,080,000 from the balance at June 29, 2002.
Following the end of its fiscal 2003 third quarter, the Company completed a
"Modified Dutch Auction" tender offer for a portion of its Senior Notes. The
offer commenced on March 5, 2003 and expired on April 2, 2003 as scheduled. As
of the expiration, a total principal amount of $12,798,000 of notes was tendered
by holders of the notes and accepted for payment by the Company. The "Clearing
Price" of $790 per $1,000 principal amount was paid on April 7, 2003 to all
holders who tendered their notes. The Company paid a total of $10,110,420, plus
accrued interest of $123,181, to repurchase notes. To fund this transaction, the
Company used funds borrowed under its revolving credit facility. The Company
expects to record a gain of $2.3 million in the fourth quarter related to this
transaction.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
On March 20, 2003, the Company's $50 million credit facility with GMAC was
amended. The facility remains a $50 million committed revolving credit facility.
Among other things, the amendment removed the minimum availability requirement
of $12.5 million, added financial covenants for a maximum leverage ratio and a
minimum fixed charge coverage ratio and extended the term of the facility until
March of 2007. The amended credit facility also includes GMAC's consent to the
sale of the Company's Catawba Plant, the closing of which was announced March 5,
2003, and allows the Company to exclude from the calculation of EBITDA (for
purposes of financial covenant ratios) the restructuring charge associated with
the closing of the Catawba Plant. Borrowings under this credit facility are
based on eligible accounts receivable and inventory of the Company. 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. Borrowings under this facility were $13.4 million
and $11.4 million as of March 29, 2003 and June 29, 2002, respectively. As of
March 29, 2003, the revolver availability was approximately $34 million and the
Company was in compliance with all covenants. Management believes the
availability under the Company's credit facility is adequate for the foreseeable
future.
The Company's credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures. The payment of
dividends with respect to Delta Mills, Inc. stock is permitted if there is no
event of default and there is at least $1 of availability under the facility.
During the nine months ended March 29, 2003 and the year ended June 29, 2002,
the Company did not pay any dividends to Delta Woodside Industries, Inc.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance 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 receivable are
recorded on the Company's books at full value and represent amounts due 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.
During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounts to $1.5 million, which includes interest and penalties. The assessment
was delayed pending an administrative review of the case by the State. In
October 2002, the State proposed a settlement in which the Company would have
paid approximately 90% of the assessed amount plus a portion of certain
penalties for the Company's tax years 1994 - 2000. The Company rejected this
offer and continued with its appeal due to management's belief that the State's
legal position is in conflict with established principles of federal
constitutional law. The Company believes that its reserves for any likely
settlement are adequate and any payment in settlement of this matter will not
result in a material impact on the Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
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 Company has
adopted the Statement effective for fiscal 2003. The adoption of this standard
has not materially impacted the Company.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - RECENT ACCOUNTING PRONOUNCEMENTS - 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 has adopted the Statement effective for fiscal 2003. The
adoption of this standard has not materially impacted 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, no longer requires 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 was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". This Statement amends SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock based employee
compensation. In addition, this Statement amends the disclosure requirement of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for interim
periods beginning after December 31, 2002 and are included in the notes to these
condensed consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34" ("Fin 45"). This Interpretation
elaborates on the disclosures to be made by a guarantor about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002 and
are not expected to have a material effect on the Company's financial
statements. The disclosure requirements are effective for financial statements
of interim and annual reporting periods after December 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation and sets forth additional
disclosures about such interests. FIN 46 is effective for the Company's 2004
fiscal year. The adoption of FIN 46 is not expected to have a material effect on
the Company's consolidated financial statements.
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CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments 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: The Company accounts for income taxes under the asset and
liability method in accordance with Financial Accounting Standard 109,
Accounting for Income Taxes ("SFAS 109"). The Company recognizes deferred income
taxes, net of valuation allowances, for the estimated future tax effects of
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their tax bases and net operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Changes in deferred tax
assets and liabilities are recorded in the provision for income taxes. As of
March 29, 2003 and June 29,2002, the Company had approximately $7.9 million in
net deferred tax liabilities.
The Company evaluates on a regular basis the realizability of its deferred tax
assets for each taxable jurisdiction. In making this assessment, management
considers whether it is more likely than not that some portion or all of its
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers all available evidence, both positive and negative, in making this
assessment.
Item 3. 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. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. 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.
As of March 29, 2003, a 10% decline in market price of the Company's fixed price
contracts would have had a negative impact of approximately $1.1 million on the
value of the contracts. As of June 29, 2002, such a 10% decline would have had a
negative impact of $1.5 million. The decline in the potential negative impact
from June 29, 2002 to March 29, 2003 is due principally to a decline in the
quantity of cotton with fixed prices as compared to the previous period.
Interest Rate Sensitivity
The $50 million secured four-year revolving credit facility expiring in 2007 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 March 29, 2003, an
increase in the interest rate of 1% would have a negative impact of
approximately $134,000 annually. As of June 29, 2002, an increase in the
interest rate of 1% would have had a negative impact of approximately $114,000
annually. The increase in the potential negative impact from June 29, 2002 to
March 29, 2003 is due to the increase in borrowings from the facility.
An interest rate change would not have an impact on the payments due under the
fixed rate ten year Senior Notes.
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Item 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures within 90 days of the filing date of this quarterly report, and,
based on their evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that these controls and procedures are effective. There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds*
Item 3. Defaults upon Senior Securities*
Item 4. Submission of Matters to a Vote of Security Holders*
Item 5. Other Information*
Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
4.3.1.4 Consent and Amendment to Credit Agreement and Other Documents, dated as
March 20, 2003.
99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by William F. Garrett, dated May 12, 2003.
99.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
signed by William H. Hardman, dated May 12, 2003.
b) Form 8-K dated March 5, 2003 reporting Other Events was filed on March 6,
2003.
* Items 1,2,3,4 and 5 are not applicable.
14
SIGNATURES
Pursuant to the requirements 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)
Date May 12, 2003 By:/s/ W.H. Hardman, Jr.
------------------------ ---------------------------
W.H. Hardman, Jr.
Chief Financial Officer
15
CERTIFICATIONS
I, William F. Garrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Mills,
Inc;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report ("the Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
fulfilling the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date May 12, 2003 By: /s/ William F. Garrett
----------------------------- ------------------------------
William F. Garrett
President & Chief Executive Officer
16
I, William H. Hardman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Delta Mills,
Inc;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("the Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
fulfilling the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date May 12, 2003 By: /s/ W. H. Hardman, Jr.
----------------------------- --------------------------------
W.H. Hardman, Jr.
Chief Financial Officer
17