UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 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 333-37617
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)
864/255-4100
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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
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 ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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The aggregate market value of the common equity stock held by non-affiliates of
the registrant as of December 28, 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 25, 2003 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 28, 2003
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 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
Item 9A. Controls and Procedures 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 37
Item 13. Certain Relationships and Related Transactions 37
Item 14. Principal Accountant Fees and Services 38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
PART I.
ITEM I. BUSINESS
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 and
international trade regulations, including without limitation the expected end
of quotas on textile and apparel products amongst WTO member states in 2005, 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: 864-255-4100). 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, 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 the year ended June 29, 2003, the Company announced the closing of its
Catawba Plant, a yarn manufacturing facility located in Maiden, North Carolina.
The equipment run-out schedule was completed in April 2003 and the Company is in
the process of liquidating the assets associated with this facility. The Company
has replaced the production from this facility with purchased yarn from outside
sources.
During the year ended June 29, 2002, the Company announced the closing of its
Furman Plant, a weaving facility located in Fountain Inn, South Carolina. The
equipment run-out schedule was completed in October 2001 and the Company is in
the process of either liquidating or transferring the assets associated with
this facility. The Company transferred the production for the closed facility to
other weaving facilities in the Company to better utilize the remaining
equipment.
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GENERAL - CONTINUED
During fiscal year 2000, the Company 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.
During fiscal 1998 the Company made the decision to exit the knit textile market
by closing its Stevcoknit Fabrics Company operating division.
The Company was incorporated in Delaware in 1971 and acquired by a predecessor
of Delta Woodside Industries, Inc. in 1986.
PRODUCTS, MARKETING AND MANUFACTURING
The Company produces woven textile fabrics manufactured from cotton, wool, flax
or synthetic fibers or from synthetic filament yarns. Cotton is purchased from
numerous suppliers. Wool, flax, 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, and the
balance is purchased from a small number of domestic spinners. 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. 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 2003, the Company had three customers, Levi Strauss, V.F.
Corporation, and Haggar Apparel that each exceeded 10% of consolidated net
sales. The Company's sales to these customers totaled $71 million or
approximately 40% of net sales in fiscal 2003. For fiscal year 2002, only two of
these customers, Levi Strauss and V.F. Corporation, each exceeded 10% of
consolidated net sales. The Company's sales to these customers totaled $63
million or approximately 36% of net sales in fiscal 2002. For fiscal year 2001,
the Company again 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 or approximately 42% of net
sales for fiscal 2001. In addition, during fiscal years 2003, 2002, and 2001,
sales of military fabrics to apparel customers accounted for approximately 33%,
31%, and 22%, respectively, of the Company's total sales. The loss of any of
these accounts could have a material adverse effect on the results of the
Company.
During fiscal years 2003, 2002 and 2001, approximately 77%, 83% and 82%,
respectively, of the Company's finished woven fabric sales were of fabrics made
from cotton or cotton/synthetic blends, while approximately 23%, 17%, and 18%,
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. 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 2003 were volatile and slightly higher than in fiscal 2002. The
Company's average price per pound of cotton purchased and consumed, including
freight and carrying costs, was $.463 in fiscal year 2003 as compared to $.594
in fiscal year 2002, and $.659 in fiscal year 2001. As of June 28, 2003, the
Company had contracted to purchase 85% and had fixed the price for approximately
72% of its expected cotton requirements for fiscal year 2004. 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. In the fourth
quarter of fiscal 2003, the Company increased its cotton purchases to lock-in
favorable costs as cotton prices were rising. 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. In recent years, the Company has
seen a trend toward shorter lead times for its customers' orders. 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. The Andean Trade Promotion and Drug
Eradication Act (often referred to as "ATPDEA") was signed into force on October
31, 2002, with similar rules of origin. Because NAFTA, CBTPA, and ATPDEA 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 origin requirements of these trade preference
agreements is subject to quotas and/or relatively higher tariffs. If NAFTA,
CBTPA or ATPDEA 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.
The Company expects to face a significant change in global competition in 2005
as a result of the impact of multilateral agreements intended to liberalize
global trade. The World Trade Organization ("WTO") is overseeing the phase-out
of textile and apparel quotas over a 10-year period ending 2004. Tariffs on
textile/apparel products are being reduced (but not eliminated) over the same
10-year period. In addition, China's admission to the WTO will have a
significant impact on global textile and apparel trade. By gaining admission to
the WTO, China is able to take advantage of the elimination of quota limitations
on access to the U.S. market, and there could be a significant negative impact
on the North American textile industry. With the arrival of 2005 and the
elimination of quotas for WTO members, certain countries, most particularly, but
not limited to, China, may have cost advantages compared to the Company.
Accordingly, the Company believes it must fully utilize other competitive
advantages it believes it has compared to Asian competitors. Among the
advantages of the Company are its well established relationships with its
customers, its ability to respond quickly to its customers needs as well as the
logistic advantages associated with its manufacturing being located in North
America. However, there can be no assurance that these advantages will allow the
Company to successfully compete with foreign textile producers.
7
EMPLOYEES
The Company has approximately 1,600 employees. The Company's employees are not
represented by unions. The Company believes that its relations with its
employees are good.
ENVIRONMENTAL AND REGULATORY MATTERS
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.
8
ITEM 2 PROPERTIES
The following table provides a description of Delta Mills, Inc.'s principal
facilities.
Approximate
Square
Location Utilization Footage Owned/Leased
-------- ----------- ----------- ------------
Greenville, SC Admin Offices 17,400 Leased (1)
Beattie Plant, Fountain Inn, SC spin/weave 390,000 (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)
(1) Delta Woodside leases corporate offices in Greenville, SC that are used
by the Company. The lease expires on December 31, 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 both its Furman facility in Fountain Inn, SC and its Catawba
facility in Maiden, NC.
The Company believes that its equipment and facilities are generally
adequate to allow it to remain competitive with its principal competitors.
The Company's accounts receivable and inventory, and certain other
intangible property, including the capital stock of Delta Mills Marketing, Inc.,
secure the Company's credit facility.
9
ITEM 3. LEGAL PROCEEDINGS
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
Omitted pursuant to Instruction I (2)(c) to Form 10-K.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 2003. The information
concerning limitations on cash distributions contained under the subheading
"Liquidity and Sources of Capital" under Item 7 is incorporated herein by
reference.
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ITEM 6. SELECTED FINANCIAL DATA
In Thousands, Except Ratios
Fiscal Year
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:(1) (2)
2003 2002 2001 2000 1999
--------------- --------------- --------------- --------------- -------------
Net Sales $177,193 $174,673 $212,960 $276,511 $348,955
Cost of Goods Sold 160,243 165,266 196,692 243,254 292,914
--------------- --------------- --------------- --------------- -------------
Gross Profit 16,950 9,407 16,268 33,257 56,041
Selling, general and administrative expenses 11,370 11,634 14,609 15,345 16,937
Impairment & restructuring expenses 398 8,683
Other income 582 476 302 446 96
--------------- --------------- --------------- --------------- -------------
Operating Profit (Loss) 5,764 (10,434) 1,961 18,358 39,200
Interest expense 5,275 9,090 11,064 16,095 17,414
Interest (income) (192) (547) (958) (185)
Gain on Extinguishment of Debt 3,643 16,072 2,458 7,414
--------------- --------------- --------------- --------------- -------------
Income (Loss) from Continuing Operations
Before Income Taxes 4,132 (3,260) (6,098) 10,635 21,971
Income Tax Expense (Benefit) 1,541 (1,198) (2,192) 4,035 8,590
--------------- --------------- --------------- --------------- -------------
Income (Loss) from Continuing Operations 2,591 (2,062) (3,906) 6,600 13,381
Profit (Loss) from Discontinued Operations (174) 3,802
--------------- --------------- --------------- --------------- -------------
Net Income (Loss) $2,591 $(2,062) $(3,906) $6,426 $17,183
=============== =============== =============== =============== =============
OTHER DATA:(1)
Depreciation and amortization $9,114 $9,544 $11,310 $14,015 $14,815
Capital expenditures 6,442 6,496 5,151 4,340 9,075
BALANCE SHEET DATA:
Working Capital $26,657 $37,338 $64,270 $95,158 $101,613
Total assets 162,328 158,437 181,747 229,612 260,951
Total long-term debt 31,941 47,819 83,815 115,078 150,000
Shareholder's equity 49,910 47,319 49,381 56,187 49,761
NOTES TO SELECTED FINANCIAL DATA
(1) The Stevcoknit knitted fabrics business is presented as part of
discontinued operations.
(2) Certain prior year amounts have been reclassified to conform to the fiscal
2003 presentation that reflects the Company's adoption of SFAS 145
pertaining to the treatment of gain on retirement of debt. These
reclassifications did not effect net income (loss) or shareholders' equity.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contain 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, 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 Form 10-K 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 and international trade regulations,
including without limitation the expected end of quotas on textile and apparel
products among WTO member states in 2005, 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.
During the year ended June 29, 2003, the Company announced the closing of its
Catawba Plant, a yarn manufacturing facility located in Maiden, North Carolina.
The equipment run-out schedule was completed in April 2003 and the Company is in
the process of liquidating the assets associated with this facility. The Company
has replaced the production from this facility with purchased yarn from outside
sources.
During the year ended June 29, 2002, the Company announced the closing of its
Furman Plant, a weaving facility located in Fountain Inn, South Carolina. The
equipment run-out schedule was completed in October 2001 and the Company is in
the process of either liquidating or transferring the assets associated with
this facility. The Company transferred the production for the closed facility to
other weaving facilities in the Company to better utilize the remaining
equipment.
RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002
Net Sales. Net sales for the year ended June 28, 2003 totaled $177.2 million, as
compared to $174.7 million for the year ended June 29, 2002, an increase of
1.4%. Unit sales were approximately the same for each year. The increase in
sales for fiscal year 2003 was principally due to an increase of 2.2 % in
average sales price as a result of a change in product mix. At the end of fiscal
year 2003, there were approximately $6.0 million in sales order deferments that
remained in finished inventory, accounting for the majority of the $11.4 million
inventory increase over fiscal year 2002. Management believes that these
deferments represent sales that will occur in future quarters but could
negatively effect capacity utilization in the process.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Gross Profit. Gross profit as a percent of sales for the year ended June 28,
2003 was 9.6%, as compared to 5.4% for the year ended June 29, 2002. The
majority of the gross profit improvement was due to lower cotton raw material
cost. Also contributing to the gross profit increase was reduced manufacturing
cost as a result of the cost reduction program put in place at the beginning of
fiscal year 2003. These cost reductions were somewhat offset by disruption costs
associated with the modernization of the Estes cotton weaving facility and
continued downward pressure on sales prices caused by cotton garment
manufacturers expanding their supplier base to gain more competitive prices.
Selling, General and Administrative Expenses. During the year ended June 28,
2003, selling, general and administrative expenses were $11.4 million, as
compared to $11.6 million during the year ended June 29, 2002, a decrease of
$0.2 million or 2.3%. Expenses in this category were 6.4% of net sales in fiscal
2003 as compared to 6.7% in fiscal 2002. The decrease was due primarily to a
reduction in compensation expense that was somewhat offset by increases in
insurance, legal and other fixed costs.
Impairment and Restructuring Expenses. During the year ended June 28, 2003, the
Company incurred restructuring expenses of $0.4 million related to the closing
of its Catawba plant, a yarn manufacturing facility in Maiden, NC. 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. The net book value of the closed facilities
is presented as assets held for sale on the consolidated balance sheet as of
June 28, 2003.
Other Income: Other income was $0.6 million for fiscal year 2003, primarily from
gains on equipment sales that occurred in the first quarter. In fiscal year
2002, other income was $0.5 million, primarily from gains on equipment sales
that occurred in the fourth quarter.
Operating Profit (Loss). Operating profit for the year ended June 28, 2003 was
$5.8 million, as compared to an operating loss of $10.4 million for the year
ended June 29, 2002. The $16.2 million improvement in operating profit was
principally the result of a $7.5 million improvement in gross profit and a
reduction of $8.3 million in impairment and restructuring expenses. Gross profit
and impairment and restructuring expenses are discussed above.
Net Interest Expense. For the year ended June 28, 2003, net interest expense was
$5.3 million, as compared to $8.9 million for the year ended June 29, 2002. The
decrease in net interest expense was principally due to the purchase of a
portion of the Company's 9.625% Senior Notes and was somewhat offset by an
increase in revolver debt at a substantially lower rate of interest. Interest
expense for fiscal year 2003 also reflected $0.4 million of capitalized interest
as a result of the Company's 2003 capital expenditures.
Gain on Extinguishment of Debt. During fiscal 2003, the Company purchased $15.9
million face amount of its 9.625% Senior Notes for $11.9 million, in addition to
expenses of approximately $0.2 million. The Company recognized a gain of $3.6
million after the write-off of deferred loan costs of $0.2 million. During
fiscal 2002, the Company purchased $36.0 million face amount of its 9.625%
Senior Notes for $19.4 million. The Company recognized a gain of $16.1 million
after the write-off of deferred loan costs of $0.5 million.
Taxes. The effective tax rate of 37.3% for the year ended June 28, 2003 is
higher than the 36.7% effective tax rate for the year ended June 29, 2002,
primarily because of the effect of nondeductible permanent differences on pretax
income in fiscal year 2003 compared to pretax losses in 2002.
Net Income (Loss). Net Income for the year ended June 28, 2003 was $2.6 million
as compared to a loss of $2.1 million for the year ended June 29, 2002. The $4.7
million improvement in net income was primarily due to the pretax, year-to-year
changes in each of the following: $7.6 million improvement in gross profit, $8.3
million reduction in impairment and restructuring expenses, and a $3.6 million
reduction in net interest expense. These items were somewhat offset by a $12.4
million reduction in gain on extinguishment of debt. Each of these items is
discussed above.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
Order Backlog. The Company's order backlog at June 28, 2003 was $55.5 million,
an increase of $7.7 million from the $47.8 million order backlog at June 29,
2002. The majority of this increase was in the uniform fabrics used in apparel
sold to the United States Department of Defense. In recent years, customers in
the industry have shortened lead times for delivery requirements. In response to
this, the Company has implemented a quick response delivery system. Because of
this and because the apparel market continues to be soft, 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 August of 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 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 was effective for fiscal years beginning after June
15, 2002. The adoption of this standard has not materially impacted the Company.
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 adopted the Statement effective in 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 (loss) before income taxes for all financial
statement periods presented.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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 adoption of Statement
No. 146 has not had a material impact on the Company's financial statements.
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. The disclosure modifications are included in the notes to these
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. The
disclosure requirements are effective for financial statements of interim and
annual reporting periods after December 31, 2002. The Company adopted this
Interpretation with no material impact to its consolidated financial statements.
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.
RESULTS OF OPERATIONS FISCAL 2002 VERSUS FISCAL 2001
Net Sales. 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. Gross profit as a percent of net 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 prices caused by
cotton garment manufacturers expanding their supplier base to gain more
competitive prices and by increased import pressure on synthetic products.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - CONTINUED
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 net 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.
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 Profit (Loss). The operating loss for the year ended June 29, 2002 was
$10.4 million, as compared to operating profit 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
profit for fiscal 2002 included an $8.7 million impairment and restructuring
charge that occurred in the first quarter of the 2002 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 net 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.
Gain on Extinguishment of Debt. During fiscal 2002, the Company purchased $36.0
million face amount of its 9.625% Senior Notes for $19.4 million. The Company
recognized a gain of $16.1 million after 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 a
gain of $2.5 million after the write-off of deferred loan costs of $0.8 million.
Taxes. The effective tax rate of 36.7% for the year ended June 29, 2002 is
higher than the 35.9% effective tax rate for the year ended June 30, 2001,
primarily because of the effect of nondeductible permanent differences on pretax
losses in fiscal year 2002 and 2001.
Net Income (Loss). The net loss for the year ended June 29, 2002 was $2.1
million, as compared to a net loss of $3.9 million for the year ended June 30,
2001. For fiscal year 2002, the loss 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.
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.
LIQUIDITY AND SOURCES OF CAPITAL
The Company generated $4.5 million of cash from operations in fiscal 2003. This
included a change in operating assets and liabilities that resulted in a $6.0
million use of cash due to an increase in inventory of $11.4 million and a
decrease in accounts receivable of $5.4 million. The increase in inventory was
primarily due to customer sales deferments that occurred at the end of the
fourth quarter as well as the acceleration of cotton raw material purchases that
took place during the fourth quarter in order to minimize the future impact of
increasing cotton prices. During fiscal year 2003, the Company used $6.4 million
to fund capital expenditures and received $0.8 million in proceeds from excess
equipment sales. The Company increased borrowings on the revolving credit
facility $13.5 million. The Company used $11.9 million in borrowings from its
revolving credit facility to purchase a portion of the Company's 9.625% Senior
Notes and $1.6 million to fund a portion of its capital expenditures.
16
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
During fiscal year 2002, the Company generated $2.4 million from operating cash
flow, used $6.1 million for capital expenditures, net of $0.4 million proceeds
from equipment sales, and used $8.0 million from financing activities. During
fiscal year 2002, the Company's financing activities resulted in the use of $8.0
million net of $11.4 in borrowings from its revolving credit facility to
purchase a portion of the Company's 9.625% Senior Notes for $19.4 million.
During fiscal year 2001, the Company generated $29.1 million from operations and
used $4.7 million for capital expenditures net of proceeds of $0.5 million from
equipment sales. Financing activities during fiscal year 2001 resulted in the
use of $30.9 million primarily for the purchase of a portion of the Company's
9.625% Senior Notes.
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
June 28, 2003, the outstanding balance of the notes was $31,941,000, a decrease
of $15,878,000 from the balance of $47,819,000 at June 29, 2002. During the year
ended June 28, 2003, the Company acquired for $12,060,000, including expenses of
approximately $172,000, a portion of its 9.625% Senior Notes. The aggregate
principal face amount of the acquired Senior Notes was $15,878,000. The future
annual reduction in the Company's interest expense because of this Senior Note
repurchase will be approximately $1,179,725, net of variable rate revolver
interest on the portion of the revolver balance attributable to the note
repurchase. At June 28, 2003, the interest rate on the revolver was 2.932%.
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 was 2.932% at June 28, 2003
and is based on a spread over either LIBOR or a base rate. Borrowings under this
facility were $24.9 million and $11.4 million as of June 28, 2003 and June 29,
2002, respectively. As of June 28, 2003, the revolver availability was
approximately $24 million and the Company was in compliance with all covenants.
There is a substantial likelihood that Delta Mills will not be in compliance
with the financial covenants of the credit agreement at the end of the first
quarter of fiscal 2004. As a precaution, Delta Mills has already obtained a
waiver of compliance with these covenants from GMAC for the first quarter of
fiscal 2004. Management believes the availability under Delta Mills' 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. At
June 28, 2003, under the most restrictive of these covenants, no dividends were
available for distribution by Delta Mills to Delta Woodside Industries, Inc. The
indenture pertaining to the Company's 9.625% Senior Notes contains restrictive
covenants that restrict additional indebtedness, dividends, and investments by
the Company and its subsidiaries. The payment of dividends with respect to Delta
Mills, Inc. stock is permitted if there is no event of default under the
indenture and after payment of the dividend, the Company could incur at least $1
of additional indebtedness under a fixed coverage ratio. Dividends are also
capped based on cumulative net income and proceeds from the issuance of
securities and liquidation of certain investments. Delta Mills may loan funds to
Delta Woodside Industries, Inc. if there is no event of default and a fixed
charge coverage ratio test is satisfied. During the year ended June 28, 2003 and
the year ended June 29, 2002, Delta Mills did not pay any dividends to Delta
Woodside Industries, Inc. Industries, Inc. During the year ended June 30, 2001,
Delta Mills paid $2.9 million of dividends to Delta Woodside Industries, Inc.
17
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
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 selling, general and administrative expense.
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
first phase of this project was completed in 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 $6.4 million in capital expenditures for fiscal year 2003 and the
majority of the approximately $7.0 to $8.0 million planned for capital
expenditures in each of fiscal years 2004 and 2005.
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 28, 2003 minimum
payments under these contracts with non-cancelable contract terms were $8.1
million.
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.
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 for the next twelve months.
Commitments. As of June 28, 2003, the Company had contractual obligations in the
form of leases, cotton commitments, and debt as follows (in thousands):
Payments Due by Fiscal Year
Contractual Obligations 2004 2005 2006 2007 2008 Thereafter Total
------------ ----------- ----------- ------------ ----------- ----------- ------------
Cotton Commitments $8,051 $8,051
Non-Cancelable Operating Leases 433 203 8 4 2 650
Revolving Credit Facility 24,856 24,856
Long-Term Debt 31,941 31,941
------------ ----------- ----------- ------------ ----------- ----------- ------------
Total $8,484 $203 $8 $24,860 31,943 $65,498
============ =========== =========== ============ =========== =========== ============
18
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: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets such as property, plant and equipment,
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Prior to June 30, 2002, the impairment of long-lived assets was accounted for in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of."
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
June 28, 2003 and June 29,2002, the Company had approximately $6.9 million and
$8.0 million, respectively, 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.
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
situation. 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's financial position.
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
$308,000 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.
19
ENVIRONMENTAL MATTERS - 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.) 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.
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. In recent months, the price of cotton has
trended upward, and the Company has increased its cotton inventory in order to
obtain its cotton at a lower price. 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 28, 2003, 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 $0.8 million on the value of the contracts. At the end of fiscal
2002, a 10% decline in the market price of the Company's fixed price contracts
would have had a negative impact of approximately $1.5 million on the value of
the contracts. The decline in the potential negative impact from 2002 to 2003 is
due principally to current cotton commitments being at significantly lower
average prices than in fiscal 2002.
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 June 28, 2003, an
increase in the interest rate of 1% would have a negative impact of
approximately $249,000. As of June 29, 2002, an increase in the interest rate of
1% would have had a negative impact of approximately $114,000. The increase in
the negative impact is due to the increased borrowings under the revolving
credit facility in fiscal 2003.
An interest rate change would not impact the Company's cash flows on the fixed
rate ten year Senior Notes.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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Report of KPMG LLP 22
Consolidated Balance Sheets as of June 28, 2003 and June 29, 2002 23
Consolidated Statements of Operations for the fiscal years ended June 28, 2003,
June 29, 2002 and June 30, 2001 25
Consolidated Statements of Shareholder's Equity for the fiscal years ended June 28, 2003,
June 29, 2002 and June 30, 2001 26
Consolidated Statements of Cash Flows for the fiscal years ended June 28, 2003,
June 29, 2002 and June 30, 2001 27
Notes to Consolidated Financial Statements 28
21
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
DELTA MILLS, INC.
We have audited the accompanying consolidated balance sheets of Delta
Mills, Inc. and subsidiaries as of June 28, 2003 and June 29, 2002 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 28, 2003. 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. and subsidiaries as of June 28, 2003 and June 29,
2002, and the results of their operations and their cash flows for each
of the years in the three-year period ended June 28, 2003 in conformity
with accounting principles generally accepted in the United States of
America.
As discussed in Note A to the consolidated financial statements, on
June 30, 2002, the Company adopted Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements Nos. 4 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections."
/s/KPMG LLP
KPMG LLP
Greenville, South Carolina
July 25, 2003
22
CONSOLIDATED BALANCE SHEETS Delta Mills, Inc.
(In Thousands, except share amounts)
June 28, 2003 June 29, 2002
--------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $520 $52
Accounts receivable:
Factor and other 44,628 49,887
Less allowances for returns 180 32
--------------------- ----------------------
44,448 49,855
Inventories
Finished goods 7,711 7,085
Work in process 25,765 19,878
Raw materials and supplies 10,659 5,784
--------------------- ----------------------
44,135 32,747
Deferred income taxes 1,517 1,347
Other assets 520 25
--------------------- ----------------------
TOTAL CURRENT ASSETS 91,140 84,026
--------------------- ----------------------
ASSETS HELD FOR SALE 3,948 3,141
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements 1,587 1,702
Buildings 30,943 32,171
Machinery and equipment 109,623 114,070
Furniture, fixtures and office equipment 9,789 9,599
Lease improvements 1,030 1,030
Construction in progress 4,427 1,025
--------------------- ----------------------
157,399 159,597
Less accumulated depreciation and amortization 90,618 89,096
--------------------- ----------------------
66,781 70,501
DEFERRED LOAN COSTS
less accumulated amortization of $ 5,634
and $5,324 in 2003 and 2002 respectively 459 769
--------------------- ----------------------
$162,328 $158,437
===================== ======================
23
CONSOLIDATED BALANCE SHEETS Delta Mills, Inc.
(In Thousands, except share amounts)
June 28, 2003 June 29, 2002
------------------ ------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $14,217 $11,689
Revolving credit facility 24,856 11,365
Payable to Affiliates 3,517 3,321
Accrued employee compensation 1,414 1,696
Accrued and sundry liabilities 20,479 18,617
------------------ ------------------
TOTAL CURRENT LIABILITIES 64,483 46,688
LONG-TERM DEBT 31,941 47,819
DEFERRED INCOME TAXES 8,421 9,340
DEFERRED COMPENSATION 7,573 7,271
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 (accumulated deficit) (1,882) (4,473)
------------------ ------------------
49,910 47,319
COMMITMENTS AND CONTINGENCIES
------------------ ------------------
$162,328 $158,437
================== ==================
See notes to consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 28, 2003 June 29, 2002 June 30, 2001
---------------- ---------------- -----------------
Net sales $177,193 $174,673 $212,960
Cost of goods sold 160,243 165,266 196,692
---------------- ---------------- -----------------
Gross profit 16,950 9,407 16,268
Selling, general and administrative expenses 11,370 11,634 14,609
Impairment and restructuring expenses 398 8,683
Other income 582 476 302
---------------- ---------------- -----------------
OPERATING PROFIT (LOSS) 5,764 (10,434) 1,961
Other (expense) income:
Interest expense (5,275) (9,090) (11,064)
Interest income 192 547
Gain on extinguishment of debt 3,643 16,072 2,458
---------------- ---------------- -----------------
(1,632) 7,174 (8,059)
---------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES 4,132 (3,260) (6,098)
Income tax expense (benefit) 1,541 (1,198) (2,192)
---------------- ---------------- -----------------
NET INCOME (LOSS) $2,591 $(2,062) $(3,906)
================ ================ =================
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills, Inc.
(In Thousands)
Additional Retained Total
Common Stock Paid-In Earnings Shareholder's
Shares Amount Capital (Accumulated Deficit) Equity
-------------- ------------- --------------- ----------------------- -----------------
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
Net Income 2,591 2,591
-------------- ------------- --------------- ----------------------- -----------------
Balance at June 28, 2003 100 $0 $51,792 $(1,882) $49,910
============== ============= =============== ======================= =================
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
June 28, 2003 June 29, 2002 June 30, 2001
------------------ ------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $2,591 $(2,062) $(3,906)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 8,979 9,174 10,886
Amortization 135 370 424
Decrease in deferred loan costs 175 541 784
Discount to face value on repurchase of bonds (3,818) (16,613) (3,242)
Impairment and restructuring expenses 398 8,683
Change in deferred income taxes (1,089) (1,225) (1,888)
Gains on disposition of property
and equipment (433) (356) (342)
Changes in operating assets and liabilities:
Accounts receivable 5,407 (12,251) 33,579
Inventories (11,388) 10,455 717
Other current assets (495) 522 (80)
Deferred compensation 306 672 786
Accounts payable and accrued expenses 3,732 4,512 (8,668)
------------------ ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,500 2,422 29,050
------------------ ------------------ ------------------
INVESTING ACTIVITIES Property, plant and equipment:
Purchases (6,442) (6,496) (5,151)
Proceeds of dispositions 807 429 450
------------------ ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (5,635) (6,067) (4,701)
------------------ ------------------ ------------------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 195,461 44,979 3,003
Repayments on revolving lines of credit (181,970) (33,614) (3,003)
Repurchase and retirement of long-term debt (11,888) (19,383) (28,021)
Dividends paid (2,900)
------------------ ------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,603 (8,018) (30,921)
------------------ ------------------ ------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 468 (11,663) (6,572)
Cash and cash equivalents at beginning of year 52 11,715 18,287
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $520 $52 $11,715
================== ================== ==================
See notes to consolidated financial statements.
27
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").
CASH EQUIVALENTS: The Company considers all highly liquid investments with
initial maturities of three months or less when purchased to be cash
equivalents.
INVENTORIES: Inventories are stated at the lower of 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: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets such as property, plant and equipment,
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Prior to June 30, 2002, the impairment of long-lived assets was accounted for in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived and
Long-Lived Assets to be Disposed Of."
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 and net operating losses and
tax credit carryforwards. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date. Accruals
for tax exposures are recorded when they are probable and estimable, and tax
valuation allowances are established when management cannot conclude that the
realization of deferred tax assets are more likely than not.
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.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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. If the Company had determined
compensation expense at fair value, as under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) would have been as
follows:
(In thousands) Year Ended Year Ended Year Ended
June 28, 2003 June 29, 2002 June 30, 2001
----------------- ------------------ -----------------
Net income (loss), as reported $ 2,591 $ (2,062) $ (3,906)
Add stock based employee compensation expense
included in reported net income (loss), net of tax 174 136
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (496) (491) (331)
----------------- ------------------ -----------------
Pro forma net income (loss) $ 2,269 $ (2,417) $ (4,237)
----------------- ------------------ -----------------
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, 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 (loss) before income
taxes for all financial statement periods presented.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of the Company's
financial instruments, except for those disclosed in Note C, approximate their
estimated fair values due to either the short-term maturities of such
instruments or minor interest rate differentials.
RECLASSIFICATIONS: Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform to the fiscal 2003
presentation. These reclassifications did not effect net income (loss) or
shareholders' equity.
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 2003,
2002 and 2001 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 receivable 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 selling, general and administrative expense.
For fiscal year 2003, the Company had three customers, Levi Strauss, V.F.
Corporation, and Haggar Apparel that each exceeded 10% of consolidated net
sales. The Company's sales to these customers totaled $71 million in fiscal
2003. For fiscal year 2002, only two of these customers, Levi Strauss and V.F.
Corporation, each exceeded 10% of consolidated net sales. The Company's sales to
these customers totaled $63 million in fiscal 2002. For fiscal year 2001, the
Company again 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 for fiscal 2001. In
addition, during fiscal years 2003, 2002, and 2001, sales of military fabrics to
apparel customers accounted for approximately 33%, 31%, and 22%, respectively,
of the Company's total sales. 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. Credit risk for the
receivables generally remains with the Factor under the terms of the factoring
agreement.
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%. These notes will mature in August 2007. At
June 28, 2003, the outstanding balance of the notes was $31,941,000, a decrease
of $15,878,000 from the balance of $47,819,000 at June 29, 2002.
At June 28, 2003, the carrying value of the Senior Notes was $31,941,000 and the
fair value, based on quoted market prices was $25,233,000. The fair value of the
revolving credit facility approximates its carrying value as of June 28, 2003
due to the variable interest rate provision of the facility.
30
NOTE C--LONG-TERM DEBT AND LEASES - 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 a 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 was 2.932% at June 28, 2003
and is based on a spread over either LIBOR or a base rate. Borrowings under this
facility were $24.9 million and $11.4 million as of June 28, 2003 and June 29,
2002, respectively. As of June 28, 2003, the revolver availability was
approximately $24 million and the Company was in compliance with all covenants.
There is a substantial likelihood that Delta Mills will not be in compliance
with the financial covenants of the credit agreement at the end of the first
quarter of fiscal 2004. As a precaution, the Delta Mills has already obtained a
waiver of compliance with these covenants from GMAC for the first quarter of
fiscal 2004. Management believes the availability under Delta Mills' 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. At
June 28, 2003, under the most restrictive of these covenants, no dividends were
available for distribution by Delta Mills to Delta Woodside Industries, Inc. The
indenture pertaining to the Company's 9.625% Senior Notes contains restrictive
covenants that restrict additional indebtedness, dividends, and investments by
the Company and its subsidiaries. The payment of dividends with respect to Delta
Mills, Inc. stock is permitted if there is no event of default under the
indenture and after payment of the dividend, the Company could incur at least $1
of additional indebtedness under a fixed coverage ratio. Dividends are also
capped based on cumulative net income and proceeds from the issuance of
securities and liquidation of certain investments. Delta Mills may loan funds to
Delta Woodside Industries, Inc. if there is no event of default and a fixed
charge coverage ratio test is satisfied. Certain prior year amounts have been
reclassified to conform to the fiscal 2003 presentation that reflects the
Company's adoption of SFAS 145 pertaining to the treatment of gain on retirement
of debt. During the year ended June 28, 2003 and the year ended June 29, 2002,
Delta Mills did not pay any dividends to Delta Woodside Industries, Inc.
Industries, Inc. During the year ended June 30, 2001, Delta Mills paid $2.9
million of dividends to Delta Woodside Industries, Inc.
Total interest expense incurred by the Company was $5,275,000, $9,090,000 and
$11,064,000 for fiscal years 2003, 2002, and 2001, respectively, net of $386,000
of capitalized interest in fiscal 2003. Total interest paid during fiscal years
2003, 2002, and 2001 was $5,778,000, $10,252,000 and $12,099,000, respectively.
Rent expense relating to operating leases was approximately $435,000, $1,733,000
and $ 3,165,000 for fiscal years 2003, 2002 and 2001 respectively.
Aggregate principal maturities of all long-term debt and minimum payments under
non-cancelable operating leases are as follows:
Long-term Operating
Fiscal Year Debt Leases
2004 433,000
2005 203,000
2006 8,000
2007 4,000
2008 $31,941,000 2,000
------------------------------------
$31,941,000 $650,000
====================================
31
NOTE D--EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries, Inc. 40l(k) Plan.
During fiscal 2003, 2002 and 2001, the Company contributed $617,000, $574,000,
and $411,000, respectively, to the 401(k) plan to match employee contributions.
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 28, 2003 and
June 29, 2002, the Company's liability was $7,573,000 and $7,271,000
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 $280,000,
$198,000, and $0 for fiscal years 2003, 2002 and 2001, respectively. The Company
has adopted the disclosure only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." SFAS 123 requires
pro forma disclosures for option grants when accounting for stock-based
compensation plans in accordance with APB 25. The pro forma effects are
determined as if compensation costs were recognized using a fair value based
accounting method. The fair value of each option granted, as disclosed in Note
A, is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
2003 2002 2001
---- ---- ----
Risk free interest rate N/A N/A 5.0%
Expected lives for options N/A N/A 10 Years
Expected volatility N/A N/A 62%
Dividend yield N/A N/A N/A
Fair value per option at grant date N/A N/A $4.00
NOTE E--AFFILIATED PARTY TRANSACTIONS
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--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
approximately $6.6 million which will be reported in the fiscal 2003
consolidated Federal income tax return with its parent, DWI. The consolidated
tax group had regular taxable income of approximately $5.8 million and
alternative minimum taxable income (AMT) of approximately $3.4 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 2003 or 2002.
32
Significant components of the Company's deferred tax assets and liabilities are
as follows:
- ---------------------------------------------------------------------------------------
2003 2002
Assets:
Deferred compensation $ 3,026,000 $ 2,799,000
Accrued and sundry liabilities 1,389,000 1,696,000
Net operating loss carryforwards 284,000 749,000
Inventories 62,000
Other 68,000 14,000
------------ ------------
Gross deferred tax assets 4,829,000 5,258,000
Valuation allowance ------------ ------------
Deferred tax assets 4,829,000 5,258,000
Liabilities:
Depreciation 11,733,000 12,888,000
Inventories 363,000
------------- -------------
Deferred tax liabilities 11,733,000 13,251,000
------------- -------------
Net deferred tax liabilities $(6,904,000) $ (7,993,000)
============== =============
Significant components of the provision for income tax expense (benefit) are as
follows:
2003 2002 2001
----------------------------------------------------------
Current:
Federal income taxes $2,230,000
State income taxes 400,000 $15,000 $105,000
----------------------------------------------------------
Total current 2,630,000 15,000 105,000
Deferred:
Federal income taxes (804,000) (1,009,000) (2,056,000)
State income taxes (285,000) (204,000) (241,000)
----------------------------------------------------------
Total deferred (1,089,000) (1,213,000) (2,297,000)
----------------------------------------------------------
Total income tax expense (benefit) $1,541,000 $(1,198,000) $(2,192,000)
==========================================================
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rates is as follows:
2003 2002 2001
------------------ ------------------ -------------
Income tax expense (benefit) at statutory rates $ 1,446,000 $ (1,141,000) $ (2,134,000)
State tax expense (benefit), net of federal benefit 75,000 (123,000) (88,000)
Other 20,000 66,000 30,000
--------------- ---------------- --------------
$ 1,541,000 $ (1,198,000) $ (2,192,000)
=============== ================ ==============
The Company made tax payments of $0, $0 and $1,000 during fiscal years 2003,
2002 and 2001, respectively.
33
NOTE G--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.
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 28, 2003 JUNE 29, 2002
------------- -------------
Current assets $ 88 $ 33
Noncurrent assets 38 61
Current Liabilities 1,912 1,902
Noncurrent liabilities 1,047 978
Stockholders' deficit (2,833) (2,786)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Year Ended
--------------------------------------------------
June 28, 2003 June 29, 2002 June 30, 2001
------------- ------------- -------------
Net sales -intercompany commissions $3,986 $3,930 $3,602
Cost and expenses 4,033 4,250 4,155
Net loss (47) (320) (553)
NOTE H--COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At June 28, 2003, minimum
payments under these contracts with non-cancelable contract terms were
approximately $8.1 million.
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
situation. 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's financial position or results of operations.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H--COMMITMENTS AND CONTINGENCIES - CONTINUED
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
$308,000 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.
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
results of operations or financial condition.
NOTE I--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended June 28, 2003 and June 29, 2002:
2003 Quarter Ended
(In thousands) September 28 December 28 March 30 June 28
------------ ----------- -------- -------
Net sales $46,179 $35,853 $46,489 $48,672
Gross profit 5,545 3,695 2,840 4,870
Net income (loss) 1,432 293 (1,100) 1,966
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
Net income (loss) (8,153) (2,402) (2,447) 10,940
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J--GAIN ON EXTINGUISHMENT OF DEBT
During fiscal 2003, the Company purchased $15,878,000 face amount of its 9.625%
Senior Notes for $12,060,000 including expenses of approximately $172,000. The
Company recognized a gain of $3,643,000 after the write-off of deferred loan
costs of $175,000. 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 a gain of $16,072,000 after the
write-off of deferred loan costs of $541,000. During fiscal 2001, the Company
purchased $31,263,000 face amount of its 9.625% Senior Notes for $28,021,000.
The Company recognized a gain of $2,458,000 after the write-off of deferred loan
costs of $784,000.
NOTE L-- RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 28, 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 reflected employee
termination costs of approximately $354,000. Production at the Catawba facility
ceased in April of 2003 and the Company is in the process of liquidating the
assets associated with this facility.
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. 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 in October
of 2001 and the Company is in the process of liquidating the assets associated
with this facility.
During fiscal 2003 and fiscal 2002, the Company paid $196,000 and $345,000,
respectively, in restructuring costs and has a remaining liability of $342,000
and $140,000 as of June 28, 2003 and June 29, 2002, respectively.
As of June 28, 2003 and June 29, 2002 the Company had $3.9 million and $3.1
million, respectively, in assets held for sale related to the closing of the
Catawba facility and the Furman plant.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
principal executive officer and its principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)),
have concluded that, as of June 28, 2003, the Company's disclosure
controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those
entities.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect the Company's disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's
internal controls. As a result, no corrective actions were required or
undertaken.
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.
37
ITEM 14. PRINCIPAL ACCOUNTANT FEES & SERVICES
The table below and the accompanying footnotes set forth the fees paid by the
Company to its independent auditors KPMG, LLP for the periods and in the
categories indicated.
AUDIT FEES AND SERVICES FISCAL 2003 FISCAL 2002
Audit Fees $115,000 $99,500
Audit Related Fees 12,500 (1) 14,000 (1)
Tax Fees 92,045 (2) 74,000 (2)
All Other Fees 0 0
----------------------- -----------------------
TOTAL FEES FOR ALL SERVICES $219,545 $187,500
======================= =======================
1) Audit related fees for both fiscal 2003 and 2002 consisted of fees for
employee benefit plan audits and responses to inquiries that arise in the
normal course of business related to accounting and auditing pronouncements
and SEC rules and regulations.
2) Tax fees for both fiscal 2003 and 2002 consisted of fees for preparation of
returns and estimates, responding to miscellaneous state notices, research
of tax matters, and preparation of prior year amended returns.
The item "Audit Committee Pre-Approval Policies and Procedures" is effective for
filings for fiscal years ending after December 15, 2003, and has therefore not
been included in this filing. The Company's Audit Committee has not yet adopted
the pre-approval policies and procedures described in paragraph (c)(7)(i) of
Rule 2-01 of Regulation S-X. However, since May 6, 2003, the Company's Audit
Committee has approved all services of KPMG, LLP prior to the rendering of these
services.
38
PART IV
ITEM 15. 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 28, 2003 are included in Item 8.
Consolidated balance sheets--June 28, 2003 and June 29, 2002.
Consolidated statements of operations--Years ended June 28, 2003, June
29, 2002, and June 30,2001.
Consolidated statements of shareholder's equity-- Years ended June 28,
2003, June 29, 2002, and June 30,2001.
Consolidated statements of cash flows-- Years ended June 28, 2003, June
29, 2002, and June 30,2001.
Notes to consolidated financial statements.
The following consolidated financial statement schedules of Delta Mills, Inc.
are included in Item 15a (2):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Columns omitted from schedules filed have been omitted because the information
is not applicable.
(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 Mills, Inc. for the fiscal year
ended June 30, 2001 (the "DMI 2000 10-K").*
4.3.1.2 Consent and Amendment to Credit Agreement and Other Documents,
dated as of October 5, 2001: Incorporated by reference to
Exhibit 4.3.1.2 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 29, 2001 and filed with
the Securities and Exchange Commission on November 9, 2001.
39
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - CONTINUED
4.3.1.3 Consent and Amendment to Credit Agreement and Other Documents,
dated as of March 31,2002: Incorporated by reference to
Exhibit 4.3.1.3 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 2002 and filed with the
Securities and Exchange Commission on May 14, 2002.
4.3.1.4 Consent and Amendment to Credit Agreement and Other Documents,
dated as of March 20,2003: Incorporated by reference to
Exhibit 4.3.1.4 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 29, 2003 and filed with the
Securities and Exchange Commission on May 13, 2003.
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.
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.
10.1** 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. *
10.3.1** 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.*
10.3.2** 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").*
10.3.3** 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").*
10.3.4** 1995 Amendment to Stock Option Plan effective as of November
9, 1995: Incorporated by reference to Exhibit 10.4.4 to the
Form 10-Q of Delta Woodside Industries, Inc. for the quarterly
period ended December 30, 1995 (the "Delta Woodside
Industries, Inc. 12/95 10-Q".)*
10.3.5** 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).
40
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -
CONTINUED
10.3.6** 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.*
10.3.7** Amendments to Stock Option Plan: Incorporated by reference to
Exhibit 10.4.7 to the DWI 2000 10-K.*
10.4** 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.*
10.4.1 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.*
10.4.2** 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.*
10.5.1** Directors Stock Acquisition Plan: Incorporated by reference to
Exhibit 10.14 to the DWI 1991 10-K.*
10.5.2** Amendment to Directors Stock Acquisition Plan, dated April 30,
1992: Incorporated by reference to Exhibit 10.12.2 to the DWI
1992 10-K.*
10.6** 2000 Stock Option Plan of Delta Woodside Industries, Inc.:
Incorporated by reference to Exhibit 10.10 to the DWI 2000
10-K.*
10.6.1 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.
10.7** 2000 Incentive Stock Award Plan of Delta Woodside Industries,
Inc.: Incorporated by reference to Exhibit 10.11 to the DWI
2000 10-K.*
10.8 Tax Sharing Agreement, dated as of June 30, 2000 by and among
Delta Woodside Industries, Inc. Duck Head Apparel Company,
Inc. and Delta Apparel, Inc.: Incorporated by reference to
Exhibit 2.2 to the Report on Form 8-K of the Company with the
date of June 30, 2000.
10.8.1 Amendment to tax sharing agreement dated as of August 6, 2001:
Incorporated by reference to Exhibit 10.17.2 to the
Company's Report on Form 10-K for the fiscal year ended June
30, 2001 and filed with the Securities and Exchange Commission
on September 24, 2001, the "2001 10-K."
10.9** Letter dated June 28, 2000 to William F. Garrett: Incorporated
by reference to Exhibit 10.l4 to the DWI 2000 10-K.*
10.10 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.
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 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.
41
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
On April 4, 2003, the Company filed a Current Report on Form
8-K dated April 3, 2003 reporting information under Item 5 and
Item 7.
(c) Exhibits
The response to this portion of Item 15 is incorporated by
reference from Item 15(a)(3) above.
(d) Financial Statement Schedules
Not applicable
42
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 25, 2003 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 9/25/2003 /s/ William F. Garrett 9/25/2003
- ------------------------------------- ------------ -------------------------------------------------------- ------------
E. Erwin Maddrey, II Date William F. Garrett Date
Director President, Chief Executive Officer and Director
/s/ Buck A. Mickel 9/25/2003 /s/ William H. Hardman, Jr. 9/25/2003
- ------------------------------------- ------------ -------------------------------------------------------- ------------
Buck A. Mickel Date William H. Hardman, Jr. Date
Director Vice President, Treasurer, and Chief Financial Officer
/s/ Donald C. Walker 9/25/2003
-------------------------------------------------------- ------------
Donald C. Walker Date
Vice President, Assistant Secretary, and Controller
43
EXHIBIT INDEX
23 Report on Schedule by Independent Auditors.
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
44
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA MILLS, INC.
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------------
Balance at (2)
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 28 2003 $ 32,000 $1,751,000 (1) ($1,603,000) (2) $180,000
================= ==================== ================= ================
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
================= ==================== ================= ================
NOTES:
1) The change in the reserve for returns and allowances is charged to income as
a reduction of net sales. 2) Deductions represent customer returns and
allowances during the period.
45