UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 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 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57- 0535180
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6126 100 Augusta Street
Greenville, South Carolina 29606
- ---------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
864 255-4122
-----------------
(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ].
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act ). Yes [ ] No [ X ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value--5,892,000 shares as of November 7, 2003
DELTA WOODSIDE INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--September 27, 2003 and June 28, 2003 3
Condensed consolidated statements of operations--
Three months ended September 27, 2003 and September 28, 2002 4
Condensed consolidated statements of cash flows--
Three months ended September 27, 2003 and September 28, 2002 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
CERTIFICATIONS 18-25
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Delta Woodside Industries Inc. (In Thousands, except share amounts)
September 27, 2003 June 28, 2003
---------------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 785 $ 781
Accounts receivable:
Factor and other 37,736 44,628
Less allowances for returns 3 180
---------------------- ----------------
37,733 44,448
Inventories
Finished goods 6,867 7,711
Work in process 23,206 25,765
Raw materials and supplies 11,795 10,659
---------------------- ----------------
41,868 44,135
Deferred income taxes 716 955
Other assets 262 519
---------------------- ----------------
TOTAL CURRENT ASSETS 81,364 90,838
ASSETS HELD FOR SALE 3,948 3,948
PROPERTY, PLANT AND EQUIPMENT, at cost 158,651 157,400
Less accumulated depreciation 92,769 90,619
---------------------- ----------------
65,882 66,781
DEFERRED LOAN COSTS AND OTHER ASSETS 476 503
---------------------- ----------------
$ 151,670 $ 162,070
====================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 9,761 $ 14,217
Revolver 23,023 24,856
Accrued employee compensation 1,242 1,414
Accrued and sundry liabilities 9,404 10,303
---------------------- ----------------
TOTAL CURRENT LIABILITIES 43,430 50,790
LONG-TERM DEBT 31,941 31,941
DEFERRED COMPENSATION 7,775 7,578
NON-CURRENT DEFERRED INCOME TAXES 716 955
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized
50,000,000 shares, issued and outstanding 5,885,000 shares
at September 27, 2003 and 5,862,000 at June 28, 2003 59 59
Additional paid-in capital 87,012 86,869
Accumulated deficit (19,263) (16,122)
---------------------- ----------------
67,808 70,806
COMMITMENTS AND CONTINGENCIES
---------------------- ----------------
$ 151,670 $ 162,070
====================== ================
See notes to consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Delta Woodside Industries Inc.
(In Thousands, except per share data)
3 Mths Ended 3 Mths Ended
September 27, September 28,
2003 2002
---------------- -----------------
Net sales $ 42,581 $ 46,179
Cost of goods sold 41,962 40,634
---------------- -----------------
Gross profit 619 5,545
Selling, general and administrative expenses 2,843 2,905
Other income 290 465
---------------- -----------------
OPERATING PROFIT (LOSS) (1,934) 3,105
Other (expense) income:
Interest expense (1,207) (1,531)
Gain on extinguishment of debt 738
---------------- -----------------
(1,207) (793)
---------------- -----------------
INCOME (LOSS) BEFORE
INCOME TAXES (3,141) 2,312
Income tax expense 890
---------------- -----------------
NET INCOME (LOSS) $ (3,141) $ 1,422
================ =================
Basic and diluted earnings (loss) per share $ (0.53) $ 0.24
================ =================
Weighted average shares outstanding 5,892 5,861
================ =================
See notes to consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Woodside Industries Inc. (In Thousands)
3 Months Ended 3 Months Ended
September 27, 2003 September 28, 2002
----------------------- ----------------------
OPERATING ACTIVITIES
Net income (loss) $ (3,141) $ 1,422
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 2,198 2,289
Amortization 28 34
Discount to face value on repurchase of bonds (738)
Gain on disposition of property and equipment (253) (433)
Change in deferred income taxes 831
Deferred compensation 197 (278)
Changes in operating assets and liabilities 3,881 2,315
----------------------- ----------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,910 5,442
----------------------- ----------------------
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (1,355) (1,306)
Proceeds of dispositions 308 743
----------------------- ----------------------
NET CASH USED IN
INVESTING ACTIVITIES (1,047) (563)
----------------------- ----------------------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 47,435 48,900
Repayments on revolving lines of credit (49,268) (52,511)
Repurchase and retirement of long term debt (815)
Repurchase common stock (26)
----------------------- ----------------------
NET CASH USED IN
FINANCING ACTIVITIES (1,859) (4,426)
----------------------- ----------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4 453
Cash and cash equivalents at beginning of period 781 314
----------------------- ----------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 785 $ 767
======================= ======================
See notes to consolidated financial statements.
5
DELTA WOODSIDE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Delta
Woodside Industries, Inc. and subsidiaries ("the Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended September 27, 2003 are not
necessarily indicative of the results that may be expected for the year ending
July 3, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended June 28, 2003.
NOTE B-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997, a subsidiary of the Company, Delta Mills, Inc. ("Delta
Mills"), issued $150 million of unsecured ten-year Senior Notes at an interest
rate of 9.625%. These notes will mature in August 2007. At September 27, 2003,
the outstanding balance of the notes was $31,941,000, unchanged from the balance
at June 28, 2003.
On March 20, 2003, Delta Mills' $50 million credit facility with GMAC was
amended. The facility remained 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 2007. The amended credit facility also includes GMAC's
consent to the sale of Delta Mills' Catawba Plant, the operational closing of
which was announced on March 5, 2003, and allows Delta Mills 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 inventories of Delta Mills. The facility is secured by the accounts
receivable, inventories and capital stock of Delta Mills. The interest rate on
the credit facility was 2.870% at September 27, 2003 and is based on a spread
over either LIBOR or a base rate. Borrowings under this facility were $23.0
million and $24.9 million as of September 27, 2003 and June 28, 2003,
respectively. As of September 27, 2003, the revolver availability was
approximately $20 million. As a result of the operating loss in the current year
first quarter, Delta Mills was not in compliance with the financial covenants in
the credit agreement at the end of the first quarter of fiscal 2004. As reported
on Form 8-K furnished on September 26, 2003, Delta Mills obtained a waiver of
compliance with these covenants from GMAC for the first quarter of fiscal 2004.
Management is currently in discussions with GMAC with respect to amending these
covenants or extending the waiver. Management believes the availability under
Delta Mills' credit facility is adequate for the foreseeable future.
The Delta Mills' credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures. The payment of
dividends with respect to Delta Mills' stock is permitted if there is no event
of default and there is at least $1 of availability under the facility. At
September 27, 2003, Delta Mills was prohibited by these covenants from paying
dividends to Delta Woodside. The indenture pertaining to Delta Mills' 9.625%
Senior Notes contains restrictive covenants that restrict additional
indebtedness, dividends, and investments by Delta Mills and its subsidiaries.
The payment of dividends with respect to Delta Mills' stock is permitted if
there is no event of default under the indenture and after payment of the
dividend, Delta Mills 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 the Company if there is no event of
default and a fixed charge coverage ratio test is satisfied. At September 27,
2003, Delta Mills was prohibited by these covenants from paying dividends and
making loans to Delta Woodside. During the three months ended September 27, 2003
and the year ended June 28, 2003, Delta Mills did not pay any dividends to Delta
Woodside Industries, Inc.
6
NOTE B-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE - CONTINUED
Delta Mills 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 Delta Mills' books at full value and represent amounts due Delta
Mills from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on Delta Mills' books as
incurred as a part of selling, general and administrative expense.
NOTE C - STOCKHOLDERS' EQUITY
Activity in stockholders' equity during the three months ended September 27,
2003 is as follows (in thousands):
Total
Common Additional Paid Accumulated Stockholders'
Stock In Capital Deficit Equity
--------------- ---------------------------------- -----------------
Balance at June 28, 2003 $59 $86,869 $(16,122) $70,806
Incentive stock award plan, shares issued 169 169
Share repurchases (26) (26)
Net loss (3,141) (3,141)
--------------- ---------------------------------- -----------------
Balance at September 27, 2003 $59 $87,012 $(19,263) $67,808
=============== ================================== =================
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 28, 2003, the Company recorded a restructuring charge
of $398,000 on a pre-tax basis associated with the operational 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 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 took an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. 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
2001, and the Company is in the process of liquidating the assets associated
with this facility.
During the first quarter of fiscal 2004 ending September 27, 2003 and the first
quarter of fiscal 2003 ending September 28, 2002, the Company paid $80,000 and
$17,000, respectively, in restructuring costs. The Company had a remaining
liability of $262,000 and $342,000 as of September 27, 2003 and June 28, 2003,
respectively.
As of September 27, 2003 and June 28, 2003, the Company had $3.9 million in
assets held for sale related to the closing of the Furman and Catawba plants.
7
NOTE E - GAIN ON EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145, through the rescission of Statement No.
4, no longer requires extraordinary item treatment for gains and losses from the
extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes for all financial statement
periods presented. For the three months ended September 27, 2003, the Company
did not recognize any gains from the repurchase of debt. For the three months
ended September 28, 2002, Delta Mills, Inc. purchased $1,553,000 face amount of
its 9.625% Senior Notes for $815,000. The Company recognized a gain of $738,000,
net of the write-off of deferred loan costs, as a result of these purchases,
which is also included in income before income taxes in the accompanying
statement of operations.
NOTE F - STOCK OPTIONS
The Company applies the intrinsic value-based method of accounting for its stock
option plans, 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) and income (loss) per share would have been as
follows:
(In thousands, except per share data) Quarter Ended Quarter Ended
September 27, 2003 September 28, 2002
------------------------ -----------------------
Net income (loss), as reported $ (3,141) $ 1,422
Add stock based employee compensation expense
included in reported net income (loss), net of tax 26 42
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (26) (121)
------------------------ -----------------------
Pro forma net income (loss) $ (3,141) $ 1,343
======================== =======================
Income (loss) per share:
Basic and diluted - as reported $ (0.53) $ 0.24
======================== =======================
Basic and diluted - pro forma $ (0.53) $ 0.23
======================== =======================
8
NOTE G - COMMITMENTS AND CONTINGENCIES
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 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.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such matters as future revenues, future cost savings,
future capital expenditures, business strategy, competitive strengths, goals,
plans, references to future success and other such information are
forward-looking statements. The words "estimate", "project", "anticipate",
"expect", "intend", "believe" and similar expressions are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward-looking statements. These risks and
uncertainties include, among others, changes in the retail demand for apparel
products, the cost of raw materials, competitive conditions in the apparel and
textile industries, the relative strength of the United States dollar as against
other currencies, changes in United States and international trade regulations,
including without limitation the expected end of quotas on textile and apparel
products among World Trade Organization 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.
The Company, through its Delta Mills, Inc. operating subsidiary, sells a broad
range of woven, finished apparel fabric primarily to branded apparel
manufacturers and resellers. Delta Mills also sells camouflage fabric and other
fabrics used in apparel sold to the United States Department of Defense. Delta
Mills represents the only business segment of the Company.
RESULTS OF OPERATIONS
The Company expects to face 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
and 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.
During the quarter ended September 27, 2003, the Company experienced a decline
in sales primarily due to a decline in customer demand attributable to weak
retail sales, continued pressure from imports and oversupply in the domestic
textiles market. These factors also continue to cause negative price pressure on
the Company's products. As a result, the Company does not expect substantial
improvement in pricing until two fundamental factors affecting the domestic
textile market are addressed - competition from imports and excess domestic
capacity. The Company believes that consolidation in the domestic textile
industry, which is beyond the Company's control, is necessary to address excess
domestic capacity. There can be no assurance that excess domestic capacity will
be addressed in a manner beneficial to the Company.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Net sales for the quarter ended September 27, 2003 were $42.6 million, a
decrease of 7.8% when compared to net sales of $46.2 million for the quarter
ended September 28, 2002. The decrease was the result of a decrease in unit
sales partially offset by a 1.4% increase in average sales price. Unit sales
declined because customer demand declined, primarily as a result of weak retail
sales. Also contributing to the decline was continued pressure from imports
coupled with over capacity of domestic textile production. Product mix changes
accounted for the increase in average sales price.
Gross profit was $0.6 million and 1.5% of net sales for the first quarter of
fiscal year 2004. This compares to gross profit of $5.5 million and 12.0% of
sales in the prior year first quarter. In the current year quarter ended
September 27, 2003, the decline in gross profit was principally due to
unabsorbed manufacturing costs associated with reduced running schedules brought
on by reduced customer demand. The decline in unit sales, increased employee
benefit costs, and price pressure on certain core products, somewhat offset by
lower raw material prices, also contributed to the gross profit decline.
Selling, general and administrative expense (SG&A) was $2.8 million and 6.7% of
net sales for the first quarter of fiscal year 2004 compared to SG&A of $2.9
million and 6.3% of net sales for the prior year first quarter. The increase in
SG&A as a percent of net sales is attributable to the decreased sales volume in
the current year quarter.
The Company reported an operating loss of $1.9 million for the quarter ended
September 27, 2003 compared to an operating profit of $3.1 million in the prior
year quarter. The operating loss for the current year quarter was principally
the result of the decline in gross profit discussed above.
Interest expense was $1.2 million for the quarter ended September 27, 2003,
compared to $1.5 million for the prior year quarter. The reduction in interest
expense was primarily due to the reduction in the balance of Delta Mills' 9.625%
Senior Notes. There was no interest income in either the current or prior year
quarters.
Included in other (expense) income for the quarter ended September 28, 2002 was
a $0.7 million gain resulting from the repurchase by Delta Mills of a portion of
its 9.625% Senior Notes. There was no similar income or expense in this category
in the current year quarter ended September 27, 2003.
There was no income tax impact for the current year quarter due to the
requirement, previously announced on September 26, 2003, for a deferred income
tax valuation allowance that reduced the Company's net deferred tax assets to
zero as of the fiscal year ended June 28, 2003 and will similarly reduce it for
subsequent periods unless and until such time when it is more likely than not
that the deferred income tax asset will be realized. For the prior year quarter,
the Company recorded tax expense of $0.9 million.
The Company reported a net loss of $3.1 million or $0.53 per common share for
the quarter ended September 27, 2003 compared to net income of $1.4 million or
$0.24 per common share for the quarter ended September 28, 2002. Net income for
the previous year quarter included a gain of $0.5 million on an after tax basis
from the repurchase by Delta Mills of a portion of its 9.625% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 27, 2003, the Company generated $2.9
million in cash from operations. The principal uses of cash were capital
expenditures of $1.0 million, net of $0.3 million in proceeds from the disposal
of assets. The outstanding borrowings under the GMAC revolver decreased $1.8
million from the balance at June 28, 2003. As a result of the operating loss in
the current year first quarter, the Company's operating subsidiary Delta Mills,
Inc. was not in compliance with the financial covenants of its $50 million
revolving credit agreement with GMAC at the end of the first quarter of fiscal
2004. As reported on Form 8-K furnished on September 26, 2003, Delta Mills
obtained a waiver of compliance with these covenants from GMAC for the first
quarter of fiscal 2004. Management is currently in discussions with GMAC with
respect to amending these covenants or extending the waiver. The Company
believes that the cash flow generated by its operations combined with the
availability on its revolving credit facility will be sufficient to service its
debt, to satisfy its day to day working capital requirements and to fund its
planned capital expenditures for the foreseeable future.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
On November 6, 2002, the Company announced that it had started a major capital
project to modernize its Delta 3 cotton finishing plant in Wallace SC. The
Company completed the first phase of this project in June of 2003. During fiscal
years 2004 and 2005, the Company plans to make additional capital expenditures
for this project to position the finishing facility 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 million and $8.0 million planned for capital
expenditures in fiscal years 2004 and 2005, respectively.
On August 25, 1997, Delta Mills issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
September 27, 2003, the outstanding balance of the notes was $31,941,000,
unchanged from the balance at June 28, 2003.
On March 20, 2003, Delta Mills' $50 million credit facility with GMAC was
amended. The facility remained 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 Delta Mills' Catawba Plant, the operational closing of
which was announced on March 5, 2003, and allows Delta Mills 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 inventories of Delta Mills. The facility is secured by the accounts
receivable, inventories and capital stock of Delta Mills. The interest rate on
the credit facility was 2.870% at September 27, 2003 and is based on a spread
over either LIBOR or a base rate. Borrowings under this facility were $23.0
million and $24.9 million as of September 27, 2003 and June 28, 2003,
respectively. As of September 27, 2003, the revolver availability was
approximately $20 million. As a result of the operating loss in the current year
first quarter, Delta Mills was not in compliance with the financial covenants of
the credit agreement at the end of the first quarter of fiscal 2004. As reported
on September 26, 2003, Delta Mills obtained a waiver of compliance with these
covenants from GMAC for the first quarter of fiscal 2004. Management is
currently in discussions with GMAC with respect to amending these covenants or
extending the waiver. Management believes the availability under Delta Mills'
credit facility is adequate for the foreseeable future.
The Delta Mills' credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures. The payment of
dividends with respect to Delta Mills' stock is permitted if there is no event
of default and there is at least $1 of availability under the facility. At
September 27, 2003, Delta Mills was prohibited by these covenants from paying
dividends to Delta Woodside. The indenture pertaining to Delta Mills' 9.625%
Senior Notes contains restrictive covenants that restrict additional
indebtedness, dividends, and investments by Delta Mills and its subsidiaries.
The payment of dividends with respect to Delta Mills' stock is permitted if
there is no event of default under the indenture and after payment of the
dividend, Delta Mills 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 the Company if there is no event of
default and a fixed charge coverage ratio test is satisfied. At September 27,
2003, Delta Mills was prohibited by these covenants from paying dividends and
making loans to Delta Woodside. During the three months ended September 27, 2003
and the year ended June 28, 2003, Delta Mills did not pay any dividends to Delta
Woodside Industries, Inc.
Delta Mills 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 Delta Mills' books at full value and represent amounts due Delta
Mills from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on Delta Mills' books as
incurred as a part of selling, general and administrative expense.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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 settlement are
adequate and any payment in settlement of this matter will not result in a
material impact on the Company's results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions.
Impairment of Long - Lived Assets: 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.
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
September 27, 2003 and June 28, 2003, the Company established a full valuation
allowance for its net deferred tax assets.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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. Positive evidence supporting the realizability of the Company's
deferred tax assets includes improved operating results in fiscal 2003 and the
longer term periods over which net operating loss carryforwards expire. The
Company's pre-tax operating losses in fiscal 2002, fiscal 2001 and the first
quarter of fiscal 2004 represent negative evidence, which is difficult to
overcome under SFAS 109, with respect to the realizability of the Company's
deferred tax assets.
To fully realize the deferred tax assets for net operating losses, the Company
will need to generate future taxable income of approximately $29,000,000 in the
United States. The Company's federal net operating loss carryforwards generally
expire in varying intervals from 2013 to 2021, while state loss carryforwards
expire at various intervals beginning in fiscal 2004. Management currently
believes that it is more likely than not that the Company will be unable to
fully utilize its net deferred tax assets before they expire. Therefore, SFAS
109 required the Company to record a full valuation allowance for its net
deferred tax assets. Accordingly, the Company has a full valuation allowance for
its net deferred tax assets of $7,692,000 at September 27, 2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. In recent months, the price of cotton has trended
upward, and the Company increased its cotton inventory during the fourth quarter
of fiscal 2003 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. As of September 27, 2003, a 10% decline
in market price of the Company's fixed price contracts would have had a negative
impact of approximately $0.6 million on the value of the contracts. As of June
28, 2003, such a 10% decline would have had a negative impact of $0.8 million.
The decline in the potential negative impact from June 28, 2003 to September 27,
2003 is due principally to a decline in the quantity of cotton with fixed prices
as compared to the previous period.
Interest Rate Sensitivity
The $50 million secured four-year revolving credit facility expiring in 2007 is
sensitive to changes in interest rates. Interest is based on a spread over LIBOR
or a base rate. An interest rate increase would have a negative impact to the
extent the Company borrows against the revolving credit facility. The impact
would be dependent on the level of borrowings incurred. As of September 27,
2003, an increase in the interest rate of 1% would have a negative impact of
approximately $230,000 annually. As of June 28, 2003, an increase in the
interest rate of 1% would have had a negative impact of approximately $249,000
annually. The decrease in the potential negative impact from June 28, 2003 to
September 27, 2003 is due to the decrease in borrowings from the facility.
An interest rate change would not have an impact on the payments due under the
fixed rate ten year Senior Notes.
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Item 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
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-14(c) and 15d-14(c)), have
concluded that, as of September 27, 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.
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 during the most recent fiscal quarter, 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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults upon Senior Securities
At the end of the first quarter of fiscal 2004, the Company's operating
subsidiary Delta Mills, Inc. was not in compliance with financial covenants in
its $50 million revolving credit agreement with GMAC imposing a maximum leverage
ratio and a minimum fixed charge coverage ratio. As reported on September 26,
2003, Delta Mills obtained a waiver of compliance with these covenants from GMAC
for the first quarter of fiscal 2004. Management is currently in discussions
with GMAC with respect to amending these covenants or extending the waiver.
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes at the Annual Meeting of the
Company's shareholders held on November 6, 2003.
Broker
For Against Withheld Abstentions Non-Votes
Election of
Directors
W.F. Garrett 5,558,305 72,472
J.P. Danahy 5,556,628 74,149
C.C. Guy 4,960,866 669,911
M. Lennon 5,558,199 72,578
E.E. Maddrey, II 4,933,261 697,516
B.A. Mickel 4,953,794 676,983
Approval of
2004 Stock Plan 2,407,107 1,238,773 8,016 1,976,881
- ---------------
Ratification of
Appointment of
KPMG LLP as
Independent
Auditors for
Fiscal 2004 5,602,859 24,745 3,173
- -----------
Item 5. Other Information
On November 3, 2003, the Company received notification from the New
York Stock Exchange that the Company was below the continued listing standard
that provides that a listed company's average market capitalization cannot be
less than $15 million over a consecutive 30 trading day period. The Company has
been required to submit a business plan to the exchange that returns the Company
to compliance with this continued listing standard within a period of 18 months.
The Company had received a similar notice of non-compliance on April 22, 2002.
The Company complied with all of the NYSE's rules and procedures in this first
instance, returned to compliance, and was deemed cured on February 28, 2003.
Because the Company remains within a 12 month follow-up period after the first
cure, the New York Stock Exchange is requiring the Company to submit its plan
for future compliance on an accelerated basis and may not afford the Company the
full 18 month cure period. The Company's management is considering options to
address the deficiency within the required time frame and expects to present to
representatives of the New York Stock Exchange a business plan that will
demonstrate a return by the Company to compliance with this continued listing
standard. However, there can be no assurance that such materials will be
accepted by the NYSE.
16
Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
4.3.1.5 Letter from GMAC dated September 27, 2003 agreeing to
waive the existing defaults of the Revolving Credit and
Security Agreement dated as of March 31, 2000.
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.
b) Reports on Form 8-K
Form 8-K dated August 19, 2003 reporting Regulation FD Disclosure
and Results of Operations and Financial Condition for the fiscal
quarter and year ended June 28, 2003 under Items 7, 9 and 12
furnished on August 20, 2003.
Form 8-K dated September 26, 2003 reporting Regulation FD
Disclosure and change in Results of Operations and Financial
Condition for the fiscal quarter and year ended June 28, 2003
furnished on September 26, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Woodside Industries, Inc.
(Registrant)
Date November 11, 2003 By: /s/ W. H. Hardman, Jr.
-------------------------- --------------------------------
W.H. Hardman, Jr.
Chief Financial Officer
17