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 333-376-17
DELTA MILLS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6126 100 Augusta Street
Greenville, South Carolina 29606
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(Address of principal executive offices) (Zip Code)
864 255-4122
----------------
(Registrant's telephone number, including area code)
(Not Applicable)
----------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act ). Yes [ ] No [ X ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value -
100 shares as of November 10, 2003.
DELTA MILLS, 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 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17-24
2
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
Delta Mills, Inc. (In Thousands, except share amounts) September 27, 2003 June 28, 2003
----------------------- ---------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 593 $ 520
Accounts receivable:
Factor and other 37,736 44,628
Less allowances for returns 3 180
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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
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41,868 44,135
Deferred income taxes 1,067 1,517
Other assets 267 520
----------------------- ---------------------
TOTAL CURRENT ASSETS 81,528 91,140
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 432 459
----------------------- ---------------------
$ 151,790 $ 162,328
======================= =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 9,746 $ 14,217
Revolver 23,023 24,856
Payable to Affiliates 3,686 3,517
Accrued employee compensation 1,242 1,414
Accrued and sundry liabilities 19,821 20,479
----------------------- ---------------------
TOTAL CURRENT LIABILITIES 57,518 64,483
LONG-TERM DEBT 31,941 31,941
NON-CURRENT DEFERRED INCOME TAXES 6,628 8,421
DEFERRED COMPENSATION 7,770 7,573
SHAREHOLDER'S EQUITY
Common Stock -- par value $.01 a share -- authorized
3,000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Accumulated deficit (3,859) (1,882)
----------------------- ---------------------
47,933 49,910
COMMITMENTS AND CONTINGENCIES
----------------------- ---------------------
$ 151,790 $ 162,328
======================= =====================
See notes to consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Delta Mills Inc.
(In Thousands)
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
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Gross profit 619 5,545
Selling, general and administrative expenses 2,828 2,895
Other income 290 465
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OPERATING PROFIT (LOSS) (1,919) 3,115
Other (expense) income:
Interest expense (1,207) (1,531)
Gain on extinguishment of debt 738
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(1,207) (793)
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INCOME (LOSS) BEFORE
INCOME TAXES (3,126) 2,322
Income tax expense (benefit) (1,149) 890
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NET INCOME (LOSS) $ (1,977) $ 1,432
================= =================
See notes to consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Mills Inc.
(In Thousands)
3 Months Ended 3 Months Ended
September 27, September 28,
2003 2002
-------------------- -------------------
OPERATING ACTIVITIES
Net income (loss) $ (1,977) $ 1,432
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)
Change in deferred income taxes (1,342) (166)
Gain on disposition of property and equipment (253) (433)
Deferred compensation 197 (272)
Changes in operating assets and liabilities 4,102 3,355
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,953 5,501
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INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (1,355) (1,306)
Proceeds of dispositions 308 743
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NET CASH USED IN INVESTING ACTIVITIES (1,047) (563)
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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)
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NET CASH USED IN FINANCING ACTIVITIES (1,833) (4,426)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 73 512
Cash and cash equivalents at beginning of period 520 52
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 593 $ 564
==================== ===================
See notes to consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Delta
Mills, 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--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (the "Guarantor") is a wholly-owned subsidiary of
the Company and has fully and unconditionally guaranteed (the "Guarantee") the
Company's payment of principal, premium, if any, interest and certain liquidated
damages, if any, on the Company's Senior Notes. The Guarantor's liability under
the Guarantee is limited to such amount, the payment of which would not have
left the Guarantor insolvent or with unreasonably small capital at the time its
Guarantee was entered into, after giving effect to the incurrence of existing
indebtedness immediately prior to such time.
The Guarantor is the sole subsidiary of the Company and does not comprise a
material portion of the Company's assets or operations. All future subsidiaries
of the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.
The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.
Summarized financial information for the Guarantor is as follows (in thousands):
September 27, 2003 June 28, 2003
------------------ -------------
Current assets $ 135 $ 88
Non-current assets 32 38
Current liabilities 1,845 1,912
Non-current liabilities 1,169 1,047
Stockholders' deficit $(2,847) $ (2,833)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Three Months Ended
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September 27, 2003 September 28, 2002
------------------ ------------------
Net sales - Intercompany commissions $ 949 $ 1,040
Cost and expenses 963 895
Net income (loss) (14) 145
6
NOTE C-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997, the Company issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
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, the Company's' $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 the Company's' Catawba Plant, the operational closing of
which was announced on 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 inventories of the Company. The facility is secured by the accounts
receivable, inventories and capital stock of the Company. 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, the Company 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, the Company 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
the Company' 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 the Company's 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, the Company was prohibited by these covenants from paying
dividends to Delta Woodside. 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 the Company's 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. The Company may loan funds to the Delta Woodside if there is no
event of default and a fixed charge coverage ratio test is satisfied. At
September 27, 2003, the Company 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, the Company did not pay any
dividends to Delta Woodside Industries, Inc.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance LLC (the "Factor") under a factor agreement. The
assignment of these receivables is primarily without recourse, provided that
customer orders are approved by the Factor prior to shipment of goods, up to a
maximum for each individual account. The assigned trade accounts receivable are
recorded on the Company's books at full value and represent amounts due the
Company from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Company's books as
incurred as a part of selling, general and administrative expense.
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.
7
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES - CONTINUED
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.
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 participates in the Delta Woodside Industries Inc. Stock Option
Plan. 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.
8
NOTE F - STOCK OPTIONS - CONTINUED
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) Quarter Ended Quarter Ended
September 27, 2003 September 28, 2002
------------------------ -----------------------
Net income (loss), as reported $ (1,977) $ 1,432
Add stock based employee compensation expense
included in reported net income (loss), net of tax 16 41
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (16) (121)
------------------------ -----------------------
Pro forma net income (loss) $ (1,977) $ 1,352
======================== =======================
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.
Delta Mills, Inc. ("the Company") sells a broad range of woven, finished apparel
fabric primarily to branded apparel manufacturers and resellers. The Company
also sells camouflage fabric and other fabrics used in apparel sold to the
United States Department of Defense.
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 6.6% 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 the Company's
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 the Company 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.
The income tax benefit for the current quarter was $1.1 million. This compares
to an income tax expense of $0.9 million in the previous year quarter. The
effective tax rate for the three months ended September 27, 2003 was
approximately 36.8% compared to an effective tax rate of 38.3% in the prior year
quarter.
The Company reported a net loss of $2.0 million for the quarter ended September
27, 2003 compared to net income of $1.4 million 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 the Company of a portion of
its 9.625% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 27, 2003, the Company generated $3.0
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 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, the Company 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, 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
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, the Company's' $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 the Company's' Catawba Plant, the operational closing of
which was announced on 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 inventories of the Company. The facility is secured by the accounts
receivable, inventories and capital stock of the Company. 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, the Company 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, the Company 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
the Company' 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 the Company's 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, the Company was prohibited by these covenants from paying
dividends to Delta Woodside. 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 the Company's 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. The Company may loan funds to the Delta Woodside if there is no
event of default and a fixed charge coverage ratio test is satisfied. At
September 27, 2003, the Company 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, the Company did not pay any
dividends to Delta Woodside Industries, Inc.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance LLC (the "Factor") under a factor agreement. The
assignment of these receivables is primarily without recourse, provided that
customer orders are approved by the Factor prior to shipment of goods, up to a
maximum for each individual account. The assigned trade accounts receivable are
recorded on the Company's books at full value and represent amounts due the
Company from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Company's books as
incurred as a part of 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 had approximately $5.6 million
and $6.9 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.
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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.
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.
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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 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, the Company 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 (not applicable)
Item 5. Other Information (not applicable)
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Mills, Inc.
-----------------------------------
(Registrant)
Date November 11, 2003 By:/s/ W.H. Hardman, Jr.
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W.H. Hardman, Jr.
Chief Financial Officer
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