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 December 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.
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(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
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ].
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value--5,893,000 shares as of February 6, 2004
DELTA WOODSIDE INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--December 27, 2003 and June 28, 2003 3
Condensed consolidated statements of operations--
Three and six months ended December 27, 2003 and December 28, 2002 4
Condensed consolidated statements of cash flows--
Six months ended December 27, 2003 and December 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 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
CERTIFICATIONS 27-34
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Delta Woodside Industries Inc. (In Thousands, except share amounts)
December 27, 2003 June 28, 2003
---------------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 776 $ 781
Accounts receivable:
Factor and other 38,506 44,628
Less allowances for returns 19 180
---------------------- ----------------
38,487 44,448
Inventories
Finished goods 8,538 7,711
Work in process 22,812 25,765
Raw materials and supplies 8,864 10,659
---------------------- ----------------
40,214 44,135
Deferred income taxes 655 955
Other assets 399 519
---------------------- ----------------
TOTAL CURRENT ASSETS 80,531 90,838
ASSETS HELD FOR SALE 3,911 3,948
PROPERTY, PLANT AND EQUIPMENT, at cost 160,089 157,400
Less accumulated depreciation 94,964 90,619
---------------------- ----------------
65,125 66,781
DEFERRED LOAN COSTS AND OTHER ASSETS 448 503
---------------------- ----------------
$ 150,015 $ 162,070
====================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 10,245 $ 14,217
Revolving credit facility 19,487 24,856
Accrued employee compensation 4,738 1,414
Accrued and sundry liabilities 10,110 10,303
---------------------- ----------------
TOTAL CURRENT LIABILITIES 44,580 50,790
LONG-TERM DEBT 31,941 31,941
DEFERRED COMPENSATION 4,345 7,578
NON-CURRENT DEFERRED INCOME TAXES 655 955
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01 a share -- authorized
50,000,000 shares, issued and outstanding 5,893,000 shares
at December 27, 2003 and 5,862,000 at June 28, 2003 59 59
Additional paid-in capital 87,038 86,869
Accumulated deficit (18,603) (16,122)
---------------------- ----------------
68,494 70,806
COMMITMENTS AND CONTINGENCIES
---------------------- ----------------
$ 150,015 $ 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 6 Mths Ended 6 Mths Ended
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
---------------- ----------------- ----------------- ----------------
Net sales $ 48,500 $ 35,853 $ 91,081 $ 82,032
Cost of goods sold 44,087 32,168 86,049 72,802
---------------- ----------------- ----------------- ----------------
Gross profit 4,413 3,685 5,032 9,230
Selling, general and administrative expenses 2,968 2,556 5,811 5,461
Other income 411 23 701 488
---------------- ----------------- ----------------- ----------------
OPERATING PROFIT (LOSS) 1,856 1,152 (78) 4,257
Other (expense) income:
Interest expense (1,161) (1,240) (2,368) (2,771)
Gain on extinguishment of debt 565 1,303
---------------- ----------------- ----------------- ----------------
(1,161) (675) (2,368) (1,468)
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 695 477 (2,446) 2,789
Income tax expense 35 184 35 1,074
---------------- ----------------- ----------------- ----------------
NET INCOME (LOSS) $ 660 $ 293 $ (2,481) $ 1,715
================ ================= ================= ================
Basic and diluted earnings (loss) per share $ 0.11 $ 0.05 $ (0.42) $ 0.29
================ ================= ================= ================
Weighted average shares outstanding 5,892 5,862 5,892 5,861
================ ================= ================= ================
See notes to consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Woodside Industries Inc. (In Thousands)
6 Months Ended 6 Months Ended
December 27, 2003 December 28, 2002
----------------------- ----------------------
OPERATING ACTIVITIES
Net income (loss) $ (2,481) $ 1,715
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 4,396 4,578
Amortization 55 68
Discount to face value on repurchase of bonds (1,303)
Gain on disposition of property and equipment (253) (433)
Change in deferred income taxes 664
Deferred compensation 418 (86)
Changes in operating assets and liabilities 5,626 7,020
----------------------- ----------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 7,761 12,223
----------------------- ----------------------
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (2,795) (3,302)
Proceeds of dispositions 424 775
----------------------- ----------------------
NET CASH USED IN
INVESTING ACTIVITIES (2,371) (2,527)
----------------------- ----------------------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 91,571 88,752
Repayments on revolving lines of credit (96,940) (96,180)
Repurchase and retirement of long term debt (1,778)
Repurchase common stock (26) (24)
----------------------- ----------------------
NET CASH USED IN
FINANCING ACTIVITIES (5,395) (9,230)
----------------------- ----------------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (5) 466
Cash and cash equivalents at beginning of period 781 314
----------------------- ----------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 776 $ 780
======================= ======================
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 six months ended December 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 December 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 average interest
rate on the credit facility was 2.907% at December 27, 2003 and is based on a
spread over either LIBOR or a base rate. Borrowings under this facility were
$19.5 million and $24.9 million as of December 27, 2003 and June 28, 2003,
respectively. As of December 27, 2003, the revolver availability was
approximately $25 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.
At the end of the quarter ended December 27, 2003, Delta Mills had returned to
compliance with all covenants related to its $50 million revolving credit
facility. 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. The
indenture pertaining to Delta Mills' 9.625% Senior Notes also 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 charge coverage ratio test.
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 subject to compliance with the same conditions. At
December 27, 2003, Delta Mills was prohibited by these covenants from paying
dividends and making loans to Delta Woodside. During the six months ended
December 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 six months ended December 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)
Shares issued 26 26
Net loss (2,481) (2,481)
--------------- ---------------------------------- -----------------
Balance at December 27, 2003 $59 $87,038 $(18,603) $68,494
=============== ================================== =================
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 recorded an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. The Company
recorded an $8.2 million non-cash asset write-down to reflect the property and
equipment at the Furman Plant at its estimated fair value, less selling costs.
The carrying amount of these assets was reduced to approximately $3,923,000. The
balance of the charge was approximately $0.5 million of accrued expenses for
involuntary termination costs associated with the 122 employees terminated as a
result of the plant closing. Production at the Furman facility ceased in October
2001, and the Company is in the process of liquidating the assets associated
with this facility.
During the six months of fiscal 2004 ended December 27, 2003 and the
corresponding period of fiscal 2003 ended December 28, 2002, the Company paid
$236,000 and $30,000, respectively, in restructuring costs. The Company had a
remaining liability of $106,000 and $342,000 as of December 27, 2003 and June
28, 2003, respectively.
As of December 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 quarter and six months ended December 27, 2003, the
Company did not recognize any gains from the repurchase of debt. For the three
months ended December 28, 2002, Delta Mills, Inc. purchased $1,527,000 face
amount of its 9.625% Senior Notes for $962,000. The Company recognized a gain of
$565,000 as a result of these purchases. For the six months ended December 28,
2002, Delta Mills, Inc. purchased $3,080,000 face amount of its 9.625% Senior
Notes for $1,777,000. The Company recognized a gain of $1,303,000 as a result of
these purchases. These gains from the repurchase of debt are included in income
before income taxes in the accompanying statements of operations.
NOTE F - STOCK COMPENSATION
The Company applies the intrinsic value-based method of accounting for its stock
compensation, 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) 3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
12/27/2003 12/28/2002 12/27/2003 12/28/2002
------------- ------------- ------------- -------------
Net income (loss), as reported $ 660 $ 293 $ (2,481) $ 1,715
Add stock based employee compensation expense
included in reported net income (loss), net of tax 0 42 26 83
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects 0 (121) (26) (242)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ 660 $ 214 $ (2,481) $ 1,556
============= ============= ============= =============
Income (loss) per share:
Basic and diluted - as reported $ 0.11 $ 0.05 $ (0.42) $ 0.29
============= ============= ============= =============
Basic and diluted - pro forma $ 0.11 $ 0.04 $ (0.42) $ 0.27
============= ============= ============= =============
8
NOTE F - STOCK COMPENSATION - CONTINUED
The Company's 2004 Stock Plan was approved by the Company's shareholders on
November 6, 2003. The Stock Plan permits the Company to grant restricted stock
awards and phantom stock awards for up to an aggregate maximum of 240,000 shares
of the Company's common stock. The Company granted awards for 132,000 shares of
restricted stock and phantom stock awards with respect to 88,000 shares during
December of 2003.
All awards granted are subject to vesting conditions, including conditions based
on continued employment with the Company (fifty percent of the awards) and
performance-based conditions (fifty percent of the awards). One third of the
shares subject to vesting based on continued employment will vest on the last
day of each of fiscal years 2004, 2005 and 2006. The shares subject to vesting
based on performance will vest if certain targets are attained for net income
and return on assets in each of fiscal years 2004, 2005 and 2006. A participant
in the plan may not transfer shares issued under the plan prior to the fifth
anniversary of the date the shares first vested. To the extent that an award is
forfeited, any shares subject to the forfeited portion of the award will again
become available for issuance under the Stock Plan. The issuance of shares is
subject to registration of such issuance under the Securities Act of 1933, as
amended, and acceptance of the shares for additional listing by the New York
Stock Exchange.
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
amounted to $1.5 million, which included 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.
NOTE H - DEFERRED COMPENSATION
On January 16, 2004, based on the recommendation of Delta Woodside's
Compensation Committee, the Board (with Mr. Garrett abstaining) approved an
amendment of the Company's deferred compensation plan contingent on receiving
the requisite consent of the Company's revolving credit agreement lender. This
consent has subsequently been obtained. The deferred compensation plan amendment
provides that each participant's deferred compensation account will be paid to
the participant upon the earlier of the participant's termination of employment
or in accordance with a schedule of payment that will pay approximately 40%,
30%, 20% and 10% of the participant's current account on February 15 of 2004,
2005, 2006 and 2007, respectively. Any such February 15 payment will be
conditioned on there being no default under the Delta Mills Senior Note
Indenture or the Company's revolving credit facility and on compliance with the
fixed charge coverage ratio test in the Senior Note Indenture for the most
recently ended four full fiscal quarters, determined on a pro forma basis. As a
result of this amendment to the deferred compensation plan, approximately $3.7
million, which represents the first February 15 payment, plus distributions
anticipated to occur in the next twelve months due to participant retirements,
has been reclassified on the balance sheet at December 27, 2003 from deferred
compensation to accrued employee compensation in current liabilities.
NOTE I - EARNINGS PER SHARE
Basic and diluted earnings per share is based upon the number of weighted
average shares outstanding. Options outstanding at December 27, 2003 and
December 28, 2002 for approximately 371,000 and 403,000 shares, respectively,
were excluded from the calculation of diluted income (loss) per share as the
impact would have been antidilutive.
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
During the quarter and six months ended December 27, 2003, the Company
experienced 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.
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.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Net sales for the quarter ended December 27, 2003 were $48.5 million, an
increase of 35.3% when compared to net sales of $35.9 million for the quarter
ended December 28, 2002. The increase over the prior year quarter was the result
of increased unit sales partially offset by a 2.3% decline in average sales
price. Net sales for the six months ended December 27, 2003 were $91.1 million,
an increase of 11.0% when compared to net sales of $82.0 million for the six
months ended December 28, 2002. This increase was the result of an increase in
unit sales partially offset by a 1.0% decline in average sales price. Unit sales
increased because customer demand improved, primarily as a result of stronger
retail sales coupled with improved demand for military fabrics. Product mix
changes accounted for the decline in average sales price.
Gross profit was $4.4 million and 9.1% of net sales for the second quarter of
fiscal year 2004. This compares to gross profit of $3.7 million and 10.3% of net
sales in the prior year second quarter. Gross profit for the six months ended
December 27, 2003 was $5.0 million and 5.5% of net sales as compared to gross
profit of $9.2 million and 11.3% of net sales for the six months ended December
28, 2002. The improvement in gross profit in the current year quarter was
impacted by improved manufacturing costs absorbed due to increased running
schedules, partially offset by deteriorating margins on commodity products due
to continued pressure from imports coupled with over capacity of domestic
textile production. The decline in gross profit for the current year six month
period resulted principally from unabsorbed manufacturing costs associated with
reduced running schedules during the first quarter brought on by reduced
customer demand in the first quarter coupled with deteriorating margins as
mentioned above. Increased employee benefit costs in the first quarter also
contributed to the decline in gross profit.
Selling, general and administrative expense (SG&A) was $3.0 million and 6.1% of
net sales for the second quarter of fiscal year 2004 compared to SG&A of $2.6
million and 7.1% of net sales for the prior year second quarter. Selling,
general and administrative expense (SG&A) was $5.8 million and 6.4% of net sales
for the six months ended December 27, 2003 compared to SG&A of $5.5 million and
6.7% of net sales for the six months ended December 28, 2002. The increase in
SG&A in the quarter and the six month period is attributable to an increase in
distribution costs associated with increased unit volume, an increase in
factoring costs associated with increased sales to customers based in the
Caribbean, and increased costs of audit and tax services.
The Company reported an operating profit of $1.9 million for the quarter ended
December 27, 2003 compared to an operating profit of $1.2 million in the prior
year quarter. The Company reported an operating loss of $78,000 for the six
months ended December 27, 2003 compared to an operating profit of $4.3 million
for the six months ended December 28, 2002. The improvement in operating profit
for the current year quarter was attributable to the improvement in gross profit
discussed above and a gain on disposal of equipment reflected in other operating
income, somewhat offset by the increase in SG&A expense. The decline in
operating profit for the current year six month period was caused primarily by
the decline in gross profit discussed above.
Interest expense was $1.2 million and $2.4 million for the quarter and six
months ended December 27, 2003, respectively, compared to $1.2 million and $2.8
million for the corresponding prior year periods. The reduction in interest
expense for the six month period was primarily due to the reduction in the
balance of Delta Mills' 9.625% Senior Notes. The prior year quarter and six
month periods are each net of $.2 million interest capitalized related to
capital projects. Capitalized interest in the current year periods was not
material. There was no interest income in either the current or prior year.
Included in other (expense) income for the quarter ended December 28, 2002 was a
$0.6 million gain resulting from the repurchase by Delta Mills of a portion of
its 9.625% Senior Notes. Included in this category for the six months ended
December 28, 2002 was a $1.3 million gain also resulting from the repurchase by
Delta Mills of a portion of its 9.625% Senior Notes. There was no income or
expense in this category in the current quarter and six months ended December
27, 2003.
Income tax expense for the current year quarter and six months ending December
27, 2003 was $35,000 relating to state taxes. There was no federal tax expense
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 and six months, the Company recorded tax expense of $0.2
million and $1.1 million, respectively.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The Company reported net income of $0.7 million or $0.11 per common share for
the quarter ended December 27, 2003 compared to net income of $0.3 million or
$0.05 per common share for the quarter ended December 28, 2002. For the six
months ended December 27, 2003, the Company reported a net loss of $2.5 million
or $0.42 per common compared to net income of $1.7 million or $0.29 per common
share for the six months ended December 28, 2002. Net income for the previous
year quarter included a gain of $0.2 million on an after tax basis from the
repurchase by Delta Mills of a portion of its 9.625% Senior Notes. Net income
for the previous year six months included a gain of $0.8 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 six months ended December 27, 2003, the Company generated $7.8 million
in cash from operations. The principal uses of cash were capital expenditures of
$2.4 million, net of $0.4 million in proceeds from the disposal of assets. The
outstanding borrowings under the GMAC revolver decreased $5.4 million from the
balance at June 28, 2003. The Company is currently in compliance with all of the
covenants related to its $50 million revolving credit facility. 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. At the end of the quarter ended December 27,
2003, Delta Mills had returned to compliance with all covenants related to its
$50 million revolving credit facility. 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.
On January 16, 2004, based on the recommendation of Delta Woodside's
Compensation Committee, the Board (with Mr. Garrett abstaining) approved an
amendment of the Company's deferred compensation plan. The amendment was
contingent on receiving the requisite consent of the Company's revolving credit
agreement lender. This consent has subsequently been obtained. The deferred
compensation plan amendment provides that each participant's deferred
compensation account will be paid to the participant upon the earlier of the
participant's termination of employment or in accordance with a schedule of
payment that will pay approximately 40%, 30%, 20% and 10% of the participant's
current account on February 15 of 2004, 2005, 2006 and 2007, respectively. Any
such February 15 payment will be conditioned on there being no default under the
Delta Mills Senior Note Indenture or the Company's revolving credit facility and
on compliance with the fixed charge coverage ratio test in the Senior Note
Indenture for the most recently ended four full fiscal quarters, determined on a
pro forma basis. The Compensation Committee and the Board adopted this amendment
as a measure to retain key employees who, in light of the general difficulties
in the textile industry, have expressed a desire to diversify their retirement
assets. As of December 27, 2003, the Company's aggregate deferred compensation
liability was approximately $8 million. Of this amount, approximately
$1,949,000, $463,000 and $131,000 were for the accounts of William F. Garrett,
CEO, William H. Hardman, Jr., CFO, and Donald C. Walker, Controller,
respectively.
As a result of this amendment to the deferred compensation plan, approximately
$3.7 million, which represents the first February 15 payment, plus distributions
anticipated to occur in the next twelve months due to participant retirements,
has been reclassified on the condensed consolidated balance sheet at December
27, 2003 from deferred compensation to accrued employee compensation in current
liabilities. The Company estimates that this amendment will result in interest
savings of $1.1 million over the next four years and approximately $5.1 million
over the term of the original plan.
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, 2005 and 2006, 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 $5.0 million and $5.0 million planned for capital
expenditures in fiscal years 2004 and 2005, respectively. During the quarter
ended December 27, 2003, the Company revised its capital expenditure plans to
delay a portion of its spending into fiscal 2006.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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
December 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 average interest
rate on the credit facility was 2.907% at December 27, 2003 and is based on a
spread over either LIBOR or a base rate. Borrowings under this facility were
$19.5 million and $24.9 million as of December 27, 2003 and June 28, 2003,
respectively. As of December 27, 2003, the revolver availability was
approximately $25 million. At the end of the quarter ended December 27, 2003,
Delta Mills was in compliance with all covenants related to its $50 million
revolving credit facility. 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. The
indenture pertaining to Delta Mills' 9.625% Senior Notes also 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 charge coverage ratio test.
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 subject to compliance with the same conditions. At
December 27, 2003, Delta Mills was prohibited by these covenants from paying
dividends and making loans to Delta Woodside. During the six months ended
December 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.
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
amounted to $1.5 million, which included 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.
13
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised Interpretation No. 46 ("FIN
46"),"Consolidation of Variable Interest Entities," which was originally issued
in January 2003, to provide guidance regarding issues arising from the
implementation of FIN 46. Many variable interest entities have commonly been
referred to as special-purpose entities or off-balance sheet structures. In
general, a variable interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period ending after December
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN 46 did not have an 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
December 27, 2003 and June 28, 2003, the Company established a full valuation
allowance for its net deferred tax assets.
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.
14
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 beginning in fiscal 2004. The Company's federal net operating loss
carryforwards generally expire in varying intervals from 2013 to 2021, while
state loss carryforwards began to expire at various intervals beginning in
fiscal 2003. 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 $ 8,297,000 at December
27, 2003.
15
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 December 27, 2003, a 10% decline
in market price of the Company's fixed price contracts would have had a negative
impact of approximately $0.4 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 December 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 December 27, 2003,
an increase in the interest rate of 1% would have a negative impact of
approximately $195,000 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
December 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-15(e) and 15d-15(e)), have
concluded that, as of December 27, 2003, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act was recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
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.
16
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 (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders
Incorporated by reference from Part II, Item 4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27, 2003.
Item 5. Other Information
As previously announced, the Company received notification from the New York
Stock Exchange (NYSE) on November 3, 2003 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's plan for restoring compliance with the $15 million market
capitalization criterion was submitted to the NYSE on December 2, 2003. As a
result of its review, the NYSE's Compliance Committee informed the Company that
if the Company restores its absolute and 30 trading day average market
capitalization to the required $15 million level by March 31, 2004 (and the
30-day average market capitalization does not fall below $7.5 million before
such date), the NYSE will refrain from initiating suspension and delisting
procedures against the Company and reassess continued listing at that time. The
Company's average market capitalization for the 30 trading day period ended
February 6, 2004 was $14.6 million and the Company's market capitalization on
February 6, 2004 was $14.1 million. There can be no assurance that the Company
will meet the criteria described above by March 31, 2004.
The NYSE has very recently amended its continued listing criteria to provide
that a listed company such as the Company will be below continued listing
compliance standards if either (1) its average global market capitalization over
a consecutive 30 trading day period is less than $75 million (increased from $50
million prior to the amendment) and, at the same time, its total stockholders'
equity is less than $75 million (increased from $50 million) or (2) its average
global market capitalization over a consecutive 30 trading-day period is less
than $25 million (increased from $15 million). The NYSE has advised the Company
that it must come into compliance with the old criteria by March 31, 2004, and
after that date, it will have the opportunity to present materials to the NYSE
that reflect a return to compliance with the new standards over a period of 12
months. The Company is currently developing its response to the new criteria. At
December 27, 2003, the Company's stockholders' equity was approximately $68.5
million. There can be no assurance that the Company will meet the new continued
listing criteria within the required timeframe.
17
Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
4.3.1.5 Consent Under Credit Agreement and Other Documents dated as of February 4, 2004 between Delta Woodside
Industries, Inc. and GMAC Commercial Finance LLC.
10.1.1 First Amendment dated December 23, 2003 to Delta Woodside Deferred Compensation Plan for Key
Managers, Amended and Restated Effective June 30, 2000.
10.1.2 Second Amendment dated January 16, 2004 to Delta Woodside Deferred Compensation Plan for Key Managers,
Amended and Restated Effective June 30, 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 October 21, 2003 reporting Regulation FD Disclosure and Results of Operations and Financial Condition
for the fiscal quarter ended September 27, 2003 under Items 7, 9 and 12 furnished on October 21, 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 February 10, 2004 By: /s/ W. H. Hardman, Jr.
---------------------------------- ------------------------------
W.H. Hardman, Jr.
Chief Financial Officer
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