UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 333-37617
DELTA MILLS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
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(State of Incorporation) (I.R.S. Employer Identification No.)
PO Box 6126
100 Augusta Street
Greenville, South Carolina 29606
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(Address of principal executive offices) (Zip code)
864/255-4100
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
None
1
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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The aggregate market value of the common equity stock held by non-affiliates of
the registrant as of December 27, 2003 was:
Common Stock, $.01 par value - 0
The number of shares outstanding of each of the registrant's classes of Common
Stock, as of October 1, 2004 was:
Common Stock, par value $.01 100
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
2
FOR THE FISCAL YEAR ENDED JULY 3, 2004
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 5
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common equity and Related Stockholder Matters and Issuer Purchases 11
of Equity Securities
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 42
Item 9A. Controls and Procedures 42
Item 9B. Other Information 42
PART III
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Principal Accountant Fees and Services 43
PART IV
Item 15. Exhibits and Financial Statement Schedules 44
3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
The following discussion contains various "forward-looking statements". All
statements, other than statements of historical fact, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future are forward-looking statements. Examples are statements that
concern future revenues, future costs, future capital expenditures, business
strategy, competitive strengths, competitive weaknesses, goals, plans,
references to future success or difficulties and other similar information. The
words "estimate", "project", "forecast", "anticipate", "expect", "intend",
"believe" and similar expressions, and discussions of strategy or intentions,
are intended to identify forward-looking statements.
The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a number
of business risks and uncertainties, any of which could cause actual results to
differ materially from those set forth in or implied by the forward-looking
statements. These risks and uncertainties include, but are not limited to:
o changes in the retail demand for apparel products
o the cost of raw materials
o competitive conditions in the apparel and textile industries
o the relative strength of the United States dollar as against other
currencies
o changes in United States and international trade regulations,
including without limitation the expected end of quotas on textile and
apparel products amongst WTO member states in 2005
o the discovery of unknown conditions, such as environmental matters and
similar items
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized. You should also review
the other cautionary statements we make in this Annual Report and in other
reports and other documents the Company files with the Securities and Exchange
Commission. All forward-looking statements attributable to us, or persons acting
for us, are expressly qualified in their entirety by our cautionary statements.
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.
4
PART I.
ITEM I. BUSINESS
GENERAL
Delta Mills, Inc. ("Delta Mills" or the "Company") is a Delaware corporation
with its principal executive offices located at 100 Augusta Street, PO Box 6126,
Greenville, South Carolina 29606 (telephone number: 864-255-4100). The Company
is a wholly owned subsidiary of Delta Woodside Industries, Inc. ("Delta
Woodside"), a South Carolina corporation, the common stock of which is listed on
the NASDAQ OTC Bulletin Board under the symbol "DLWI". Unless the context
otherwise requires, all references herein to "Delta Mills" or the "Company"
refer to Delta Mills, Inc. and any of its existing and future subsidiaries. The
Company was incorporated in Delaware in 1971 and acquired by a predecessor of
Delta Woodside Industries, Inc. in 1986.
PRODUCTS, RAW MATERIALS, AND MANUFACTURING
The Company manufactures woven textile fabrics from cotton, wool, flax or
synthetic fibers from cotton yarn or from synthetic filament yarns. Cotton is
purchased from numerous suppliers. Wool, flax, synthetic fibers and synthetic
filament yarns are purchased from a smaller number of competitive suppliers. The
Company spins the major portion of the spun yarns used in its weaving operations
and the balance is purchased from a small number of domestic spinners. The
Company expects the portion of its yarn purchases from outside suppliers to
increase in fiscal year 2005. In manufacturing these yarns, the cotton and
synthetic fibers, either separately or in blends, are carded (fibers
straightened and oriented) and then spun into yarn. The Company combs (removing
short fibers) some cotton fiber to make high quality yarns. In other fabrics,
filament yarns are used. The spun or filament yarn is then woven into fabric on
looms. The unfinished fabric at this stage is referred to as greige goods.
Finished fabric refers to fabric that has been treated by washing, bleaching,
dyeing and applying certain chemical finishes. Finished apparel fabric is ready
to be cut and sewn into garments.
The Company's principal raw material is cotton, although it also spins
polyester, wool, linen fiber, acrylic, lyocell, nylon and rayon fibers and
weaves textured polyester filament. Polyester is obtained primarily from two
major suppliers, both of whom provide competitive prices. Polyester prices for
fiscal year 2004 were unchanged from fiscal year 2003. The Company's average
price per pound of cotton purchased and consumed, including freight and carrying
costs, was $0.590 in fiscal year 2004 as compared to $0.463 in fiscal year 2003,
and $0.594 in fiscal year 2002. As of July 3, 2004, the Company had contracted
to purchase 74%, and had fixed the price for approximately 47%, of its expected
cotton requirements for fiscal year 2005. The percentage of the Company's cotton
requirements that the Company fixes each year varies depending upon the
Company's forecast of future cotton prices. The Company believes that recent
cotton prices have enabled it to contract for cotton at prices that will permit
it to be competitive with other companies in the United States textile industry
when the cotton purchased for future use is put into production. To the extent
that cotton prices decrease before the Company uses these future purchases, the
Company could be materially and adversely affected, as there can be no assurance
that it would be able to pass along its higher costs to its customers. In
addition, to the extent that cotton prices increase and the Company has not
provided for its requirements with fixed price contracts, the Company may be
materially and adversely affected, as there can be no assurance that it would be
able to pass along these increased costs to its customers.
5
Most of the Company's raw materials are available from more than one primary
source, but the Company is currently depending primarily on one supplier for
rayon staple. This supplier recently emerged from reorganization under Chapter
11 of the federal bankruptcy laws. While the Company does not anticipate, and
has not suffered, any adverse effects from this reorganization, there can be no
assurances that this supplier will remain viable in the future. The Company does
not currently have an alternate domestic source for rayon staple. However, the
Company is currently investigating foreign sources of rayon staple or possibly
the use of other types of rayon-like fibers. If an alternate source of rayon
staple must be used, the Company believes that a cost increase is likely.
During fiscal years 2004, 2003 and 2002, approximately 84%, 77% and 83%,
respectively, of the Company's finished woven fabric sales were of fabrics made
from cotton or cotton/synthetic blends, while approximately 16%, 23%, and 17%,
respectively, of such sales were of fabrics made from spun synthetics and other
natural fibers, including various blends of rayon, polyester, and wool. Fabrics
are generally produced and shipped pursuant to specific purchase orders, which
minimizes the Company's uncommitted inventory levels. The Company's production
of cotton and cotton/synthetic blend and spun synthetic finished woven fabrics
is largely vertically integrated, with the Company performing most of its own
spinning, weaving and finishing. The Company's finished fabrics plants are
currently operating at less than full capacity.
SALES AND MARKETING
The Company has focused its marketing efforts on building close relationships
with major apparel companies that have broad distribution channels and that the
Company believes have positioned themselves for long-term growth. The Company
sells its fabrics primarily to numerous apparel manufacturers and apparel
resellers and their subcontractors. These manufacturers and resellers include
Levi-Strauss, Haggar Corp., the Wrangler (R) and Lee(R) divisions of V.F.
Corporation, and Liz Claiborne, Inc. and private label apparel manufacturers for
J.C. Penney Company, Inc., Sears, Roebuck & Co., Wal Mart Stores, Inc. and other
retailers. The Company believes that it is a leading producer of cotton
pants-weight woven fabric used in the manufacture of casual slacks such as
Levi-Strauss' Dockers(R) and Haggar Corp.'s Wrinkle-free(R). Other apparel items
manufactured with the Company's fabrics include women's chino pants, women's
blazers, and career apparel (uniforms). The Company also sells camouflage fabric
and other fabrics used in apparel for the United States Department of Defense.
The Company sells its fabrics through Delta Mills Marketing Inc., a wholly owned
subsidiary with a marketing office based in New York City (which serves the
United States, Canadian and Mexican markets), with sales agents also operating
in Atlanta, Dallas, San Francisco and Mexico.
For fiscal year 2004, the Company had two customers, V.F. Corporation, and
Levi-Strauss and its subcontractors, which exceeded 10% of consolidated net
sales. The Company's net sales to these customers totaled $45 million, or
approximately 26%, of net sales in fiscal 2004. For fiscal year 2003, the
Company had three customers, Levi-Strauss, Haggar Apparel and V.F. Corporation,
net sales to each of which exceeded 10% of consolidated net sales. The Company's
net sales to these customers totaled $71 million, or approximately 40%, of net
sales in fiscal year 2003. For fiscal year 2002, the Company had two customers,
Levi-Strauss and V.F. Corporation, net sales to each of which each exceeded 10%
of consolidated net sales. The Company's aggregate net sales to these customers
were $63 million, or approximately 36%, of net sales for fiscal year 2002. There
is a trend towards selling directly to subcontractors of major apparel companies
either in additional to in lieu of sales directly to the major apparel companies
themselves. The foregoing amounts include sales directly to subcontractors or
the apparel companies named. In addition, during fiscal years 2004, 2003, and
2002, net sales of military fabrics to apparel customers accounted for
approximately 44%, 33%, and 31%, respectively, of the Company's total net sales.
The loss of any of these accounts could have a material adverse effect on the
results of the Company.
6
ORDER BACKLOG
The Company's order backlog at July 3, 2004 was $41.6 million, a decrease of
$13.9 million from the $55.5 million order backlog at June 28, 2003. The
majority of this decrease was in men's apparel fabrics. This decline was
partially offset by an increase in the order backlog for both government and
synthetic fabrics. In recent years, customers in the industry have shortened
lead times for delivery requirements. In response to this, the Company has
implemented a quick response delivery system. The Company expects to ship the
majority of the orders that make up its order backlog during the next twelve
months. However, because the apparel market continues to be soft, management
believes that the order backlog at any given point in time is not an indication
of future sales.
COMPETITION
The cyclical nature of the textile and apparel industries, characterized by
rapid shifts in fashion, consumer demand and competitive pressures, results in
both price and demand volatility. The demand for any particular product varies
from time to time based largely upon changes in consumer preferences and general
economic conditions affecting the textile and apparel industries, such as
consumer expenditures for non-durable goods. In recent years, the Company has
seen a trend toward shorter lead times for its customers' orders. The textile
and apparel industries are also volatile because the supply of particular
products changes as competitors enter or leave the market.
The Company sells primarily to domestic apparel manufacturers, many of which
operate offshore sewing operations. The Company competes with numerous domestic
and foreign fabric manufacturers, including companies larger in size and having
greater financial resources than the Company. The principal competitive factors
in the woven fabrics markets are price, service, delivery time, quality and
flexibility, with the relative importance of each factor depending upon the
needs of particular customers and the specific product offering. Management
believes that the Company can maintain its ability to compete effectively by
providing its customers with a broad array of high-quality fabrics at
competitive prices on a timely basis.
The Company's competitive position varies by product line. There are several
major domestic competitors in the finished cotton and cotton/polyester blend
woven fabrics business, none of which dominates the market. The Company
believes, however, that it has a strong competitive position in the all cotton
pants-weight fabrics business. In addition, the Company believes that it is one
of only two finishers that print camouflage for sale to apparel suppliers of the
U.S. Government and the only supplier that is vertically integrated for
camouflage production. We believe additional competitive strengths of the
Company include: knowledge of its customers' business needs; its ability to
produce special fabrics such as textured blends; state of the art spinning,
weaving and fabric finishing equipment at most of its facilities; substantial
vertical integration; and its ability to communicate electronically with its
customers.
Foreign competition is a significant factor in the United States fabric market.
The Company believes that its relatively small manual labor component,
highly-automated manufacturing processes and domestic manufacturing base allow
the Company to compete on a price basis and to respond more quickly than foreign
producers to changing fashion trends and to its domestic customers' delivery
schedules. In addition, the Company benefits from protections afforded to
apparel manufacturers based in certain Latin American and Caribbean countries
that ship finished garments into the United States. The North American Free
Trade Agreement (often referred to as "NAFTA") entered into force on January 1,
1994. NAFTA has effectively eliminated all tariffs and quotas on goods imported
from Mexico if such goods are made from fabric originating in Canada, Mexico, or
the United States. The Caribbean Basin Trade Partnership Act (often referred to
as "CBTPA") became effective on October 1, 2000. CBTPA has effectively
eliminated tariffs and quotas on apparel products imported from participating
Caribbean and Central American nations if such products are made from fabric
woven in the United States of U.S. yarn. Because NAFTA and CBTPA create an
incentive to use fabric manufactured in the United States, they are beneficial
to the Company and other domestic producers of apparel fabrics. In contrast,
apparel not meeting the origin requirements of these trade preference agreements
is subject to tariffs. If NAFTA or CBTPA were repealed or altered in whole or in
part, the Company believes that it could be at a serious competitive
disadvantage relative to textile manufacturers in other parts of the world
seeking to enter the United States market, which would have a material adverse
effect on the Company. Moreover, there can be no assurance that the current
favorable regulatory environment will continue or that other geographic areas
will not be afforded similar regulatory advantages.
7
The World Trade Organization (often referred to as the "WTO"), a multilateral
trade organization, was formed in January 1995 and is the successor to the
General Agreement on Tariffs and Trade or "GATT". This multilateral trade
organization has set forth mechanisms by which world trade in clothing is being
progressively liberalized by phasing-out quotas and reducing duties. Quotas
among WTO members are to be eliminated by the end of calendar year 2004. As it
implements the WTO mechanisms, the U.S. government is negotiating bilateral
trade agreements with developing countries (which are generally exporters of
textile and apparel products) that are members of the WTO to get them to reduce
their tariffs on imports of textiles and apparel in exchange for reductions by
the United States in tariffs on imports of textiles and apparel. The elimination
of quotas and the reduction of tariffs under the WTO is expected to result in
increased imports of certain textile and apparel products into North America.
These factors could make the Company's products less competitive against low
cost imports from developing countries.
The Company expects to face a significant change in global competition in 2005
as a result of the impact of the WTO's phase-out of textile and apparel quotas.
Tariffs on textile/apparel products are also being reduced (but not eliminated).
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, competitors in 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.
The U.S., the Dominican Republic and the five Central American countries of
Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua have signed the
U.S./Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). This
merged trade agreement is awaiting Congressional consideration. DR-CAFTA will be
a NAFTA-like agreement among the signature countries. The rules of origin will
allow apparel to be imported into the United States without tariff provided the
yarns and fabrics are formed in any participating country. This agreement would
create an incentive for apparel manufacturers to use fabric from this region
rather than from other parts of the world, which could be beneficial to the
Company and other domestic textile manufacturers. Conversely, this agreement may
result in an increase in the production and use of regional fabrics formed
outside the U.S., which would be a disadvantage to the Company.
EMPLOYEES
The Company has approximately 1,500 employees. Unions do not represent any of
the Company's employees and the Company is not aware of any efforts to organize
any of its employees. The Company believes that its relations with its employees
are good.
ENVIRONMENTAL
The Company is subject to various federal, state and local environmental laws
and regulations concerning, among other things, wastewater discharges, storm
water flows, air emissions, ozone depletion and solid waste disposal. The
Company's plants generate very small quantities of hazardous waste, which are
either recycled or disposed of off-site. Most of its plants are required to
possess one or more discharge permits.
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing
Plants, have experienced high nitrate levels at the spray field for these
plants. The Company is working with the South Carolina Department of Health and
Environmental Control ("DHEC") to address this issue. On August 5, 2004, DHEC
proposed a consent agreement, which establishes a groundwater mixing zone with
nitrate parameters that the Company believes it can satisfy without additional,
material cost or future violations. Although there is no assurance that the
Company will be successful and it could face administrative penalties if it is
not, the Company does not currently believe that this matter will have a
material adverse impact on the Company's financial position.
8
In addition, the National Pollutant Discharge Elimination System ("NPDES")
permit issued to the Delta 2 and Delta 3 Finishing Plants on April 1, 2004,
contained a new parameter for zinc that the Company is supposed to meet by April
1, 2006. Discharges from nitrate recovery wells have exceeded this parameter.
The Company has proposed to convert the recovery wells into monitoring wells to
eliminate the zinc discharge and understands that DHEC is amenable to this
approach. Although there is no assurance that the Company will be successful and
it could be required to construct a zinc wastewater treatment feature and/or
face administrative penalties if it is not, the Company does not currently
believe that this matter will have a material adverse impact on the Company's
financial position.
On June 30, 2000, the Company sold its Greensboro, North Carolina plant to the
City of Greensboro. The Company had been working with environmental consultants
in assessing groundwater contamination at this site. Because of these studies,
one-half of the proceeds from the sale of the plant, consisting of approximately
$400,000, were placed in an interest bearing escrow account to cover expenses
related to this contamination. As of the date of this filing, approximately
$306,000 remains in this escrow account. The Company recorded the sale net of
estimated costs to remediate the property. The North Carolina Department of
Environment and Natural Resources is requiring The Company to install a
monitoring well on an adjacent property owner's land. The adjacent owner is
requesting that The Company provide it with the sampling results and indemnify
it from any contamination on its property. If contamination is discovered, the
Company would likely face a claim for damages. At the time of this filing,
management believes that the escrow is sufficient to cover any expenses related
to the remediation of this property.
Delta Woodside's previously owned Nautilus business has been named as a
"potentially responsible party" ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") with respect to three
hazardous waste sites in North Carolina, South Carolina and Mississippi. To the
Company's knowledge, all of the transactions with these sites were conducted by
a corporation (the "Selling Corporation") whose assets were sold in 1990
pursuant to the terms of an order of the United States Bankruptcy Court to
another corporation, the stock of which was subsequently acquired by the Company
in January 1993.
At the North Carolina site, the Selling Corporation is listed as a "de Minimis"
party, and at the South Carolina site, the Selling Corporation has been listed
as an "insolvent" party and would appear to qualify as a "de Minimis" party. The
Company believes that the Selling Corporation's share of the liabilities at
either of these sites will be immaterial.
At the Mississippi site, the PRP group completed the surface removal action and
investigated soil and groundwater contamination, both at the site and in the
surrounding area. The Company's latest information is that the Selling
Corporation is ranked eleventh out of a total of over 300 PRPs in contributions
of material to the site, and, based on volume, the Selling Corporation
contributed approximately 3% of the site's material. To the Company's knowledge,
estimates of costs to clean-up the site were $4 million, and could be higher.
Trichloromethane, one of the substances delivered by the Selling Corporation to
the site, was found in the site's groundwater and at nearby drinking water
wells. The EPA referred the site to the Mississippi Department of Environmental
Quality ("MDEQ") in 1996. In August of 2001, MDEQ indicated to a third party
that it was still considering action at the site. On June 16, 2004, MDEQ
conducted a site investigation for an EPA RCRA contractor to determine if any
homes around the site still used private water wells and located three such
homes.
Although no assurance can be provided, the Company believes that it is shielded
from liability at these three sites by the order of the United States Bankruptcy
Court pursuant to which the Selling Corporation sold its assets to the
corporation subsequently acquired by the Company. The Company has denied any
responsibility at these three sites, has declined to participate as a member of
the respective PRP groups, and has not provided for any reserves for costs or
liabilities attributable to the Selling Corporation.
9
On January 10, 2000, the North Carolina Department of Environment and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous substances at a hazardous waste site known as the Glen
Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by
merger of Delta Mills, Inc., Park Yarn Mills Company, Inc. ("Park Yarn"), owned
the Site for approximately six (6) years, from 1977 to 1983 (prior to the time
Delta Mills, Inc. became a subsidiary of Delta Woodside Industries, Inc.) Delta
Mills, Inc. is aware of no evidence that Park Yarn discharged or deposited any
hazardous substance at the Site or is otherwise a "responsible party" for the
Site. Further, Park Yarn filed bankruptcy and was discharged in 1983. Although
no assurance can be provided, any liability of Park Yarn for the Site may have
been discharged by the bankruptcy order. Accordingly, the Company has denied any
responsibility at the Site, declined to undertake any activities concerning the
Site, and has not provided for any reserves for costs or liabilities
attributable to Park Yarn.
Generally, the environmental rules applicable to the Company are becoming
increasingly stringent. The Company incurs capital and other expenditures in
each year that are aimed at achieving compliance with current and future
environmental standards.
The Company does not expect that the amount of such expenditures in the future
will have a material adverse effect on its operations or financial condition.
There can be no assurance, however, that future changes in federal, state or
local regulations, interpretations of existing regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Similarly, the extent of the Company's liability, if any, for past
failures to comply with laws, regulations and permits applicable to its
operations cannot be determined.
10
ITEM 2 PROPERTIES
The following table provides a description of the Company's principal
facilities.
Approximate
Square
Location Utilization Footage Owned/Leased
-------- ----------- ------- ------------
Greenville, SC Admin Offices 17,400 Leased (1)
New York, NY Sales Offices 10,245 Leased (2)
Beattie Plant, Fountain Inn, SC spin/weave 390,000 (3)
Estes Plant, Piedmont, SC spin/weave 332,000 (3)
Delta 3 Plant, Wallace, SC dye/finish 555,000 (3)
Pamplico and Cypress Plants, Pamplico, SC spin/weave 419,000 (3)
Delta 2 Plant, Wallace, SC dye/finish 347,000 (3)
(1) Delta Woodside leases corporate offices in Greenville, SC that are used by
the Company. The lease expires on December 31, 2008.
(2) Delta Woodside leases a sales office in New York, NY that is used by the
Company. The lease expires in December of 2004.
(3) The title to these facilities and substantially all of the equipment
located in these facilities is held by three South Carolina counties under
a fee-in-lieu-of-taxes arrangement, which has the effect of substantially
reducing the Company's property taxes in South Carolina. Although the
Company can reacquire such property at a nominal price, this would
currently cause a significant increase in the amount of property taxes paid
by the Company.
Except as noted above, all of the above facilities are owned by the Company
subject in certain cases to various outstanding liens. Delta Woodside leases
corporate offices in Greenville, South Carolina. The lease on the corporate
offices expires on December 31, 2008. Sales offices are leased in New York City
under leases expiring in December 2004. At the date of execution of this Form
10-K, the Company's plants are operating at less than full production capacity.
The Company believes that its equipment and facilities are generally adequate to
allow it to remain competitive with its principal competitors.
During the year ended June 29, 2002, the Company announced the closing of its
Furman Plant, a weaving facility located in Fountain Inn, South Carolina. The
equipment run-out schedule was completed in October 2001. The Company has since
liquidated or transferred substantially all of the assets associated with this
facility except for the facility's real property. On August 24, 2004, the
Company contracted to sell the real property for expected net proceeds of
approximately $1.8 million. The sales price, net of selling costs, under the
contract was approximately $847,000 less than the carrying amount of the asset
on the Company's books. Based on this information relative to the fair value of
the property at July 3, 2004, the Company recorded an impairment charge of
approximately $847,000 for the fourth quarter of fiscal year 2004. The sale was
subject to closing conditions, and the prospective purchaser has since
terminated the proposed sale as permitted by the contract. The Company has
lowered its offering price for the property to reflect the price in the
terminated contract.
During the year ended June 28, 2003, the Company announced the closing of its
Catawba Plant, a yarn manufacturing facility located in Maiden, North Carolina.
The equipment run-out schedule was completed in April 2003, and the Company is
in the process of liquidating the assets associated with this facility. The
Company has replaced the production from this facility with purchased yarn from
outside sources. At the date of execution of this Form 10-K, the Company has
closed and plans to dispose of its Catawba facility in Maiden, NC.
The Company's accounts receivable and inventory, and certain other intangible
property, including the capital stock of Delta Mills Marketing, Inc., secure the
Company's credit facility.
11
ITEM 3. LEGAL PROCEEDINGS
All litigation to which the Company is a party is ordinary routine product
liability litigation, contract breach litigation, or employment litigation
incident to its business that does not depart from the normal kind of such
actions. The Company believes that none of these actions should have a material
adverse effect on its results of operations or financial condition taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to Instruction I (2)(c) to Form 10-K.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company is a wholly-owned subsidiary of Delta Woodside Industries, Inc.
Accordingly, there is no established public trading market for the Company's
common stock.
During 2001, the Company declared dividends of $2,900,000. The Company declared
no dividends for fiscal year 2002, fiscal year 2003, or fiscal year 2004. The
information concerning limitations on cash distributions contained under the
subheading "Liquidity and Sources of Capital" under Item 7 is incorporated
herein by reference.
12
ITEM 6. SELECTED FINANCIAL DATA
In Thousands, Except Ratios
Fiscal Year
--------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:(1) (2)
2004 2003 2002 2001 2000
--------------- --------------- --------------- --------------- -------------
Net Sales $174,358 $177,193 $174,673 $212,960 $276,511
Cost of Goods Sold 166,314 160,243 165,266 196,692 243,254
--------------- --------------- --------------- --------------- -------------
Gross Profit 8,044 16,950 9,407 16,268 33,257
Selling, general and administrative expenses 11,810 11,370 11,634 14,609 15,345
Impairment and restructuring expenses 847 398 8,683
Other income 766 582 476 302 446
--------------- --------------- --------------- --------------- -------------
Operating Profit (Loss) (3,847) 5,764 (10,434) 1,961 18,358
Interest expense 4,783 5,275 9,090 11,064 16,095
Interest (income) (192) (547) (958)
Gain on Extinguishment of Debt 3,643 16,072 2,458 7,414
--------------- --------------- --------------- --------------- -------------
Income (Loss) from Continuing Operations
Before Income Taxes (8,630) 4,132 (3,260) (6,098) 10,635
Income Tax Expense (Benefit) (3,164) 1,541 (1,198) (2,192) 4,035
--------------- --------------- --------------- --------------- -------------
Income (Loss) from Continuing Operations (5,466) 2,591 (2,062) (3,906) 6,600
Loss from Discontinued Operations (174)
--------------- --------------- --------------- --------------- -------------
Net Income (Loss) $(5,466) $2,591 $(2,062) $(3,906) $6,426
=============== =============== =============== =============== =============
OTHER DATA:(1)
Depreciation and amortization $8,942 $9,114 $9,544 $11,310 $14,015
Capital expenditures 5,146 6,442 6,496 5,151 4,340
BALANCE SHEET DATA:
Working Capital $17,599 $26,657 $37,338 $64,270 $95,158
Total assets 138,939 162,328 158,437 181,747 229,612
Total long-term debt 31,941 31,941 47,819 83,815 115,078
Shareholder's equity 44,444 49,910 47,319 49,381 56,187
NOTES TO SELECTED FINANCIAL DATA
(1) The Stevcoknit knitted fabrics business is presented as part of
discontinued operations.
(2) Certain amounts prior to fiscal year 2003 have been reclassified to
reflects the Company's adoption in fiscal year 2003 of SFAS 145 pertaining
to the treatment of gain on retirement of debt. These reclassifications did
not effect net income (loss) or shareholders' equity.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE CURRENT ENVIRONMENT. In fiscal year 2004, we continued our efforts to become
globally competitive in 2005 and beyond. Some items are largely under our
control. We will continue to focus on inventory control, product innovation,
cost-containment, improved product mix and the modernization of our Delta 3
finishing facility located in Wallace, SC. We have engaged a consulting company
to assist us in developing a long-term financial strategy. We have continued to
develop programs for improved quality and yield at our Delta 3 finishing
facility. Outside of our control, however, are what we believe are unfair trade
practices of foreign competitors, particularly, the Chinese government's policy
of maintaining an artificially low valuation for its currency and of subsidizing
China's textile industries to keep their manufacturing costs artificially low.
We will, therefore, continue to monitor foreign trade legislation and appeal to
our government officials to enforce current legislation and install a new trade
policy that creates a level playing field. Our long-term success will hinge on
government policy. There can be no assurances that the United States government
will adopt policies favorable to us.
The Company expects to face a significant change in global competition in 2005
as a result of the WTO's phase-out of textile and apparel quotas by the end of
calendar year 2004. Tariffs on textile/apparel products are also being reduced
(but not eliminated). 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
logistical 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 year ended June 28, 2003, the Company announced the closing of its
Catawba Plant, a yarn manufacturing facility located in Maiden, North Carolina.
The equipment run-out schedule was completed in April 2003 and the Company is in
the process of liquidating the assets associated with this facility. The Company
has replaced the production from this facility with purchased yarn from outside
sources.
During the year ended June 29, 2002, the Company announced the closing of its
Furman Plant, a weaving facility located in Fountain Inn, South Carolina. The
equipment run-out schedule was completed in October 2001. The Company has since
liquidated or transferred substantially all of the assets associated with this
facility except for the facility's real property.
In August of 2004, the Company entered into a contract to sell the Furman Plan
real property for expected net proceeds of approximately $1.8 million. The sales
price, net of selling costs, under the contract was approximately $847,000 less
than the carrying amount of the asset on the Company's books. Based on this
information relative to the fair value of the property at July 3, 2004, the
Company recorded an impairment charge of approximately $847,000 for the fourth
quarter of fiscal 2004. The sale was subject to closing conditions, and the
prospective purchaser has since terminated the proposed sale as permitted by
this contract. The Company has lowered its offering price for the property to
reflect the price in the terminated contract.
FISCAL YEAR 2004. Our fiscal year 2004 sales volume was down $2.8 million
(1.6%). This was the result of a 17% decline in our commercial business somewhat
offset by a 28% improvement in our sales of military fabric to apparel customers
for ultimate use by the U.S. armed forces (which we refer to as our "Government
Business," though we do not sell directly to the U.S. government). Reduced
production volume associated with the downturn in commercial cottons created
unabsorbed fixed overhead costs of approximately $9.0 million. This, coupled
with increased cotton costs of approximately $2.3 million and an erosion of
commercial product margins of approximately $1.8 million (due primarily to price
deterioration) accounted for the losses suffered in fiscal year 2004. Somewhat
offsetting these losses was an improvement in gross profit margin associated
with the increased sales of our Government Business. We have continued to reduce
costs and have managed our working capital well. Even with an $8.6 million
pretax loss in fiscal year 2004, we were able to meet all financial obligations
and reduce our revolving credit facility by $3.5 million. We also completed
phase two and started work on the final phase (three) of our Delta #3 finishing
plant modernization project. We are excited about the completion of this
three-year modernization effort and the positive impact it will have on the
quality and the service we will provide our customers in the future.
14
OUR OUTLOOK FOR FISCAL YEAR 2005. Looking forward to fiscal year 2005, on the
commercial side of our business, we expect to continue to suffer from a high
level of over capacity in the textile industry, inconsistent retail demand and
pressure from foreign imports that we expect to intensify beginning in January
2005 with the removal of import quotas. While we believe the volume of
commercial business will stabilize at approximately the fiscal year 2004 level,
we believe there is also little hope for any pricing improvement, so we do not
expect gross margin to improve in fiscal year 2005.
The outlook for our Government Business is better beginning in the last two
quarters of our 2005 fiscal year. The U.S. Department of Defense ("DOD")
recently introduced a new uniform design, the implementation of which should
begin during the second quarter of our 2005 fiscal year. DOD has reduced fabric
orders for the old uniform design in the last two quarters of calendar year 2004
(the first two quarters of our 2005 fiscal year) in anticipation of a surge in
production of the new uniform design in the first two quarters of calendar year
2005. Working with DOD to accomplish the change to the new uniform has created a
shortfall in our sales for the first quarter of our 2005 fiscal year; however,
we believe we are well positioned to participate in production of the new
uniform and anticipate an increase in our Government Business in the second half
of our 2005 fiscal year and improved sales of this product line for the
foreseeable future.
OUR 2005 REALIGNMENT PLAN. We are well aware of the negative forces in our
industry that will adversely affect our operations in the future, and we realize
we must do more in order to compete in 2005 and beyond. Therefore, we have
developed a comprehensive realignment plan that will streamline the Company's
operations and provide for significant cost reductions. As a result of this
realignment plan, the Company expects to record a second quarter pretax asset
impairment and restructuring charge to earnings ranging from $9.0 to $12.0
million comprised of approximately $3.0 to $4.0 million in cash charges and
approximately $5.0 to $8.0 million of non-cash charges. We estimate that this
aggressive cost reduction initiative will improve pretax earnings by $11.0 to
$16.0 million when compared to fiscal year 2004 results, although there can be
no assurance to this effect. The uncertainty associated with these anticipated
charges relates to the timing and the amount of the charges resulting from the
rollout of the detailed plan.
GMAC, our revolving
credit facility lender, has demonstrated its commitment to us by agreeing to
revise the financial covenants in our credit facility to accommodate our
realignment plan. We firmly believe that this plan will allow the Company to
continue to meet its financial obligations, maintain GMAC's support, and define
a path to profitability in the future.
15
RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003
The following table summarizes the Company's results for Fiscal 2004 versus
Fiscal 2003.
Increase/ (Decrease)
In thousands, except percentages From 2003 to 2004
------------------------
2004 2003 $ %
----------------------------------------------------------
Net Sales $ 174,358 $ 177,193 $ (2,835) (1.60)%
% of Net Sales 100.00% 100.00%
Gross Profit 8,044 16,950 (8,906) (52.54)%
% of Net Sales 4.61% 9.57%
Selling, General and Administrative Expenses 11,810 11,370 440 3.87 %
% of Net Sales 6.77% 6.42%
Impairment and Restructuring Expenses 847 398 449 112.81 %
Other Income 766 582 184 31.62 %
Operating Profit (Loss) (3,847) 5,764 (9,611) (166.74)%
% of Net Sales (2.21)% 3.25%
Interest Expense (Net) 4,783 5,275 (492) (9.33)%
% of Net Sales 2.74% 2.98%
Gain on Extinguishment of Debt 3,643 (3,643) (100.00)%
Income (Loss) Before Income Taxes (8,630) 4,132 (12,762) (308.86)%
% of Net Sales (4.95)% 2.33%
Income Tax Expense (Benefit) (3,164) 1,541 (4,705) (305.32)%
% of Net Sales (1.81)% 0.87%
Net Loss (5,466) 2,591 (8,057) (310.96)%
% of Net Sales (3.13)% 1.46%
Order Backlog $ 41,567 $ 55,527 $ (13,960) (25.14)%
NET SALES:
The 1.6% decline in net sales was the result of a 5.0% decline in unit sales
partially offset by a 3.6% increase in average sales price. The unit sales
decline was principally due to weaker retail sales in the Company's commercial
cotton products and was partially offset by improved demand for military
fabrics. The increased unit sales of military fabrics accounted for the majority
of the average sales price increase.
16
RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003 - CONTINUED
GROSS PROFIT:
The $8.9 million decline in gross profit was primarily due to unabsorbed
manufacturing cost increases associated with reduced plant operating schedules
resulting primarily from reduced customer demand for the Company's commercial
cotton products. This created approximately $9.0 million of unabsorbed fixed
overhead costs. Also contributing to the decline in gross profit was
approximately $2.3 million associated with increased cotton raw material costs.
These factors were partially offset by increased profit margins associated with
increased military fabric sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Approximately half of the $0.4 million increase in selling, general and
administrative expenses was due to the extra week of fixed expenses in the
53-week 2004 fiscal year. The balance of the increase was due to increased
credit insurance costs associated with increased sales to customers based in the
Caribbean.
IMPAIRMENT AND RESTRUCTURING EXPENSES:
The $847,000 impairment charge recorded in fiscal year 2004 reflects the
Company's change in the estimated fair value of the Company's Furman Plant,
which is accounted for as an asset held for sale. In fiscal year 2003, expenses
in this category, totaling $398,000, represented exit costs associated with the
closing of the Company's Catawba Plant.
OTHER INCOME:
Other income for both the 2004 and 2003 fiscal years was primarily associated
with asset disposals associated with the Company's two closed facilities, the
Furman Plant and the Catawba Plant, and in fiscal year 2004, included the
involuntary conversion of insured equipment at the Beattie facility. The
remaining net book value for both the Catawba and Furman facilities is shown as
assets held for sale on the Company's consolidated balance sheet.
OPERATING PROFIT (LOSS):
The majority of the $9.6 million decline in operating profit was the result of
unabsorbed manufacturing cost increases of approximately $9.0 million associated
with reduced plant operating schedules. Other contributing factors are discussed
above.
INTEREST EXPENSE, NET, AND GAIN ON EXTINGUISHMENT OF DEBT:
The $0.5 million decrease in net interest expense was due to the reduction in
the outstanding principal amount of the Company's 9.625% Senior Notes resulting
from repurchases in fiscal year 2003 which was somewhat offset by an increase in
the borrowings outstanding under the revolving credit facility as described
below. The $3.6 million gain on extinguishment of debt in fiscal year 2003 was
the result of repurchases of Senior Notes during fiscal year 2003, the majority
of which were the result of the "Modified Dutch Auction" in the fourth quarter
of fiscal year 2003 as described below.
On March 5, 2003, the Company completed a "Modified Dutch Auction" tender offer
for a portion of its Senior Notes. In April of 2003, as a result of the
"Modified Dutch Auction", a total principal amount of $12,798,000 of notes was
tendered by holders of the notes and accepted for payment by the Company. The
"Clearing Price" of $790 per $1,000 principal amount was paid on April 7, 2003
to all holders who tendered their notes. The Company paid a total of
$10,110,420, plus accrued interest of $123,181, to repurchase the notes. To fund
this transaction, the Company used funds borrowed under its revolving credit
facility and recorded a gain of $2.3 million in the fourth quarter of fiscal
year 2003 related to this transaction.
INCOME TAX EXPENSE (BENEFIT):
The effective tax rate of 36.7% for the year ended July 3, 2004 is approximately
the same as the 37.3% effective tax rate for the year ended June 28, 2003.
NET INCOME (LOSS):
The $8.1 million decrease in net income for fiscal year 2004 was primarily due
to the deterioration of gross margins, and was somewhat offset by a decrease in
net interest expense. Each of these items is discussed above.
17
RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003 - CONTINUED
ORDER BACKLOG:
The $13.9 million decrease in the order backlog was primarily due to the decline
in orders for the Company's commercial cotton products as a result of a high
level of over capacity in the textile industry, pressure from foreign imports
and inconsistent demand at retail. This decline was somewhat offset by an
increase in orders for uniform fabrics used in apparel sold to the United States
Department of Defense. Over the last several years, many of the Company's
commercial customers have shortened lead times for delivery requirements.
Because of shortened lead-times coupled with inconsistent demand at retail,
management believes that the order backlog at any given point in time may not be
an indication of future sales.
ADOPTION OF ACCOUNTING STANDARDS:
In December 2003, the Financial Accounting Standards Board (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. This interpretation addresses
the consolidation by business enterprises of variable interest entities, as
defined in the interpretation, and sets forth additional disclosure regarding
such interests. For entities acquired or created before February 1, 2003, this
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those variable interest
entities that are considered to be special purpose entities, for which the
effective date is no later than the end of the first interim or annual reporting
period ending after December 15, 2003. For all entities that were acquired
subsequent to January 31, 2003, this interpretation is effective as of the first
interim or annual period ending after December 31, 2003. The adoption of FIN 46
did not affect the Company's consolidated financial statements.
18
RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002
The following table summarizes the Company's results for Fiscal 2003 versus
Fiscal 2002.
Increase/ (Decrease)
In thousands, except percentages From 2002 to 2003
-----------------------
2003 2002 $ %
------------------------------------------------------------
Net Sales $ 177,193 $ 174,673 $ 2,520 1.44 %
% of Net Sales 100.00% 100.00%
Gross Profit 16,950 9,407 7,543 80.18 %
% of Net Sales 9.57% 5.39%
Selling, General and Administrative Expenses 11,370 11,634 (264) (2.27)%
% of Net Sales 6.42% 6.66%
Impairment and Restructuring Expenses 398 8,683 (8,285) (95.42)%
Other Income 582 476 106 22.27 %
Operating Profit (Loss) 5,764 (10,434) 16,198 (155.24)%
% of Net Sales 3.25% (5.97)%
Interest Expense (Net) 5,275 8,898 (3,623) (40.72)%
% of Net Sales 2.98% 5.09%
Gain on Extinguishment of Debt 3,643 16,072 (12,429) (77.33)%
Income (Loss) Before Income Taxes 4,132 (3,260) 7,392 (226.75)%
% of Net Sales 2.33% (1.87)%
Income Tax Expense (Benefit) 1,541 (1,198) 2,739 (228.63)%
% of Net Sales 0.87% (0.69)%
Net Loss 2,591 (2,062) 4,653 (225.65)%
% of Net Sales 1.46% (1.18)%
Order Backlog $ 55,527 $ 47,813 $ 7,714 16.13%
NET SALES:
Unit sales were approximately the same for both fiscal year 2003 and fiscal year
2002. The 1.44% increase in sales for fiscal year 2003 was principally due to an
increase of 2.20% in average sales price as a result of a change in product mix.
At the end of fiscal year 2003, there were approximately $6.0 million in sales
order deferments that remained in finished inventory as of June 28, 2003.
GROSS PROFIT:
The majority of the $7.5 million gross profit improvement in fiscal year 2003
versus fiscal year 2002 was due to lower cotton raw material costs. Also
contributing to the gross profit increase were reduced manufacturing costs as a
result of the cost reduction program put in place at the beginning of fiscal
year 2003. These cost reductions were somewhat offset by disruption costs
associated with the modernization of the Estes cotton weaving facility and
continued downward pressure on sales prices caused by cotton garment
manufacturers expanding their supplier base to gain more competitive prices.
19
RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002 - CONTINUED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The $0.3 million decrease in this category in fiscal year 2003 was due primarily
to a reduction in compensation expense that was somewhat offset by increases in
insurance, legal and other fixed costs.
IMPAIRMENT AND RESTRUCTURING EXPENSES:
During the year ended June 28, 2003, the Company incurred restructuring expenses
of $0.4 million related to the closing of its Catawba plant, a yarn
manufacturing facility in Maiden, NC. During the year ended June 29, 2002, the
Company incurred impairment and restructuring expenses of $8.7 million related
to the closing of its Furman plant, a weaving only facility in Fountain Inn, SC.
The net book value of the closed facilities is presented as assets held for sale
on the consolidated balance sheet as of June 28, 2003.
OTHER INCOME:
Other income was $0.6 million for fiscal year 2003, primarily from gains on
equipment sales that occurred in the first quarter. In fiscal year 2002, other
income was $0.5 million, primarily from gains on equipment sales that occurred
in the fourth quarter.
OPERATING PROFIT (LOSS):
The $16.2 million improvement in operating profit was principally the result of
a $7.6 million improvement in gross profit and a reduction of $8.3 million in
impairment and restructuring expenses discussed above.
INTEREST EXPENSE, NET:
The $3.6 million decrease in net interest expense in fiscal year 2003 versus
fiscal year 2002 was principally due to the purchase of a portion of the
Company's 9.625% Senior Notes and was somewhat offset by an increase in revolver
debt at a substantially lower rate of interest. Interest expense for fiscal year
2003 also reflected $0.4 million of capitalized interest, as a result of the
Company's 2003 capital expenditures.
GAIN ON EXTINGUISHMENT OF DEBT:
During fiscal year 2003, the Company purchased $15.9 million face amount of its
9.625% Senior Notes for $11.9 million, and incurred expenses related to the
purchase of approximately $0.2 million. The Company recognized a gain of $3.6
million after the write-off of deferred loan costs of $0.2 million. During
fiscal year 2002, the Company purchased $36.0 million face amount of its 9.625%
Senior Notes for $19.4 million. The Company recognized a gain of $16.1 million
after the write-off of deferred loan costs of $0.5 million.
INCOME TAX EXPENSE (BENEFIT):
The effective tax rate of 37.3% for the year ended June 28, 2003 is higher than
the 36.7% effective tax rate for the year ended June 29, 2002, primarily because
of the effect of nondeductible permanent differences on pretax income in fiscal
year 2003 compared to pretax losses in 2002.
NET INCOME (LOSS):
The $4.7 million improvement in net income in fiscal year 2003 was primarily due
to the pretax, year-to-year changes in each of the following: $7.6 million
improvement in gross profit, $8.3 million reduction in impairment and
restructuring expenses, and a $3.6 million reduction in net interest expense.
These items were somewhat offset by a $12.4 million reduction in gain on
extinguishment of debt. Each of these items is discussed above.
20
RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002 - CONTINUED
ORDER BACKLOG:
The majority of the $7.7 million increase in order backlog was in the uniform
fabrics used in apparel sold to the United States Department of Defense.
LIQUIDITY AND SOURCES OF CAPITAL
SOURCES AND USES OF CASH. The Company's primary sources of liquidity are cash
flow from operations and its revolving credit facility with GMAC. The Company
generated $7.8 million in cash from operations in fiscal year 2004, principally
from a $9.1 million reduction in working capital, where working capital is
defined as current assets less current liabilities. An $11.8 million reduction
in inventory, a $5.9 million reduction in accounts receivable and a $1.8 million
increase in accrued employee compensation somewhat offset by reductions in the
outstanding balance on the revolving credit facility, trade accounts payable,
income taxes payable and accrued and sundry liabilities accounted for the
majority of the reduction in working capital. Also contributing to the Company's
cash sources was $0.9 million in proceeds from the sale of unused assets. Year
over year, inventory turns were approximately the same while days sales in
accounts receivable improved approximately 10%.
The Company used cash in fiscal year 2004 to reduce debt and deferred
compensation liabilities by $6.4 million and to fund capital expenditures of
$5.1 million. Throughout the year, amounts available under the Company's
revolving credit facility were used to fund short-term cash flow needs; however,
for the fiscal year, repayments on the revolving credit facility exceeded
borrowings by $3.5 million. Availability on the revolving credit facility was
$12.5 million at July 3, 2004 and the Company was in compliance with the credit
facility's financial covenants at July 3, 2004. The Company reduced debt
associated with its deferred compensation plan by $2.9 million.
Capital expenditures were primarily used for the second phase of the Company's
modernization project at its Delta 3 cotton finishing plant. 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, S.C. This plan was
divided into three phases. The first phase consisted of the installation of a
new dye range that was completed in June of fiscal year 2003. The majority of
the $6.4 million in capital expenditures for fiscal year 2003 were for this
project. The second phase consisted of the installation of a new print range and
a new prep range that was completed in early fiscal year 2005. The majority of
the $5.1 million in capital expenditures for fiscal year 2004 were for this
project. The third phase will start in fiscal year 2005 and consists of the
installation of a new dye range that will be designed for wide fabric finishing.
The majority of the $4.0 million capital expenditures planned for fiscal year
2005 will be spent on this project, primarily in the third and fourth quarter of
fiscal year 2005, which ends on July 2, 2005. With the completion of phases one
and two of this modernization plan, the Company will be positioned to provide
long-term support for its government business and long-term support for an
improved quality product for its commercial cotton business. The completion of
phase three will further enhance the Company's ability to meet the needs of its
cotton business on a cost effective and profitable basis and compete more
effectively in the industry in 2005 and beyond.
With its entry into the October 2004 amendment to the GMAC revolving credit
agreement described below and subject to completion of the Company's 2005
realignment discussed above, the Company believes that the cash flows generated
by its operations and funds available under the Company's credit facility should
be sufficient to service its debt, to satisfy its day-to-day working capital
needs and to fund its planned capital expenditures for the next twelve months
and beyond.
DELTA MILLS' 9.625% SENIOR NOTES. On August 25, 1997, the Company issued $150
million of unsecured ten-year Senior Notes at an interest rate of 9.625%. These
notes will mature in August 2007. At July 3, 2004, the outstanding balance of
the notes was $31,941,000, unchanged from the balance at June 28, 2003. During
the year ended June 28, 2003, the Company acquired $15,878,000 in aggregate
principal amount of its 9.625% Senior Notes for $12,060,000 (including expenses
of approximately $172,000). The purchase was funded by borrowings under the
Company's revolving credit facility.
21
THE GMAC REVOLVING CREDIT FACILITY. The Company has a revolving credit facility
with GMAC with a term lasting until March 2007. 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 average interest rate on the credit facility
was 4.362% at July 3, 2004 and is based on a spread over either LIBOR or a base
rate. Borrowings under this facility were $21.4 million and $24.9 million as of
July 3, 2004 and June 28, 2003, respectively. As of July 3, 2004, the revolver
availability was approximately $12.5 million, net of the $7 million availability
reduction described below.
Prior to April 19, 2004, the GMAC credit facility had a maximum loan amount of
$50 million, and prior to August 18, 2004 had financial covenants that required
the Company to comply with a maximum leverage ratio and a minimum fixed coverage
charge ratio. As a result of the operating loss in the third quarter of fiscal
year 2004, the Company was not in compliance with the maximum leverage ratio
covenant at the end of that quarter. On April 19, 2004, GMAC granted the Company
a waiver and amendment that waived the existing default with respect to the
maximum leverage ratio covenant, temporarily amended the maximum leverage ratio
covenant for the fourth quarter of fiscal year 2004, and temporarily eliminated
the fixed charge coverage ratio covenant for the fourth quarter of fiscal year
2004. The Company was in compliance with these amended covenants at July 3,
2004. The April 2004 waiver and amendment also reduced the Company's
availability under the credit facility by $7 million for the remaining term of
the facility and increased the interest rates under the credit facility by 125
basis points; however, the interest rates will revert to their pre-amendment
levels if the Company has net income for fiscal year 2005 and no event of
default exists under the credit facility. On August 18, 2004, the Company
entered into further amendments to the GMAC credit facility pursuant to which
the maximum availability was reduced to $38 million, and the maximum leverage
ratio and fixed charge coverage ratio covenants were replaced with a minimum
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
covenant. The new covenant sets required minimum EBITDA levels for each quarter
of fiscal year 2005 and provides that it will constitute an event of default if
the Company and its lender fail to agree by the end of fiscal year 2005 to
minimum EBITDA levels for the remainder of the term of the revolving credit
facility.
On October 18, 2004, GMAC, the lender under Delta Mills' revolving credit
facility, agreed to an amendment to the financial covenants in the credit
facility to reduce the required minimum EBITDA levels for each quarter of fiscal
year 2005. This amendment is expected to allow the Company to remain in
compliance with these covenants while executing its realignment plan.
RESTRICTIVE COVENANTS. 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. The indenture pertaining to the Company's
9.625% Senior Notes also 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 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. The Company may loan funds to Delta Woodside subject to
compliance with the same conditions. At July 3, 2004, the Company was prohibited
by these covenants from paying dividends and making loans to Delta Woodside.
During the year ended July 3, 2004 and the year ended June 28, 2003, the Company
did not pay any dividends to the Delta Woodside.
OTHER MATTERS. 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
expenses.
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 3, 2004, minimum
payments under these contracts with non-cancelable contract terms were $7.1
million.
22
During 1998, the Delta Woodside received notices from the State of North
Carolina asserting deficiencies in state corporate income and franchise taxes
for the Delta Woodside's 1994 - 1997 tax years. The total assessment proposed by
the State amounted to $1.5 million, which included interest and penalties at
that time. 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
Delta Woodside would have paid approximately 90% of the assessed amount plus a
portion of certain penalties for the Delta Woodside's tax years 1994 - 2000.
Delta Woodside 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. Delta Woodside considers
all exposures in determining probable amounts of payment; therefore, any payment
in settlement of this matter is not expected to result in a material impact on
the Company's results of operations.
CONTRACTUAL OBLIGATIONS. As of July 3, 2004, the Company had contractual
obligations in the form of leases, cotton commitments, deferred compensation,
debt, and related interest as follows (in thousands):
Payments Due by Fiscal Year
Contractual Obligations 2005 2006 2007 2008 2009 Thereafter Total
---------------------- ----------- ------------ ----------- ----------- ------------
Cotton Commitments $7,093 $7,093
Deferred Compensation 2,365 1,604 773 4,742
Non-Cancelable Operating Leases 248 82 77 76 37 520
Revolving Credit Facility 21,388 21,388
Long-Term Debt 31,941 31,941
Interest Payments on Long-Term Debt 3,074 3,074 3,074 512 9,734
----------- ---------- ----------- ------------ ----------- ----------- ------------
Total $12,780 $4,760 $25,312 $32,529 $37 $0 $75,418
=========== ========== =========== ============ =========== =========== ============
23
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 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 the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized equal to the
amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of by sale are separately presented in the
consolidated balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated. Estimates of
future cash flows and asset selling prices are inherently uncertain. Different
estimates could result in materially different carrying amounts.
Income Taxes: The Company accounts for income taxes under the asset and
liability method in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS 109"). The Company recognizes
deferred income taxes, net of any 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 July 3, 2004 and June 28, 2003, the Company had
approximately $3.7 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. In addition, management monitors and assesses the need to change
estimates with respect to tax exposure reserve items, resulting in income tax
expense increases or decreases occurring in the period of changes in estimates.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK SENSITIVITY
As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Under these
contracts, nonperformance by either the buyer or the seller may result in net
cash settlement of the difference between the current market price of cotton and
the contract price. The Company has not utilized the net settlement provision in
the past, and does not anticipate using it in the future. The Company may seek
to fix prices up to 18 months in advance of delivery. Daily price fluctuations
are minimal, yet long-term trends in price movement can result in unfavorable
pricing of cotton for the Company. Before fixing prices, the Company looks at
supply and demand fundamentals, recent price trends and other factors that
affect cotton prices. The Company also reviews the backlog of orders from
customers as well as the level of fixed price cotton commitments in the industry
in general. At July 3, 2004, a 10% decline in the market price of the cotton
covered by the Company's fixed price contracts would have a negative impact of
approximately $0.7 million on the value of the contracts. At the end of fiscal
year 2003, a 10% decline in the market price of the Company's fixed price
contracts would have had a negative impact of approximately $0.8 million on the
value of the contracts. The decline in the potential negative impact from 2003
to 2004 is due principally to current cotton commitments being at lower average
prices than in fiscal year 2003.
INTEREST RATE SENSITIVITY
The revolving credit facility 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 July 3, 2004, an increase in the interest rate of 1%
would have a negative impact of approximately $214,000 on annual interest
expense. As of June 28, 2003, an increase in the interest rate of 1% would have
had a negative impact of approximately $249,000 on annual interest expense. The
decrease in the negative impact is due to the decreased borrowings under the
revolving credit facility in fiscal year 2004.
An interest rate change would not impact the Company's cash flows on the fixed
rate ten year Senior Notes.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-------
Report of KPMG LLP 27
Consolidated Balance Sheets as of July 3, 2004 and June 28, 2003 28
Consolidated Statements of Operations for the fiscal years ended July 3, 2004,
June 28, 2003 and June 29, 2002 30
Consolidated Statements of Shareholder's Equity for the fiscal years ended July 3, 2004,
June 28, 2003 and June 29, 2002 31
Consolidated Statements of Cash Flows for the fiscal years ended July 3, 2004,
June 28, 2003 and June 29, 2002 32
Notes to Consolidated Financial Statements 33
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS
DELTA MILLS, INC.:
We have audited the accompanying consolidated balance sheets of Delta Mills,
Inc. and subsidiaries as of July 3, 2004 and June 28, 2003 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended July 3, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta Mills, Inc.
and subsidiaries at July 3, 2004 and June 28, 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 3, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Greenville, South Carolina
July 30, 2004, except as to Note C, which is as of October 15, 2004
27
CONSOLIDATED BALANCE SHEETS Delta Mills, Inc.
(In Thousands)
July 3, 2004 June 28, 2003
--------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $585 $520
Accounts receivable:
Factor and other 38,613 44,628
Less allowances for returns 20 180
--------------------- ----------------------
38,593 44,448
Inventories
Finished goods 6,613 7,711
Work in process 18,877 25,765
Raw materials and supplies 6,889 10,659
--------------------- ----------------------
32,379 44,135
Deferred income taxes 1,113 1,517
Other assets 302 520
--------------------- ----------------------
TOTAL CURRENT ASSETS 72,972 91,140
--------------------- ----------------------
ASSETS HELD FOR SALE 2,495 3,948
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and land improvements 1,587 1,587
Buildings 31,006 30,943
Machinery and equipment 116,696 109,623
Furniture, fixtures and office equipment 11,948 9,789
Lease improvements 1,030 1,030
Construction in progress 765 4,427
--------------------- ----------------------
163,032 157,399
Less accumulated depreciation and amortization 99,907 90,618
--------------------- ----------------------
63,125 66,781
DEFERRED LOAN COSTS
less accumulated amortization of $5,746
and $5,634 in 2004 and 2003 respectively 347 459
--------------------- ----------------------
$138,939 $162,328
===================== ======================
28
CONSOLIDATED BALANCE SHEETS Delta Mills, Inc.
(In Thousands, except share amounts)
July 3, 2004 June 28, 2003
------------------ ------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Trade accounts payable $7,879 $14,217
Revolving credit facility 21,388 24,856
Payable to Affiliates 3,686 3,517
Accrued employee compensation 3,179 1,414
Income taxes payable 13,698 13,698
Accrued and sundry liabilities 5,543 6,781
------------------ ------------------
TOTAL CURRENT LIABILITIES 55,373 64,483
LONG-TERM DEBT 31,941 31,941
DEFERRED INCOME TAXES 4,853 8,421
DEFERRED COMPENSATION 2,334 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 (7,348) (1,882)
------------------ ------------------
44,444 49,910
COMMITMENTS AND CONTINGENCIES
------------------ ------------------
$138,939 $162,328
================== ==================
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
July 3, 2004 June 28, 2003 June 29, 2002
---------------- ---------------- -----------------
Net sales $174,358 $177,193 $174,673
Cost of goods sold 166,314 160,243 165,266
---------------- ---------------- -----------------
GROSS PROFIT 8,044 16,950 9,407
Selling, general and administrative expenses 11,810 11,370 11,634
Impairment and restructuring expenses 847 398 8,683
Other income 766 582 476
---------------- ---------------- -----------------
OPERATING PROFIT (LOSS) (3,847) 5,764 (10,434)
Other (expense) income:
Interest expense (4,783) (5,275) (9,090)
Interest income 192
Gain on extinguishment of debt 3,643 16,072
---------------- ---------------- -----------------
(4,783) (1,632) 7,174
---------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES (8,630) 4,132 (3,260)
Income tax expense (benefit) (3,164) 1,541 (1,198)
---------------- ---------------- -----------------
NET INCOME (LOSS) $(5,466) $2,591 $(2,062)
================ ================ =================
See notes to consolidated financial statements.
30
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills, Inc.
(In Thousands)
Additional Total
Common Stock Paid-In Shareholder's
Shares Amount Capital Accumulated Deficit Equity
-------------- ------------- --------------- ----------------------- -----------------
Balance at June 30, 2001 100 $0 $51,792 $(2,411) $49,381
Net Loss (2,062) (2,062)
-------------- ------------- --------------- ----------------------- -----------------
Balance at June 29, 2002 100 0 51,792 (4,473) 47,319
Net Income 2,591 2,591
-------------- ------------- --------------- ----------------------- -----------------
Balance at June 28, 2003 100 0 51,792 (1,882) 49,910
Net Loss (5,466) (5,466)
-------------- ------------- --------------- ----------------------- -----------------
Balance at July 3, 2004 100 $0 $51,792 $(7,348) $44,444
============== ============= =============== ======================= =================
See notes to consolidated financial statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)
Year Ended Year Ended Year Ended
July 3, 2004 June 28, 2003 June 29, 2002
------------------ ------------------ ------------------
OPERATING ACTIVITIES
Net income (loss) $(5,466) $2,591 $(2,062)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 8,830 8,979 9,174
Amortization 112 135 370
Decrease in deferred loan costs 175 541
Discount to face value on repurchase of bonds (3,818) (16,613)
Impairment and restructuring expenses 847 398 8,683
Change in deferred income taxes (3,164) (1,089) (1,225)
Gains on disposition of property
and equipment (253) (433) (356)
Changes in operating assets and liabilities:
Accounts receivable 5,855 5,407 (12,251)
Inventories 11,756 (11,388) 10,455
Other current assets 218 (495) 522
Deferred compensation (2,920) 306 672
Accounts payable and accrued expenses (7,997) 3,732 4,512
------------------ ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,818 4,500 2,422
------------------ ------------------ ------------------
INVESTING ACTIVITIES Property, plant and equipment:
Purchases (5,146) (6,442) (6,496)
Proceeds of dispositions 861 807 429
------------------ ------------------ ------------------
NET CASH USED IN
INVESTING ACTIVITIES (4,285) (5,635) (6,067)
------------------ ------------------ ------------------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 176,501 195,461 44,979
Repayments on revolving lines of credit (179,969) (181,970) (33,614)
Repurchase and retirement of long-term debt (11,888) (19,383)
------------------ ------------------ ------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,468) 1,603 (8,018)
------------------ ------------------ ------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 65 468 (11,663)
Cash and cash equivalents at beginning of year 520 52 11,715
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $585 $520 $52
================== ================== ==================
See notes to consolidated financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company manufactures woven fabrics that are sold to
customers. The Company's operations, all within the textile industry, are
considered a single business segment.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Delta Mills, Inc. and Delta Mills Marketing, Inc. (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. Delta Mills, Inc. and Delta Mills Marketing, Inc.
are wholly-owned subsidiaries of Delta Woodside Industries, Inc. ("Delta
Woodside" or "DWI").
CASH EQUIVALENTS: The Company considers all highly liquid investments with
initial maturities of three months or less when purchased to be cash
equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the
basis of cost. Depreciation is computed using the straight-line method for
financial reporting based on estimated useful lives of three to thirty-two
years, but predominantly over seven to fourteen years.
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 as the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets held for sale
are separately presented in the consolidated balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Prior to June 30, 2002, the impairment of long-lived assets was accounted for in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No.
144 did not have a material impact on the Company's consolidated financial
statements.
REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific
goods for later shipment at customers' request with related risk of ownership
passing to such customers.
DEFERRED LOAN COSTS: Deferred loan costs are being amortized over the life of
the related debt which is primarily ten years.
INCOME TAXES: Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities and net operating losses and
tax credit carryforwards. The effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
ENVIRONMENTAL COSTS: Environmental compliance cost, including ongoing
maintenance, monitoring and similar costs, are expensed as incurred.
Environmental remediation costs are accrued, except to the extent costs can be
capitalized, when remedial efforts are probable, and the cost can be reasonably
estimated.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
COTTON PROCUREMENT: The Company contracts to buy cotton with future delivery
dates at fixed prices in order to reduce the effects of fluctuations in the
prices of cotton used in the manufacture of its products. These contracts are
settled by delivery and are not used for trading purposes. The Company commits
to fixed prices on a percentage of its cotton requirements up to eighteen months
in the future. If market prices for cotton fall below the Company's committed
fixed costs and it is estimated that the cost of cotton is not recoverable in
future sales of finished goods, the differential is charged to income at that
time. The Company's management has determined that its cotton buying contracts
meet the criteria for exclusion under the normal purchases and normal sales
exemption of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", and its related amendments.
STOCK OPTIONS: The Company participates in the Delta Woodside Industries Inc.
Stock Option Plan, the 2004 Stock Award Plan, and the Incentive Stock Award
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," (APB
25), and related interpretations. Under this method, compensation expense for
stock options is recorded on the date of the grant only if the current market
price of the underlying stock exceeded the exercise price. Compensation expense
for the Company's incentive stock award programs is approximately the same under
APB 25 as it would under SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123). If the Company had determined compensation expense at fair value
for stock options, as under SFAS No. 123, the Company's net loss would have been
as follows:
(In thousands) Year Ended Year Ended Year Ended
July 3, 2004 June 28, 2003 June 29, 2002
----------------- ------------------ -----------------
Net income (loss), as reported $ (5,466) $ 2,591 $ (2,062)
Add stock based employee compensation expense
included in reported net income (loss), net of tax 25 174 136
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (25) (496) (491)
----------------- ------------------ -----------------
Pro forma net income (loss) $ (5,466) $ 2,269 $ (2,417)
================= ================== =================
RECENT ACCOUNTING PRONOUNCEMENTS: In April 2002, the Financial Accounting
Standards Board (FASB) issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, Statement No. 145, through the rescission of Statement No.
4, no longer requires extraordinary item treatment for gains and losses from the
extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income (loss) before income taxes for all financial
statement periods presented.
ESTIMATES: The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of the Company's
financial instruments, except for those disclosed in Note C, approximate their
estimated fair values due to either the short-term maturities of such
instruments or minor interest rate differentials.
FISCAL YEAR: The Company's operations are based on a fifty-two or fifty-three
week fiscal year ending on the Saturday closest to June 30. Fiscal years 2003
and 2002 each consisted of 52 weeks. Fiscal year 2004 consisted of 53 weeks.
NOTE B--ACCOUNTS RECEIVABLE AND MAJOR CUSTOMERS
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Credit LLC (the Factor) under a factor agreement. The assignment
of these receivables is primarily without recourse, provided that customer
orders are approved by the Factor prior to shipment of goods, up to a maximum
for each individual account. The assigned trade accounts receivable are recorded
on the Company's books at full value and represent amounts due to the Company
from the Factor. There are no advances from the Factor against the assigned
receivables. All factoring fees are recorded on the Company's books as incurred
as a part of selling, general and administrative expenses.
The Company's accounts receivable are due from many companies that produce
apparel products. Credit risk for the receivables generally remains with the
Factor under the terms of the factoring agreement.
For fiscal year 2004, the Company had two customers, V.F. Corporation, and
Levi-Strauss and their respective subcontractors, which exceeded 10% of
consolidated net sales. The Company's net sales to these customers totaled $45
million, or approximately 26%, of net sales in fiscal 2004. For fiscal year
2003, the Company had three customers, Levi-Strauss, Haggar Apparel and V.F.
Corporation, net sales to each of which exceeded 10% of consolidated net sales.
The Company's net sales to these customers totaled $71 million, or approximately
40%, of net sales in fiscal year 2003. For fiscal year 2002, the Company had two
customers, Levi-Strauss and V.F. Corporation, net sales to each of which each
exceeded 10% of consolidated net sales. The Company's aggregate net sales to
these customers were $63 million, or approximately 36%, of net sales for fiscal
year 2002. The foregoing amounts include sales directly to subcontractors of the
named companies. In addition, during fiscal years 2004, 2003, and 2002, net
sales of military fabrics to apparel customers accounted for approximately 44%,
33%, and 31%, respectively, of the Company's total net sales. The loss of any of
these accounts could have a material adverse effect on the results of the
Company.
NOTE C--LONG-TERM DEBT AND LEASES
On August 25, 1997, the Company issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
July 3, 2004, the outstanding balance of the notes was $31,941,000, unchanged
from the balance at June 28, 2003.
At July 3, 2004, the carrying value of the Senior Notes was $31,941,000. The
last period of meaningful trading activity for these notes was the Dutch Auction
in 2003, when the Company repurchased a principal amount of $12,798,000 at $790
per $1,000 principal amount. Management believes that the notes are not widely
held and there is very little if any trading activity. Recent indications of
interest in the marketplace have ranged in value from $500 to $800 per $1,000
principal amount.
The fair value of the revolving credit facility approximates its carrying value
as of July 3, 2004 due to the variable interest rate provision of the facility.
The Company has a revolving credit facility with GMAC with a term lasting until
March 2007. 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 average
interest rate on the credit facility was 4.362% at July 3, 2004 and is based on
a spread over either LIBOR or a base rate. Borrowings under this facility were
$21.4 million and $24.9 million as of July 3, 2004 and June 28, 2003,
respectively. As of July 3, 2004, the revolver availability was approximately
$12.5 million, net of the $7 million availability reduction described below.
35
NOTE C--LONG-TERM DEBT AND LEASES - CONTINUED
Prior to April 19, 2004, the GMAC credit facility had financial covenants that
required the Company to comply with a maximum leverage ratio and a minimum fixed
coverage charge ratio. As a result of the operating loss in the third quarter of
fiscal year 2004, the Company was not in compliance with the maximum leverage
ratio covenant at the end of that quarter. On April 19, 2004, GMAC granted the
Company a waiver and amendment that waived the existing default with respect to
the maximum leverage ratio covenant, temporarily amended the maximum leverage
ratio covenant for the fourth quarter of fiscal year 2004, and temporarily
eliminated the fixed charge coverage ratio covenant for the fourth quarter of
fiscal year 2004. The Company was in compliance with these amended covenants at
July 3, 2004. The April 2004 waiver and amendment also reduced the Company's
availability under the credit facility by $7 million for the remaining term of
the facility and increased the interest rates under the credit facility by 125
basis points; however, the interest rates will revert to their pre-amendment
levels if the Company has net income for fiscal year 2005 and no event of
default exists under the credit facility. On August 18, 2004, the Company
entered into further amendments to the GMAC credit facility pursuant to which
the maximum availability was reduced to $38 million, and the maximum leverage
ratio and fixed charge coverage ratio covenants were replaced with a minimum
EBITDA covenant. The new covenant sets required minimum EBITDA levels for each
quarter of fiscal year 2005 and provides that it will constitute an event of
default if the Company and its lender fail to agree by the end of fiscal year
2005 to minimum EBITDA levels for the remainder of the term of the revolving
credit facility.
On October 18, 2004, GMAC, the lender under Delta Mills' revolving credit
facility, agreed to an amendment to the financial covenants in the credit
facility to reduce the required minimum EBITDA levels for each quarter of fiscal
year 2005.
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. The
indenture pertaining to the Company's 9.625% Senior Notes also 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 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. The Company may
loan funds to Delta Woodside subject to compliance with the same conditions. At
July 3, 2004, the Company was prohibited by these covenants from paying
dividends and making loans to Delta Woodside. During the year ended July 3, 2004
and the year ended June 28, 2003, the Company did not pay any dividends to Delta
Woodside.
Total interest expense incurred by the Company was $4,783,000, $5,275,000 and
$9,090,000 for fiscal years 2004, 2003, and 2002, respectively, net of $46,000
and $386,000 of capitalized interest in fiscal years 2004 and 2003,
respectively. There was no interest capitalized in fiscal year 2002. Total
interest paid during fiscal years 2004, 2003, and 2002 was $4,781,000,
$5,778,000 and $10,252,000, respectively.
Rent expense relating to operating leases was approximately $466,000, $435,000
and $ 1,733,000 for fiscal years 2004, 2003 and 2002, respectively.
Aggregate principal maturities of all long-term debt and minimum payments under
non-cancelable operating leases are as follows:
Long-term Operating
Fiscal Year Debt Leases
----------- ---------- ---------
2005 $248,000
2006 82,000
2007 77,000
2008 $31,941,000 76,000
2009 37,000
---------------- ------------------
$31,941,000 $520,000
================ ==================
36
NOTE D--EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries, Inc. 40l(k) Plan.
During fiscal years 2004, 2003 and 2002, the Company contributed $556,000,
$617,000, and $574,000, respectively, to the 401(k) plan to match employee
contributions.
The Company participates in a Deferred Compensation Plan, managed by DWI, which
permitted certain management employees to defer a portion of their compensation.
Deferred compensation accounts are credited with interest and are distributed
after retirement, disability or employment termination. As of July 3, 2004 and
June 28, 2003, the Company's liability was $4,665,000 and $7,573,000,
respectively. The ability of participants to add to their accounts under this
plan was effectively discontinued pursuant to an amendment described below.
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 deferred compensation
plan amendment provided 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 Company's 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 $2.3
million, which represents the February 15, 2005 payment, plus distributions
anticipated to occur in the next twelve months due to participant retirements,
has been reclassified on the consolidated balance sheet at July 3, 2004 from
deferred compensation to accrued employee compensation in current liabilities.
The first payment of approximately $3.1 million was made in February 2004.
The Company also participates in the Delta Woodside Industries, Inc. 2004 Stock
Plan, Incentive Stock Award Plan, and 2000 Stock Option Plan. The Company
recognized expense of $66,000 in fiscal year 2004 for awards granted pursuant to
the 2004 Stock Award Plan. Including associated tax assistance, under the
Incentive Stock Award Plan the Company also recognized expense (income) of
$(26,000), $280,000, and $198,000 for fiscal years 2004, 2003 and 2002,
respectively. The Company has adopted the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." See Note A for further discussion.
NOTE E--AFFILIATED PARTY TRANSACTIONS
The Company is the only operating subsidiary of DWI. Actual corporate service
costs for management, treasury, auditing, and shareholder relations are charged
to the Company as incurred. As of July 3, 2004, the balance of the payable to
affiliate was $3.7 million, as compared to a balance of $3.5 million as of June
28, 2003. The increase of $0.2 million in fiscal year 2004 was attributable to
corporate service costs charged to the Company. Receivable or payable to
affiliates bears no interest and includes amounts payable to or receivable from
DWI for current activity as described.
37
NOTE F--INCOME TAXES
The Company reports federal income taxes in the consolidated return of its
parent, DWI, and had a taxable loss of approximately $8.8 million which will be
reported in the fiscal year 2004 consolidated Federal income tax return with its
parent, DWI. The consolidated tax group had a regular taxable loss of
approximately $9.0 million and alternative minimum taxable loss of approximately
$11.0 million. The Federal income tax obligation or refund that is allocated to
the Company is determined as if the Company was filing a separate Federal income
tax return. The Company's Federal tax liability or receivable is paid to or is a
receivable from the parent company.
Deferred income taxes reflect the net tax effects of temporary differences
between the financial statement amounts and amounts reported for income tax
purposes. The Company's management believes that the reversal of existing
taxable temporary differences will provide sufficient taxable income to realize
the remaining deferred tax assets. Accordingly, no valuation allowance has been
provided for 2004 or 2003.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2004 2003
---- ----
Assets:
Deferred compensation $ 1,926,000 $ 3,026,000
Accrued and sundry liabilities 1,157,000 1,389,000
Net operating loss carryforwards 3,704,000 284,000
Inventories 62,000
Other 8,000 68,000
------------------ ----------------
Gross deferred tax assets 6,795,000 4,829,000
Valuation allowance
------------------ ----------------
Deferred tax assets 6,795,000 4,829,000
------------------ ----------------
Liabilities:
Depreciation 10,483,000 11,733,000
Inventories 52,000
------------------ ----------------
Deferred tax liabilities 10,535,000 11,733,000
------------------ ----------------
Net deferred tax liabilities $(3,740,000) $(6,904,000)
================== ================
Significant components of the provision for income tax expense (benefit) are as
follows:
2004 2003 2002
------------------- -------------------- --------------------
Current:
Federal income taxes $2,230,000
State income taxes 400,000 $15,000
------------------- -------------------- --------------------
Total current 2,630,000 15,000
Deferred:
Federal income taxes $(2,939,000) (804,000) (1,009,000)
State income taxes (225,000) (285,000) (204,000)
------------------- -------------------- --------------------
Total deferred (3,164,000) (1,089,000) (1,213,000)
------------------- -------------------- --------------------
Total income tax expense (benefit) $(3,164,000) $1,541,000 $(1,198,000)
=================== ==================== ====================
38
NOTE F--INCOME TAXES - CONTINUED
The reconciliation of income tax expense (benefit) computed at the Federal
statutory tax rates is as follows:
2004 2003 2002
------------------ -------------------- ------ -----
Income tax expense (benefit) at statutory rates $ (3,021,000) $ 1,446,000 $ (1,141,000)
State tax expense (benefit), net of federal benefit (146,000) 75,000 (123,000)
Other 3,000 20,000 66,000
------------------ ------------------ -----------------
$ (3,164,000) $ 1,541,000 $ (1,198,000)
================== ================== =================
The Company did not make any tax payments during fiscal years 2004, 2003 and
2002, respectively.
NOTE G--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (the "Guarantor") does not comprise a material
portion of the Company's assets or operations. The Guarantor is a wholly-owned
subsidiary of the Company and has fully and unconditionally guaranteed (the
"Guarantee") the Company's payment of principal, premium, interest and certain
liquidated damages, if any, on the Company's Senior Notes (the "Notes"). The
Guarantor's liability under the Guarantee is limited to such amount, the payment
of which would not have left the guarantor insolvent or with unreasonably small
capital at the time its Guarantee was entered into, after giving effect to the
incurrence of existing indebtedness immediately prior to such time.
The Guarantor is the sole subsidiary of the Company. All future subsidiaries of
the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.
The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.
Summarized financial information for the Guarantor is as follows (in thousands):
JULY 3, 2004 JUNE 28, 2003
------------ -------------
Current assets $ 83 $ 88
Noncurrent assets 13 38
Current Liabilities 2,275 1,912
Noncurrent liabilities 697 1,047
Stockholder's deficit (2,876) (2,833)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Year Ended
-------------------------------------------------
July 3, 2004 June 28, 2003 June 29, 2002
------------ ------------- -------------
Net sales -intercompany commissions $3,909 $3,986 $3,930
Cost and expenses 3,952 4,033 4,250
Net loss (43) (47) (320)
39
NOTE H--COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At July 3, 2004, minimum
payments under these contracts with non-cancelable contract terms were
approximately $7.1 million.
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing
Plants, have experienced high nitrate levels at the spray field for these
plants. The Company is working with the South Carolina Department of Health and
Environmental Control ("DHEC") to address this issue. On August 5, 2004, DHEC
proposed a consent agreement, which establishes a groundwater mixing zone with
nitrate parameters that the Company believes it can satisfy without additional
material cost or future violations. Although there is no assurance that the
Company will be successful and it could face administrative penalties if it is
not, the Company does not currently believe that this matter will have a
material adverse impact on the Company's financial position.
In addition, the National Pollutant Discharge Elimination System ("NPDES")
permit issued to the Delta 2 and Delta 3 Finishing Plants on April 1, 2004,
contained a new parameter for zinc that the Company is required to meet by April
1, 2006. Discharges from nitrate recovery wells have exceeded this parameter.
The Company has proposed to convert the recovery wells into monitoring wells to
eliminate the zinc discharge and understands that DHEC is amenable to this
approach. Although there is no assurance that the Company will be successful and
it could be required to construct a zinc wastewater treatment feature and/or
face administrative penalties if it does not, the Company does not currently
believe that this matter will have a material adverse impact on the Company's
financial position.
On June 30, 2000, the Company sold its Greensboro, North Carolina plant to the
City of Greensboro. The Company had been working with environmental consultants
in assessing groundwater contamination at this site. Because of these studies,
one-half of the proceeds from the sale of the plant, consisting of approximately
$400,000, were placed in an interest bearing escrow account to cover expenses
related to this contamination. As of the date of this filing, approximately
$306,000 remains in this escrow account. The Company recorded the sale net of
estimated costs to remediate the property. The North Carolina Department of
Environment and Natural Resources is requiring the Company to install a
monitoring well on an adjacent property owner's land. The adjacent owner is
requesting that the Company provide it with the sampling results and indemnify
it from any contamination on its property. If contamination is discovered, the
Company would likely face a claim for damages. At the time of this filing,
management believes that the escrow is sufficient to cover any expenses related
to the remediation of this property.
Delta Woodside's previously owned Nautilus business has been named as a
"potentially responsible party" ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") with respect to three
hazardous waste sites in North Carolina, South Carolina and Mississippi. To the
Company's knowledge, all of the transactions with these sites were conducted by
a corporation (the "Selling Corporation") whose assets were sold in 1990
pursuant to the terms of an order of the United States Bankruptcy Court to
another corporation, the stock of which was subsequently acquired by the Company
in January 1993.
At the North Carolina site, the Selling Corporation is listed as a "de Minimis"
party, and at the South Carolina site, the Selling Corporation has been listed
as an "insolvent" party and would appear to qualify as a "de Minimis" party. The
Company believes that the Selling Corporation's share of the liabilities at
either of these sites will be immaterial.
At the Mississippi site, the PRP group completed the surface removal action and
investigated soil and groundwater contamination, both at the site and in the
surrounding area. The Company's latest information is that the Selling
Corporation is ranked eleventh out of a total of over 300 PRPs in contributions
of material to the site, and, based on volume, the Selling Corporation
contributed approximately 3% of the site's material. To the Company's knowledge,
estimates of costs to clean-up the site were $4 million, and could be higher.
Trichloromethane, one of the substances delivered by the Selling Corporation to
the site, was found in the site's groundwater and at nearby drinking water
wells. The EPA referred the site to the Mississippi Department of Environmental
Quality ("MDEQ") in 1996. In August of 2001, MDEQ indicated to a third party
that it was still considering action at the site. On June 16, 2004, MDEQ
conducted a site investigation for an EPA RCRA contractor to determine if any
homes around the site still used private water wells and located three such
homes.
40
NOTE H -- COMMITMENTS AND CONTINGENCIES - CONTINUED
Although no assurance can be provided, the Company believes that it is shielded
from liability at these three sites by the order of the United States Bankruptcy
Court pursuant to which the Selling Corporation sold its assets to the
corporation subsequently acquired by the Company. The Company has denied any
responsibility at these three sites, has declined to participate as a member of
the respective PRP groups, and has not provided for any reserves for costs or
liabilities attributable to the Selling Corporation.
On January 10, 2000, the North Carolina Department of Environment and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous substances at a hazardous waste site known as the Glen
Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by
merger of Delta Mills, Inc., Park Yarn Mills Company, Inc. ("Park Yarn"), owned
the Site for approximately six (6) years, from approximately 1977 to 1983 (prior
to the time Delta Mills, Inc. became a subsidiary of Delta Woodside Industries,
Inc.) Delta Mills, Inc. is aware of no evidence that Park Yarn discharged or
deposited any hazardous substance at the Site or is otherwise a "responsible
party" for the Site. Further, Park Yarn filed bankruptcy and was discharged in
1983. Although no assurance can be provided, any liability of Park Yarn for the
Site may have been discharged by the bankruptcy order. Accordingly, the Company
has denied any responsibility at the Site, declined to undertake any activities
concerning the Site, and has not provided for any reserves for costs or
liabilities attributable to Park Yarn.
During 1998, Delta Woodside received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Delta Woodside's 1994 - 1997 tax years. The total assessment proposed by the
State amounted to $1.5 million, which included interest and penalties at that
time. The assessment was delayed pending an administrative review of the case by
the State. In October 2002, the State proposed a settlement in which Delta
Woodside would have paid approximately 90% of the assessed amount plus a portion
of certain penalties for Delta Woodside's tax years 1994 - 2000. Delta Woodside
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. Delta Woodside considers all exposures in
determining probable amounts of payment; therefore, any payment in settlement of
this matter will not result in a material impact on the Company's results of
operations.
From time to time the Company and its subsidiaries are defendants in other legal
actions involving claims arising in the normal course of business, including
product liability claims. The Company believes that, as a result of legal
defenses, insurance arrangements and indemnification provisions with parties
believed to be financially capable, none of these actions should have a material
effect on its results of operations or financial condition.
NOTE I--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended July 3, 2004 and June 28, 2003:
2004 QUARTER ENDED
(IN THOUSANDS) SEPTEMBER 27 DECEMBER 27 MARCH 27 JULY 3
------------ ----------- -------- ------
Net sales $42,581 $48,500 $37,919 $45,358
Gross profit 619 4,413 1,677 1,335
Net income (loss) (1,977) 287 (1,238) (2,538)
2003 QUARTER ENDED
(IN THOUSANDS) SEPTEMBER 28 DECEMBER 28 MARCH 30 JUNE 28
------------ ----------- -------- -------
Net sales $46,179 $35,853 $46,489 $48,672
Gross profit 5,545 3,695 2,840 4,870
Net income (loss) 1,432 293 (1,100) 1,966
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J--GAIN ON EXTINGUISHMENT OF DEBT
During fiscal year 2003, the Company purchased $15,878,000 face amount of its
9.625% Senior Notes for $12,060,000 including expenses of approximately
$172,000. The Company recognized a gain of $3,643,000 after the write-off of
deferred loan costs of $175,000. During fiscal year 2002, the Company purchased
$35,996,000 face amount of its 9.625% Senior Notes for $19,383,000 including
expenses of approximately $500,000. The Company recognized a gain of $16,072,000
after the write-off of deferred loan costs of $541,000. The Company did not
purchase any of its 9.625% Senior Notes during fiscal year 2004, and there was
no gain on extinguishment of debt in fiscal year 2004.
NOTE K-- RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 28, 2003, the Company recorded a restructuring charge
of $0.4 million on a pre-tax basis associated with the closing of its Catawba
facility as announced on March 5, 2003. The charge reflected employee
termination costs of approximately $354,000. Production at the Catawba facility
ceased in April of 2003 and the Company is in the process of liquidating the
assets associated with this facility.
During the year ended June 29, 2002, the Company recorded an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. The Company
recorded an $8.2 million non-cash asset impairment charge to reflect the
property and equipment at the Furman Plant at its estimated fair value, less
selling costs. The carrying amount of these assets was reduced to approximately
$3,923,000. The balance of the charge was approximately $0.5 million of accrued
expenses for involuntary termination costs associated with the 122 employees
terminated as a result of the plant closing. Production at the Furman facility
ceased in October of 2001 and the Company is in the process of liquidating the
assets associated with this facility.
On August 24, 2004, the Company contracted to sell the real property for
expected net proceeds of approximately $1.8 million. The sales price, net of
selling costs, under the contract was approximately $847,000 less than the
carrying amount of the asset on the Company's books. Based on this information
relative to the fair value of the property at July 3, 2004, the Company recorded
an impairment charge of approximately $847,000 for the fourth quarter of fiscal
year 2004. The sale was subject to closing conditions, and the prospective
purchaser has since terminated the proposed sale as permitted by the contract.
The Company has lowered its offering price for the property to reflect the price
in the terminated contract.
During fiscal year 2004 and fiscal year 2003, the Company paid $342,000 and
$196,000, respectively, in restructuring costs and has a remaining liability of
$0 and $342,000 as of July 3, 2004 and June 28, 2003, respectively.
As of July 3, 2004 and June 28, 2003, the Company had $2.5 million and $3.9
million, respectively, in assets held for sale related to the closing of the
Catawba facility and the Furman plant.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
principal executive officer and its principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e),
have concluded that, as of July 3, 2004, the Company's disclosure
controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those
entities.
(b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting during the fiscal quarter
ended July 3, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a code of ethics that applies to its chief executive
officer, its chief financial officer and its controller. A copy of this code of
ethics is posted on the Delta Woodside web site at www.deltawoodside.com. The
Company will disclose any amendment to, or any waiver of, any provision of its
code of ethics that is required to be included in the code by Item 406 of
Regulation S-K promulgated under the Securities Exchange Act that applies to the
Company's chief executive officer, chief financial officer or controller by
posting such information on this web site.
The other information required by this item is omitted pursuant to instructions
I (2)(c) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Omitted pursuant to instructions I (2)(c) to Form 10-K.
43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The table below and the accompanying footnotes set forth the fees paid by the
Company to its independent registered public accounting firm, KPMG, LLP, for the
periods and in the categories indicated.
AUDIT FEES AND SERVICES FISCAL 2004 FISCAL 2003
Audit Fees $174,700 $115,000
Audit Related Fees 9,000(1) 12,500(1)
Tax Fees 36,800(2) 92,045(2)
All Other Fees 0 0
----------------------- -----------------------
TOTAL FEES FOR ALL SERVICES $220,500 $219,545
======================= =======================
1) Audit related fees for both fiscal years 2004 and 2003 consisted of fees
for employee benefit plan audits and responses to inquiries that arise in
the normal course of business related to accounting and auditing
pronouncements and SEC rules and regulations.
2) Tax fees for both fiscal years 2004 and 2003 consisted of fees for
preparation of returns and estimates, responding to miscellaneous state
notices, research of tax matters, and preparation of prior year amended
returns.
All audit related services, tax services and other services were pre-approved by
the Audit Committee, which concluded that the provision of such services by KPMG
LLP was compatible with the maintenance of that firm's independence in the
conduct of its auditing functions. The Audit Committee's Audit Policies provide
for pre-approval of all audit, audit-related and tax services and, in addition,
individual engagements must be separately approved. These policies authorize the
Audit Committee to delegate to one or more of its members pre-approval authority
with respect to permitted services.
44
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Delta Mills, Inc. as of the
Year ended July 3, 2004 are included in item 8.
Consolidated balance sheets--July 3, 2004 and June 28, 2003.
Consolidated statements of operations--Years ended July 3, 2004, June
28, 2003, and June 29,2002.
Consolidated statements of shareholder's equity-- Years ended July 3,
2004, June 28, 2003, and June 29,2002.
Consolidated statements of cash flows-- Years ended July 3, 2004, June
28, 2003, and June 29,2002.
Notes to consolidated financial statements.
The following consolidated financial statement schedules of Delta Mills, Inc.
are included in Item 15a (2):
Schedule II -- Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Columns omitted from schedules filed have been omitted because the information
is not applicable.
(3) Listing of Exhibits:
3.1 Restated and Amended Certificate of Incorporation of Delta Mills, Inc.: Incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-4 of the Company and Delta Mills Marketing, Inc., File No.
333-37617 (the "S-4").
3.2 Bylaws of Delta Mills, Inc.: Incorporated by reference to Exhibit 3.2 to the S-4.
4.1 See Exhibits 3.1 and 3.2.
4.2 Indenture, dated as of August 25, 1997, by and among the Company, Delta Mills Marketing, Inc. and The Bank of
New York, as Trustee, with respect to the Company's Series A and Series B 9-5/8% Senior Notes due 2007,
$150,000,000 in aggregate principal amount, together with forms of certain related instruments, agreements and
documents: Incorporated by reference to Exhibit 4.2.6 to the Current Report on Form 8-K/A of Delta Woodside
Industries, Inc. with the date of September 25, 1997 (the "DWI 8-K/A").*
4.3.1 Revolving Credit and Security Agreement, dated as of March 31, 2000, between GMAC Commercial Credit LLC as agent
and lender, and Delta Mills, Inc. as borrower: Incorporated by reference to Exhibit 99.1 to the Company's
Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13,
2000
4.3.1.1 Letter, dated July 28, 2000, amending Revolving Credit and Security Agreement: Incorporated by reference to
Exhibit 4.3.1.1 to Form 10-K of Delta Mills, Inc. for the fiscal year ended June 30, 2001 (the "DMI 2000 10-K").*
4.3.1.2 Consent and Amendment to Credit Agreement and Other Documents, dated as of October 5, 2001: Incorporated by
reference to Exhibit 4.3.1.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2001 and filed with the Securities and Exchange Commission on November 9, 2001.
45
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - CONTINUED
4.3.1.3 Consent and Amendment to Credit Agreement and Other Documents, dated as of March 31,2002: Incorporated by
reference to Exhibit 4.3.1.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30,
2002 and filed with the Securities and Exchange Commission on May 14, 2002.
4.3.1.4 Consent and Amendment to Credit Agreement and Other Documents, dated as of March 20,2003: Incorporated by
reference to Exhibit 4.3.1.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 29,
2003 and filed with the Securities and Exchange Commission on May 13, 2003.
4.3.1.5 Waiver dated September 27, 2003 by GMAC Commercial Credit, LLC as a lender and agent: Incorporated by reference
to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2003.
4.3.1.6 Consent under Credit Agreement and Other Documents dated February 4, 2004: Incorporated by reference to Exhibit
4.3.1.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 2003.
4.3.1.7 Waiver and Amendment to Credit Agreement and Other Documents dated April 19, 2004: Incorporated by reference to
Exhibit 4.3.1.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 27, 2004.
4.3.1.8 Amendment to Credit Agreement dated August 18, 2004 by and between Delta Mills, Inc. and GMAC Commercial Finance,
LLC, as a lender and agent.
4.3.1.9 Amendment to Credit Agreement dated October 18, 2004 by and between Delta Mills, Inc. and GMAC Commercial Finance,
LLC, as a lender and agent.
4.3.2 Guarantee, dated as of March 31, 2000, of Delta Mills Marketing, Inc. in favor of GMAC Commercial Credit LLC as
agent: Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 31,
2000 and filed with the Securities and Exchange Commission on April 13, 2000.
4.3.3 General Security Agreement, dated as of March 31, 2000, between Delta Mills Marketing, Inc. and GMAC Commercial
Credit LLC as agent: Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated
March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000.
4.3.4 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Alchem Capital Corporation in favor of GMAC
Commercial Credit LLC as agent: Incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form
8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000.
4.3.5 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Delta Mills, Inc. in favor of GMAC Commercial
Credit LLC as agent: Incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated
March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000
4.3.6 Stock Pledge and Security Agreement, dated as of May 11, 2000, by Delta Woodside Industries, Inc. in favor of GMAC
Commercial Credit LLC as agent: Incorporated by reference to Exhibit 4.3.6 to the DWI 2000 10-K.*
4.4 The Company hereby agrees to furnish to the Commission upon request of the Commission a copy of any instrument
with respect to long-term debt not being registered in a principal amount less than 10% of the total assets of
the Company and its subsidiaries on a consolidated basis.
10.1** Delta Woodside Deferred Compensation Plan for Key Managers, Amended and Restated Effective June 30, 2000:
Incorporated by reference to Exhibit 10.2 to the Delta Woodside Industries, Inc. Report on Form 10-K dated July 1,
2000 and filed with the Securities and Exchange Commission on September 29, 2000. *
10.1.1 First Amendment dated December 23, 2003 to Delta Woodside Group Deferred Compensation Plan for Key Managers
Amended and Restated Effective June 30, 2000: Incorporated by reference to Exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended December 27, 2003.
10.1.2 Second Amendment dated January 16, 2004 to Delta Woodside Group Deferred Compensation Plan for Key Managers
Amended and Restated Effective June 30, 2000: Incorporated by reference to Exhibit 10.1.2 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 2003.
46
10.3.1** Delta Woodside Industries, Inc. Stock Option Plan effective as of July 1, 1990: Incorporated by reference to
Exhibit 10.11 to the Form 10-K of Delta Woodside Industries, Inc. for the fiscal year ended June 30, 1990.*
10.3.2** Amendment No. 1 to Stock Option Plan: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of Delta
Woodside Industries, Inc. for the quarterly period ended December 29, 1990 (the "DWI 12/90 10-Q").*
10.3.3** Amendment to Stock Option Plan: Incorporated by reference to Exhibit 10.9.2 to the Form 10-K of Delta Woodside
Industries, Inc. for the fiscal year ended June 29, 1991 (the "DWI 1991 10-K").*
10.3.4** 1995 Amendment to Stock Option Plan effective as of November 9, 1995: Incorporated by reference to Exhibit
10.4.4 to the Form 10-Q of Delta Woodside Industries, Inc. for the quarterly eriod ended December 30, 1995 (the
"Delta Woodside Industries, Inc. 12/95 10-Q".)*
10.3.5** 1997 Amendment to Stock Option Plan effective as of November 6, 1997: Incorporated by reference to Exhibit 99.1
to the Registration Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-45767).
47
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED
- -------- ----------------------------------------------------------------------------
10.3.6** Amendment to Stock Option Plan adopted April 25, 2000: Incorporated by reference to Exhibit 10.4.6 to Form 10-Q
of Delta Woodside Industries, Inc. for the fiscal quarter ended April 1, 2000.*
10.3.7** Amendments to Stock Option Plan: Incorporated by reference to Exhibit 10.4.7 to the DWI 2000
10-K.*
10.4** Form of Amendment of Certain Rights and Benefits Relating to Stock Options and Deferred Compensation by and
between the Company and certain pre-spin-off plan participants: Incorporated by reference to Exhibit 10.7 to
the DWI 2000 10-K.*
10.4.1 List of directors and officers of the Company who signed the
document described in Exhibit 10.7: Incorporated by reference
to Exhibit 10.7.1 to DWI 2000 10-K.*
10.4.2** Form of Amendment of Stock Options by and between Delta Woodside Industries, Inc. and certain pre-spin-off plan
participants. Incorporated by reference to Exhibit 10.7.2 to DWI 2000 10-K.*
10.5.1** Directors Stock Acquisition Plan: Incorporated by reference to Exhibit 10.14 to the DWI 1991 10-K.*
10.5.2** Amendment to Directors Stock Acquisition Plan, dated April 30, 1992: Incorporated by reference to Exhibit
10.12.2 to the DWI 1992 10-K.*
10.6** 2000 Stock Option Plan of Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 10.10 to the
DWI 2000 10-K.*
10.6.1 Amendment of 2000 stock option plan of Delta Woodside Industries, Inc: Incorporated by reference to Item 6(a)
of the Delta Woodside Industries, Inc. report on Form 10-Q for the quarter ended September 30, 2000 and filed with
the Securities and Exchange Commission on November 14, 2000.
10.7** 2000 Incentive Stock Award Plan of Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 10.11
to the DWI 2000 10-K.*
10.8 Tax Sharing Agreement, dated as of June 30, 2000 by and among Delta Woodside Industries, Inc. Duck Head Apparel
Company, Inc. and Delta Apparel, Inc.: Incorporated by reference to Exhibit 2.2 to the Report on Form 8-K of
the Company with the date of June 30, 2000.
10.8.1 Amendment to tax sharing agreement dated as of August 6, 2001: Incorporated by reference to Exhibit 10.17.2 to
the Company's Report on Form 10-K for the fiscal year ended June 30, 2001 and filed with the Securities and
Exchange Commission on September 24, 2001, the "2001 10-K."
10.9** Delta Woodside Industries, Inc. 2004 Stock Plan. Effective September 25, 2003. Incorporated by reference to
Exhibit 99 to the Delta Woodside Registration Statement on Form S-8 filed with the Commission on January 29,
2004 (Commission File No. 333-112308.)
10.10** Letter dated June 28, 2000 to William F. Garrett: Incorporated by reference to Exhibit 10.l4 to the DWI 2000
10-K.*
10.11 See Exhibits 4.2, 4.3.1, 4.3.2, 4.3.3, 4.3.4, 4.3.5 and 4.3.6.
23 Report on Schedule by Independent Registered Public Accounting Firm
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* All reports previously filed with the Commission by Delta
Woodside Industries, Inc. pursuant to the Exchange Act and
rules and regulations promulgated thereunder, exhibits of
which are incorporated by reference into this Report, were
filed under Commission File No. 1-10095.
** This is a management contract or compensatory plan or
arrangement.
The registrant agrees to furnish supplementally to the Securities and
Exchange Commission a copy of any omitted schedule or exhibit to any of
the above filed exhibits upon request of the Commission.
(b) Reports on Form 8-K
None
(c) Exhibits
The response to this portion of Item 15 is incorporated by
reference from Item 15(a)(3) above.
(d) Financial Statement Schedules
Not applicable
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELTA MILLS, INC.
(Registrant)
October 15, 2004 By: /s/ William F. Garrett
- --------------------------------- ---------------------------------
Date William F. Garrett
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ E. Erwin Maddrey, II 10/15/2004 /s/ William F. Garrett 10/15/2004
- ------------------------------------- ------------- -------------------------------------------------------- -------------
E. Erwin Maddrey, II Date William F. Garrett Date
Director President, Chief Executive Officer and Director
/s/ Buck A. Mickel 10/15/2004 /s/ William H. Hardman, Jr. 10/15/2004
- ------------------------------------- ------------- -------------------------------------------------------- -------------
Buck A. Mickel Date William H. Hardman, Jr. Date
Director Vice President, Treasurer, and Chief Financial Officer
/s/ Donald C. Walker 10/15/2004
-------------------------------------------------------- -------------
Donald C. Walker Date
Vice President, Assistant Secretary, and Controller
50
EXHIBIT INDEX
4.3.1.8 Amendment to Credit Agreement dated August 18, 2004 by and between Delta Mills, Inc. and GMAC
Commercial Finance, LLC, as a lender and agent.
4.3.1.9 Amendment to Credit Agreement dated October 18, 2004 by and between Delta Mills, Inc. and
GMAC Commercial Finance, LLC, as a lender and agent.
23 Report on Schedule by Independent Registered Public Accounting Firm
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.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
DELTA MILLS, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------------------
Balance at (2)
DESCRIPTION Beginning (1) (2) Deductions Balance at End
of Period Charged to Costs Charged to Other Describe of Period
and Expenses Accounts-Describe
- ------------------------------------------------------------------------------------------------------------------------------------
Deducted from asset accounts
Allowance for Returns:
Year ended July 3, 2004 $180,000 1,714,000(1) $(1,874,000)(2) $20,000
================ ================ ================== ==============
Year ended June 28, 2003 $ 32,000 $1,751,000(1) $(1,603,000)(2) $180,000
================ ================ ================== ==============
Year ended June 29, 2002 $ 51,000 $1,795,000(1) $(1,814,000)(2) $32,000
================ ================ ================== ==============
NOTES:
1) The change in the allowance for returns is charged to income as a reduction
of net sales.
2) Deductions represent customer returns and allowances during the period.
F-2