UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57- 0535180
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
P.O. Box 6126
100 Augusta Street
Greenville, South Carolina 29606
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(Address of principal executive offices) (Zip Code)
864 255-4122
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value-5,830,423 shares as of May 14, 2002
DELTA WOODSIDE INDUSTRIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-March 30, 2002 and June 30, 2001 3
Condensed consolidated statements of operations--
Three and Nine months ended March 30, 2002 and March 31, 2001 4
Condensed consolidated statements of cash flows--
Nine months ended March 30, 2002 and March 31, 2001 5
Notes to condensed consolidated financial statements-March 30, 2002 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and use of Proceeds 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and per share data)
Delta Woodside Industries, Inc.
March 30, 2002 June 30, 2001
---------------- ---------------
Unaudited
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,269 $ 14,491
Accounts receivable:
Factor 42,688 37,617
Less allowances for doubtful accounts and returns 51 51
---------------- ---------------
42,637 37,566
Inventories
Finished goods 6,493 13,241
Work in process 22,234 23,195
Raw materials and supplies 5,752 6,766
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34,479 43,202
Deferred income taxes 3,338 2,966
Prepaid expenses and other current assets 360 547
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TOTAL CURRENT ASSETS 87,083 98,772
PROPERTY, PLANT AND EQUIPMENT
Cost 172,022 166,226
Less accumulated depreciation 96,242 81,195
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75,780 85,031
DEFERRED LOAN COSTS 1,410 1,680
NONCURRENT DEFERRED INCOME TAXES 11,730 4,959
OTHER ASSETS 74
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TOTAL ASSETS $ 176,003 $ 190,516
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 9,512 $ 8,570
Accrued employee compensation 1,370 2,339
Accrued and sundry liabilities 10,771 11,966
---------------- ---------------
TOTAL CURRENT LIABILITIES 21,653 22,875
LONG-TERM DEBT 82,815 83,815
DEFERRED COMPENSATION 7,122 6,608
SHAREHOLDERS' EQUITY
Preferred Stock
Common Stock - par value $.01 a share - authorized 50,000,000 shares,
issued and outstanding 5,830,000 shares at March 30, 2002 and
5,809,000 shares at June 30, 2001,as adjusted (see Note D) 58 58
Additional paid-in capital 86,694 86,561
Accumulated deficit (22,339) (9,401)
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TOTAL SHAREHOLDERS' EQUITY 64,413 77,218
Commitments and Contingencies
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,003 $ 190,516
================ ===============
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share data)
Delta Woodside Industries, Inc.
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net sales $ 41,190 $ 52,991 $ 122,307 $ 175,887
Cost of goods sold 40,165 50,795 118,500 158,500
-------------- -------------- -------------- --------------
Gross profit 1,025 2,196 3,807 17,387
Selling, general and
administrative expenses 3,033 3,001 8,496 9,922
Impairment and
restructuring charges 8,683
Other income (expense) 50 (11) 90 352
-------------- -------------- -------------- --------------
Operating Profit (Loss) (1,958) (816) (13,282) 7,817
Interest (expense) income:
Interest expense (2,409) (2,653) (7,342) (8,327)
Interest income 93 75 226 533
-------------- -------------- -------------- --------------
(2,316) (2,578) (7,116) (7,794)
-------------- -------------- -------------- --------------
Income (Loss) before Income
Taxes and Extraordinary Item (4,274) (3,394) (20,398) 23
Income tax expense (benefit) (1,496) (1,205) (7,135) 20
-------------- -------------- -------------- --------------
Income (Loss ) before
Extraordinary Item (2,778) (2,189) (13,263) 3
Extraordinary gain (net of taxes) 325 325 1,585
-------------- -------------- -------------- --------------
Net Income (Loss) ($2,453) ($2,189) ($12,938) $ 1,588
============== ============== ============== ==============
Basic and diluted earnings (loss)
per share, as adjusted (Note D):
Income (loss) before
extraordinary item $ (0.48) $ (0.37) $ (2.27) $ 0.00
Extraordinary gain 0.06 0.00 0.06 0.27
-------------- -------------- -------------- --------------
Net earnings (loss) $ (0.42) $ (0.37 ) $ (2.21) $ 0.27
============== ============== ============== ==============
Weighted average number
of shares outstanding 5,831,000 5,910,000 5,832,000 5,992,000
============== ============== ============== ==============
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Woodside Industries, Inc.
(In Thousands)
For the Nine Months Ended
March 30, 2002 March 31, 2001
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OPERATING ACTIVITIES
Net income (loss) ($12,938) $ 1,588
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 6,836 8,204
Amortization 316 318
Decrease in deferred loan costs 783
Discount to face value on repurchase of bonds (500) (3,242)
Provision for impairment and restructuring 8,683
Change in deferred income taxes (7,144) 1,164
Deferred compensation 513
Changes in operating assets and liabilities 2,342 8,621
Other 5
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,892) 17,441
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (5,786) (4,612)
Proceeds of dispositions of assets 450
Other 811
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NET CASH USED BY INVESTING ACTIVITIES (5,786) (3,351)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 3,003
Repayments of revolving line of credit (3,003)
Repurchase and retirement of long term debt (500) (28,021)
Repurchase of common stock (44) (641)
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NET CASH USED BY FINANCING ACTIVITIES (544) (28,662)
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DECREASE IN CASH AND CASH EQUIVALENTS (8,222) (14,572)
Cash and cash equivalents at beginning of year 14,491 19,385
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CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 6,269 $ 4,813
================ ================
See notes to consolidated financial statements.
5
DELTA WOODSIDE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Delta
Woodside Industries, Inc. ("the Company") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended March 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending June 29, 2002. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 2001.
NOTE B-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., issued $150
million of unsecured ten-year Senior Notes at an interest rate of 9.625%. These
notes will mature in August 2007. At March 30, 2002, the outstanding balance of
the notes was $82,815,000, a decrease of $1.0 million from the balance at June
30, 2001.
Delta Mills has completed a "Modified Dutch Auction" tender offer for a portion
of its Senior Notes. The offer commenced on April 3, 2002 and expired on May 1,
2002 as scheduled. As of the expiration, a total principal amount of $34,996,000
of notes was tendered by holders of the notes and accepted for payment by Delta
Mills. The "Clearing Price" of $525 per $1,000 principal amount was paid on May
6, 2002 to all holders who tendered their notes. The Company paid a total of
$18,372,900, plus accrued interest of $608,177, to repurchase notes. To fund
this transaction, Delta Mills used available cash plus borrowings of $14.2
million from its revolving credit facility and $3.4 million from its parent,
Delta Woodside Industries, Inc.
On March 31, 2000 a subsidiary of the Company, Delta Mills, Inc., obtained a
secured four-year $50 million revolving credit facility. Borrowings under this
credit facility are based on eligible accounts receivable and inventory of the
Company, subject to a maximum $37.5 million availability limit as a result of a
March 31, 2002 amendment described below. The facility is secured by the
accounts receivable, inventory and capital stock of the Company. The interest
rate on the credit facility is based on a spread over either LIBOR or a base
rate. At each of June 30, 2001 and March 30, 2002, no amounts were outstanding
under this facility.
The credit facility contains restrictive covenants that, among other things,
require that the Delta Mills' Maximum Leverage Ratio, as defined therein, not
exceed specified amounts. The agreement also restricts additional indebtedness,
dividends, and capital expenditures. The payment of dividends with respect to
Delta Mills' stock is permitted if there is no event of default and there is at
least $1 of availability under the facility. An amendment of October 5, 2001
substantially increased the permitted leverage ratio for the preceding four
quarters ending with the third quarter of fiscal year 2002, and slightly reduced
the permitted leverage ratio for the four quarters ending with the fourth fiscal
quarter of fiscal year 2002 and subsequent quarters that Delta Mills is required
to maintain pursuant to covenants in the agreement. This amendment also extends
the term of the Revolving Credit Agreement to March 31, 2004, includes the
lender's consent to the sale of Delta Mills' Furman Plant, which was announced
August 22, 2001, and allows Delta Mills to exclude from the calculation of the
leverage ratio the closing costs and continuing costs associated with the
closing of its Furman Plant. Effective March 31, 2002, Delta Mills amended its
$50 million credit facility, eliminating the permitted leverage ratio covenant
and adding a $12.5 million minimum availability requirement. Under the minimum
availability requirement, Delta Mills' availability for borrowings cannot exceed
$37.5 million.
6
NOTE B-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE-CONTINUED
Delta Mills assigns a substantial portion of its trade accounts receivable to
GMAC Commercial 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 receivables
are recorded on the Delta Mills' books at full value and represent amounts due
Delta Mills from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Delta Mills' books
as incurred as a part of General and Administrative Expense.
NOTE C - STOCKHOLDERS' EQUITY
Activity in stockholders' equity during the nine months ended March 30, 2002 is
as follows (in thousands):
Total
Common Additional Paid Accumulated Stockholders'
Stock In Capital Deficit Equity
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Balance at June 30, 2001 $ 58 $ 86,561 ($9,401) $ 77,218
Incentive stock award plan, shares issued 1 176 177
Share repurchases (1) (43) (44)
Net Loss (12,938) (12,938)
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Balance at March 30, 2002 $ 58 $ 86,694 ($22,339) $ 64,413
======== ================= ============ ===============
NOTE D - REVERSE STOCK SPLIT
The Company effected a 4:1 reverse split of its common stock on Tuesday,
February 5, 2002. The Company's shareholders adopted an amendment to the
Company's articles of incorporation that provided for the reverse split at a
special meeting held on January 28, 2002. The shareholders authorized the
Company's board of directors to determine whether to consummate the reverse
split and to determine the ratio of the reverse split within a range of whole
shares from 3:1 to10:1. The Company's board of directors set the ratio for the
reverse split at 4:1. The Company paid cash in lieu of any fractional share in
an amount based on the average of the closing sale prices of the Company's
common stock (as adjusted to reflect the reverse split of shares) for the 20
trading days immediately prior to February 5, 2002 as reported in The Wall
Street Journal. The total number of authorized shares of common stock and the
par value of the common stock remain the same and were unaffected by the reverse
split.
The common stock purchase rights attached to the Company's common stock pursuant
to its Shareholder Rights Agreement, dated December 10, 1999, as amended, with
First Union National Bank as rights agent, were adjusted in connection with the
reverse stock split as required by the provisions of Section 11(a) of the Rights
Agreement to prevent any dilution or enlargement of the rights. The exercise
price of each right was increased from the pre-split $5.00 per quarter-share of
common stock to $20.00 per quarter-share. Each share of common stock will
continue to have only one right attached to it, and each right will continue to
evidence the right to acquire one quarter share of the Company's common stock.
All shares and per share amounts in the condensed consolidated financial
statements have been retroactively restated in connection with the reverse stock
split.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such matters as future revenues, future cost savings,
future capital expenditures, business strategy, competitive strengths, goals,
plans, references to future success and other such information are
forward-looking statements. The words "estimate", "project", "anticipate",
"expect", "intend", "believe" and similar expressions are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward-looking statements. These risks
and uncertainties include, among others, changes in the retail demand for
apparel products, the cost of raw materials, competitive conditions in the
apparel and textile industries, the relative strength of the United States
dollar as against other currencies, changes in United States trade regulations
and the discovery of unknown conditions (such as with respect to environmental
matters and similar items). The Company does not undertake publicly to update
or revise the forward-looking statements even if it becomes clear that any
projected results will not be realized.
The Company, through its Delta Mills operating division, sells a broad range of
woven, finished apparel fabric primarily to branded apparel manufacturers and
resellers. Delta Mills also sells camouflage fabric and other fabrics used in
apparel sold to the United States Department of Defense. Delta Mills represents
the only business segment of the Company.
Net sales for the three months ended March 30, 2002 were $41.2 million as
compared to $53.0 million in the third quarter of the prior fiscal year, a
decrease of 22.3%. For the nine months ended March 30, 2002, net sales were
$122.3 million as compared to $175.9 million for the nine months ended March 31,
2001, a decrease of 30.5%. For both the current quarter and the nine months,
the majority of the decline in sales was due to a reduction in sales unit volume
that reflects the downward adjustment in market demand for the apparel industry.
Some sales price declines also contributed to the decline in sales.
Gross profit was $1.0 million and 2.5% of sales in the third quarter of fiscal
year 2002. This compares to gross profit of $2.2 million and 4.1% of sales in
the prior year quarter. For the nine months ended March 30, 2002, gross profit
was $3.8 million or 3.1% of net sales as compared to $17.4 million or 9.9% of
net sales for the same nine months period of the prior fiscal year. For both the
current quarter and the nine months, the decline in gross profit was due to
decreased production schedules, reduced sales prices and some change in product
mix. All three factors were caused by the decline in sales and market demand.
The decline in gross profit was somewhat offset by reduced manufacturing costs
as a result of the cost reduction plan put in place at the beginning of fiscal
year 2002.
Selling, general and administrative expense (SG&A) was $3.0 million and 7.4% of
net sales for the third quarter of fiscal year 2002 compared to SG&A of $3.0
million and 5.7% of net sales for the prior year quarter. Selling, general and
administrative expense (SG&A) was $8.5 million and 6.9% of net sales for the
nine months ended March 30, 2002 as compared to SG&A of $9.9 million and 5.6%
of net sales for the nine months ended March 31, 2001. The year to date
reduction in SG&A over the previous year's expense represents reductions in
expenses associated with administrative salaries and various general expense
items. Some of these reductions were part of the cost reduction plan put in
place at the beginning of fiscal year 2002.
The Company reported an operating loss of $2.0 million in the current quarter
compared to an operating loss of $.8 million in the previous year quarter and an
operating loss of $1.1 million in the second quarter of the current fiscal year.
The previous quarter's operating loss included continuing costs of closed
facilities of $329,000. The current quarter's operating loss includes
continuing costs of $86,000 associated with closed facilities. Excluding the
asset impairment and continuing costs of closed facilities, the Company's
operating loss during the current quarter would have been $1.9 million. For the
nine months ended March 30, 2002, the Company's operating loss was $13.3 million
as compared to an operating profit of $7.8 million for the nine months ended
March 31, 2001. The current year results include an impairment and restructuring
charge of $8.7 million related to the closing of the Company's Furman facility.
Excluding impairment and restructuring charges and the continuing costs of
closed facilities, the Company's operating loss would have been $4.2 million for
the nine months ended March 30, 2002. The decline in operating profit was due
to the factors discussed above.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Interest expense net of interest income was $2.3 million for the quarter ended
March 30, 2002, compared to $2.6 million for the prior year quarter. Interest
expense net of interest income for the nine months ended March 30, 2002 was $7.1
million compared to $7.8 million for the same period in fiscal 2001. The
reduction in interest expense is primarily due to the reduction in the senior
notes and was somewhat offset by a reduction in interest income due to a decline
in interest rates and a reduction in cash.
The income tax benefit for the quarter was $1.5 million. This compares to an
income tax benefit of $1.2 million in the previous year quarter. The income tax
benefit for the nine months ended March 30, 2002 was $7.1 million. This
compares to income tax expense of $20,000 for the nine months ended March 31,
2001. The effective tax rate in both periods was approximately 35%. At March
30, 2002, the Company had regular tax loss carry forwards of $39 million for
federal purposes and $13 million for state purposes. The Federal loss carry
forwards expire at various intervals from 2012 to 2021,while the state loss
carry forwards expire at various intervals beginning in 2003. At March 30,
2002, the Company's gross deferred tax assets are not reduced by a valuation
allowance due to management's belief that it is more likely than not that the
gross deferred tax assets will be realized in the future. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management continues to evaluate the need for a valuation
allowance based upon the Company's current operations and projections of future
earnings. The potential tax effect of establishing a full valuation allowance
is approximately $15 million.
The Company reported a net loss of $2.5 million or $0.42 per common share for
the quarter ended March 30, 2002 compared to a net loss of $2.2 million or $.37
per common share for the quarter ended March 31, 2001. The Company's net loss
for the quarter ended March 30, 2002 included an after tax extraordinary gain of
$325,000 or $0.06 per common share. This extraordinary gain occurred when the
Company's subsidiary, Delta Mills, Inc., purchased $1.0 million face amount of
its 9.625 % Senior Notes for $.5 million. The Company's net loss for the
quarter ended March 30, 2002 included continuing costs of closed facilities of
$56,000 or $.01 per share on an after tax basis. The Company reported a net loss
of $12.9 million or $2.21 per common share for the nine months ended March 30,
2002 compared to net income of $1.6 million or $.27 per common share for the
nine months ended March 31, 2001. The Company's net income for the nine months
ended March 31, 2001 included an after tax extraordinary gain of $1.6 million.
This extraordinary gain occurred when the Company's subsidiary, Delta Mills,
Inc., purchased $15.7 million face amount of its 9.625 % Senior Notes for $14.2
million. The net loss for the nine months ended March 30, 2002 included asset
impairment and continuing costs associated with closed facilities of $5.9
million or $1.00 per share on an after tax basis. The decline in net income was
due to the factors discussed above.
On August 25, 1997 Delta Mills issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
March 30, 2002, the outstanding balance of the notes was $82,815,000, a decrease
of $1.0 million from the balance at June 30, 2001.
Delta Mills has completed a "Modified Dutch Auction" tender offer for a portion
of its Senior Notes. The offer commenced on April 3, 2002 and expired on May 1,
2002 as scheduled. As of the expiration, a total principal amount of $34,996,000
of notes was tendered by holders of the notes and accepted for payment by Delta
Mills. The "Clearing Price" of $525 per $1,000 principal amount was paid on May
6, 2002 to all holders who tendered their notes. The Company paid a total of
$18,372,900, plus accrued interest of $608,177, to repurchase notes. To fund
this transaction, Delta Mills used available cash plus borrowings of $14.2
million from its revolving credit facility and $3.4 million from its parent,
Delta Woodside Industries, Inc.
On March 31, 2000 Delta Mills obtained a secured four-year $50 million revolving
credit facility. Borrowings under this credit facility are based on eligible
accounts receivable and inventory of the Company, subject to a maximum $37.5
million availability limit as a result of a March 31, 2002 amendment described
below. The facility is secured by the accounts receivable, inventory and capital
stock of the Company. The interest rate on the credit facility is based on a
spread over either LIBOR or a base rate. At each of June 30, 2001 and March 30,
2002, no amounts were outstanding under this facility.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The credit facility contains restrictive covenants that, among other things,
require that the Delta Mills' Maximum Leverage Ratio, as defined therein, not
exceed specified amounts. The agreement also restricts additional indebtedness,
dividends, and capital expenditures. The payment of dividends with respect to
Delta Mills' stock is permitted if there is no event of default and there is at
least $1 of availability under the facility. An amendment of October 5, 2001
substantially increased the permitted leverage ratio for the preceding four
quarters ending with the third quarter of fiscal year 2002, and slightly reduced
the permitted leverage ratio for the four quarters ending with the fourth fiscal
quarter of fiscal year 2002 and subsequent quarters that Delta Mills is required
to maintain pursuant to covenants in the agreement. This amendment also extends
the term of the Revolving Credit Agreement to March 31, 2004, includes the
lender's consent to the sale of Delta Mills' Furman Plant, which was announced
August 22, 2001, and allows Delta Mills to exclude from the calculation of the
leverage ratio the closing costs and continuing costs associated with the
closing of its Furman Plant. Effective March 31, 2002, Delta Mills amended its
$50 million credit facility, eliminating the permitted leverage ratio covenant
and adding a $12.5 million minimum availability requirement. Under the minimum
availability requirement, Delta Mills' availability for borrowings cannot exceed
$37.5 million. During the three months ended March 30, 2002, Delta Mills did
not pay any dividends to the Company.
On October 3, 2001 the FASB issued statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The
FASB's new rules on asset impairment supersede FASB statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and provide a single accounting model for long-lived assets to
be disposed of. The Company will adopt the Statement effective for fiscal 2003.
The adoption of this standard is not expected to materially impact the Company.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgements and uncertainties, and potentially result in materially
different results under different assumptions and conditions.
Impairment of Long - Lived Assets: When required by circumstances, the Company
evaluates the recoverability of its long - lived assets by comparing estimated
future undiscounted cash flows with the asset's carrying amount to determine if
a write - down to fair value is required.
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. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date. At March 30, 2002, the Company had regular tax loss carry
forwards of $39 million for federal purposes and $13 million for state purposes.
The Federal loss carry forwards expire at various intervals from 2012 to
2021,while the state loss carry forwards expire at various intervals beginning
in 2003. At March 30, 2002, the Company's gross deferred tax assets are not
reduced by a valuation allowance due to management's belief that it is more
likely than not that the gross deferred tax assets will be realized in the
future. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management continues to evaluate the need for
a valuation allowance based upon the Company's current operations and
projections of future earnings. The potential tax effect of establishing a full
valuation allowance is approximately $15 million.
10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. Before fixing prices, the Company looks at supply
and demand fundamentals, recent price trends and other factors that affect
cotton prices. The Company also reviews the backlog of orders from customers as
well as the level of fixed price cotton commitments in the industry in general.
As of March 30, 2002, a 10% decline in market price of the Company's fixed price
contracts would have had a negative impact of approximately $1.4 million on the
value of the contracts. As of June 30, 2001, such a 10% decline would have had
a negative impact of $2.1 million. The decline in the potential negative impact
from June 30, 2001 to March 30, 2002 is due principally to current cotton
commitments being at lower average prices and because of a decline in the
quantity of cotton with fixed prices as compared to the previous period.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings*
Item 2. Changes in Securities and Use of Proceeds
The Company effected a 4:1 reverse split of its common stock on Tuesday,
February 5, 2002. The Company's shareholders adopted an amendment to the
Company's articles of incorporation that provides for the reverse split at a
special meeting held on January 28, 2002. The shareholders authorized the
Company's board of directors to determine whether to consummate the reverse
split and to determine the ratio of the reverse split within a range of whole
shares from 3:1 to10:1. The Company's board of directors set the ratio for the
reverse split at 4:1. The Company paid cash in lieu of any fractional share in
an amount based on the average of the closing sale prices of the Company's
common stock (as adjusted to reflect the reverse split of shares) for the 20
trading days immediately prior to February 5, 2002 as reported in The Wall
Street Journal. The total number of authorized shares of common stock and the
par value of the common stock remain the same and were unaffected by the reverse
split.
The common stock purchase rights attached to the Company's common stock pursuant
to its Shareholder Rights Agreement, dated December 10, 1999 as amended, with
First Union National Bank as rights agent were adjusted in connection with the
reverse stock split as required by the provisions of Section 11(a) of the Rights
Agreement to prevent any dilution or enlargement of the rights. The exercise
price of each right was increased from the pre-split $5.00 per quarter-share of
common stock to $20.00 per quarter-share. Each share of common stock will
continue to have only one right attached to it, and each right will continue to
evidence the right to acquire one quarter share of the Company's common stock.
All shares and per share amounts in the condensed consolidated financial
statements have been retroactively restated in connection with the reverse stock
split.
Item 3. Defaults upon Senior Securities*
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of its shareholders on January 28, 2002 to
consider an amendment to the Company's articles of incorporation to authorize a
reverse stock split with a ratio within a range of whole shares from 3:1 to 10:1
to be determined by the Company's board of directors. The amendment also
authorized the board of directors to determine whether to consummate the reverse
split. Holders of a total of 21,063,924 shares (90.3% of the total outstanding
shares) of the Company's common stock were present at the special meeting either
in person or by proxy constituting a quorum. The amendment was approved with
20,672,014 shares (98.1% of shares present) votes for, 362,138 shares (1.7%)
voted against or withheld and 29,772 shares (.2%) abstaining. There were no
broker non-votes.
Item 5. Other Information
On April 22, 2002, the Company received notification from the New York Stock
Exchange that the Company had not met the continued listing standard that
provides that average total market capitalization cannot be less than $15
million over a consecutive 30 trading day period. The Company has 45 days from
April 22, 2002 to submit a business plan to the exchange that returns the
Company to conformity with this continued listing standard within 18 months of
April 22, 2002. Management is considering options to address the deficiency
within the required time frame and expects to present a business plan to
representatives of the New York Stock Exchange within the required time frame.
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Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
3.1.6 Articles of Amendment to the Articles of Incorporation of the Company
filed with the South Carolina Secretary of State on February 5, 2002.
4.3.1.2 Consent and Amendment to Credit Agreement and Other Documents, dated as
of October 5, 2001.
4.3.1.3 Consent and Amendment to Credit Agreement and Other Documents, dated
as of March 31,2002.
b) No report on Form 8-K was filed during the fiscal quarter ended
March 30, 2002.
* Items 1 and 3 are not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Woodside Industries, Inc.
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(Registrant)
Date May 14, 2002 By: /s/ W. H. Hardman, Jr.
---------------------------- --------------------------
W.H. Hardman, Jr.
Chief Financial Officer
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