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 27, 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 333-376-17
DELTA MILLS, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2677657
----------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 6126 100 Augusta Street
Greenville, South Carolina 29606
------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
864 255-4122
---------------
(Registrant's telephone number, including area code)
(Not Applicable)
---------------------------------
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act ). Yes [ ] No [ X ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value -
100 shares as of May 7, 2004.
DELTA MILLS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 27, 2004 and June 28, 2003 3
Condensed consolidated statements of operations--
Three and nine months ended March 27, 2004 and March 29, 2003 4
Condensed consolidated statements of cash flows--
Nine months ended March 27, 2004 and March 29, 2003 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS 23-29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Delta Mills, Inc.
(In Thousands)
March 27, 2004 June 28, 2003
----------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 583 $ 520
Accounts receivable:
Factor and other 34,877 44,628
Less allowances for returns 90 180
----------------- -------------
34,787 44,448
Inventories
Finished goods 7,533 7,711
Work in process 26,924 25,765
Raw materials and supplies 7,764 10,659
----------------- -------------
42,221 44,135
Deferred income taxes 1,624 1,517
Other assets 342 520
----------------- -------------
TOTAL CURRENT ASSETS 79,557 91,140
ASSETS HELD FOR SALE 3,781 3,948
PROPERTY, PLANT AND EQUIPMENT, at cost 161,722 157,400
Less accumulated depreciation 97,669 90,619
----------------- -------------
64,053 66,781
DEFERRED LOAN COSTS AND OTHER ASSETS 377 459
----------------- -------------
$ 147,768 $ 162,328
================= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 11,049 $ 14,217
Revolving credit facility 22,734 24,856
Payable to Affiliates 3,686 3,517
Accrued employee compensation 3,278 1,414
Accrued and sundry liabilities 18,990 20,479
----------------- -------------
TOTAL CURRENT LIABILITIES 59,737 64,483
LONG-TERM DEBT 31,941 31,941
NON-CURRENT DEFERRED INCOME TAXES 6,641 8,421
DEFERRED COMPENSATION 2,467 7,573
SHAREHOLDERS' 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 (4,810) (1,882)
----------------- -------------
46,982 49,910
COMMITMENTS AND CONTINGENCIES
----------------- -------------
$ 147,768 $ 162,328
================= =============
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Delta Mills, Inc.
(In Thousands)
3 Mths Ended 3 Mths Ended 9 Mths Ended 9 Mths Ended
March 27, March 29, March 27, March 29,
2004 2003 2004 2003
---------------- ----------------- ----------------- ----------------
Net sales $ 37,919 $ 46,489 $ 129,000 $ 128,521
Cost of goods sold 36,242 43,649 122,291 116,441
---------------- ----------------- ----------------- ----------------
Gross profit 1,677 2,840 6,709 12,080
Selling, general and administrative expenses 2,926 2,969 8,713 8,430
Impairment and restructuring charges 398 398
Other income 28 48 729 536
---------------- ----------------- ----------------- ----------------
OPERATING PROFIT (LOSS) (1,221) (479) (1,275) 3,788
Other (expense) income:
Interest expense (1,171) (1,326) (3,539) (4,097)
Gain on extinguishment of debt 1,303
---------------- ----------------- ----------------- ----------------
(1,171) (1,326) (3,539) (2,794)
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) BEFORE
INCOME TAXES (2,392) (1,805) (4,814) 994
Income tax expense (benefit) (1,154) (705) (1,886) 369
---------------- ----------------- ----------------- ----------------
NET INCOME (LOSS) $ (1,238) $ (1,100) $ (2,928) $ 625
================ ================= ================= ================
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Mills, Inc.
(In Thousands)
9 Mths Ended 9 Mths Ended
March 27, 2004 March 29, 2003
----------------------- ------------------------
OPERATING ACTIVITIES
Net income (loss) $ (2,928) $ 625
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 6,595 6,874
Amortization 83 101
Discount to face value on repurchase of bonds (1,303)
Provision for impairment and restructuring 398
Gains on disposition of property
and equipment (253) (433)
Change in deferred income taxes (1,887) (56)
Deferred compensation (2,780) 113
Changes in operating assets and liabilities 6,789 (2,148)
----------------------- ------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 5,619 4,171
----------------------- ------------------------
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (3,858) (4,648)
Proceeds of dispositions 424 807
----------------------- ------------------------
NET CASH USED IN
INVESTING ACTIVITIES (3,434) (3,841)
----------------------- ------------------------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 136,497 134,625
Repayments on revolving lines of credit (138,619) (132,587)
Repurchase and retirement of long term debt (1,778)
----------------------- ------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (2,122) 260
----------------------- ------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 63 590
Cash and cash equivalents at beginning of period 520 52
----------------------- ------------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 583 $ 642
======================= ========================
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Delta
Mills, Inc. and subsidiaries ("the Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of only normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended March 27, 2004 are not necessarily
indicative of the results that may be expected for the year ending July 3, 2004.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 28, 2003.
NOTE B--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY
Delta Mills Marketing, Inc. (the "Guarantor") is a wholly-owned subsidiary of
the Company and has fully and unconditionally guaranteed (the "Guarantee") the
Company's payment of principal, premium, if any, interest and certain liquidated
damages, if any, on the Company's Senior Notes. The Guarantor's liability under
the Guarantee is limited to such amount, the payment of which would not have
left the Guarantor insolvent or with unreasonably small capital at the time its
Guarantee was entered into, after giving effect to the incurrence of existing
indebtedness immediately prior to such time.
The Guarantor is the sole subsidiary of the Company and does not comprise a
material portion of the Company's assets or operations. All future subsidiaries
of the Company will provide guarantees identical to the one described in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional guarantees
will be joint and several with the Guarantee of the Guarantor.
The Company has not presented separate financial statements or other disclosures
concerning the Guarantor because Company management has determined that such
information is not material to investors.
Summarized financial information for the Guarantor is as follows (in thousands):
March 27, 2004 June 28, 2003
-------------- -------------
Current assets $ 91 $ 88
Non-current assets 1,995 2,014
Current liabilities 3,997 1,912
Non-current liabilities 998 3,023
Stockholders' deficit (2,909) (2,833)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Nine Months Ended
March 27, 2004 March 29, 2003
-------------- --------------
Net sales - Intercompany commissions $2,893 $ 2,888
Cost and expenses 2,969 2,982
Net loss (76) (94)
6
NOTE C-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997, the Company issued $150 million of unsecured ten-year Senior
Notes at an interest rate of 9.625%. These notes will mature in August 2007. At
March 27, 2004, the outstanding balance of the notes was $31,941,000, unchanged
from the balance at June 28, 2003.
Delta Mills has a $50 million 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 Delta Mills. The facility is secured by
the accounts receivable, inventories and capital stock of Delta Mills. The
average interest rate on the credit facility was 2.843% at March 27, 2004 prior
to giving effect to the increase described below and is based on a spread over
either LIBOR or a base rate. Borrowings under this facility were $22.7 million
and $24.9 million as of March 27, 2004 and June 28, 2003, respectively. As of
March 27, 2004, the revolver availability was approximately $18 million without
giving effect to the $7 million availability requirement described below.
The GMAC credit facility has financial covenants that require 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 2004, the
Company was not in compliance with the maximum leverage ratio covenant at the
end of that quarter. GMAC has granted the Company a waiver and amendment that
waives the existing default with respect to the maximum leverage ratio covenant,
temporarily amends the maximum leverage ratio covenant for the fourth quarter of
fiscal 2004, and temporarily eliminates the fixed charge coverage ratio covenant
for the fourth quarter of fiscal 2004. The waiver and amendment also reduces the
Company's availability under the credit facility by $7 million for the remaining
term of the facility and increases 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 2005 and no event
of default exists under the credit facility. Management believes that there will
be adequate availability under the Company's credit facility and that the
Company will remain in compliance with the facility's financial covenants for
the remainder of fiscal 2004; however, there can be no assurance to this effect
for fiscal 2005. Management believes that it will be able to address with GMAC
any availability or financial covenant issues; however, there can be no
assurance to this effect.
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 Industries, Inc. ("Delta Woodside") subject to
compliance with the same conditions. At March 27, 2004, the Company was
prohibited by these covenants from paying dividends and making loans to Delta
Woodside. During the nine months ended March 27, 2004 and the year ended June
28, 2003, the Company did not pay any dividends to Delta Woodside.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance LLC (the "Factor") under a factor agreement. The
assignment of these receivables is primarily without recourse, provided that
customer orders are approved by the Factor prior to shipment of goods, up to a
maximum for each individual account. The assigned trade accounts receivable are
recorded on the Company's books at full value and represent amounts due the
Company from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Company's books as
incurred as a part of selling, general and administrative expense.
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 28, 2003, the Company recorded a restructuring charge
of $398,000 on a pre-tax basis associated with the operational closing of its
Catawba facility as announced on March 5, 2003. The charge reflected employee
termination costs of approximately $354,000. Production at the Catawba facility
ceased in April 2003 and the Company is in the process of liquidating the assets
associated with this facility.
7
NOTE D - RESTRUCTURING AND IMPAIRMENT CHARGES (CONTINUED)
During the year ended June 29, 2002, the Company recorded an impairment and
restructuring charge of $8.7 million, on a pretax basis, associated with the
closing of the Furman Plant as announced on August 22, 2001. The Company
recorded an $8.2 million non-cash asset write-down to reflect the property and
equipment at the Furman Plant at its estimated fair value, less selling costs.
The carrying amount of these assets was reduced to approximately $3,923,000. The
balance of the charge was approximately $0.5 million of accrued expenses for
involuntary termination costs associated with the 122 employees terminated as a
result of the plant closing. Production at the Furman facility ceased in October
2001, and the Company is in the process of liquidating the assets associated
with this facility.
During the nine months ended March 27, 2004 and the nine months ended March 29,
2003, the Company paid $253,000 and $42,000, respectively, in restructuring
costs. The Company had a remaining liability of $80,000 and $342,000 as of March
27, 2004 and June 28, 2003, respectively.
As of March 27, 2004 and June 28, 2003, the Company had $3.8 million and $3.9
million, respectively, in assets held for sale related to the closing of the
Furman and Catawba plants.
NOTE E - GAIN ON EXTINGUISHMENT OF DEBT
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements
Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
Among other things, Statement No. 145, through the rescission of Statement No.
4, no longer requires extraordinary item treatment for gains and losses from the
extinguishment of debt, unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria established in APB 30. The
Statement was effective for fiscal years beginning after May 15, 2002 and
requires the reclassification of prior period items that do not meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early extinguishment of
debt as a component of income before income taxes for all financial statement
periods presented. For the quarter and nine month periods ended March 27, 2004
and the three months ended March 29,2003, the Company did not recognize any
gains from the repurchase of debt. For the nine months ended March 29, 2003,
Delta Mills, Inc. purchased $3,080,000 face amount of its 9.625% Senior Notes
for $1,777,000. The Company recognized a gain of $1,303,000 as a result of these
purchases. These gains from the repurchase of debt are included in income before
income taxes in the accompanying condensed consolidated statements of
operations.
NOTE F - STOCK COMPENSATION
The Company participates in the Delta Woodside Industries Inc. Stock Option Plan
and the Delta Woodside Industries, Inc. 2004 Stock Plan.
The Delta Woodside Industries, Inc. 2004 Stock Plan was approved by Delta
Woodside's shareholders on November 6, 2003. The Stock Plan permits Delta
Woodside to grant restricted stock awards and phantom stock awards for up to an
aggregate maximum of 240,000 shares of its common stock. Delta Woodside
Industries, Inc. granted awards for 132,000 shares of restricted stock and
phantom stock awards with respect to 88,000 shares during December of 2003.
All awards granted are subject to vesting conditions, including conditions based
on continued employment with Delta Woodside or its subsidiaries (fifty percent
of the awards) and performance-based conditions (fifty percent of the awards).
One third of the shares subject to vesting based on continued employment will
vest on the last day of each of fiscal years 2004, 2005 and 2006. The shares
subject to vesting based on performance will vest if certain targets are
attained for net income and return on assets in each of fiscal years 2004, 2005
and 2006. A participant in the plan may not transfer shares issued under the
plan prior to the fifth anniversary of the date the shares first vested. To the
extent that an award is forfeited, any shares subject to the forfeited portion
of the award will again become available for issuance under the Stock Plan.
8
NOTE F - STOCK COMPENSATION (CONTINUED)
The Company applies the intrinsic value-based method of accounting for its stock
compensation, in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under this method, compensation expense is recorded on the date
of the grant only if the current market price of the underlying stock exceeded
the exercise price. If the Company had determined compensation expense at fair
value, as under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net income (loss) would have been as follows:
(In thousands) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
3/27/2004 3/29/2003 3/27/2004 3/29/2003
------------- ------------- ------------- -------------
Net income (loss), as reported $ (1,238) $ (1,100) $ (2,928) $ 625
Add stock based employee compensation expense
included in reported net income (loss), net of tax 26 51 47 138
Less total stock based compensation expense
determined under fair value based method, net
of related tax effects (26) (130) (47) (382)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ (1,238) $ (1,179) $ (2,928) $ 381
============= ============= ============= =============
NOTE G - COMMITMENTS AND CONTINGENCIES
During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounted to $1.5 million, which included interest and penalties. The assessment
was delayed pending an administrative review of the case by the State. In
October 2002, the State proposed a settlement in which the Company would have
paid approximately 90% of the assessed amount plus a portion of certain
penalties for the Company's tax years 1994 - 2000. The Company rejected this
offer and continued with its appeal due to management's belief that the State's
legal position is in conflict with established principles of federal
constitutional law. The Company believes that its reserves for settlement are
adequate and any payment in settlement of this matter will not result in a
material impact on the Company's results of operations.
NOTE H - DEFERRED COMPENSATION
On January 16, 2004, based on the recommendation of Delta Woodside's
Compensation Committee, the Board (with Mr. Garrett abstaining) approved an
amendment of the Company's deferred compensation plan. The deferred compensation
plan amendment provides that each participant's deferred compensation account
will be paid to the participant upon the earlier of the participant's
termination of employment or in accordance with a schedule of payment that will
pay approximately 40%, 30%, 20% and 10% of the participant's current account on
February 15 of 2004, 2005, 2006 and 2007, respectively. Any such February 15
payment will be conditioned on there being no default under the Delta Mills
Senior Note Indenture or the Company's revolving credit facility and on
compliance with the fixed charge coverage ratio test in the Senior Note
Indenture for the most recently ended four full fiscal quarters, determined on a
pro forma basis. As a result of this amendment to the deferred compensation
plan, approximately $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 condensed consolidated
balance sheet at March 27, 2004 from deferred compensation to accrued employee
compensation in current liabilities. The first payment of approximately $3.1
million was made in February 2004.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains certain "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future, including such matters as future revenues, future cost savings,
future capital expenditures, business strategy, competitive strengths, goals,
plans, references to future success and other such information are
forward-looking statements. The words "estimate", "project", "anticipate",
"expect", "intend", "believe" and similar expressions are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are subject to a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those set forth in or implied by the forward-looking statements. These risks and
uncertainties include, among others, changes in the retail demand for apparel
products, the cost of raw materials, competitive conditions in the apparel and
textile industries, the relative strength of the United States dollar as against
other currencies, changes in United States and international trade regulations,
including without limitation the expected end of quotas on textile and apparel
products among World Trade Organization member states in 2005, and the discovery
of unknown conditions (such as with respect to environmental matters and similar
items). The Company does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.
Delta Mills, Inc. ("the Company") sells a broad range of woven, finished apparel
fabric primarily to branded apparel manufacturers and resellers. The Company
also sells camouflage fabric and other fabrics used in apparel sold to the
United States Department of Defense.
RESULTS OF OPERATIONS
During the quarter and nine months ended March 27, 2004, the Company experienced
continued pressure from imports and oversupply in the domestic textiles market.
These factors also continue to cause negative price pressure on the Company's
products. As a result, the Company does not expect substantial improvement in
pricing until two fundamental factors affecting the domestic textile market are
addressed - competition from imports and excess domestic capacity. The Company
believes that consolidation in the domestic textile industry, which is beyond
the Company's control, is necessary to address excess domestic capacity. There
can be no assurance that excess domestic capacity will be addressed in a manner
beneficial to the Company.
The Company expects to face significant change in global competition in 2005 as
a result of the impact of multilateral agreements intended to liberalize global
trade. The World Trade Organization ("WTO") is overseeing the phase-out of
textile and apparel quotas over a 10-year period ending 2004. Tariffs on textile
and apparel products are being reduced (but not eliminated) over the same
10-year period. In addition, China's admission to the WTO will have a
significant impact on global textile and apparel trade. By gaining admission to
the WTO, China is able to take advantage of the elimination of quota limitations
on access to the U.S. market, and there could be a significant negative impact
on the North American textile industry. With the arrival of 2005 and the
elimination of quotas for WTO members, certain countries, most particularly but
not limited to China, may have cost advantages compared to the Company.
Accordingly, the Company believes it must fully utilize other competitive
advantages it believes it has compared to Asian competitors. Among the
advantages of the Company are its well-established relationships with its
customers, its ability to respond quickly to its customers' needs as well as the
logistic advantages associated with its manufacturing being located in North
America. However, there can be no assurance that these advantages will allow the
Company to successfully compete with foreign textile producers.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Net sales for the quarter ended March 27, 2004 were $37.9 million, a decrease of
18.4% when compared to net sales of $46.5 million for the quarter ended March
29, 2003. The decrease from the prior year quarter was the result of reduced
unit sales partially offset by a 6.0% increase in average sales price. For the
nine months ended March 27, 2004, the Company reported net sales of $129.0
million as compared to net sales of $128.5 million for the previous year nine
months ended March 29, 2003. The increase was the result of a 1.2% increase in
average sales price partially offset by a decline in unit sales. Unit sales
declined in both the quarter and nine-month periods primarily as a result of
weaker retail sales partially offset by improved demand for military fabrics.
Product mix changes accounted for the increase in average sales price.
Gross profit was $1.7 million and 4.4% of net sales for the third quarter of
fiscal year 2004. This compares to gross profit of $2.8 million and 6.1% of net
sales in the prior year third quarter. Gross profit for the nine months ended
March 27, 2004 was $6.7 million and 5.2% of net sales as compared to gross
profit of $12.1 million and 9.4% of net sales for the nine months ended March
29, 2003. The decrease in gross profit in the current year quarter was the
result of reduced absorption of manufacturing costs due to reduced running
schedules and deteriorating margins on commodity products due to continued
pressure from imports coupled with over capacity of domestic textile production,
partially offset by an improved product mix. The decrease in gross profit for
the current year nine month period resulted principally from unabsorbed
manufacturing costs associated with reduced running schedules brought on by
reduced customer demand. Increased employee benefit costs in the first quarter
also contributed to the decline in gross profit for the nine months ended March
27, 2004.
Selling, general and administrative expense (SG&A) was $2.9 million and 7.7% of
net sales for the third quarter of fiscal year 2004 compared to SG&A of $3.0
million and 6.4% of net sales for the prior year third quarter. Selling, general
and administrative expense (SG&A) was $8.7 million and 6.8% of net sales for the
nine months ended March 27, 2004 compared to SG&A of $8.4 million and 6.6% of
net sales for the nine months ended March 29, 2003. The increase in SG&A in the
nine month period is attributable to an increase in factoring costs associated
with increased sales to customers based in the Caribbean (where the factor's
risks are higher) and increased costs of audit and tax services, insurance and
property taxes.
During the quarter ended March 29, 2003, the Company recorded a restructuring
charge of $398,000 on a pre-tax basis associated with the operational closing of
its Catawba facility as announced on March 5, 2003. The charge reflected
employee termination costs of approximately $354,000. Production at the Catawba
facility ceased in April 2003 and the Company is in the process of liquidating
the assets associated with this facility. There were no restructuring charges
recorded during the nine months ended March 27, 2004.
The Company reported an operating loss of $1.2 million for the quarter ended
March 27, 2004 compared to an operating loss of $0.5 million in the prior year
quarter. The Company reported an operating loss of $1.3 million for the nine
months ended March 27, 2004 compared to an operating profit of $3.8 million for
the nine months ended March 29, 2003. The decline in operating profit for the
current year quarter and nine-month period was attributable to the decline in
gross profit as discussed above.
Interest expense was $1.2 million and $3.5 million for the quarter and nine
months ended March 27, 2004, respectively, compared to $1.3 million and $4.1
million for the corresponding prior year periods. The reduction in interest
expense for the nine-month period was primarily due to the reduction in the
balance of Delta Mills' 9.625% Senior Notes. The prior year quarter and
nine-month periods are net of $0.1 million and $0.3 million, respectively, in
interest capitalized related to capital projects. Capitalized interest in the
current year periods was not material. There was no interest income in either
the current or the prior year period.
Included in other (expense) income for the nine months ended March 29, 2003 was
a $1.3 million gain resulting from the Company's repurchase of a portion of its
9.625% Senior Notes. There was no income or expense in this category in the nine
months ended March 27, 2004.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The income tax benefit for the current year quarter was $1.2 million compared to
an income tax benefit of $0.7 million in the previous year quarter. For the nine
months ended March 27, 2004, the Company recorded an income tax benefit of $1.9
million compared to income tax expense of $0.4 million for the prior year nine
months ended March 29, 2003.
The Company reported a net loss of $1.2 million for the quarter ended March 27,
2004 compared to a net loss of $1.1 million for the quarter ended March 29,
2003. The Company reported a net loss of $2.9 million for the nine months ended
March 27, 2004 compared to net income of $0.6 million for the nine months ended
March 29, 2003. Net income for the previous year nine months included a gain of
$0.8 million on an after tax basis from the repurchase by the Company of a
portion of its 9.625% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 27, 2004, the Company generated $5.6 million in
cash from operations. This includes $6.8 million in cash from changes in
operating assets and liabilities, resulting primarily from a $9.7 million
decrease in accounts receivable associated with the decrease in sales. The
principal uses of cash were capital expenditures of $3.4 million, net of $0.4
million in proceeds from the disposal of assets. Outstanding borrowings under
the GMAC revolving credit facility described below decreased $2.1 million from
the balance at June 28, 2003.
Delta Mills has a $50 million 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 Delta Mills. The facility is secured by
the accounts receivable, inventories and capital stock of Delta Mills. The
average interest rate on the credit facility was 2.843% at March 27, 2004 prior
to giving effect to the increase described below and is based on a spread over
either LIBOR or a base rate. Borrowings under this facility were $22.7 million
and $24.9 million as of March 27, 2004 and June 28, 2003, respectively. As of
March 27, 2004, the revolver availability was approximately $18 million without
giving effect to the $7 million availability requirement described below.
The GMAC credit facility has financial covenants that require the Company to
comply with a maximum leverage ratio and a minimum fixed charge coverage ratio.
As a result of the operating loss in the third quarter of fiscal 2004, the
Company was not in compliance with the maximum leverage ratio covenant at the
end of that quarter. GMAC has granted the Company a waiver and amendment that
waives the existing default with respect to the maximum leverage ratio covenant,
temporarily amends the maximum leverage ratio covenant for the fourth quarter of
fiscal 2004, and temporarily eliminates the fixed charge coverage ratio covenant
for the fourth quarter of fiscal 2004. The waiver and amendment also reduces the
Company's availability under the credit facility by $7 million for the remaining
term of the facility and increases 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 2005 and no event
of default exists under the credit facility. Management believes that there will
be adequate availability under the Company's credit facility and that the
Company will remain in compliance with the facility's financial covenants for
the remainder of fiscal 2004; however, there can be no assurance to this effect
for fiscal 2005. Management believes that it will be able to address with GMAC
any availability or financial covenant issues; however, there can be no
assurance to this effect.
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
March 27, 2004, the outstanding balance of the notes was $31,941,000, unchanged
from the balance at June 28, 2003.
12
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
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
March 27, 2004, the Company was prohibited by these covenants from paying
dividends and making loans to Delta Woodside. During the nine months ended March
27, 2004 and the year ended June 28, 2003, the Company did not pay any dividends
to Delta Woodside Industries, Inc.
On January 16, 2004, based on the recommendation of Delta Woodside's
Compensation Committee, the Board (with Mr. Garrett abstaining) approved an
amendment of the Company's deferred compensation plan. The amendment was
contingent on receiving the requisite consent of the Company's revolving credit
agreement lender. This consent was subsequently obtained. The deferred
compensation plan amendment provides that each participant's deferred
compensation account will be paid to the participant upon the earlier of the
participant's termination of employment or in accordance with a schedule of
payment that will pay approximately 40%, 30%, 20% and 10% of the participant's
current account on February 15 of 2004, 2005, 2006 and 2007, respectively. The
first payment of approximately $3.1 million was made in February of 2004. 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. Delta Woodside's Compensation Committee and its Board adopted
this amendment as a measure to retain key employees who, in light of the general
difficulties in the textile industry, have expressed a desire to diversify their
retirement assets. As of March 27, 2004, the Company's aggregate deferred
compensation liability was approximately $4.8 million. Of this amount,
approximately $1,198,000, $285,000 and $80,000 were for the accounts of William
F. Garrett, CEO, William H. Hardman, Jr., CFO, and Donald C. Walker, Controller,
respectively.
As a result of this amendment to the deferred compensation plan, approximately
$2.3 million, which represents the second February 15 payment, plus
distributions anticipated to occur in the next twelve months due to participant
retirements, has been reclassified on the condensed consolidated balance sheet
at March 27, 2004 from deferred compensation to accrued employee compensation in
current liabilities. The Company estimates that this amendment will result in
interest savings of $1.1 million over the next four years and approximately $5.1
million over the term of the original plan.
On November 6, 2002, the Company announced that it had started a major capital
project to modernize its Delta 3 cotton finishing plant in Wallace, SC. The
Company completed the first phase of this project in June of 2003. During fiscal
years 2004, 2005 and 2006, the Company plans to make additional capital
expenditures for this project to position the finishing facility for growth and
improved product quality. The cost of this project makes up the majority of the
approximately $6.4 million in capital expenditures for fiscal year 2003 and the
majority of the approximately $5.0 million per year planned for capital
expenditures in each of fiscal years 2004 and 2005. During the quarter ended
December 27, 2003, the Company revised its capital expenditure plans to delay a
portion of its spending into fiscal 2006.
The Company assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance LLC (the "Factor") under a factor agreement. The
assignment of these receivables is primarily without recourse, provided that
customer orders are approved by the Factor prior to shipment of goods, up to a
maximum for each individual account. The assigned trade accounts receivable are
recorded on the Company's books at full value and represent amounts due the
Company from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded on the Company's books as
incurred as a part of selling, general and administrative expense.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounted to $1.5 million, which included interest and penalties. The assessment
was delayed pending an administrative review of the case by the State. In
October 2002, the State proposed a settlement in which the Company would have
paid approximately 90% of the assessed amount plus a portion of certain
penalties for the Company's tax years 1994 - 2000. The Company rejected this
offer and continued with its appeal due to management's belief that the State's
legal position is in conflict with established principles of federal
constitutional law. The Company believes that its reserves for settlement are
adequate and any payment in settlement of this matter will not result in a
material impact on the Company's results of operations.
RECENT DEVELOPMENTS
The Company has retained the investment banking firm of Soles Brower Smith & Co.
to provide the Company with strategic advisory services.
RECENT ACCOUNTING PRONOUNCEMENTS
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 have a material effect on the Company's consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions.
Impairment of Long - Lived Assets: In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets, such as property, plant and equipment,
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to its fair value, which SFAS 144 defines as the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its SFAS 144 fair value, an impairment charge is recognized
equal to the amount by which the carrying amount of the asset exceeds the fair
value of the asset. Any impairment charge would reduce the value of the
Company's assets on its balance sheet and result in a corresponding non-cash
charge to earnings that would reduce the Company's net income on its income
statement. Assets to be disposed of are separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less costs
to sell, and are no longer depreciated. The Company does not currently expect to
take any material impairment charges in the near future; however, if the Company
continues to experience demand significantly less than its production capacity
and to experience significant operating losses, SFAS 144 could require the
Company in the future to record a material impairment charge against some of its
property, plant and equipment.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Income Taxes: The Company accounts for income taxes under the asset and
liability method in accordance with Financial Accounting Standard 109,
Accounting for Income Taxes ("SFAS 109"). The Company recognizes deferred income
taxes, net of valuation allowances, for the estimated future tax effects of
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their tax bases and net operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Changes in deferred tax
assets and liabilities are recorded in the provision for income taxes. As of
March 27, 2004 and June 28, 2003, the Company had approximately $5.0 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.
15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. 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 27, 2004, a 10% decline in market price of the Company's fixed price
contracts would have had a negative impact of approximately $1.0 million on the
value of the contracts. As of June 28, 2003, such a 10% decline would have had a
negative impact of $0.8 million. The increase in the potential negative impact
from June 28, 2003 to March 27, 2004 is due principally to higher cotton prices
at the more recent date.
Interest Rate Sensitivity
The $50 million secured four-year revolving credit facility expiring in 2007 is
sensitive to changes in interest rates. Interest is based on a spread over LIBOR
or a base rate. An interest rate increase would have a negative impact to the
extent the Company borrows against the revolving credit facility. The impact
would be dependent on the level of borrowings incurred. As of March 27, 2004, an
increase in the interest rate of 1% would have a negative impact of
approximately $227,000 annually. As of June 28, 2003, an increase in the
interest rate of 1% would have had a negative impact of approximately $249,000
annually. The decrease in the potential negative impact from June 28, 2003 to
March 27, 2004 is due to the decrease in borrowings from the facility.
An interest rate change would not have an impact on the payments due under the
fixed rate ten year Senior Notes.
Item 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and its principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), have
concluded that, as of March 27, 2004, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act was recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
Changes in Internal Controls
There was no change in the Company's internal controls over financial reporting
during the most recent fiscal quarter that has materially affected, or is likely
to materially affect, the Company's internal control over financial reporting.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults upon Senior Securities
As a result of the operating loss in the current year third quarter, the Company
was not in compliance with the maximum leverage ratio covenant of its $50
million revolving credit agreement with GMAC at the end of the third quarter of
fiscal 2004. GMAC has granted the Company a waiver and amendment that waives the
existing default with respect to the maximum leverage ratio covenant,
temporarily amends the maximum leverage ratio covenant for the fourth quarter of
fiscal 2004, and temporarily eliminates the fixed charge coverage ratio covenant
for the fourth quarter of fiscal 2004. The waiver and amendment also reduces the
Company's availability under the credit facility by $7 million for the remaining
term of the facility and increases 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 2005 and no event
of default exists under the credit facility.
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
a) Listing of Exhibits
<s>
4.3.1.6 Waiver and Amendment to Credit Agreement and Other Documents dated as of April 19, 2004 between Delta Mills, Inc.
and GMAC Commercial Finance LLC.
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
There were no reports filed or furnished on Form 8-K for the
quarter ended March 27, 2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Mills, Inc.
(Registrant)
Date May 11, 2004 By:/s/ W.H. Hardman, Jr.
-------------------------------- ----------------------------
W.H. Hardman, Jr.
Chief Financial Officer
18