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 October 2, 1999
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
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
233 North Main Street
Hammond Square, Suite 200
Greenville, South Carolina 29601
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(Address of principal executive offices) (Zip Code)
864\232-8301
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value--
100 shares as of November 8, 1999.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND H(1)(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
1
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DELTA MILLS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--
October 2, 1999 and July 3, 1999 3-4
Condensed consolidated statements of operations--
Three months ended October 2, 1999 and
September 26, 1998 5
Condensed consolidated statements of cash
flows-Three months ended October 2, 1999
and September 26, 1998 6
Notes to condensed consolidated financial
statements-October 2, 1999 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
2
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTA MILLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS October 2, July 3,
1999 1999
----------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,821 $ 9,903
Accounts receivable:
Factor and other 57,194 69,881
Affiliates 5,522 12,994
----------- --------
62,716 82,875
Less allowances for doubtful accounts and returns 143 291
----------- --------
62,573 82,584
Inventories:
Finished goods 9,581 9,122
Work in process 28,382 29,201
Raw materials and supplies 7,937 7,144
----------- --------
45,900 45,467
Current assets of discontinued operations 692 780
Deferred income taxes 2,509 2,482
----------- --------
TOTAL CURRENT ASSETS 134,495 141,216
PROPERTY, PLANT AND EQUIPMENT
Cost 200,911 200,723
Accumulated depreciation 89,177 85,743
----------- --------
111,734 114,980
DEFERRED LOAN COSTS AND OTHER ASSETS 4,582 4,755
----------- --------
TOTAL ASSETS $ 250,811 $260,951
=========== ========
</TABLE>
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<TABLE>
<CAPTION>
DELTA MILLS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS-Continued
October 2, July 3,
1999 1999
------------ ---------
(Unaudited)
(In thousands)
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Trade accounts payable $ 11,710 $ 15,887
Payable to affiliates 1,520 571
Accrued employee compensation 1,876 4,014
Accrued and sundry liabilities 14,421 18,381
Accrued restructuring charges 700 750
------------ ---------
TOTAL CURRENT LIABILITIES 30,227 39,603
LONG-TERM DEBT 150,000 150,000
DEFERRED INCOME TAXES 15,547 15,547
OTHER LIABILITIES AND DEFERRED CREDITS 6,326 6,040
SHAREHOLDERS' EQUITY
Common Stock, par value $.01--authorized 0 0
3,000 shares, issued and outstanding 100 shares
Additional paid-in capital 51,792 51,792
Retained earnings (deficit) (3,081) (2,031)
------------ ---------
TOTAL SHAREHOLDERS' EQUITY 48,711 49,761
------------ ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 250,811 $260,951
============ =========
</TABLE>
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<TABLE>
<CAPTION>
DELTA MILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
--------------------------------
October 2, September 26,
1999 1998
--------------- ---------------
(In thousands)
<S> <C> <C>
Net sales to non-affiliated parties $ 58,008 $ 83,702
Net sale to affiliated parties 7,310 8,715
--------------- ---------------
Net sales 65,318 92,417
Cost of goods sold 59,501 75,229
--------------- ---------------
Gross profit on sales 5,817 17,188
Selling, general and administrative 3,409 3,948
Other (income) (33) (25)
--------------- ---------------
OPERATING PROFIT 2,441 13,265
Interest expense (income):
Interest expense 4,313 4,514
Interest (income) (145) (25)
--------------- ---------------
4,168 4,489
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,727) 8,776
Income tax expense (benefit) (677) 3,379
--------------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,050) 5,397
Gain on disposal of discontinued operations
less applicable income taxes 0 2,632
--------------- ---------------
NET INCOME (LOSS) $ (1,050) $ 8,029
=============== ===============
</TABLE>
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<TABLE>
<CAPTION>
DELTA MILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
-----------------------------
October 2, September 26,
1999 1998
------------ ---------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ (1,050) $ 8,029
Adjustments to reconcile net income to net cash
provided by operating activities:
Discontinued operations 0 10,903
Depreciation 3,434 3,432
Amortization 173 (65)
Other 138 3,754
Changes in operating assets and liabilities 11,800 (20,060)
------------ ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,495 5,993
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (1,577) (3,153)
Proceeds of dispositions 0 566
Investing activities of discontinued operations 0 (44)
Other 0 87
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NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (1,577) (2,544)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 0 57,365
Repayments on revolving lines of credit 0 (59,000)
------------ ---------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES
0 (1,635)
------------ ---------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 12,918 1,814
Cash and cash equivalents at beginning of year 9,903 544
------------ ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,821 $ 2,358
============ ===============
</TABLE>
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DELTA MILLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
October 2, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Delta
Mills, Inc. ("the Company") have been prepared in accordance with generally
accepted accounting principles 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 generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three months ended
October 2, 1999 are not necessarily indicative of the results that may be
expected for the year ending July 1, 2000. 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 July 3, 1999.
NOTE B--DISCONTINUED OPERATIONS
On March 3, 1998, the Company made the decision to close its Stevcoknit Fabrics
division. Accordingly, results of that segment have been reported as
discontinued operations. During the first quarter of fiscal year 1999, the
Company reduced the estimate of the cost to close the business and recognized a
credit of $2.6 million in discontinued operations, net of income taxes of $1.8
million.
The assets of discontinued business at October 2, 1999 and July 3, 1999, are as
follows:
October 2, July 3,
(In thousands) 1999 1999
----------- --------
Accounts Receivable (net of reserves) $ 675 $ 763
Other current assets 17 17
----------- --------
Total current assets $ 692 $ 780
=========== ========
Summarized results of operations for discontinued business are as follows: (In
thousands)
Three Months Ended
---------------------------
October 2, September 26,
1999 1998
----------- --------------
Net Sales $ 0 $ 2,000
Cost and expenses 0 2,000
----------- --------------
Total from discontinued operations $ 0 $ 0
=========== ==============
7
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NOTE C--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, if any, 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):
October 2, July 3,
1999 1999
------------ ---------
Current assets $ 194 $ 194
Noncurrent assets 100 71
Current liabilities 499 560
Noncurrent liabilities 1,079 980
Stockholder's (deficit) (1,284) (1,275)
Summarized results of operations for the Guarantor are as follows (in
thousands):
Three Months Ended
-----------------------------
October 2, September 26,
1999 1998
------------ ---------------
Net sales - intercompany commissions $ 944 $ 1,377
Costs and expenses 1,043 1,327
Income from continuing operations (9) 184
Net profit (loss) (9) (83)
NOTE D--LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
At each of July 3, 1999 and October 2, 1999, no amounts were outstanding under
the Company's bank credit facility. The Company's first fiscal 2000 quarter
operating results have caused the Company not to be in compliance at the end of
that quarter with the credit facility's covenants respecting minimum interest
coverage ratio, maximum leverage ratio and minimum consolidated tangible net
worth. The same covenants are contained in, and therefore a default also exists
under, operating leases of the Company with an aggregatte outstanding lease
balance f\of approximately $5.5 million. The company intends to negotiate with
its bank lenders amendments of the applicable covenants (which will
correspondingly amend the operating lease covenants) together with a reduction
in borrowing availability under the bank credit facility to a level more
consistent with the Company's needs and plans. The Company believes that it
will be able to enter into such an amendment agreement on terms satisfactory to
it. Accordingly, the Company does not believe that these credit facility or
operating lease covenant defaults will have a material adverse effect on the
Company.
8
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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, Year 2000 readiness 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 manufactures and sells finished woven fabrics to non-affiliated
parties and manufactures and sells yarn, primarily to Delta Apparel, a division
of Duck Head Apparel Company, Inc., which is owned by the Company's parent
company, Delta Woodside Industries, Inc.
Net sales to non-affiliated parties for the first quarter of fiscal year 2000
were $58.0 million as compared to $83.7 million in the same quarter of the prior
fiscal year, a decrease of 31%. Sales decreases were in both cotton and
synthetic fabric volume with the principal decline in synthetic fabric unit
sales. The change in synthetic fabric sales is related to weak market demand as
a result of increased import pressure. The Company is in the process of
downsizing this portion of the business in order to match capacity to current
market demand. To a lesser extent, market demand for cotton twill fabric has
also declined. Management believes this decline in cotton twills, the Company's
core product, is the result of garment manufacturers and the related sector
moving through a backlog of inventory that has resulted in a slow down of
replenishment orders to the fabric supplier.
Net sales to affiliated parties for the first quarter of fiscal year 2000 were
$7.3 million as compared to $8.7 million in the same quarter of the prior fiscal
year. The decrease was due to a change in the market price for yarn in
accordance with the transfer price agreement between the affiliates. The
Company believes that the affiliate will continue to purchase yarn throughout
the second quarter of fiscal year 2000 at approximately the same level as during
the first fiscal quarter.
Gross profit as a percent of sales was 8.9% for the first quarter of fiscal year
2000 compared to 18.6% in the prior year quarter. This 9.7 point decline was
primarily due to the sales volume declines and related manufacturing efficiency
losses. Also contributing to this decline in gross profit were losses incurred
in the first quarter of fiscal year 2000 as downsizing of the synthetic fabric
facilities continued in order to match capacity with reduced demand. In
addition, the prior year quarter included an approximately $1.4 million gain
from the USDA cotton rebate program that was not in effect during the first
quarter of the current year.
Selling, general and administrative cost were $3.4 million and 5.2% of sales
compared to $3.9 million and 4.3% of sales in the prior year quarter.
The Company reported a net loss from continuing operations of $1.1 million for
the first quarter of fiscal year 2000 as compared to income from continuing
operations of $5.4 million in the prior year quarter. The net loss for the
current quarter was $1.1 million compared to net income of $8.0 for the prior
year quarter. Net income for the prior year quarter included a gain of $2.6
million from discontinued operations.
The Company's order backlog at October 2, 1999 was $59.2 million, down from the
$93.2 million order backlog at September 26, 1998. The decline was spread
throughout all product lines.
9
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Inventory for the quarter ended October 2, 1999 was contained at $45.9 million
in line with reduced sales volume. This compares with inventory of $45.5 at
July 3, 1999 and $58.6 million at September 26, 1998.
The Company has a variety of computers and systems that are subject to Year 2000
issues. The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these programs do not
properly recognize a year that begins with "20" instead of the familiar "19".
If not corrected, many computer applications could fail, or cause erroneous
results. The Company has considered the impact of Year 2000 issues on the
Company's computer information systems and other equipment that use embedded
technology such as micro-controllers, and has developed a remediation plan. The
Company's Year 2000 plan includes 1) Identifying year 2000 issues, 2) Assessment
and prioritization of issues, 3) Remediation, and 4) Testing for Year 2000
compliance. Because the Company has a wide variety of systems and equipment at
various locations affected by the Year 2000 issue, various aspects of the
Company's Year 2000 efforts are at different stages of progress. Most of the
work now being done involves testing of Year 2000 solutions, tracking key vendor
compliance, and testing contingency plans. As a part of its plan to achieve Year
2000 compliance, the Company decided to accelerate the schedule for
implementation of certain data collection systems. The cost of these systems,
which should be in place prior to the end of 1999, is approximately $1.2
million. In addition, the Company spent approximately $21,000 on software
improvements and remediation work in fiscal year 1998, $216,000 in fiscal year
1999, and $81,000 in the first quarter of fiscal year 2000. The Company expects
to spend an additional $131,000 in the second quarter of fiscal year 2000. No
further significant spending is anticipated for remediation and software
improvements. Most key vendors and customers have documented assurance of
current or planned readiness for the year 2000. The most likely worst-case
scenario is that certain non-critical business systems might fail. The Company
has developed contingency plans for all systems that had not been remediated as
of October 2, 1999. Contingency plans include the option to disable certain
systems or to use alternate methods of providing the same or similar service.
The Company does not believe that these non-critical systems will have a
material adverse impact on the Company's ability to generate revenue. In the
event that the Company is unable to implement all or a part of its Year 2000
plan, then some of the Company's computer systems could fail. Any liability or
lost revenue associated with systems failure cannot be reasonably estimated at
this time.
At each of July 3, 1999 and October 2, 1999, no amounts were outstanding under
the Company's bank credit facility. The Company's first fiscal 2000 quarter
operating results have caused the Company not to be in compliance at the end of
that quarter with the credit facility's covenants respecting minimum interest
coverage ratio, maximum leverage ratio and minimum consolidated tangible net
worth. The same covenants are contained in, and therefore a default also exists
under, operating leases of the Company with an aggregate outstanding lease
balance of approximately $5.5 million. The Company intends to negotiate with
its bank lenders amendments of the applicable covenants (which will
correspondingly amend the operating lease covenants) together with a reduction
in borrowing availability under the bank credit facility to a level more
consistent with the Company's needs and plans. The Company believes that it
will be able to enter into such an amendment agreement on terms satisfactory to
it. Accordingly, the Company does not believe that these credit facility or
operating lease covenant defaults will have a material adverse effect on the
Company.
The Company believes that cash flow generated by its operations and funds
available under its current credit facilities will be sufficient to service its
debt, to satisfy its day-to-day working capital requirements, and to fund its
planned capital expenditures.
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. A 10% decline in market price of the Company's fixed price
contracts would have a negative impact of approximately $3.9 million on the
value of the contracts.
10
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings*
Item 5 Other Information*
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
None
(b) The Company filed Form 8-K with date of August 26, 1999.
Items reported were:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
*Items 1 and 5 are not applicable
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Mills, Inc.
-------------------
(Registrant)
Date November 16, 1999 /s/ David R. Palmer
---------------- ----------------------
David R. Palmer
Controller
(Authorized signatory and
chief accounting officer)
12
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 22821
<SECURITIES> 0
<RECEIVABLES> 62716
<ALLOWANCES> 143
<INVENTORY> 45900
<CURRENT-ASSETS> 134495
<PP&E> 200911
<DEPRECIATION> 89177
<TOTAL-ASSETS> 250811
<CURRENT-LIABILITIES> 30227
<BONDS> 150000
0
0
<COMMON> 51792
<OTHER-SE> (3081)
<TOTAL-LIABILITY-AND-EQUITY> 250811
<SALES> 65318
<TOTAL-REVENUES> 65318
<CGS> 59501
<TOTAL-COSTS> 59501
<OTHER-EXPENSES> (33)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4313
<INCOME-PRETAX> (1727)
<INCOME-TAX> (677)
<INCOME-CONTINUING> (1050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1050)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
