1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
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.)
233 North Main Street
Hammond Square, Suite 200
Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
864\232-8301
(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 January 29,
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.
DELTA MILLS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--
December 26, 1998 and June 27, 1998 3-4
Condensed consolidated statements of operations--
Three and six months ended December 26, 1998 and
December 27, 1997 5
Condensed consolidated statements of cash
flows-Six months ended December 26, 1998
and December 27, 1997 6
Notes to condensed consolidated financial
statements-December 26, 1998 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTA MILLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 26, June 27,
1998 1998
(Unaudited)
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,094 $ 544
Accounts receivable:
Factor and other 72,918 82,454
Affiliates 12,349 6,783
85,267 89,237
Less allowances for doubtful accounts 348 246
84,919 88,991
Inventories
Finished goods 15,090 10,427
Work in process 31,820 37,000
Raw materials and supplies 8,662 8,412
55,572 55,839
Current assets of discontinued operations 1,401 15,484
Deferred income taxes and other assets 1,261 2,567
TOTAL CURRENT ASSETS 146,247 163,425
PROPERTY, PLANT AND
EQUIPMENT, at cost 196,050 201,887
Less accumulated depreciation 80,270 80,257
115,780 121,630
DEFERRED LOAN COSTS AND OTHER ASSETS 5,126 5,235
$267,153 $290,290
DELTA MILLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 26, June 27,
1998 1998
(Unaudited)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 14,275 $ 23,890
Payable to affiliates 3,571 4,493
Accrued and sundry liabilities 17,301 20,979
Accrued restructuring charges 3,718 6,640
TOTAL CURRENT LIABILITIES 38,865 56,002
LONG-TERM DEBT 155,000 176,635
DEFERRED INCOME TAXES 14,655 7,431
OTHER LIABILITIES AND DEFERRED
CREDITS 6,340 10,144
SHAREHOLDERS' EQUITY
Common Stock -- par value $.01
a share - authorized
3,000 shares, issued and outstanding 100
Additional paid-in capital 51,792 51,792
Retained earnings (deficit) 501 (11,714)
52,293 40,078
COMMITMENTS AND CONTINGENCIES
$267,153 $ 290,290
See notes to consolidated financial statements.
DELTA MILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
(In thousands, except per share data)
Net sales to non-affiliated
parties $79,134 $85,131 $162,835 $173,702
Net sales to affiliated
parties 7,804 4,154 16,520 7,966
Net sales 86,938 89,285 179,355 181,668
Cost of goods sold 71,156 74,279 146,385 149,637
Gross profit on sales 15,782 15,006 32,970 32,031
Selling, general and
administrative expense 4,403 3,950 8,351 8,054
Other income (expense) (22) 27 3 42
OPERATING PROFIT 11,357 11,083 24,622 24,019
Interest expense (income):
Interest expense 4,489 4,968 9,003 9,313
Interest (income) (42) (26) (67) (63)
4,447 8,936 4,942 9,250
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 6,910 6,141 15,686 14,769
Income tax expense 2,724 2,509 6,103 5,834
INCOME FROM CONTINUING
OPERATIONS 4,186 3,632 9,583 8,935
Decrease in estimate of loss
on disposal of discontinued
operations less
applicable income taxes 2,632
(Loss) from operations of
discontinued operations
less applicable income taxes (1,725) (3,362)
Income (loss) from
discontinued operations (1,725) 2,632 (3,362)
NET INCOME $4,186 $1,907 $12,215 $5,573
See notes to consolidated financial statements.
DELTA MILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 26, December 27,
1998 1997
OPERATING ACTIVITIES
Net income $ 12,215 $ 5,573
Adjustments to reconcile net income
to net cash provided by operating activities:
Discontinued operations 14,025 (623)
Depreciation 6,991 7,343
Amortization 346 223
Other 9,257 1,807
Changes in operating assets and
liabilities (15,175) (11,447)
NET CASH PROVIDED BY
OPERATING ACTIVITIES 27,659 2,876
INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (4,419) (917)
Proceeds of dispositions 1,034 6
Investing activities of discontinued
operations 59 (1,921)
Other 87
NET CASH (USED) BY
INVESTING ACTIVITIES (3,239) (2,832)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 74,365 98,000
Repayments on revolving lines of credit (96,000) (38,000)
Net repayments of loan from parent company (202,093)
Proceeds from issuance of long-term debt 145,688
Other (235) (1,480)
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (21,870) 2,115
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,550 2,159
Cash and cash equivalents at
beginning of year 544 1,095
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,094 $ 3,254
See notes to consolidated financial statements.
DELTA MILLS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 26, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited combined 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 (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended December 26, 1998 are
not necessarily indicative of the results that may be expected
for the year ending July 3, 1999. 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 27, 1998.
NOTE B--DISCONTINUED OPERATIONS
On March 3, 1998, the Company made the decision to close its
Stevcoknit Fabrics division. During the first quarter of fiscal
1999, the Company reduced the estimate of the cost to close the
business and recognized a credit of $2.6 million in discontinued
operations, including a tax benefit of $1.8 million. The amount
the Company will ultimately realize from the liquidation of the
Stevcoknit Fabrics division could differ materially from the
carrying value of the assets of the business.
The assets of discontinued business at December 26, 1998 and June
27, 1998, are as follows:
December 26, June 27,
(In thousands) 1998 1998
Accounts Receivable $ 1,384 $ 13,893
Inventories 0 1,529
Other current assets 17 62
Total current assets 1,401 15,484
Property, plant and
equipment net of
accumulated depreciation 11 12
Total Assets $ 1,412 $ 15,496
Summarized results of operations for discontinued business are as
follows: (In thousands)
Three Months Ended Six Months Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
Net Sales $ 80 $ 25,510 $ 2,080 $ 53,058
Cost and expenses 1,688 28,373 4,920 58,584
Net costs charged to reserves (1,608) (2,840)
(Loss) before income taxes 0 (2,863) 0 (5,526)
Income tax (benefit) 0 (1,138) 0 (2,164)
(Loss) from discontinued
operations $ 0 $ (1,725) $ 0 $ (3,362)
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):
December 26, June 27,
1998 1998
Current assets $ 336 $ 1,301
Noncurrent assets 92 412
Current liabilities 388 1,428
Noncurrent liabilities 1,396 1,260
Stockholder's (deficit) (1,356) (975)
Summarized results of operations for the Guarantor are as follows
(in thousands):
Three Months Ended Six Months Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
Net sales - intercompany
commissions $ 1,315 $ 1,536 $ 2,692 $ 3,127
Costs and expenses 1,238 1,095 2,296 2,508
Income from continuing
operations 67 266 251 386
Net (loss) (361) (42) (444) (258)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company manufactures and sells finished and unfinished 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 parent company, Delta
Woodside Industries, Inc. Net sales to non-affiliated parties
for the second quarter of fiscal year 1999, were $79 million as
compared to $85 million in the same quarter of the prior fiscal
year, a decrease of 7%. For the six months ended December 26,
1998, net sales to non-affiliated parties were $163 million, a 6%
decline from $174 million in the first six months of the prior
fiscal year. Sales decreases were primarily due to lower demand
for unfinished and synthetic fabric.
Net sales to affiliated parties for the second quarter of fiscal
1999 were $7.8 million as compared to $4.2 million in the same
quarter of the prior fiscal year and $16.5 million for the six
months ended December 26, 1998 as compared to $8.0 million for
the first six months of the prior fiscal year. The increases in
sales to affiliated parties is due primarily to the Company's
discontinuation of its Stevcoknit Fabrics operation, which
previously consumed a significant portion of the production now
being sold to the affiliate. The Company believes that the
affiliate will continue to purchase yarn at approximately the
same level as during the first two quarters of fiscal 1999
through the remainder of the fiscal year.
Gross margins improved due to lower raw material cost and
improved manufacturing efficiencies. Gross profit as a percent of
sales increased in the quarter and six months ended December 26,
1998, as compared to the same periods of the prior fiscal year.
Improvements in gross margins on declining sales resulted in a
gross profit improvement in the second quarter and six months
ended December 26, 1998, as compared to the same periods of the
prior fiscal year. Progress is being made in shifting production
from unfinished greige fabric to fabrics used in finished
products. The improvement in gross margin permitted the segment
to report operating earnings of $11 million, approximately 1%
higher than in the same quarter of the prior fiscal year.
Operating earnings for the six months ended December 26, 1998
were $25 million, also about 1% ahead of the same six months of
the prior fiscal year.
The impact of a decline in sales was more than offset by an
improvement in gross margins. Gross profit as a percent of sales
improved due to lower raw material cost and improved
manufacturing efficiencies. The improvement in gross profit as a
percent of sales, resulted in an increase in gross profit for
the quarter and six months ended December 26, 1998 as compared to
the same periods of the prior fiscal year.
Operating profits increased 2% in the second quarter of fiscal
year 1999 as compared to the same quarter of the prior fiscal
year, and operating profits increased 3% in the first six months
of fiscal year 1999 as compared to the same period of the prior
fiscal year. The improvements in operating profits are
attributable to the increases in gross profit and gross margin as
described above. Selling, general and administrative expenses
were slightly higher in the quarter and six months ended December
26, 1998, but total expenses for the twelve months ending July 3,
1999 are expected to be comparable to those of the prior fiscal
year.
The Company reported income from continuing operations of $4.2
million in the second quarter of fiscal year 1999 as compared to
$3.6 million in the same quarter of the prior fiscal year.
In the first quarter of fiscal year 1999, the Company recognized
a pretax credit of $4.5 million in discontinued operations to
reflect a reduction in estimated costs of closing the Stevcoknit
Fabrics Company. At December 26, 1998, the Company still has
$3.7 million in restructuring reserves related to the Stevcoknit
Fabrics Company. The Company regularly reviews these reserves,
and adjusts them as necessary based on current estimates of cost
to close the discontinued operations.
Net income for the second quarter of fiscal year 1999 was $4.2
million, as compared to $1.9 million in the same quarter of the
prior fiscal year. Net income for the first six months of fiscal
year 1999 was $12.2 million as compared to $5.6 million in the
same period of the prior fiscal year. The improvement in
earnings is primarily attributable to the reduction in losses
from discontinued operations, and the improvements in gross
margin, described above.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
The order backlog was $85 million at December 26, 1998, a
decrease of 6% as compared to $91 million at December 27, 1997.
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 remediation and testing of Year 2000 solutions.
Expenditures in fiscal 1998 for the Year 2000 project amounted to
approximately $21,000. As a part of its plan to achieve Year
2000 compliance, the Company has decided to accelerate the
schedule for implementation of certain data collection systems.
The cost of these systems is approximately $1 million. The
Company now expects to spend approximately $1.2 million on
software improvements and remediation work in fiscal year 1999,
and an additional $.3 million in fiscal year 2000, with
completion expected by the first quarter of fiscal year 2000.
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 December 26, 1998.
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.
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, to pay dividends 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 $5.8 million on the value of the contracts.
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) No reports were filed on form 8-K during the
quarter ended December 26, 1998
*Items 1 and 5 are not applicable
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 February 4, 1999 /s/ Robert W. Humphreys
Robert W. Humphreys
Vice President-Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL
QUARTER ENDED DECEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH RINANCIAL STATEMENTS.
</LEGEND>
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0
0
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