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 January 1, 2000
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 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57- 0535180
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
233 North Main Street, Suite 200
Greenville, South Carolina 29601
- --------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
864\232-8301
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value-23,863,745 shares as of February 11, 2000
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INDEX
DELTA WOODSIDE INDUSTRIES, INC.
PART I. FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--
January 1, 2000 and July 3, 1999 3-4
Condensed consolidated statements of operations--
Three and six months ended January 1,2000 and
December 26, 1998 5
Condensed consolidated statements of cash flows
Six months ended January 1, 2000
and December 26, 1998 6
Notes to condensed consolidated financial
statements- January 1, 2000 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14-15
SIGNATURES 16
2
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PART I. FINANCIAL INFORMATION
- --------------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 1, July 3,
2000 1999
----------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 39,350 $ 14,066
Accounts receivable:
Factor 52,796 66,854
Customers 257 354
----------- --------
53,053 67,208
Less allowances for doubtful accounts and returns 120 287
----------- --------
52,933 66,921
Inventories:
Finished goods 10,782 9,122
Work in process 26,430 28,630
Raw materials and supplies 7,063 6,617
----------- --------
44,275 44,369
Net current assets of discontinued operations 49,054 65,709
Deferred income taxes 2,186 2,186
Prepaid expenses and other current assets 969 905
----------- --------
TOTAL CURRENT ASSETS 188,767 194,156
PROPERTY, PLANT AND EQUIPMENT
Cost 166,857 166,419
Accumulated depreciation 71,192 65,864
----------- --------
95,665 100,555
Noncurrent assets of discontinued operations 39,526 43,902
Other assets 7,300 7,638
----------- --------
$ 331,258 $346,251
=========== ========
</TABLE>
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<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--Continued
January 1, July 3,
2000 1999
------------ ---------
(Unaudited)
(In thousands)
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Short-term bank debt $ 0 $ 1,678
Trade accounts payable 11,691 16,233
Accrued and sundry liabilities 18,173 25,335
Current portion of long-term debt 6,564 6,710
------------ ---------
TOTAL CURRENT LIABILITIES 36,428 49,956
LONG-TERM DEBT 150,028 150,158
DEFERRED INCOME TAXES 4,295 4,295
OTHER LIABILITIES AND DEFERRED CREDITS 8,523 7,862
SHAREHOLDERS' EQUITY
Common Stock, par value $.01-authorized
50,000,000 shares, issued and outstanding
23,864,000 shares at January 1, 2000 and
23,792,000 shares at July 3, 1999 239 238
Additional paid-in capital 161,098 160,863
Accumulated deficit (29,353) (27,121)
------------ ---------
131,984 133,980
COMMITMENTS AND CONTINGENCIES
$ 331,258 $346,251
============ =========
</TABLE>
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<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
------------ -------------- ------------ --------------
(In thousands, except per share data) (In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 58,082 $ 78,861 $ 115,388 $ 162,084
Cost of goods sold 51,743 63,321 102,948 129,665
------------ -------------- ------------ --------------
Gross profit on sales 6,339 15,540 12,440 32,419
Selling, general and administrative expense 5,151 4,929 8,914 9,830
Other income 58 24 103 50
------------ -------------- ------------ --------------
OPERATING PROFIT 1,246 10,635 3,629 22,639
Interest expense (income):
Interest expense 4,595 5,310 9,137 10,221
Interest (income) (367) (95) (542) (148)
------------ -------------- ------------ --------------
4,228 5,215 8,595 10,073
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,982) 5,420 (4,966) 12,566
Income tax expense 954 1,239 409 1,382
------------ -------------- ------------ --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
(3,936) 4,181 (5,375) 11,184
(Loss) on disposal of discontinued operations
less applicable income taxes 0 (3,469) 0 (7,863)
Income (loss) from operations of discontinued operations
less applicable income taxes 1,580 (3,552) 3,143 (2,506)
------------ -------------- ------------ --------------
NET INCOME (LOSS) $ (2,356) $ (2,840) $ (2,232) $ 815
============ ============== ============ ==============
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.16) $ 0.17 $ (0.22) $ 0.46
============ ============== ============ ==============
Discontinued operations $ 0.06 $ (0.29) $ 0.13 $ (0.43)
============ ============== ============ ==============
Net earnings (loss) $ (0.10) $ ( 0.12) $ (0.09) $ 0.03
============ ============== ============ ==============
Weighted average shares outstanding 23,864 24,190 23,832 24,423
============ ============== ============ ==============
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
----------------------------
January 1, December 26,
2000 1998
------------ --------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ (2,232) $ 815
Adjustments to reconcile net income to net cash
provided by operating activities:
Discontinued operations 18,614 19,842
Depreciation 5,391 5,572
Amortization 346 346
Other 886 1,787
Changes in operating assets and liabilities 6,403 (2,654)
------------ --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,408 25,708
INVESTING ACTIVITIES
Property, plant and equipment purchases (2,249) (4,246)
Proceeds of dispositions 13 525
Investing activities of discontinued operations 101 (2,613)
Other (9) 23
------------ --------------
NET CASH (USED) BY INVESTING ACTIVITIES (2,144) (6,311)
FINANCING ACTIVITIES
Proceeds from revolving lines of credit 118,936 222,359
Repayments on revolving lines of credit (120,641) (237,679)
Scheduled principal payments of long-term debt (149) (277)
Dividends paid 0 (1,221)
Repurchase common stock 0 (1,880)
Other (126) (237)
------------ --------------
NET CASH (USED) BY FINANCING ACTIVITIES (1,980) (18,935)
INCREASE IN CASH AND CASH EQUIVALENTS 25,284 462
Cash and cash equivalents at beginning of year 14,066 2,753
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,350 $ 3,215
============ ==============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
DELTA WOODSIDE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
January 1, 2000
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Delta
Woodside Industries, Inc. ("the Company") have been prepared in accordance with
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 January 1, 2000 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 and sell its Nautilus International division (fitness equipment).
Accordingly, results of those segments have been reported as discontinued
operations. The Stevcoknit Fabrics division was closed during the fourth quarter
of fiscal 1998 and the Company sold the Nautilus International division during
the third quarter of fiscal 1999. The Company increased the estimate of the
after-tax cost to close discontinued businesses and recognized after tax charges
on discontinued businesses of $4.4 million and $3.5 million during the first and
second quarters of fiscal year 1999, respectively.
On October 4, 1999, the Company announced its decision to spin-off to its
current shareholders, as separate public companies, its Delta Apparel and Duck
Head Apparel divisions. Since these businesses will no longer be a part of the
Company, the results of these segments have been reclassified and reported as
discontinued operations.
The net assets of discontinued businesses are as follows (in thousands):
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
------------ ---------
<S> <C> <C>
Accounts Receivable $ 18,609 $ 31,849
Inventories 45,661 51,754
Other current assets 1,182 1,058
Accounts Payable (8,006) (9,121)
Accrued and sundry liabilities (8,392) (9,831)
------------ ---------
Total net current assets 49,054 65,709
Property, plant and equipment net of
accumulated depreciation 39,089 43,361
Intangibles 101 145
Other noncurrent assets 336 396
------------ ---------
Total Assets $ 88,580 $109,611
============ =========
</TABLE>
7
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Summarized results of operations for discontinued businesses are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ------------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 34,831 $ 39,782 $ 79,945 $ 94,090
Cost and expenses 34,186 44,482 77,145 96,721
------------ -------------- -------------- --------------
Income (loss) before income taxes 645 (4,700) 2,800 (2,631)
Income tax (benefit) (935) (1,148) (343) (125)
------------ -------------- -------------- --------------
Income (loss) from discontinued operations $ 1,580 $ (3,552) $ 3,143 $ (2,506)
============ ============== ============== ==============
</TABLE>
Net sales for the prior year periods include sales of Stevcoknit Fabrics and
Nautilus International totaling $4.9 million and $11.9 million for the quarter
and six month period, respectively.
Summarized statements of cash flows for discontinued operations are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
January 1, December 26,
2000 1998
------------ --------------
<S> <C> <C>
Net income from discontinued operations $ 3,143 $ (2,506)
Depreciation 4,807 6,057
Amortization 0 9,256
Other (25) 85
Changes in operating assets and liabilities 13,832 4,444
------------ --------------
Subtotal 18,614 19,842
------------ --------------
Net cash provided by operating activities 21,757 17,336
Property, plant and equipment purchases (1,300) (5,360)
Proceeds of dispositions 1,400 2,174
Other 1 573
------------ --------------
Net cash provided (used) by investing activities 101 (2,613)
Net cash provided by discontinued operations $ 21,858 $ 14,723
------------ --------------
</TABLE>
Amortization in the six months ended December 26, 1998 included $8.9 million in
impairment charges at the Nautilus International division. Changes in operating
assets in the six months ended December 26, 1998 included $12.9 million in
reductions of accounts receivable and inventory at the Stevcoknit Fabrics
division.
NOTE C-INCOME TAXES
The effective income tax rate on income from continuing operations for the six
months ended January 1, 2000 is a negative 8%, compared to a negative 3% for the
fiscal year ended July 3, 1999. The Company currently has tax expense due to
state income taxes and from valuation allowance increases.
NOTE D-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., obtained a
secured five-year $100 million revolving bank credit facility. At each of July
3, 1999, October 2, 1999, and January 1, 2000, no amounts were outstanding under
this bank credit facility. The subsidiary's first and second fiscal 2000
quarter operating results have caused the subsidiary not to be in compliance at
the end of those quarters 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 exist under, operating leases of the subsidiary with an aggregate
outstanding lease balance of approximately $5.5 million.
In February 2000, the Delta Mills, Inc. subsidiary acquired for $15,619,744 a
portion of its 9 5/8% Senior Notes. The aggregate principal face amount of the
acquired Senior Notes was $20,260,000. This transaction was an event of default
under the subsidiary's bank credit facility with respect to repayment of
8
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indebtedness while in default (see the preceding paragraph). The subsidiary's
intent is to replace the existing bank credit facility with a new credit
facility that provides for a lower level of borrowing availability that is more
consistent with the subsidiary's needs and plans. The subsidiary has largely
negotiated the terms of a new facility and the Company believes the subsidiary
will be able to enter into the new agreement on terms satisfactory to it before
the end of the third fiscal quarter. The financial covenants in the new credit
facility will automatically replace the current financial covenants incorporated
into the operating leases. Accordingly, the Company does not believe that these
credit facility or operating lease covenant defaults will have a material
adverse effect on the Company.
NOTE E-COMMITMENTS AND CONTINGENCIES
On January 10, 2000, the North Carolina Department of Environment and Natural
Resources requested that Delta Mills, Inc., a subsidiary of the Company, accept
responsibility for investigating the discharge of hazardous substances at an
inactive hazardous waste site known as the Glen Raven Mills Site, Kings
Mountain, North Carolina (the "Site"). A predecessor by merger of Delta Mills,
Inc., Park Yarn Mills Company, Inc. ("Park Yarn"), owned the Site for
approximately six (6) years, from approximately 1977 to 1983 (prior to the time
Delta Mills, Inc. became a subsidiary of Delta Woodside Industries, Inc.).
Delta Mills, Inc. is aware of no evidence that Park Yarn discharged or deposited
any hazardous substance at the Site or is otherwise a "responsible party" for
the Site. Further, Park Yarn filed bankruptcy and was discharged in 1983.
Although no assurance can be provided, any liability of Park Yarn for the Site
may have been discharged by the bankruptcy order. Accordingly, Delta Mills,
Inc. has denied any responsibility at the Site, has declined to undertake any
activities concerning the Site, and has not provided for any reserves for costs
or liabilities attributable to Park Yarn.
On January 13, 2000, Marion Mills, LLC, a supplier to the Delta Mills, Inc.
subsidiary of the Company, brought an action against Delta Mills, Inc. in North
Carolina Superior Court in McDowell County, North Carolina. Plaintiff seeks
actual damages in excess of $1.8 million and consequential and incidental
damages in excess of $7.4 million. The actual damages claim is based on an
alleged failure by Delta Mills, Inc. to pay in excess of $1.8 million of invoice
amounts. The consequential and incidental damages claim is based on the
allegation that Delta Mills, Inc.'s failure to pay caused Marion Mills, LLC to
shut down its business. The Company's position is that Delta Mills, Inc. paid
some of the invoices claimed to be unpaid and did not pay the other invoices
because of defects in the goods supplied by the plaintiff, (which were returned
per the plaintiff's authorization). The Company and Delta Mills, Inc.,
therefore deny and are vigorously contesting the claims.
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 costs, future
capital expenditures, business strategy, competitive strengths, competitive
weaknesses, goals, plans, references to future success or difficulties and other
similar information, are forward-looking statements. The words "estimate",
"project", "anticipate", "expect", "intend", "believe" and similar expressions,
and discussions of strategy and intentions, are intended to identify
forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are necessarily dependent upon assumptions, estimates
and data that the Company believes are reasonable and accurate but may be
incorrect, incomplete or imprecise. Forward-looking statements are also subject
to a number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. These risks and uncertainties include, among
others, changes in the retail demand for apparel products, the cost of raw
materials, competitive conditions in the apparel and textile industries, the
relative strength of the United States dollar as against other currencies,
changes in United States trade regulations and the discovery of unknown
conditions (such as with respect to environmental matters and similar items).
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized.
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.
9
<PAGE>
On October 4, 1999, the Company announced its decision to spin-off to its
current shareholders, as separate public companies, its Delta Apparel and Duck
Head Apparel divisions. On December 30, 1999 the Company announced that the
corporations that will conduct each of these businesses had filed registration
statements under the Securities Exchange Act of 1934, as amended, with the
Securities and Exchange Commission (File Numbers 1-15583 and 1-15585). The
Company currently anticipates that the record date for these spin-offs will be a
date in April 2000 and that the spin-offs will be completed in April 2000.
Since the Duck Head and Delta Apparel businesses will no longer be a part of the
Company, the results of these segments have been reclassified and reported as
discontinued operations. Accordingly, for financial reporting purposes the
Delta Mills Marketing Company division is the only continuing operating segment
of the Company.
Net sales from continuing operations in the second quarter of fiscal year 2000
were $58.1 million as compared to $78.9 million in the second quarter of the
prior fiscal year, a decrease of 26%. For the six months ended January 1, 2000,
net sales were $115.4 million a decline of 29% from $162.1 million in the first
six months of the prior fiscal year.
Gross profit from continuing operations declined to $6.3 million for the quarter
ended January 1, 2000 from $15.5 million in the second quarter of the prior
fiscal year and the gross margin declined to 10.8% from 19.6%. For the six
months ended January 1, 2000, gross profit from continuing operations declined
to $12.4 million or 10.7% of sales as compared to $32.4 million or 20.0% of
sales in the same period of the prior fiscal year.
Operating profits from continuing operations in the current quarter decreased to
$1.2 million as compared to $10.6 million in the same quarter of the prior
fiscal year. Operating profits from continuing operations in the first six
months of fiscal 2000 decreased to $3.6 million as compared to $22.6 million in
the first six months of fiscal 1999. The declines were due to the gross margin
declines described above for both the quarter and the six month period, somewhat
offset, in the six months period, by reductions in selling, general and
administrative costs compared to the six months of the prior fiscal year.
Income (loss) from continuing operations declined to a loss of $3.9 million in
the current quarter as compared to a profit of $4.2 million in the same quarter
of the prior fiscal year. The decline in operating profits was somewhat offset
by a decrease in interest expense due to lower debt levels. On a per share
basis, loss from continuing operations for the current quarter was $.16 on
23,864,000 average shares outstanding as compared to income of $.17 per share on
the 24,190,000 average shares outstanding in the same quarter of the prior
fiscal year. For the six months ended January 1, 2000 income (loss) from
continuing operations declined to a loss of $5.4 million as compared to a profit
of $11.2 million in the same period of the prior fiscal year. On a per share
basis, loss from continuing operations for the six months of the current fiscal
year was $.22 per share on 23.8 million average shares outstanding as compared
to a profit of $.46 per share on 24.4 million shares in the six months of the
prior year.
During the prior year quarter, the Company recognized a net loss of $3.5 million
on disposal of discontinued operations, which reflected a reduction in the
estimated net proceeds from the sale of Nautilus. The prior year six month $7.9
million loss on disposal of discontinued operations included reductions in the
estimated net proceeds from the sale of Nautilus and a reduction in the
estimated costs to close the Stevcoknit Fabrics operation.
Income from operations of discontinued operations, net of income taxes, was $1.6
million in the current quarter as compared to a loss of $3.6 million in the
prior year quarter. Income from operations of discontinued operations, net of
income taxes, was $3.1 million in the current six months as compared to a loss
of $2.5 million in the prior year six months. Included in operations of
discontinued operations, for each of the current year quarter and six months and
the prior year quarter and six months, are the results of the Delta Apparel and
Duck Head Apparel divisions. For the current quarter in discontinued
operations, Delta Apparel had operating profits of $1.2 million, Duck Head
Apparel had operating losses of $.6 million, and total income tax benefit was
$.9 million. For the same quarter in the prior fiscal year in discontinued
operations, Delta Apparel had operating losses of $1.3 million, Duck Head
Apparel had operating losses of $3.4 million, and total income tax benefit was
$1.7 million. For the six months ended January 1, 2000 in discontinued
operations, Delta Apparel had operating profits of $3.0 million , Duck Head
Apparel had operating losses of $.2 million and total income tax benefit was $.3
million. For the six months in the prior fiscal year in discontinued
operations, Delta Apparel had operating losses of $.8 million, Duck Head Apparel
had operating losses of $1.9 million, and total income tax benefit was $1.3
million.
10
<PAGE>
Net loss in the latest quarter was $2.4 million or $.10 per share as compared to
net loss of $2.8 million or $.12 per share in the same quarter of the prior
fiscal year. Net loss for the six months ended January 1, 2000 was $2.2 million
or $.09 per share as compared to net income of $.8 million or $.03 per share for
the six months ended December 26, 1998.
Delta Mills Marketing Company, which manufactures and sells finished woven
fabrics, had net sales for the second quarter of fiscal year 2000 of $58.1
million as compared to $78.8 million in the same quarter of the prior fiscal
year, a decrease of 26%. For the six months ended January 1, 2000, net sales
were $115.4 million as compared to $161.9 million for the same period of fiscal
1999, a decrease of 28.7%. Sales declines were in both cotton and synthetic
product categories and were primarily attributable to lower unit sales. The
synthetic product sales decline was a result of changing market demand due to
increased import pressure. In order to match capacity to current market demand,
the Company has downsized this portion of the business. 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 in part the result
of garment manufacturers moving through a backlog of inventory that has resulted
in a slow down of replenishment orders to the fabric supplier. Gross profit as
a percent of sales was 10.9% for the second quarter of fiscal year 2000 compared
to 19.8% in the prior year quarter. Gross profit as a percentage of sales was
10.8% for the six months ended January 1, 2000 as compared to 20.0% for the same
period of fiscal 1999. These declines were primarily due to these three
factors: 1) A decline in sales volume and related manufacturing efficiency
losses, 2) the absence of the USDA cotton rebate program for the major part of
the first six months of the current fiscal year, and 3) the cost associated with
the downsizing of the synthetic product operation. Selling, general and
administrative costs for the second quarter were $2.8 million and 4.8% of sales
compared to $4.2 million and 5.3% of sales in the prior year quarter. Year to
date selling, general and administrative costs for fiscal 2000 were $5.6 million
or 4.9% of sales as compared to $8.0 million or 4.9% of sales for the same
period of fiscal 1999. The division's, and the Company's, order backlog at
January 1, 2000 was $66.8 million, down from the $85.4 million order backlog at
December 26, 1998. The decline was spread throughout all product lines.
Delta Apparel, the Company's T-shirt and fleece apparel division, had sales for
the second quarter of fiscal year 2000 of $21.6 million as compared to $18.0
million in the same quarter of the prior fiscal year. Sales for the six months
ended January 1, 2000 were $50.2 million as compared to $42.8 million in the
same period of the prior fiscal year. The increases in both the quarter and the
six month period were due to significantly higher unit volume at lower average
selling prices. Gross profit and gross profit margin for the second quarter of
fiscal year 2000 were $3.0 million and 14.0%, respectively, as compared to $1.1
million and 6.4%, respectively, in the prior year quarter. Gross profit and
gross profit margin for the first six month period of fiscal year 2000 were $6.7
million and 13.4% respectively, as compared to $5.3 million and 12.6%
respectively, in the prior year six month period. The lower average selling
prices described above were offset by lower manufacturing costs, driven by
improved manufacturing efficiencies and higher capacity utilization in the
quarter as well as the six month period. For the second quarter of fiscal 2000,
Delta Apparel's selling, general, and administrative expenses were $1.8 million,
or 8.3% of sales, a decrease of $0.4 million from the prior year second quarter
of $2.2 million, or 12.2% of sales. For the six month period ended January 1,
2000, selling, general and administrative expenses were $3.7 million, or 7.3% of
sales, a decrease of $2.0 million from the prior year six month period of $5.7
million, or 13.3% of sales. These decreases were due to a number of factors,
including a reduction in head count, lower allocated corporate overhead, reduced
bad debt expense, lower selling expense, and a reduction in distribution
expense. This lower level of selling, general and administrative spending is
expected to continue in the future. As a result of the factors described above,
operating profits at Delta Apparel for the second quarter and first six months
of fiscal year 2000 were $1.2 million and $3.0 million, respectively, as
compared to operating losses of $1.3 million and $.8 million in the second
quarter and first six months, respectively, of fiscal year 1999.
In Duck Head Apparel Company, the Company's branded apparel business, sales
totaled $13.3 million and $29.7 million in the second quarter and first six
months of fiscal 2000, respectively, a decrease of 22% and 25%, respectively
from $17.0 million in the same quarter in fiscal 1999 and $39.5 million in the
first six months of the prior year. The dollar decreases reflect a decrease in
unit sales, which was the result of the loss of three key "Duck Head" branded
customers, reduced volume at other accounts, the exit from certain portions of
the Company's private label business, and lower sales at the company's own
retail outlet stores. There were no sales to the three key lost customers
during either the second quarter or first six months of fiscal year 2000.
During the second quarter and first six months of fiscal year 1999 there were
sales of $.7 million and $2.5 million, respectively, to these three accounts.
Reduced volume at other accounts was due to inventory levels at several key
accounts being reduced, reflecting a change in merchandise mix, and to the first
11
<PAGE>
six months of fiscal 1999 including the start-up of several new Duck Head
in-store shops. Private label sales decreased by $.7 million and $1.7 million
in the second quarter and first six months of fiscal 2000, respectively.
Additionally, there were decreases in sales at the company's own retail outlet
stores, which resulted from a combination of a comparable store sales decreases
of 4% and 8% in the second quarter and first six months of fiscal 2000,
respectively, and fewer stores being open in the both the second quarter and
first six months of fiscal year 2000 as compared with the same periods in fiscal
year 1999. During the second quarter of fiscal year 2000 the Company opened one
new store and did not close any stores and at January 1, 2000 the Company
operated 26 retail outlet stores. Gross profit for the second quarter and first
six months of fiscal year 2000 was $4.0 million and $8.9 million, respectively,
as compared to $3.3 million and $10.7 million for the same periods in fiscal
1999. Gross profit margin was 30% for both the second quarter and first six
months of fiscal 2000 as compared to gross profit margin of 20% and 27% for the
second quarter and first six months, respectively, of fiscal year 1999. The
increase in gross profit and gross profit margin in the second quarter of fiscal
year 2000 as compared to the second quarter of fiscal year 1999 was due to
higher gross profit margins on both wholesale sales and sales through the
company's own retail outlet stores. The lower gross profit during the first six
months of fiscal year 2000 as compared to the first six months of fiscal year
1999 was due to lower sales partially offset by higher gross profit margins.
Selling, general and administrative expenses were $4.7 million and $9.5 million
in the second quarter and first six months of fiscal year 2000, respectively as
compared to $6.7 million and $12.7 million during the second quarter and first
six months, respectively, of fiscal year 1999. The decreases were primarily
due to reductions in all selling, general and administrative expense categories.
The Company expects this lower selling, general and administrative expense level
to continue. As a result of the factors described above, operating losses at
Duck Head Apparel Company for the second quarter and first six months of fiscal
year 2000 were $.6 million and $.2 million, respectively, as compared operating
losses of $3.4 million and $1.9 million in the second quarter and first six
months, respectively, of fiscal year 1999.
Inventories were unchanged at $44 million at January 1, 2000 as compared to
inventories at July 3, 1999. Accounts receivable declined to $53 million at
January 1, 2000 as compared to $67 million at July 3, 1999. This decline is
directly related to the decline in sales.
The effective income tax rate on income from continuing operations for the six
months ended January 1, 2000 is a negative 8%, compared to a negative 3% for the
fiscal year ended July 3, 1999. The Company currently has tax expense due to
state income taxes and from valuation allowance increases.
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 completed a remediation plan. The
Company's Year 2000 plan included 1) Identifying year 2000 issues, 2) Assessment
and prioritization of issues, 3) Remediation, and 4) Testing for Year 2000
compliance. 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 were in place prior to the end of
1999, was approximately $1.2 million. In addition, the Company spent
approximately $150,000 on software improvements and remediation work in fiscal
year 1998, $1.5 million in fiscal year 1999 and an additional $.3 million in the
first six months of fiscal year 2000. No further spending is anticipated for
remediation and software improvements. Through the month of January 2000, the
Company has experienced no material problems associated with Year 2000 issues.
The Company believes that its Year 2000 remediation efforts were successful, and
that no further remediation efforts are necessary.
On August 25, 1997 a subsidiary of the Company, Delta Mills, Inc., obtained a
secured five-year $100 million revolving bank credit facility. At each of July
3, 1999, October 2, 1999, and January 1, 2000, no amounts were outstanding under
this bank credit facility. The subsidiary's first and second fiscal 2000
quarter operating results have caused the subsidiary not to be in compliance at
the end of those quarters 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 exist under, operating leases of the subsidiary with an aggregate
outstanding lease balance of approximately $5.5 million.
In February 2000, the Delta Mills, Inc. subsidiary acquired for $15,619,744 a
portion of its 9 5/8% Senior Notes. The aggregate principal face amount of the
acquired Senior Notes was $20,260,000. This transaction was an event of default
under the subsidiary's bank credit facility with respect to repayment of
12
<PAGE>
indebtedness while in default (see the preceding paragraph). The subsidiary's
intent is to replace the existing bank credit facility with a new credit
facility that provides for a lower level of borrowing availability that is more
consistent with the subsidiary's needs and plans. The subsidiary has largely
negotiated the terms of a new facility and the Company believes the subsidiary
will be able to enter into the new agreement on terms satisfactory to it before
the end of the third fiscal quarter. The financial covenants in the new credit
facility will automatically replace the current financial covenants incorporated
into the operating leases. Accordingly, the Company does not believe that these
credit facility or operating lease covenant defaults will have a material
adverse effect on the Company.
On December 13, 1999 the Company announced that its board had approved a plan to
purchase from time to time up to an aggregate of 5,000,000 shares of the
Company's outstanding stock at prices and at times at the discretion of the
Company's top management. This stock repurchase plan replaced the 2,500,000
stock purchase plan announced by the Company in September 1998, pursuant to
which the Company had acquired an aggregate of approximately 979,000 shares. No
shares were repurchased during the first six months of fiscal 2000. Subsequent
to January 1, 2000 and through February 10, 2000 the Company had purchased
approximately 498,000 shares at a cost of approximately $927,000.
The Company believes that cash flow generated by its operations and funds
available under its current credit facility 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.
As of January 1, 2000, a 10% decline in market price of the Company's fixed
price contracts would have had a negative impact of approximately $5.0 million
on the value of the contracts.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 10, 2000, the North Carolina Department of Environment and
Natural Resources requested that Delta Mills, Inc., a subsidiary of the
Company, accept responsibility for investigating the discharge of hazardous
substances at an inactive hazardous waste site known as the Glen Raven
Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by
merger of Delta Mills, Inc., Park Yarn Mills Company, Inc. ("Park Yarn"),
owned the Site for approximately six (6) years, from approximately 1977 to
1983 (prior to the time Delta Mills, Inc. became a subsidiary of Delta
Woodside Industries, Inc.). Delta Mills, Inc. is aware of no evidence that
Park Yarn discharged or deposited any hazardous substance at the Site or is
otherwise a "responsible party" for the Site. Further, Park Yarn filed
bankruptcy and was discharged in 1983. Although no assurance can be
provided, any liability of Park Yarn for the Site may have been discharged
by the bankruptcy order. Accordingly, Delta Mills, Inc. has denied any
responsibility at the Site, has declined to undertake any activities
concerning the Site, and has not provided for any reserves for costs or
liabilities attributable to Park Yarn.
On January 13, 2000, Marion Mills, LLC, a supplier to the Delta Mills, Inc.
subsidiary of the Company, brought an action against Delta Mills, Inc. in
North Carolina Superior Court in McDowell County, North Carolina. Plaintiff
seeks actual damages in excess of $1.8 million and consequential and
incidental damages in excess of $7.4 million. The actual damages claim is
based on an alleged failure by Delta Mills, Inc. to pay in excess of $1.8
million of invoice amounts. The consequential and incidental damages claim
is based on the allegation that Delta Mills, Inc.'s failure to pay caused
Marion Mills, LLC to shut down its business. The Company's position is that
Delta Mills, Inc. paid some of the invoices claimed to be unpaid and did
not pay the other invoices because of defects in the goods supplied by the
plaintiff, (which were returned per the plaintiff's authorization). The
Company and Delta Mills, Inc., therefore deny and are vigorously contesting
the claims.
Item 2. Changes in Securities and Use of Proceeds
On December 9, 1999, the Board of Directors of the Company declared a
dividend distribution of one common stock purchase right (a "Right") for
each outstanding share of the Company's common stock, par value $0.01 per
share (the "Common Stock"), to stockholders of record at the close of
business on December 22, 1999. Each Right entitles the registered holder to
purchase from the Company one quarter share of the Common Stock, at a cash
exercise price of $5.00 per quarter share (equivalent to $20.00 per whole
share), subject to adjustment. The description and terms of the Rights are
set forth in a Shareholder Rights Agreement dated December 10, 1999 (the
"Rights Agreement") between the Company and First Union National Bank, as
Rights Agent. For a description of the Rights Agreement, see the Company's
Current Report on Form 8-K dated December 9, 1999 and filed with the
Securities and Exchange Commission on December 16, 1999 (the "Rights
Agreement 8-K"). A copy of the Rights Agreement is included as Exhibit 4.1
to the Rights Agreement 8-K. The description of the Rights Agreement and
the copy of the Rights Agreement contained in the Rights Agreement 8-K are
incorporated herein by reference.
Item 3. Defaults upon Senior Securities*
Item 4. Submission of Matters to a Vote of Security Holders*
Item 5. Other Information*
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3.1 Amended and Restated Bylaws of the Company adopted December 9,
1999: Incorporated by reference to Exhibit 3.1 to the Company's
Current Report on Form 8-K with date of December 9, 1999 and
filed with the Securities and Exchange Commission on December
16, 1999.
4.1 Rights Agreement, dated as of December 10, 1999, between the
Company and First Union National Bank, which includes, as Exhibit
A, the Form of Rights Certificate and, as Exhibit B, the Summary
of Rights to Purchase Common Stock: Incorporated by reference to
Exhibit 4.1 the Company's Current Report on Form 8-K with dated
of December 9, 1999 and filed with the Securities and Exchange
Commission on December 16, 1999.
14
<PAGE>
(b) The Company filed Form 8-K with date of October 4, 1999. Items
reported were:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
The Company filed Form 8-K with date of December 9, 1999. Items
reported were:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
The Company filed Form 8-K with date of December 29, 1999. Items
reported were:
Item 5. Other Events
Item 7. Financial Statements and Exhibits
*Items 3, 4 and 5 are not applicable
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Woodside Industries, Inc.
----------------------------------
(Registrant)
Date February 15, 2000 /s/ David R. Palmer
----------------- ----------------------------------
David R. Palmer
Controller
(Authorized signatory and chief
accounting officer)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrants consolidated financial statements for the fiscal quarter ended
January 1, 2000 and is qualified in its entirely by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JAN-04-2001
<PERIOD-END> JAN-01-2000
<CASH> 39350
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<PP&E> 166857
<DEPRECIATION> 71192
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0
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