ITEM 2 PROPERTIES - ------------------
The following table provides a description of Delta Mills, Inc.'s principal facilities.
(1) Lease expires in December 2003 with the right to renew for one additional five-year period.
(2) Title to these facilities and substantially all of the equipment located in these facilities is held by three South Carolina counties under a fee-in-lieu-of-taxes arrangement, which has the effect of substantially reducing the Company's property taxes in South Carolina. Although the Company can reacquire such property at a nominal price, this would currently cause a significant increase in the amount of property taxes paid by the Company.
Except as noted above all of the above facilities are owned by Delta Mills, Inc., subject in certain cases to various outstanding liens.
Delta Mills Marketing, Inc. leases sales offices in New York, NY. The lease on the sales offices expires in December 2004.
At the date of execution of this Form 10-K, the Company believes that its plants are operating at less than full production capacity.
At the date of execution of this Form 10-K, the Company has closed and plans to dispose of its Furman facility in Fountain Inn, SC. The Company expects to complete the sale of this facility in fiscal year 2003.
The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors.
The Company's accounts receivable and inventory, and certain other intangible property, secure the Company's credit facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
All litigation to which the Company is a party is ordinary routine product liability litigation, contract breach litigation, or employment litigation incident to its business that does not depart from the normal kind of such actions. The Company believes that none of these actions, if adversely decided, would have a material adverse effect on its results of operations or financial condition taken as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS - ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth quarter of the Company's 2002 fiscal year.
PART II. - --------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------
The Company is a wholly-owned subsidiary of Delta Woodside Industries, Inc. Accordingly, there is no established public trading market for the Company's common stock.
During 2001, the Company declared dividends of $2,900,000. The Company declared no dividends for fiscal year 2002 or fiscal year 2000. The information concerning limitations on cash distributions contained under the subheading "Liquidity and Sources of Capital" under Item 7 is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- In Thousands, Except Ratios
NOTES TO SELECTED FINANCIAL DATA (1) The Stevcoknit knitted fabrics business is presented as part of discontinued operations.
(2) "EBITDA" is defined herein as operating profit or loss, plus depreciation and amortization expense. While EBITDA should not be construed as an alternative to operating earnings (loss) or net income (loss), or as an indicator of operating performance or liquidity, the Company believes that the ratio of EBITDA to interest expense is a measure that is commonly used to evaluate a company's ability to service debt.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND - ------------------------------------ ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains various "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 are forward-looking statements. Examples are statements that concern 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. The words "estimate", "project", "forecast", "anticipate", "expect", "intend", "believe" and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
The forward-looking statements in this document 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
During the year ended June 29, 2002, the Company announced the closing of its Furman Plant, a weaving only facility located in Fountain Inn, South Carolina. The equipment run-out schedule was completed on October 21, 2001 and the Company is in the process of liquidating the assets associated with this facility. The Company has transferred the current production for the closed facility to other weaving facilities in the Company to better utilize the remaining equipment. The Company expects to complete the sale of these assets in fiscal year 2003.
RESULTS OF OPERATIONS FISCAL 2002 VERSUS FISCAL 2001
Net Sales. Consolidated net sales for the year ended June 29, 2002 totaled $174.7 million, as compared to $213.0 million for the year ended June 30, 2001, a decrease of 18.0%. The average sales price decreased 2.8% in 2002 as compared to the previous fiscal year. The decline in sales volume occurred during the first three quarters of the year due to a weakness in market demand and some decline in sales price. The decline was somewhat offset during the fourth quarter as market demand increased. Compared to the previous fiscal year, sales volume decreased 18%.
Gross Profit. Consolidated gross profit margin as a percent of sales for the year ended June 29, 2002 was 5.4%, as compared to 7.6% for the year ended June 30, 2001. The gross profit decline occurred during the first three quarters of the year as sales declined. This resulted in decreased running schedules in order to control inventory and conserve cash. The decreased running schedules resulted in increased costs associated with under absorbed manufacturing costs. This trend was reversed in the fourth quarter of the current fiscal year. Also contributing to the gross profit decline was downward pressure on sales price caused by cotton garment manufacturers expanding their supplier base to gain a more competitive price and by increased import pressure on synthetic products.
Selling, General and Administrative Expenses. During the year ended June 29, 2002, selling, general and administrative expenses were $11.6 million, as compared to $14.6 million during the year ended June 30, 2001, a decrease of $3.0 million or 20.4%. Expenses in this category were 6.7% of sales in fiscal 2002 as compared to 6.9% in fiscal 2001. The decrease was due to a reduction in compensation expense and overall lower expenses in relation to lower sales volume.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Impairment and Restructuring Expenses. During the year ended June 29, 2002, the Company incurred impairment and restructuring expenses of $8.7 million related to the closing of its Furman plant, a weaving only facility in Fountain Inn, SC. There were no impairment or restructuring charges in fiscal 2001.
Operating Earnings. Operating losses for the year ended June 29, 2002 were $10.4 million, as compared to operating earnings of $2.0 million for the year ended June 30, 2001. In addition to the decline in gross profit that was somewhat offset by lower selling, general and administrative expenses, operating earnings for the current year included an $8.7 million impairment and restructuring charge that occurred in the first quarter of the fiscal year as a result of closing the Furman plant.
Net Interest Expense. For the year ended June 29, 2002, net interest expense was $8.9 million, as compared to $10.5 million for the year ended June 30, 2001. The decrease in interest expense resulted from the extinguishment of $36.0 million principal amount of debt related to the purchase of a portion of the Company's 9.625% Senior Notes.
Taxes. The effective tax rate of 36.8% on continuing operations for the year ended June 29, 2002 is higher than the 35.8% effective tax rate on continuing operations for the year ended June 30, 2001, primarily because of the effect of nondeductible permanent differences on pretax income in fiscal year 2002 compared to pretax losses in 2001.
Income(Loss) from Continuing Operations. Loss from Continuing Operations for the year ended June 29, 2002 was $12.0 million, as compared to a loss of $5.5 million for the year ended June 30, 2001. For the current fiscal year, the loss before extraordinary items included an impairment and restructuring charge of approximately $5.5 million on an after tax basis. There were no impairment and restructuring charges recognized in the previous fiscal year.
Extraordinary gain, net of taxes. During fiscal 2002, the Company purchased $36.0 million face amount of its 9.625% Senior Notes for $19.4 million, including expenses of approximately $0.5 million. The Company recognized an extraordinary gain of $9.9 million after tax expense of $6.2 million and the write off of deferred loan costs of $0.5 million. During fiscal 2001, the Company purchased $31.3 million face amount of its 9.625% Senior Notes for $28.0 million. The Company recognized an extraordinary gain of $1.6 million after tax expense of $0.9 million and the write off of deferred loan costs of $0.8 million.
Order Backlog. The Company's order backlog at June 29, 2002 was $47.8 million, a slight increase from the $47.2 million order backlog at June 30, 2001. Many of the Company's customers have shortened lead times for delivery requirements, and the apparel market continues to be soft. Consequently, management believes that the order backlog at any given point in time may not be an indication of future sales.
Adoption of Accounting Standards. In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets". SFAS 142 eliminates goodwill amortization, provides guidance and requirements for impairment testing of goodwill, and discusses the treatment of other intangible assets. Adoption of the standard is required for fiscal years beginning after December 15, 2001. The adoption of this standard is not expected to materially impact the Company.
In August of 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations". SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long lived-assets, which assets result from the acquisition, construction, development and or normal use of the assets. The enterprise also is to record a corresponding increase to the carrying amount of the related long-lived asset (i.e. the associated asset retirement costs) and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. This statement is effective for fiscal years beginning after June 15, 2002. The adoption of this standard is not expected to materially impact the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
On October 3, 2001 the FASB issued statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede FASB statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and provide a single accounting model for long-lived assets to be disposed of. The Company will adopt the Statement effective for fiscal 2003. The adoption of this standard is not expected to materially impact the Company.
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, will no longer require 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 is effective for fiscal years beginning after May 15, 2002 and will require the reclassification of prior period items that do not meet the extraordinary item classification criteria in APB 30. Upon adoption, the Company will reclassify all extraordinary gains recognized for the early extinguishment of debt as a component of operating income for all financial statement periods presented.
In July 2002, the FASB issued Statement No. 146, "Accounting for Obligations Associated with Disposal Activities". Statement No. 146 addresses financial reporting and accounting for costs associated with exit or disposal activities. It nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". Statement 146 requires that a liability be recognized for such costs only when the liability is incurred, which is in contrast to EITF No. 94-3, which requires the recognition of a liability upon the commitment to an exit plan. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes the adoption of Statement No. 146 will not have a material impact on its financial statements.
RESULTS OF OPERATIONS FISCAL 2001 VERSUS FISCAL 2000
Net Sales. Consolidated net sales for the year ended June 30, 2001 totaled $213.0 million, as compared to $276.5 million for the year ended July 1, 2000, a decrease of 23.0%. The decline in sales was due to declines in volume and price as retail market demand weakened over fiscal 2001. Sales of yarn from the Rainsford plant to the Delta Apparel affiliate were $0 as compared to $26.6 million in the prior year. The Rainsford plant was sold to Delta Apparel in May 2000.
Gross Profit. Consolidated gross profit margin as a percent of sales for the year ended June 30, 2001 was 7.6 %, as compared to 12.0% for the year ended July 1, 2000. The decline in gross profit percentage for the year was the result of reduced volume and price along with a change in product mix. In addition to a general market decline, these reductions were caused by cotton garment manufacturers expanding their supplier base to gain a more competitive price and by increased import pressure on synthetic products. Manufacturing cost increases caused by reduced operating schedules also contributed to the decline in gross profit.
Selling, General and Administrative Expenses. During the year ended June 30, 2001, selling, general and administrative expenses were $14.6 million, as compared to $15.3 million during the year ended July 1, 2000, a decrease of $0.7 million or 4.6%. Expenses in this category were 6.9% of sales in fiscal 2001 as compared to 5.5% in fiscal 2000. The decrease was due primarily to a reduction of fixed administrative service costs.
Operating Earnings. Operating earnings for the year ended June 30, 2001 were $2.0 million, as compared to $18.4 million for the year ended July 1, 2000. The decline in operating earnings was due to the factors described above.
Net Interest Expense. For the year ended June 30, 2001, net interest expense was $10.5 million, as compared to $15.1 million for the year ended July 1, 2000. The decrease in interest expense resulted from the extinguishment of $66.2 million of debt due to the purchases of portions of the Company's 9.625% Senior Notes in fiscal 2001 and in fiscal 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Taxes. The effective tax rate of 35.8% on continuing operations for the year ended June 30, 2001 was lower than the 39.7% effective tax rate on continuing operations for the year ended July 1, 2000 primarily because of the effect of nondeductible permanent differences on pretax income in fiscal year 2000 compared to pretax losses in fiscal year 2001.
Income(Loss) from Continuing Operations. Loss from Continuing Operations for the year ended June 30, 2001 was $5.5 million, as compared to income from continuing operations of $1.9 million for the year ended July 1, 2000. The decrease was due to the factors described above.
Extraordinary gain, net of taxes. During fiscal 2001, the Company purchased $31.3 million face amount of its 9.625% Senior Notes for $28.0 million. The Company recognized an extraordinary gain of $1.6 million after tax expense of $0.9 million and the write off of deferred loan costs of $0.8 million. During fiscal 2000, the Company purchased $34.9 million face amount of its 9.625% Senior Notes for $26.6 million. The Company recognized an extraordinary gain of $4.7 million after tax expense of $2.8 million and the write off of deferred loan costs of $0.8 million.
Order Backlog. The Company's order backlog at June 30, 2001 was $47.2 million, a 40.2% decrease from the $78.8 million order backlog at July 1, 2000. Many of the Company's customers have shortened lead times for delivery requirements. This coupled with an overall softening of the apparel market accounted for the decline in the order backlog. Management believes that the order backlog at any given point in time may not be an indication of future sales.
LIQUIDITY AND SOURCES OF CAPITAL
Cash decreased $11.7 million in fiscal 2002. The Company generated $2.4 million from operating activities and used $6.1 million to fund capital expenditures. The Company used the remaining $8.0 million net of $11.4 million in borrowings from its revolving credit facility to purchase a portion of the Company's 9.625% Senior Notes for $19.4 million, including expenses of approximately $0.5 million. The Company generated operating cash flows of $29.1 and $26.3 million for the 2001 and 2000 fiscal years, respectively. In fiscal 2001 the Company used cash for investing activities of $4.7 million and generated $8.7 million from investing activities in fiscal 2000. Cash generated in fiscal year 2000 was primarily from the sale of the Rainsford Plant and associated operating assets to the Delta Apparel affiliate for $13.6 million in May 2000.
On March 31, 2000 the Company obtained a secured four-year $50 million revolving credit facility. Borrowings under this credit facility are based on eligible accounts receivable and inventory of the Company, subject to a maximum $37.5 million availability limit as a result of a March 31, 2002 amendment described below. The facility is secured by the accounts receivable, inventory and capital stock of the Company. The interest rate on the credit facility is based on a spread over either LIBOR or a base rate. On June 29, 2002, borrowings under this facility were $11.4 million and approximately $24.3 million was still available for borrowing.
The credit facility contains restrictive covenants that, among other things, until the March 31, 2002 amendments described below, required that the Company's Maximum Leverage Ratio, as defined therein, not exceed specified amounts. The agreement also restricts additional indebtedness, dividends, and capital expenditures. The payment of dividends with respect to the Company's stock is permitted if there is no event of default and there is at least $1 of availability under the facility. An amendment dated October 5, 2001 substantially increased the permitted leverage ratio for the four quarters ending with the third quarter of fiscal year 2002, and slightly reduced the permitted leverage ratio for the fourth fiscal quarter of fiscal year 2002 and subsequent quarters. This amendment also extended the term of the Revolving Credit Agreement to March 31,2004 and included the lender's consent to the sale of the Company's Furman Plant. It also allowed the Company to exclude from the calculation of the leverage ratio the closing costs and continuing costs associated with the closing of its Furman Plant. Effective March 31, 2002, the Company amended its $50 million credit facility, eliminating the permitted leverage ratio covenant and adding a $12.5 million minimum availability requirement. Under the minimum availability requirement, the Company's availability for borrowings cannot exceed $37.5 million. During the year ended June 29, 2002, the Company did not pay any dividends to Delta Woodside Industries, Inc.
LIQUIDITY AND SOURCES OF CAPITAL - CONTINUED
Loan covenants in the Senior Notes and the Company's revolving credit facility, among other matters, limit the Company's ability to make cash distributions to Delta Woodside. At June 29, 2002, under the most restrictive of these covenants, no dividends were available for distribution by Delta Mills to Delta Woodside Industries..
During the year ended June 29, 2002, the Company acquired for $19,383,000, including expenses of approximately $500,000, a portion of its 9.625% Senior Notes. The aggregate principal face amount of the acquired Senior Notes was $35,996,000. The current outstanding aggregate principal amount of these Senior Notes is $47,819,000. The future annual reduction in the Company's interest expense because of this Senior Note repurchase will be $3,464,615.
During fiscal 2002, the Company had capital expenditures of approximately $6.5 million primarily for capital improvements, new equipment, and computer system upgrades. During fiscal 2003, the Company plans to spend approximately $8 million for capital improvements, new equipment, and computer system upgrades. The Company believes that its equipment and facilities are generally adequate to allow it to remain competitive with its principal competitors.
The Company has entered into agreements, and has fixed prices, to purchase cotton for use in its manufacturing operations. At June 29, 2002 minimum payments under these contracts with non-cancelable contract terms were $14.9 million.
During 1998, the Company received notices from North Carolina asserting deficiencies in state corporate income and franchise taxes for the Company's 1994 - 1997 tax years. The total additional tax proposed by the state amounts to $1.3 million, which includes interest. The assessment has been delayed pending an administrative review by the state of the case. The Company believes that the ultimate outcome of the case will not result in a material impact on the Company's consolidated results of operations or financial position.
The Company believes that the cash flow generated by its operations and funds available under its credit line should be sufficient to service its debt, to satisfy its day-to-day working capital needs and to fund its planned capital expenditures.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties, and potentially result in materially different results under different assumptions and conditions.
Impairment of Long - Lived Assets: When required by circumstances, the Company evaluates the recoverability of its long - lived assets by comparing estimated future undiscounted cash flows with the asset's carrying amount to determine if a write - down to fair value is required.
Income Taxes: Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Management believes that it is more likely than not that the gross deferred tax assets will be realized in the future. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
ENVIRONMENTAL MATTERS
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing Plants, have experienced high nitrate levels at the spray field for these plants. The Company is working with the South Carolina Department of Health and Environmental Control ("DHEC") to address this issue. In addressing this issue in the method and within the time frame required by DHEC, a report was submitted in June 2001 to DHEC detailing four options for dealing with this groundwater problem. At the date of this filing, DHEC has still not responded to the Company's proposal. Although there is no assurance that the Company will be successful and it could face administrative penalties if it is not, the Company does not currently believe that this matter would have a material adverse impact on the Company.
On June 11, 2001, DHEC issued a Notice of Violation ("NOV") for three alleged violations of an air permit for the Company's Delta #2 and Delta #3 Plants. On June 26, 2001, the Company participated in an enforcement conference with DHEC, during which DHEC agreed to inspect the plants again on July 24, 2001. On September 12, 2001, the Company received a proposed Consent Order from DHEC which requires that: (1) the Company submit to DHEC a construction permit application for a machine that was installed; (2) the Company comply with all DHEC regulations regarding permitting; (3) the Company comply with all emission and fuel content requirements of its operating permit; and (4) the Company pay to DHEC the amount of $2,200.00. The Company paid this penalty on November 16, 2001 and has abided by the terms of the Consent Order. The Company believes that the matter is now closed.
On June 30, 2000 the Company sold its Greensboro, North Carolina plant to the City of Greensboro. The Company had been working with environmental consultants in assessing groundwater contamination at this site. Because of these studies, one half of the proceeds from the sale of the plant, consisting of approximately $400,000, were placed in an interest bearing escrow account to cover expenses related to this contamination. As of the date of this filing, approximately $365,000 remains in this escrow account. The Company believes that this balance is adequate to cover any remaining expenses related to this matter. The Company recorded the sale net of estimated costs to remediate the property.
On January 10, 2000, the North Carolina Department of Environment and Natural Resources requested that the Company accept responsibility for investigating the discharge of hazardous substances at a hazardous waste site known as the Glen Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by merger of the Company, Park Yarn Mills Company, Inc. ("Park Yarn"), owned the Site for approximately six (6) years, from approximately 1977 to 1983 (prior to the time the Company became a subsidiary of Delta Woodside Industries, Inc.) The Company 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, the Company has denied any responsibility at the Site, declined to undertake any activities concerning the Site, and has not provided for any reserves for costs or liabilities attributable to Park Yarn.
ITEM 7A.
ITEM 7A. 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. Under these contracts, nonperformance by either the buyer or the seller may result in net cash settlement of the difference between the current market price of cotton and the contract price. The Company has not utilized the net settlement provision in the past, and does not anticipate using it in the future. The Company may seek to fix prices up to 18 months in advance of delivery. Daily price fluctuations are minimal, yet long-term trends in price movement can result in unfavorable pricing of cotton for the Company. 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. At June 29, 2002, a 10% decline in the market price of the cotton covered by the Company's fixed price contracts would have a negative impact of approximately $1.5 million on the value of the contracts. At the end of fiscal 2001, a 10% decline in the market price of the Company's fixed price contracts would have had a negative impact of approximately $2.1 million on the value of the contracts. The decline in the potential negative impact from 2001 to 2002 is due principally to current cotton commitments being at significantly lower average prices than in fiscal 2001.
INTEREST RATE SENSITIVITY
The $50 million secured four-year revolving credit facility expiring in 2004 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 June 29, 2002, an increase in the interest rate of 1% would have a negative impact of approximately $114,000.
An interest rate change would not have an impact on the fixed rate ten year Senior Notes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS DELTA MILLS, INC.
We have audited the accompanying consolidated balance sheets of Delta Mills, Inc. as of June 29, 2002 and June 30, 2001 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the years in the three-year period ended June 29, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Delta Mills, Inc. as of June 29, 2002 and June 30, 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended June 29, 2002 in conformity with accounting principles generally accepted in the United States of America.
\s\KPMG LLP ----------- KPMG LLP
Greenville, South Carolina July 26, 2002
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS: The Company manufactures woven fabrics which are sold through a separate sales subsidiary. The Company's operations, all within the textile industry, are considered a single business segment.
BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Delta Mills, Inc. and Delta Mills Marketing, Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. Delta Mills, Inc. and Delta Mills Marketing , Inc. are wholly-owned subsidiaries of Delta Woodside Industries, Inc. ("DWI"). The Company's knitted fabrics business, Stevcoknit Fabrics, is presented as a discontinued operation through its final liquidation in fiscal 2000.
CASH EQUIVALENTS: The Company considers all highly liquid investments having initial maturities of three months or less when purchased to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of the cost or market determined using the first-in , first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method for financial reporting based on estimated useful lives of three to thirty-two years, but predominantly over seven to fourteen years, and by accelerated methods for income tax reporting.
IMPAIRMENT OF LONG-LIVED ASSETS: When required by circumstances, the Company evaluates the recoverability of its long-lived assets by comparing estimated future undiscounted cash flows with the asset's carrying amount to determine if a write-down to fair value is required.
REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific goods for later shipment at customers' request with related risk of ownership passing to such customers.
DEFERRED LOAN COSTS: Deferred loan costs are being amortized over the life of the related debt which is primarily ten years.
INCOME TAXES: Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
ENVIRONMENTAL COSTS: Environmental compliance cost, including ongoing maintenance, monitoring and similar costs, are expensed as incurred. Environmental remediation costs are accrued, except to the extent costs can be capitalized, when remedial efforts are probable, and the cost can be reasonably estimated.
COTTON PROCUREMENT: The Company contracts to buy cotton with future delivery dates at fixed prices in order to reduce the effects of fluctuations in the prices of cotton used in the manufacture of its products. These contracts are settled by delivery and are not used for trading purposes. The Company commits to fixed prices on a percentage of its cotton requirements up to eighteen months in the future. If market prices for cotton fall below the Company's committed fixed costs and it is estimated that the cost of cotton is not recoverable in future sales of finished goods, the differential is charged to income at that time. The Company's management has determined that its cotton buying contracts meet the criteria for exclusion under the normal purchases and normal sales exemption of SFAS 133 and its related amendments and are not considered derivatives.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK OPTIONS: The Company participates in the Delta Woodside Industries Inc. Stock Option Plan. The Company applies the intrinsic value-based method of accounting for these stock options, 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. The Company provides pro forma disclosures of stock option compensation recorded on a fair value basis in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation".
RECENT ACCOUNTING PRONOUNCEMENTS: 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, will no longer require 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 is effective for fiscal years beginning after May 15, 2002 and will require the reclassification of prior period items that do not meet the extraordinary item classification criteria in APB 30. Upon adoption, the Company will reclassify all extraordinary gains recognized for the early extinguishment of debt as a component of operating income for all financial statement periods presented.
ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United Sates of America require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FISCAL YEAR: The Company's operations are based on a fifty-two or fifty-three week fiscal year ending on the Saturday closest to June 30. Fiscal years 2002, 2001 and 2000 each consisted of 52 weeks.
NOTE B--ACCOUNTS RECEIVABLE
The Company assigns a substantial portion of its trade accounts receivable to GMAC Commercial Credit LLC (the Factor) under a factor agreement. The assignment of these receivables is primarily without recourse, provided that customer orders are approved by the Factor prior to shipment of goods, up to a maximum for each individual account. The assigned trade accounts receivables are recorded on the Company's books at full value and represent amounts due to 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 General and Administrative Expense.
For fiscal year 2002, the Company had two customers, Levi Strauss and V.F. Corporation, that each exceeded 10% of consolidated net sales. The Company's sales to these customers totaled $63 million in fiscal 2002. For fiscal year 2001 and fiscal year 2000, the Company had three customers, Levi Strauss, Haggar Corp., and V.F. Corporation, that each exceeded 10% of consolidated net sales. The Company's aggregate sales to these customers were $90 million and $109 million for fiscal 2001 and for fiscal 2000, respectively. The loss of any of these accounts could have a material adverse effect on the results of the Company.
The Company's accounts receivable are due from many companies that produce apparel products located throughout the United States. The many companies represented in the Company's accounts receivable limit to a certain extent the concentration of credit risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C--LONG-TERM DEBT AND LEASES
On August 25, 1997 the Company issued $150 million of unsecured ten-year Senior Notes at an interest rate of 9.625%, and obtained a secured five-year $100 million revolving line of credit subject to borrowing base limitations. The $100 million revolving line of credit was replaced by a new credit facility on March 31, 2000. This credit facility was amended on March 31, 2002. The facility is secured by the accounts receivable, inventory and capital stock of the Company. The interest rate on the credit facility is based on a spread over either LIBOR or a base rate. On June 29, 2002, borrowings under this facility were $11.4 million and approximately $24.3 million was still available for borrowing.
The credit facility contains restrictive covenants that, among other things, until the March 31, 2002 amendments described below, required that the Delta Mills' Maximum Leverage Ratio, as defined therein, not exceed specified amounts. The agreement also restricts additional indebtedness, dividends, and capital expenditures. The payment of dividends with respect to the Company's stock is permitted if there is no event of default and there is at least $1 of availability under the facility. An amendment dated October 5, 2001 substantially increased the permitted leverage ratio for the four quarters ending with the third quarter of fiscal year 2002, and slightly reduced the permitted leverage ratio for the fourth fiscal quarter of fiscal year 2002 and subsequent quarters. This amendment also extended the term of the Revolving Credit Agreement to March 31, 2004, included the lender's consent to the sale of Delta Mills' Furman Plant, which was announced August 22, 2001, and allowed Delta Mills to exclude from the calculation of the leverage ratio the closing costs and continuing costs associated with the closing of its Furman Plant. Effective March 31, 2002, Delta Mills amended its $50 million credit facility, eliminating the permitted leverage ratio covenant and adding a $12.5 million minimum availability requirement. Under the minimum availability requirement, Delta Mills' availability for borrowings cannot exceed $37.5 million. During the year ended June 29, 2002, the Company did not pay any dividends to Delta Woodside Industries, Inc.
At June 29, 2002 the carrying value of the Senior Notes was $47,819,000 and the fair value, based on quoted market prices was $25,104,975. The fair value of the revolving credit facility approximates its carrying value as of June 29, 2002 due to the variable interest rate provision of the facility.
Total interest expense incurred by the Company was $9,090,000, $11,064,000 and $16,095,000 for fiscal years 2002, 2001, and 2000, respectively. Total interest paid during fiscal years 2002, 2001, and 2000 was $10,252,000, $12,099,000 and $16,343,000, respectively.
Rent expense relating to operating leases was approximately $1,733,000, $3,165,000 and $ 3,507,000 for fiscal years 2002, 2001 and 2000 respectively.
Aggregate principal maturities of all long-term debt and minimum payments under operating leases are as follows:
Long-term Operating Fiscal Year Debt Leases ----------- ---- ------
2003 414,000 2004 414,000 2005 244,000 2006 74,000 2007 74,000 Later Years 47,819,000 110,000 ------------ -------------- $47,819,000 $1,330,000 ============ ==============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D--EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries, Inc. 40l(k) Plan. During fiscal 2002, 2001 and 2000, the Company contributed $574,000, $411,000, and $453,000, respectively, to the 401(k) plan to match employee contributions.
The Company formerly participated in a 501(c)(9) trust, the Delta Woodside Employee Benefit Plan and Trust ("Trust"). The Trust collected both employer and employee contributions from the Company and made disbursements for health claims and other qualified benefits. The Company made no contributions to the trust in either fiscal 2001 or fiscal 2000. On June 13, 2001, the trust was terminated.
The Company participates in a Deferred Compensation Plan, managed by DWI, which permits certain management employees to defer a portion of their compensation. Deferred compensation accounts are credited with interest and are distributed after retirement, disability or employment termination. As of June 29, 2002 and June 30, 2001, the Company's liability was $7,271,000 and $6,599,000 respectively.
The Company also participates in the Delta Woodside Industries, Inc. Incentive Stock Award Plan and Stock Option Plan. Including associated tax assistance, under the Incentive Stock Award Plan the Company recognized expense of $198,000, $0, and $176,000 for fiscal years 2002, 2001 and 2000, respectively. Under the Stock Option Plan, the Company recognized expense of $0, $0 and $190,000 for fiscal years 2002, 2001 and 2000, respectively. Had the Company determined compensation cost based on the fair value at the grant date for these stock options, pursuant to SFAS No. 123, the Company's net loss would have increased by approximately $517,000 in each of 2002 and 2001. Net income would have been approximately the same as that reported by the Company for fiscal 2000. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
2002 2001 2000 ---- ---- ---- Risk free interest rate N/A 5.0% N/A Expected lives for options N/A 10 years N/A Expected volatility N/A 62% N/A Dividend yield N/A N/A N/A Fair value per option at grant date N/A $4.00 N/A
NOTE E--AFFILIATED PARTY TRANSACTIONS
Affiliated party transactions included in the statements of operations result from a variety of services provided and goods transferred as shown in the following table:
NOTE E--AFFILIATED PARTY TRANSACTIONS - CONTINUED
From March 29, 1997 until mid-May 2000, the Company sold textiles and yarn to the affiliate at prices which approximated market. This arrangement was terminated in the fiscal 2000 fourth quarter when the Company sold its Rainsford yarn facility and associated operating assets to the affiliate for $13.6 million which approximated net book value.
Corporate services before fiscal 2001 included management, treasury, computer, purchasing, benefits, payroll, auditing, accounting and tax services. For these services, DWI charged actual cost based on relative usage and other factors. Actual cost was charged for payroll taxes, insurance and employee related expenses, which were managed by DWI as a corporate service.
The Company is the only operating division of DWI. Actual corporate service costs for management, treasury, auditing, and shareholder relations are charged to the Company as incurred. Receivable or payable to affiliates bears no interest and includes amounts payable to or receivable from DWI for current activity as described.
NOTE F--DISCONTINUED OPERATIONS
On March 3, 1998, the Company made the decision to close its knitted fabric operation, Stevcoknit Fabrics. Accordingly operating results for this segment were reclassified and reported as discontinued operations.
In connection with the decision to discontinue this business, the Company, in fiscal 1998, recognized an estimated loss on disposal of discontinued operations of $21 million including an income tax benefit of $14 million. In fiscal 1999, the Company decreased the estimate of the after-tax cost to discontinue these businesses and recognized after-tax credits of $3.8 million. Proceeds from the liquidation of this division were used to make capital expenditures and to reduce indebtedness.
Summarized results of operations for the discontinued business are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G--INCOME TAXES
The Company reports federal income taxes in the consolidated return of its parent Delta Woodside Industries, Inc. (DWI) and had taxable income of $3.1 million which will be reported in the fiscal 2002 consolidated Federal income tax return with its parent, DWI. The consolidated tax group had regular taxable income of $2.9 million and alternative minimum taxable income (AMT) of $1.8 million. The Federal income tax obligation or refund that is allocated to the Company is determined as if the Company was filing a separate Federal income tax return. The Company's Federal tax liability or receivable is paid to or is a receivable from the parent company.
Deferred income taxes reflect the net tax effects of temporary differences between the financial statement amounts and amounts reported for income tax purposes. The company anticipates that the reversal of existing taxable temporary differences will provide sufficient taxable income to realize the remaining deferred tax assets. Accordingly, no valuation allowance has been provided for 2002 or 2001.
Significant components of the Company's deferred tax assets and liabilities are as follows:
2002 2001 Assets: Deferred compensation $ 2,799,000 $ 2,542,000 Accrued and sundry liabilities 1,696,000 1,688,000 Net operating loss carryforwards 749,000 2,077,000 Inventory 589,000 Other 14,000 20,000 -------------- -------------- Subtotal 5,258,000 6,916,000 Valuation allowance Deferred tax assets 5,258,000 6,916,000
Liabilities: Depreciation 12,888,000 15,805,000 Inventory 363,000 Other 329,000 -------------- Deferred tax liabilities 13,251,000 16,134,000 ------------- ------------- Net deferred tax liabilities ($ 7,993,000) ($ 9,218,000) ============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G--INCOME TAXES - CONTINUED
Significant components of the provision for income tax expense (benefit ) are as follows:
The reconciliation of total income tax expense (benefit) related to continuing operations computed at the Federal statutory tax rates is as follows:
The Company made tax payments of $0, $48,000 and $154,000 during fiscal years 2002, 2001 and 2000, respectively.
NOTE H--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, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY - CONTINUED
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):
JUNE 29, 2002 JUNE 30, 2001 ------------- -------------
Current assets 33 142 Noncurrent assets 61 88 Current Liabilities 1,902 2,036 Noncurrent liabilities 978 660 Stockholders' deficit (2,786) (2,466)
Summarized results of operations for the Guarantor are as follows (in thousands):
NOTE I--COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements, and has fixed prices, to purchase cotton for use in its manufacturing operations. At June 30, 2001 minimum payments under these contracts with non-cancelable contract terms were approximately $14.9 million.
During fiscal year 2002, the Company plans to spend approximately $ 8 million for capital improvements and to maintain existing facilities.
Two of the Company's South Carolina plants, the Delta 2 and Delta 3 Finishing Plants, have experienced high nitrate levels at the spray field for these plants. The Company is working with the South Carolina Department of Health and Environmental Control ("DHEC") to address this issue. In addressing this issue in the method and within the time frame required by DHEC, a report was submitted in June 2001 to DHEC detailing four options for dealing with this groundwater problem. At the date of this filing, DHEC has still not responded to the Company's proposal. Although there is no assurance that the Company will be successful and it could face administrative penalties if it is not, the Company does not currently believe that this matter would have a material adverse impact on the Company.
On June 30, 2000 the Company sold its Greensboro, North Carolina plant to the City of Greensboro. The Company had been working with environmental consultants in assessing groundwater contamination at this site. Because of these studies, one half of the proceeds from the sale of the plant, consisting of approximately $400,000, were placed in an interest bearing escrow account to cover expenses related to this contamination. As of the date of this filing, approximately $365,000 remains in this escrow account. The Company believes that this balance is adequate to cover any remaining expenses related to this matter. The Company recorded the sale net of estimated costs to remediate the property.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I--COMMITMENTS AND CONTINGENCIES - CONTINUED
On January 10, 2000, the North Carolina Department of Environment and Natural Resources requested that the Company accept responsibility for investigating the discharge of hazardous substances at a hazardous waste site known as the Glen Raven Mills Site, Kings Mountain, North Carolina (the "Site"). A predecessor by merger of the Company, Park Yarn Mills Company, Inc. ("Park Yarn") owned the Site for approximately six (6) years, from approximately 1977 to 1983 (prior to the time the Company 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, the Company has denied any responsibility at the Site, declined to undertake any activities concerning the Site, and has not provided for any reserves for costs or liabilities attributable to Park Yarn.
From time to time the Company is a defendant in other legal actions involving claims arising in the normal course of business, including product liability claims. The Company believes that, as a result of legal defenses, insurance arrangements and indemnification provisions with parties believed to be financially capable, none of these actions should have a material effect on its operations or financial condition.
NOTE J--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for the years ended June 29, 2002 and June 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K--EXTRAORDINARY ITEMS
During fiscal 2002, the Company purchased $35,996,000 face amount of its 9.625% Senior Notes for $19,383,000, including expenses of approximately $500,000. The Company recognized an extraordinary gain of $9,911,000 million after tax expense of $6,161,000 and the write off of deferred loan costs of $541,000. During the fiscal year 2001, the Company purchased $31,263,000 face amount of its 9.625% Senior Notes for $28,021,000. The Company recognized an extraordinary gain of 1,585,000 after taxes of $873,000 and the write off of deferred loan costs of $784,000. During the fiscal year 2000, the Company purchased $34,922,000 face amount of its 9.625% Senior Notes for $26,615,000. The Company recognized an extraordinary gain of $4,659,000 after a tax expense of $2,755,000 and write-off of deferred loan costs of $893,000.
NOTE L-- RESTRUCTURING AND IMPAIRMENT CHARGES
During the year ended June 29, 2002, the Company took 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. Pursuant to SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of", 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 $.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 on October 21, 2001 and the Company is in the process of liquidating the assets associated with this facility.. The Company expects to complete the sale of these assets in fiscal year 2003.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE -----------------------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS - --------------------------------------------------------------
Omitted pursuant to instructions I (2)(c) to Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------
(a)(1) and (2) Financial Statements and Financial Statement Schedules ------------------------------------------------------
The following consolidated financial statements of Delta Mills, Inc. as of the Year ended June 29, 2002
Consolidated balance sheets--June 29, 2002 and June 30, 2001.
Consolidated statements of operations--Years ended June 29, 2002, June 30, 2001, and July 1,2000.
Consolidated statements of shareholder's equity-- Years ended June 29, 2002, June 30, 2001, and July 1,2000.
Consolidated statements of cash flows-- Years ended June 29, 2002, June 30, 2001, and July 1,2000.
Notes to consolidated financial statements.
The following consolidated financial statement schedules of Delta Woodside Industries, Inc. are included in Item 14(d):
Schedule II -- Valuation and qualifying accounts
(3) Listing of Exhibits: -------------------
3.1 Restated and Amended Certificate of Incorporation of Delta Mills, Inc.: Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of the Company and Delta Mills Marketing, Inc., File No. 333-37617 (the "S-4"). 3.2 Bylaws of Delta Mills, Inc.: Incorporated by reference to Exhibit 3.2 to the S-4. 4.1 See Exhibits 3.1 and 3.2. 4.2 Indenture, dated as of August 25, 1997, by and among the Company, Delta Mills Marketing, Inc. and The Bank of New York, as Trustee, with respect to the Company's Series A and Series B 9-5/8% Senior Notes due 2007, $150,000,000 in aggregate principal amount, together with forms of certain related instruments, agreements and documents: Incorporated by reference to Exhibit 4.2.6 to the Current Report on Form 8-K/A of Delta Woodside Industries, Inc. with the date of September 25, 1997 (the "DWI 8-K/A").* 4.3.1 Revolving Credit and Security Agreement, dated as of March 31, 2000, between GMAC Commercial Credit LLC as agent and lender, and Delta Mills, Inc. as borrower: Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000 4.3.1.1 Letter, dated July 28, 2000, amending Revolving Credit and Security Agreement: Incorporated by reference to Exhibit 4.3.1.1 to Form 10-K of Delta Woodside Industries, Inc. for the fiscal year ended June 30, 2001 (the "DWI 2000 10-K").* 4.3.2 Guarantee, dated as of March 31, 2000, of Delta Mills Marketing, Inc. in favor of GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000. 4.3.3 General Security Agreement, dated as of March 31, 2000, between Delta Mills Marketing, Inc. and GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - --------------------------------------------------------------- FORM 8-K - CONTINUED - --------------------
4.3.4 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Alchem Capital Corporation in favor of GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000. 4.3.5 Stock Pledge and Security Agreement, dated as of March 31, 2000, by Delta Mills, Inc. in favor of GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K dated March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 4.3.6 Stock Pledge and Security Agreement, dated as of May 11, 2000, by Delta Woodside Industries, Inc. in favor of GMAC Commercial Credit LLC as agent: Incorporated by reference to Exhibit 4.3.6 to the DWI 2000 10-K.* 4.4 The Company hereby agrees to furnish to the Commission upon request of the Commission a copy of any instrument with respect to long-term debt not being registered in a principal amount less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 5.1** Delta Woodside Deferred Compensation Plan for Key Managers, Amended and Restated Effective June 30, 2000: Incorporated by reference to Exhibit 10.2 to the Delta Woodside Industries, Inc. Report on Form 10-K dated July 1, 2000 and filed with the Securities and Exchange Commission on September 29, 2000. * 5.2.1** Delta Woodside Industries, Inc. Incentive Stock Award Plan effective July 1, 1990: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of Delta Woodside Industries, Inc. for the fiscal quarter ended March 31, 1990.* 5.2.2** 1995 Amendment to the Incentive Stock Award Plan effective as of November 9, 1995: Incorporated by reference to Exhibit 10.3.1 to the Form 10-Q of Delta Woodside Industries, Inc. for the quarterly period ended December 30, 1995 (the "DWI 12/95 10-Q").* 5.2.3** 1997 Amendment to the Incentive Stock Award Plan effective as of November 6, 1997: Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-45771). 5.3.1** Delta Woodside Industries, Inc. Stock Option Plan effective as of July 1, 1990: Incorporated by reference to Exhibit 10.11 to the Form 10-K of Delta Woodside Industries, Inc.for the fiscal year ended June 30, 1990.* 5.3.2** Amendment No. 1 to Stock Option Plan: Incorporated by reference to Exhibit 10.1 to the Form 10-Q of Delta Woodside Industries, Inc. for the quarterly period ended December 29, 1990 (the "DWI 12/90 10-Q").* 5.3.3** Amendment to Stock Option Plan: Incorporated by reference to Exhibit 10.9.2 to the Form 10-K of Delta Woodside Industries, Inc. for the fiscal year ended June 29, 1991 (the "DWI 1991 10-K").* 5.3.4** 1995 Amendment to Stock Option Plan effective as of November 9, 1995: Incorporated by reference to Exhibit 10.4.4 to the DWI 12/95 10-Q.* 5.3.5** 1997 Amendment to Stock Option Plan effective as of November 6, 1997: Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Delta Woodside Industries, Inc. (File No. 333-45767). 5.3.6** Amendment to Stock Option Plan adopted April 25, 2000: Incorporated by reference to Exhibit 10.4.6 to Form 10-Q of Delta Woodside Industries, Inc. for the fiscal quarter ended April 1, 2000.* 5.3.7** Amendments to Stock Option Plan: Incorporated by reference to Exhibit 10.4.7 to the DWI 2000 10-K.* 5.4** Form of Amendment of Certain Rights and Benefits Relating to Stock Options and Deferred Compensation by and between the Company and certain pre-spin-off plan participants: Incorporated by reference to Exhibit 10.7 to the DWI 2000 10-K.*
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM - -------------------------------------------------------------------- 8-K - CONTINUED - ---------------
5.4.1 List of directors and officers of the Company who signed the document described in Exhibit 10.7: Incorporated by reference to Exhibit 10.7.1 to DWI 2000 10-K.* 5.4.2** Form of Amendment of Stock Options by and between Delta Woodside Industries, Inc. and certain pre-spin-off plan participants. Incorporated by reference to Exhibit 10.7.2 to DWI 2000 10-K.* 5.5.1** Directors Stock Acquisition Plan: Incorporated by reference to Exhibit 10.14 to the DWI 1991 10-K.* 5.5.2** Amendment to Directors Stock Acquisition Plan, dated April 30, 1992: Incorporated by reference to Exhibit 10.12.2 to the DWI 1992 10-K.* 5.6** 2000 Stock Option Plan of Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 10.10 to the DWI 2000 10-K.* 5.6.1 Amendment of 2000 stock option plan of Delta Woodside Industries, Inc: Incorporated by reference to Item 6(a) of the Delta Woodside Industries, Inc. report on Form 10-Q for the quarter ended September 30, 2000 and filed with the Securities and Exchange Commission on November 14, 2000. 5.7** 2000 Incentive Stock Award Plan of Delta Woodside Industries, Inc.: Incorporated by reference to Exhibit 10.11 to the DWI 2000 10-K.* 5.8** Letter dated April 22, 1999 to Robert W. Humphreys: Incorporated by reference to Exhibit 10.12.1 to the DWI 1999 10-K.* 5.9** Letter dated June 28, 2000 to William F.Garrett: Incorporated by reference to Exhibit 10.l4 to the DWI 2000 10-K.* 5.10 See Exhibits 4.2, 4.3.1, 4.3.2, 4.3.3, 4.3.4, 4.3.5 and 4.3.6. 23 Report on Schedule by Independent Auditors. 99.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by William F. Garrett, dated September 27, 2002. 99.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by William H. Hardman, dated September 27, 2002.
* All reports previously filed with the Commission by Delta Woodside Industries, Inc. pursuant to the Exchange Act and rules and regulations promulgated thereunder, exhibits of which are incorporated by reference into this Report, were filed under Commission File No. 1-10095.
** This is a management contract or compensatory plan or arrangement.
The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit to any of the above filed exhibits upon request of the Commission.
(b) Reports on Form 8-K -------------------- No reports on Form 8-K were filed during the fourth quarter of fiscal 2002.
(c) Exhibits The response to this portion of Item 14 is incorporated by reference from Item 14(a)(3) above.
(d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
September 27, 2002 By: /s/ William F. Garrett - -------------------------------------- ---------------------------- Date William F. Garrett President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
CERTIFICATIONS - --------------
I, William F. Garrett, the President and Chief Executive Officer of Delta Mills, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Delta Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 /s/ William F. Garrett ---------------------- ------------------------------ William F. Garrett President and Chief Executive Officer
I, William H. Hardman, Jr., the Vice President, Treasurer and Chief Financial Officer of Delta Mills, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Delta Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
Date: September 27, 2002 /s/ William H. Hardman, Jr. --------------------- ---------------------------------- William H. Hardman, Jr. Vice President, Treasurer and Chief Financial Officer
EXHIBIT INDEX
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
NOTES: 1) The change in the reserve for returns and allowances is charged to income as a reduction of sales. 2) Deductions represent customer returns and allowances during the period.