10-Q 1 g67017e10-q.txt THOMASTON MILLS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 30, 2000 Commission File No. 0-1915 THOMASTON MILLS, INC. -------------------------------------------------------------------------------- GEORGIA 58-0460470 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 115 East Main Street, P.O. Box 311, Thomaston, Georgia 30286 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (706) 647-7131. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class A Common Stock $1 Par Value - 5,620,518 shares including 710,838 treasury shares Class B Common Stock $1 Par Value - 1,873,506 shares including 243,140 treasury shares 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 periods 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 [ ] 2 INDEX THOMASTON MILLS, INC. AND SUBSIDIARY PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets - December 30, 2000 and July 1, 2000 Condensed consolidated statements of operations -- thirteen weeks ended December 30, 2000 and thirteen weeks ended January 1, 2000 and twenty-six weeks ended December 30, 2000 and twenty-six weeks ended January 1, 2000 Consolidated statements of cash flows - twenty-six weeks ended December 30, 2000 and twenty-six weeks ended January 1, 2000 Notes to condensed consolidated financial statements - December 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Change in Securities and Use of Proceeds 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 SIGNATURES 3 PART 1 - FINANCIAL INFORMATION THOMASTON MILLS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

~~SEPTEMBER~~DECEMBER 30, 2000 July 1, 2000 ------------------ ------------ (UNAUDITED) (Note A) ASSETS CURRENT ASSETS Cash & cash equivalents $ ~~1,081~~799 $ 1,415 Accounts receivable, less allowance of $~~706~~928 at ~~September~~December 30, 2000 and $621 at July 1, 2000 2223,~~615~~943 29,218 Inventories--Note BC 3425,~~049~~175 37,236 Other current assets 1,~~550~~756 ~~573~~604 ---------- ---------- TOTAL CURRENT ASSETS 5951,~~295~~673 68,~~442~~473 PROPERTY, PLANT AND EQUIPMENT 171,~~476~~852 170,600 Less allowance for depreciation ~~126~~128,~~247~~129 124,366 ---------- ---------- 4543,~~229~~723 46,234 Assets held for sale 53,~~431~~835 5,628 Deferred income taxes 2,~~709~~645 2,709 Other assets 76,~~149~~646 8,~~398~~367 ---------- ---------- $ ~~119~~108,~~813~~522 $ 131,411 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1716,~~185~~638 $ 19,857 Accrued liabilities 109,~~667~~867 9,533 Current portion of long-term debt ~~and capital lease obligations~~ 4,~~545~~147 4,147 Revolving credit 2827,~~280~~066 34,525 ---------- ---------- TOTAL CURRENT LIABILITIES 6057,~~677~~718 68,062 OBLIGATIONS UNDER CAPITAL LEASE - less current portion ~~460~~355 564 LONG-TERM DEBT, less current portion 2926,~~228~~780 29,876 OTHER LIABILITIES 1,~~631~~784 1,489 SHAREHOLDERS' EQUITY Class A Common Stock--5,620,518 shares outstanding including 710,838 treasury shares 5,621 5,621 Class B Common Stock--1,873,506 shares outstanding including 243,140 treasury shares 1,873 1,873 Additional paid-in capital 10,766 10,766 Retained earnings 149,~~977~~045 18,580 ---------- ---------- 3327,~~237~~305 36,840 Less treasury stock - at cost 5,420 5,420 ---------- ---------- 2721,~~817~~885 31,420 ---------- ---------- $ ~~119~~108,~~813~~522 $ 131,411 ========== ==========

NOTE: The Balance Sheet at July 1, 2000 has been derived from the Audited Financial Statements at that date. See Notes to Condensed Consolidated Financial Statements. 4 THOMASTON MILLS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in Thousands except Share and Per Share Data)

13 WEEKS 13 Weeks 26 WEEKS 26 Weeks ENDED Ended ~~SEPTEMBER~~ENDED Ended DECEMBER 30, 2000 ~~October~~January 21, ~~1999~~2000 DECEMBER 30, 2000 January 1, 2000 ----------------- --------------- ----------------- --------------- Net sales $ 3637,~~633~~152 $ 4037,~~724~~195 $ 73,785 $ 77,919 Cost of sales 3537,~~001~~469 3633,~~225~~348 72,470 69,573 ----------- ----------- ----------- ----------- Gross profit (317) 3,847 1,~~632~~315 48,~~499~~346 Selling, general and administrative expenses 3,~~386~~379 43,~~057~~741 6,765 7,798 Other expense (income), net (3549) (~~116~~289) (84) (405) ----------- ----------- ----------- ----------- Operating profit (loss) (13,~~719~~647) ~~558~~395 (5,366) 953 Interest expense 2,~~154~~002 2,~~068~~241 4,156 4,309 Amortization of credit agreement fees ~~151~~164 74100 315 174 ----------- ----------- ----------- ----------- Loss from continuing operations before income tax provision (45,~~024~~813) (1,~~584~~946) (9,837) (3,530) Provision for income taxes 64 0 64 0 ----------- ----------- ----------- ----------- Loss from continuing operations (5,877) (1,946) (9,901) (3,530) Income (loss) from discontinued operations ~~421~~(55) (6238) 366 (244) ----------- ----------- ----------- ----------- Net loss $ (35,~~603~~932) $ (12,~~590~~184) $ (9,535) $ (3,774) =========== =========== =========== =========== Weighted Average Number of Shares - Basic and Diluted 6,540,046 6,540,046 6,540,046 6,540,046 Basic and diluted loss per share: Continuing operations $ (0.6290) $ (0.2430) $ (1.52) $ (0.54) Discontinued operations (0.0701) (0.0004) 0.06 (0.04) ----------- ----------- ----------- ----------- Net loss per share $ (0.5591) $ (0.2434) $ (1.46) $ (0.58) =========== =========== =========== ===========

See accompanying notes 5 THOMASTON MILLS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in Thousands)

1326 WEEKS 1326 Weeks ENDED Ended ~~SEPTEMBER~~DECEMBER 30, 2000 ~~October~~January 21, ~~1999~~2000 ------------------ --------------- OPERATING ACTIVITIES Net loss $ (39,~~603~~535) $ (13,~~590~~774) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 24,~~221~~461 25,~~493~~047 Gains on sales of property, plant and equipment 0(9) (18266) Changes in operating assets and liabilities: Accounts receivable 65,~~603~~275 69,~~057~~887 Inventories 312,~~187~~061 53,~~535~~047 Other assets (6965) ~~166~~(429) Assets held for sale ~~197~~1,793 ~~300~~1,029 Accounts payable and accrued expenses (~~998~~2,590) (43,~~128~~604) Reserve for discontinued operations 0 (5,~~276~~533) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 711,~~538~~391 35,~~539~~404 INVESTING ACTIVITIES Purchases of property, plant and equipment (~~875~~1,252) (~~562~~926) Proceeds from sale of property, plant and equipment 9 237 ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (~~875~~1,243) (~~562~~689) FINANCING ACTIVITIES Proceeds from revolving lines of credit and long-term debt ~~226~~447 56,~~836~~936 Principal payments on revolving lines of credit, long-term debt and capital lease obligations (711,~~223~~211) (611,~~451~~712) ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (610,~~997~~764) (~~615~~4,776) ---------- ---------- (DECREASE) ~~INCREASE~~ IN CASH AND CASH EQUIVALENTS (~~334~~616) ~~2,362~~(61) Cash and cash equivalents at beginning of period 1,415 353 ---------- ---------- Cash and cash equivalents at end of period $ ~~1,081~~799 $ ~~2,715~~292 ========== ==========

See accompanying notes 6 THOMASTON MILLS, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 30, 2000 NOTE A -- MANAGEMENT PLANS AND BASIS OF PRESENTATION The Company reported a net loss of $9,535,000 and cash on hand decreased $616,000 for the six months ended December 30, 2000. This compares to a net loss of $3,774,000 in the six months ended January 1, 2000. Additionally, on February 13, 2001, the Company obtained waivers from its lenders for certain financial and other covenants as to which the Company was not in compliance as of November 25, 2000 and December 30, 2000. The Company is subject to changing business and economic conditions (many of which are beyond the Company's control), including a general deterioration in the domestic textile industry, which may affect its ability to generate cash and operating profits and to comply with its debt covenants in the near term and there can be no assurance of future debt covenant compliance. If the Company is unable to comply with its debt covenants, there can be no assurance that the Company's creditors will provide any additional waivers or amendments with respect to any such non-compliance. A breach of any of the covenants contained in the Company's Loan Agreement, Credit Agreement or Promissory Note could result in a default or event of default under the terms of these credit facilities. Upon the occurrence of an event of default, the Company's lenders would not be obligated to make additional advances under the credit facility that is in default; would be entitled to declare all amounts outstanding under the credit facilities in default, including accrued interest or other obligations, to be immediately due and payable; would have the rights to block payment on substantially all of the Company's other long-term debt; would be entitled to proceed against the collateral granted to them to secure the applicable debt. In these circumstances, cross defaults could occur making substantially all of the Company's other long-term debt due, in which event the Company cannot be certain that its assets would be sufficient to repay in full all of its long-term debt. As a result of the operating results and debt covenants described above, the Company's ability to respond to changing business and economic conditions and to secure additional financing, if needed, is significantly restricted. In the fourth quarter of fiscal 1999, the Company began a comprehensive restructuring of the Company's operations and businesses with a view towards enhancing and focusing on the Company's operations that are believed to present the best future profitability and growth potential. As a result of completing the assessment of various strategic alternatives, the Company concluded that discontinuing the Company's denim and industrial yarn operations was in the best interest of the Company. The Company has concluded that it will focus on the manufacturing and marketing of home furnishings as well as dyeing and finishing fabrics for casual and career apparel. The Company believes that these operations offer the most viable opportunity for improving future profitability. The Company has completed a personnel and operational realignment of these businesses to improve their future profit margins. Also, at the request of its lenders, the Company engaged consultants in January of 2001 to provide consulting services relating to the Company's turnaround and cost reduction initiatives. The Company believes that the initiatives discussed above will result in improved margins and future profitability; however, such plans require management to make estimates and assumptions regarding future operations. Actual results could differ from those estimates. Management is not certain that the Company's cash flow from operations, together with amounts available under its current borrowings, will be adequate to meet its anticipated cash requirements for the foreseeable future. Management is exploring additional sources of capital and seeking other accommodations from its lenders and suppliers to aid its short-term cash requirements. However, there can be no assurance that other sources of capital will be available or that the Company's lenders and suppliers will accommodate the Company, or, if such alternate sources of capital are available or such accommodations are offered, that they will be on terms acceptable to the Company. If the Company is unable to obtain additional or alternative financing or financial accommodations from its lenders and suppliers, there can be no assurance that the Company will be able to continue to meet its cash requirements, which may result in materially adverse consequences on the Company's business, financial conditions or operations. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern that contemplates continuity of operations and realization of assets and liquidation of liabilities in the normal course of business. As a result of the Company's debt structure, operating 7 results and current economic conditions, realization of assets and liquidation of liabilities are subject to significant uncertainty. Also, the Company's accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 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 normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and twenty-six weeks ended December 30, 2000 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. Certain fiscal 2000 balances have been reclassified to conform with the fiscal 2001 classifications. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report for the year ended July 1, 2000. NOTE B -- ACCOUNTING POLICIES ADOPTED IN CURRENT FISCAL YEAR In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 draws upon the existing accounting rules and explains those rules, by analogy, to other transactions that the existing rules do not specifically address. SAB 101 is effective for all of the Company's fiscal quarters of fiscal year 2001. Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), which the Company adopted effective July 1, 2000, requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. The adoptions of SAB 101, effective October 1, 2000, and SFAS 133, effective July 1, 2000, did not have a material effect on the Company's financial position or operating results. NOTE C -- INVENTORIES The components of inventory consist of the following: (Dollars in Thousands) DECEMBER 30, 2000 July 1, 2000 ----------------- ------------ Raw materials $ 3,475 $ 3,936 Work in process 13,302 18,946 Finished products 15,180 21,301 LIFO reserve (6,782) (6,947) ------- ------- $25,175 $37,236 ======= ======= 8 NOTE D -- NET LOSS PER COMMON SHARE The following table sets forth the computation of the numerator and denominator used in the calculation of basic and diluted earnings (loss) per share from continuing operations:

(Dollars in Thousands except Share and Per Share Data) ~~SEPTEMBER~~13 WEEKS 13 Weeks 26 WEEKS 26 Weeks ENDED Ended ENDED Ended DECEMBER 30, 2000 ~~July~~January 1, 2000 DECEMBER 30, 2000 January 1, 2000 ----------------- --------------- ----------------- ~~Raw~~--------------- ~~materials~~Numerator for basic and diluted earnings per share $ 3(5,~~522~~877) $ 3(1,~~936~~946) ~~Work~~$ in(9,901) ~~process~~$ 16(3,~~101~~530) ~~18,946~~----------- ~~Finished~~------------ ~~products~~----------- 21------------ Denominator: Denominator for basic earnings per share - Weighted average shares 6,~~373~~540,046 216,~~301~~540,046 ~~LIFO~~6,540,046 ~~reserve (~~6,~~947~~540,046 Basic and diluted loss per share $ (0.90) $ (~~6,947~~0.30) $ (1.52) $ (0.54) ----------- ------------ ~~$34~~----------- ------------ Potentially dilutive common shares related to options and warrants outstanding: Not considered in calculation due to net loss 730,~~049~~618 ~~$37~~736,~~236~~956 ~~=======~~732,082 ~~=======~~644,383 ---------- ----------- ---------- ----------- Not considered in calculation due to exercise price of options exceeding average price of Company's common stock 747,613 710,750 754,730 760,632 ---------- ----------- ---------- -----------

9 NOTE E -- SEGMENT INFORMATION The Company has two reportable segments in its continuing operations: Consumer Products and Apparel Fabrics. Each reportable segment is organized around product similarities. The Consumer Products segment manufactures and sells a complete line of muslin, percale and premium threadcount products for the bedroom, including fashion-coordinated bedding sets and comforters marketed under the Thomaston label, and offers home furnishing fabrics for sale to other manufacturers of home furnishings. The Apparel Fabrics line is directed toward dyeing and finishing heavier fabrics such as twill and other value-added fabrics. The profit performance measure for the Company's segments is defined as Internal EBIT (earnings before interest and taxes). The aggregate of Internal EBIT for the reportable segments differs from the Company's consolidated earnings before interest and taxes by costs that are deemed to be non-operating in nature. Allocations of corporate general and administrative expenses are used in the determination of segment profit performance.

(Dollars in Thousands) NET SALES PROFIT PERFORMANCE 13 WEEKS 13 Weeks 13 WEEKS 13 Weeks ENDED Ended ~~SEPTEMBER~~ENDED Ended DECEMBER 30, 2000 ~~October~~January 21, ~~1999~~2000 DECEMBER 30, 2000 January 1, 2000 ----------------- --------------- ----------------- ~~Revenues~~--------------- Reportable segments: Consumer products $ 025,323 $ 021,927 ~~Cost~~$ of(3,000) ~~sales~~$ (~~421~~684) 6Apparel fabrics 11,829 15,268 (647) 1,079 ---------- ----------- ~~Gross~~----------- ~~profit~~----------- Segment total $ 37,152 $ 37,195 (3,647) 395 ========== =========== Interest expense 2,002 2,241 Other non-segment 164 100 ---------- ----------- Consolidated (loss) ~~421~~before taxes from continuing operations $ (65,813) ~~Other~~$ ~~operating~~(1,946) ~~income~~=========== ============ NET SALES PROFIT PERFORMANCE 26 WEEKS 26 Weeks 26 WEEKS 26 Weeks ENDED Ended ENDED Ended DECEMBER 30, 2000 January 1, 2000 DECEMBER 30, 2000 January 1, 2000 ----------------- --------------- ----------------- --------------- Reportable segments: Consumer products $ 49,745 $ 49,308 $ (~~expenses~~4,400) $ (440) Apparel fabrics 24,040 ~~net~~28,611 0(966) 01,393 ---------- ----------- ~~Income~~----------- ----------- Segment total $ 73,785 $ 77,919 (5,366) 953 ========== =========== Interest expense 4,156 4,309 Other non-segment 315 174 ---------- ----------- Consolidated (loss) before taxes from ~~discontinued~~continuing operations $ ~~421~~(9,837) $ (63,530) =========== ============

10 THOMASTON MILLS, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In the fourth quarter of fiscal 1999, the Company began a comprehensive restructuring of its operations and businesses with a view towards enhancing and focusing on the Company's operations which are believed to present the best future profitability and growth potential. As a result of completing the assessment of various strategic alternatives, the Company concluded that discontinuing the Company's denim and industrial yarn operations, which were unprofitable in recent years, was in the best interest of the Company. In conjunction with the exit of these businesses, the Company's balance sheet at December 30, 2000 includes assets held for sale in the amount of $2,684,000. Any proceeds from the sale of these assets will be applied against outstanding term loan obligations. The Company has concluded that it will focus on the manufacturing and marketing of home furnishings as well as dyeing and finishing fabrics for casual and career apparel. The Company believes that these operations offer the most viable opportunity for improving future profitability. The Company completed a personnel and operational realignment of these businesses which it believes will improve their future profit margins. RESULTS OF OPERATIONS Sales from continuing operations for the second fiscal quarter ended December 30, 2000 were $37,152,000 compared to sales of $37,195,000 for the second fiscal quarter last year. For the twenty-six weeks ended December 30, 2000, sales were down 5.3% to $73,785,000 when compared to sales of $77,919,000 for the twenty-six weeks ended January 1, 2000. Sales in the Consumer Products area of the Company were up slightly to $49,745,000 compared to sales of $49,308,000 for the twenty-six weeks ended January 1, 2000. In the Apparel Fabrics area, a shift in customer demand from heavier, bottom-weight, cotton fabrics to lighter-weight, blended fabrics resulted in a sales decrease from $28,611,000 for the twenty-six weeks ended January 1, 2000 to $24,040,000 for the twenty-six weeks ended December 30, 2000. Cost of sales for the quarter just ended increased to 100.9% of sales or $37,469,000. For the second quarter fiscal year 2000, cost of sales were 89.7% of sales or $33,348,000. For the twenty-six weeks ended December 30, 2000, cost of sales increased to 98.2% of sales or $72,470,000 compared to cost of sales of 89.3% of sales or $69,573,000 for the twenty-six weeks ended January 1, 2000. During the twenty-six weeks ended December 30, 2000, the Company selectively idled certain manufacturing facilities in order to better match inventory levels with orders. Inventories have been reduced $12,061,000, or 32.4%, during the twenty-six weeks ended December 30, 2000. However, this slowdown of manufacturing also resulted in decreased manufacturing capacity utilization and plant productivity and increased volume related negative operating variances. Raw material prices have also increased during the twenty-six weeks ended December 30, 2000 as compared to raw material prices during the twenty-six weeks ended January 1, 2000. Gross profit for the twenty-six weeks ended December 30, 2000 was 1.8% of sales compared to 10.7% of sales for the twenty-six weeks ended January 1, 2000. Selling, general and administrative expenses were 9.1% of sales for the thirteen weeks and 9.2% of sales for the twenty-six weeks ended December 30, 2000. For the thirteen weeks and twenty-six weeks ended January 1, 2000, selling, general and administrative expenses were 10.1% and 10.0% of sales, respectively. The Company's realignment of its operations has contributed to reductions in certain selling, general and administrative expenses. Other income for the quarter and twenty-six weeks ended December 30, 2000 was $49,000 and $84,000, respectively, compared to $289,000 and $405,000 for the comparable periods last year. Other income relates to miscellaneous equipment sales, royalties and interest earned on the Company's short-term investments of cash. Interest expense and amortization of credit agreement fees totaled $2,166,000 during second quarter fiscal year 2001 and $4,471,000 for the twenty-six weeks ended December 30, 2000. For the quarter and twenty-six weeks ended January 1, 2000, interest expense and amortization of credit agreement fees totaled $2,341,000 and $4,483,000, respectively. This decrease was the result of lower borrowings under the Company's various credit agreements. Excluding capitalized leases, total debt at December 30, 2000 was $57,993,000, down $10,555,000 from total debt at July 1, 2000 of $68,548,000. 11 Although the Company recorded a pre-tax loss from continuing operations for the second quarter of fiscal year 2001, an income tax expense of $64,000 was also recorded during this quarter. This expense is the result of a change in deferred income taxes valuation allowance. During the twenty-six weeks ended January 1, 2000, the Company did not record an income tax benefit as a result of its operating loss carry forward position. For the second quarter fiscal year 2001, the Company sustained a loss from continuing operations of $5,877,000 or $ .90 per basic and diluted share as compared to a second quarter fiscal year 2000 loss from continuing operations of $1,946,000 or $ .30 per basic and diluted share. For the twenty-six weeks ended December 30, 2000, the Company sustained a loss from continuing operations of $9,901,000 or $1.52 per basic and diluted share as compared to a loss from continuing operations of $3,530,000 or $ .54 per basic and diluted share for the twenty-six weeks ended January 1, 2000. Discontinued operations income was $366,000 for the twenty-six weeks ended December 30, 2000 and included curtailment income from the Company's employee benefit plans. The Company recognized curtailment income of approximately $518,000 during the first quarter of 2001 that resulted from finalizing the calculations of the impact of the terminated employees from discontinued operations upon the benefit plans obligations. For the twenty-six weeks ended January 1, 2000, discontinued operations loss was $244,000, primarily as a result of shutdown costs associated with closed facilities. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided cash of $11,391,000 during the twenty-six weeks ended December 30, 2000. During the twenty-six weeks ended January 1, 2000, operating activities provided cash of $5,404,000. Net cash used in investing activities amounted to $1,243,000 during the first half of fiscal 2001 compared to $689,000 used in the first half of fiscal 2000. Capital expenditures are closely monitored as a result of the Company's realignment of its operations. Financing activities used cash of $10,764,000 during the first half of fiscal year 2001 as a result of net repayments of indebtedness. During the first half of fiscal year 2000, financing activities used funds of $4,776,000. The Company's Loan and Security Agreement (the Loan Agreement) provides for borrowing as follows: - Revolving advances equal to the lesser of $70,000,000 or a specified percentage of certain accounts receivable and inventory as defined in the Loan Agreement. At December 30, 2000, $27,066,000 was outstanding and $1,200,000 was available for borrowing under the revolving advances provisions. The revolving advances bear interest at the Reference Rate plus 1% or the Euro-dollar Rate plus 3.25%. The revolving advances are payable on July 27, 2004, and provide for an early termination penalty as specified in the Loan Agreement. The revolving advances are reduced by collections made through a lock box arrangement required under the terms and conditions of the Loan Agreement. - Tranche A Term Loan of $20,000,000 is payable in monthly installments of $333,333 through July 27, 2004 and bears interest at the Reference Rate plus 1.75% or the Euro-dollar Rate plus 3.75%. - Tranche B Term Loan of $5,000,000 is due July 27, 2004 and bears interest at 18.5% of which 15% is payable currently and 3.5% per annum is payable on the maturity date. Borrowings under this Loan Agreement were used to reduce the existing Credit and Security Agreement to $15,000,000 as discussed below and to repay the senior notes payable and industrial revenue bonds. On July 27, 1999, the Company entered into an Amended and Restated Credit and Security Agreement (the Credit Agreement) which reduced the existing borrowings to $15,000,000. Interest is accrued at a rate of 15% increasing at the rate of 1% per month to a rate of 20% effective January 1, 2000. Interest is payable monthly at the Euro-dollar Rate plus 3.5% or the Base Rate plus 1.5%. The difference in the interest accrued and the interest paid is added to the balance of the borrowings. Borrowings under the Credit Agreement are due July 27, 2004 unless repaid prior to that date. On May 31, 2000, the Company entered into a Promissory Note with a bank in the amount of $10,000,000. Interest is paid monthly at a rate equal to the Prime Rate plus 1.5%. Borrowings under the Promissory Note are payable monthly beginning July 1, 2000 through May 31, 2020, unless repaid prior to that date. Borrowings under this Promissory Note were used to reduce the amount outstanding under the Credit Agreement by $9,043,000 and to repay $525,000 of the balance outstanding under the Loan Agreement. Borrowings under the Loan Agreement and Credit Agreement and Promissory Note are secured by all assets and properties of the 12 Company. The Loan Agreement, the Credit Agreement and the Promissory Note contain various restrictions relating to, among other things, maintaining a certain level of tangible net worth, a minimum current ratio, a minimum debt to equity ratio, attainment of certain amounts of earnings before interest, taxes, depreciation and amortization and restrictions on capital expenditures. On September 12, 2000, the Company obtained waivers from its lenders for certain financial covenants as to which the Company was not in compliance as of May 31, 2000 and July 1, 2000, and on February 13, 2001, the Company obtained waivers from its lenders for certain financial and other covenants as to which the Company was not in compliance as of November 25, 2000 and December 30, 2000. On September 12, 2000 and February 13, 2001, the Company also obtained amendments from its lenders that established certain financial covenants covering the monthly periods between November 2000 and June 2001. The Company is subject to changing business and economic conditions (many of which are beyond the Company's control), including a general deterioration in the domestic textile industry, which may affect its ability to comply with the covenants in the near term and there can be no assurance of such compliance. If the Company is unable to comply with these covenants, there can be no assurance that the Company's creditors will provide any additional waivers or amendments with respect to any such non-compliance. The Company paid a portion of its real property tax obligations due on December 27, 2000. As a result, the Company is subject to interest on the unpaid amount of these real property taxes. In addition to interest charges, any property taxes remaining unpaid after March 27, 2001, will be subject to a late payment penalty. On February 13, 2001, the Company obtained waivers from its lenders for certain covenants related to the payment of taxes, as to which the Company was not in compliance as of December 30, 2000. If the Company does not pay in full its real property tax obligations, the Company's applicable real properties may become encumbered by tax liens. Such an encumbrance of the Company's real property may constitute a breach of the covenants contained in the Company's Loan Agreement, Credit Agreement or Promissory Note. If the Company is unable to comply with these covenants by paying in full, on or before March 31, 2001, its real property tax obligations or otherwise avoid the encumbrance of its real properties, there can be no assurance that the Company's creditors will provide additional waivers or amendments with respect to any such non-compliance. A breach of any of the covenants contained in the Company's Loan Agreement, Credit Agreement or Promissory Note could result in a default or event of default under the terms of these credit facilities. Upon the occurrence of an event of default, the Company's lenders would not be obligated to make additional advances under the credit facility that is in default; would be entitled to declare all amounts outstanding under the credit facilities in default, including accrued interest or other obligations, to be immediately due and payable; would have the rights to block payment on substantially all of the Company's other long-term debt; would be entitled to proceed against the collateral granted to them to secure the applicable debt. In these circumstances, cross defaults could occur making substantially all of the Company's other long-term debt due, in which event the Company cannot be certain that its assets would be sufficient to repay in full all of its long-term debt. As a result of the covenants described above, the Company's ability to respond to changing business and economic conditions and to secure additional financing, if needed, is significantly restricted. Management is not certain that the Company's cash flow from operations, together with amounts available under its current borrowings, will be adequate to meet its anticipated cash requirements for the foreseeable future. Management is exploring additional sources of capital and seeking other accommodations from its lenders and suppliers to aid its short-term cash requirements. However, there can be no assurance that other sources of capital will be available or that the Company's lenders and suppliers will accommodate the Company, or, if such alternate sources of capital are available or such accommodations are offered, that they will be on terms acceptable to the Company. If the Company is unable to obtain additional or alternative financing or financial accommodations from its lenders and suppliers, there can be no assurance that the Company will be able to continue to meet its cash requirements, which may result in materially adverse consequences on the Company's business, financial conditions or operations. At the request of its lenders, the Company engaged in January of 2001 the firm of Arthur Andersen to provide consulting services relating to the Company's turnaround and cost reduction initiatives. Arthur Andersen continues its engagement with the Company, and the Company's management expects Arthur Andersen to provide a final report of its findings and recommendations in the near future. WARRANTS TO LENDERS As previously disclosed, the Company has issued warrants to its lenders in connection with the Credit Agreement. The warrants permit the lenders to purchase Class A and Class B common shares of the Company for nominal consideration. The warrants are currently exercisable and may be exercised through December 31, 2004. Although the lenders have not indicated to the Company that they intend to exercise the warrants, if they elect to exercise all of their warrants, the lenders would receive an interest equal to 10% of the outstanding equity of the Company in each class, on a fully diluted basis. 13 ASSETS HELD FOR SALE The Company's management intends to utilize the proceeds from the sale of the assets held for sale to reduce outstanding term loan obligations. Management believes, based on current appraisals, that $3,835,000 could be realized from the sale of these assets, including $2,684,000 from the assets related to discontinued operations. However, actual results could differ significantly from these estimates. During the twenty-six weeks ended December 30, 2000, the Company sold $1,596,000 of assets held for sale and used the proceeds to reduce outstanding term loan obligations. INVENTORIES Inventories at December 30, 2000 and July 1, 2000 were $25,175,000 and $37,236,000, respectively. Improvements in supply-chain inventory control systems, the selective idling of certain manufacturing facilities and the selling off of inventories associated with discontinued operations have resulted in decreased inventory levels at December 30, 2000 as compared to inventory levels at July 1, 2000. Total inventory turns on an average annualized rate were 5.7 times for the first six months of fiscal 2001 as compared to 3.7 times for the first six months of fiscal 2000. RAW MATERIALS The Company's primary raw material is cotton. As a commodity, cotton is traded on established markets and periodically experiences price fluctuations. The Company monitors the cotton market and buys its cotton from brokers. The Company has not had and does not currently anticipate any difficulty in obtaining cotton. In order to assure a continuous supply of cotton, the Company enters into cotton purchase contracts for several months in advance of delivery which either provide for (1) fixed quantities to be purchased at a pre-determined price or (2) fixed quantities to be purchased at a price to be determined (at a later date). When the Company sells its product to its customers, the cost of cotton under existing cotton purchase contracts is taken into account in calculating the price for the Company's product. The Company generally attempts to match product sales contracts with fixed price cotton purchase contracts and uses market price cotton contracts to anticipate future needs and subsequent product sales contracts. To the extent prices are sometimes fixed in advance of shipment, the Company may benefit from its cotton purchase contracts to the extent prices thereafter rise, or incur increased cost to the extent prices thereafter fall. INTERNATIONAL TRADE In December 1993, 117 countries reached an agreement under the General Agreement on Tariffs and Trade (GATT) that would cover new areas of trade, further cut tariffs and strengthen multilateral free-trade rules by creating a World Trade Organization (WTO) as its successor. This agreement was ratified by the United States Congress and went into effect on July 1, 1995. As part of this new agreement, the Multifiber Arrangement (MFA) under which textile and apparel trade had been controlled, will be phased out along with its import quotas over a 10-year period. Tariffs on textiles will be cut by an average of 11.6% over 10 years. Under the agreement, the least import-sensitive products are now quota-free, and from now until 2005, products which will have more of an effect on the U. S. market will be on the phase-out schedule. The WTO agreement contains some provisions which may have a favorable impact on the textile industry. An assembly rule of origin amendment makes it illegal for a non-WTO member country to assemble garments from pieces cut in a member country and then export the garments as originating in the country where they were cut. Additionally, the agreement preserves the authority of the President of the United States to control imports from non-WTO countries such as Taiwan or China. China is currently negotiating its membership application with the WTO, and if the application is accepted and China is admitted to the WTO, the Chinese market share of apparel imports is expected to increase significantly over the phase-in period. Although the WTO agreement may reduce the cost of certain imported textiles, the Company believes that upgraded technology resulting in increased productivity and lower costs will enable it to compete in a global market. The recently enacted amendment to the Caribbean Basin Economic Recovery Act accords, for a specified transition period, the same preferential tariff and quota treatment given certain textile and apparel articles imported from North American Free Trade Agreement (NAFTA) countries to such articles that are imported from certain Caribbean countries. In order to qualify for the preferential tariff and quota treatment, however, apparel goods that are shipped back to the United States must be sewn in eligible Caribbean countries using U. S. yarn and fabrics. The Company believes that this new legislation will allow it to compete favorably with Asian countries for market share in the apparel area. 14 RECENT DEVELOPMENTS The Company's Class A Common Stock did not maintain the minimum bid price criteria set forth by the Marketplace Rules of the Nasdaq SmallCap Market (the "Rules"), and the Company's Class B Common Stock did not maintain the minimum market value of public float criteria set forth by the Rules. As a result, the Nasdaq Stock Market ("Nasdaq") delisted the Company's Class A and Class B Common Stock on December 4, 2000. As a result of the delisting, the Company's shares are no longer traded on the SmallCap Market, but instead are traded on the over-the-counter bulletin board system. FORWARD-LOOKING STATEMENTS Certain of the above statements contained herein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements express or implied by such forward-looking statements. Such factors include, among other things, business conditions, volatility of commodities markets, ability to control operating costs, developing successful new products and maintaining effective pricing and promotion of its products. Additionally, there can be no assurance that the Company (i) will have access to financial capital in the future or that it can obtain such capital on terms that are favorable to the Company or otherwise reasonably acceptable to it, or (ii) will be able to generate profits from, or continue the growth of, the lines of businesses and operations that the Company has retained subsequent to its restructuring efforts. A failure by the Company to obtain capital in the future on terms that are favorable to it or a failure by the Company to generate profits from, or grow, its remaining business lines may have a material adverse effect on the Company's business, financial condition or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of certain market risks related to the Company, see Part I Item 7 "Quantitative and Qualitative Disclosures about Market Risks" in the Company's Annual Report on Form 10-K for the fiscal year ended July 1, 2000. There have been no significant developments with respect to derivatives or exposure to market risk. 15 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (a) As of December 30, 2000, there were no material pending legal proceedings, other than routine litigation incidental to its business, to which the Company was a party or to which any property of the Company was subject. Such routine legal proceedings are not believed to be material to the Company. (b) Not applicable ITEM 2. CHANGE IN SECURITIES (a) Not applicable. (b) Not applicable. (c) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) Not applicable. (b) Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Not applicable. (b) Not applicable. (c) Not applicable. (d) Not applicable. ITEM 5. OTHER INFORMATION On December 4, 2000, the Company's Class A and Class B Common Stock began trading on the Over the Counter Bulletin Board. The Common Stocks had previously traded on the Nasdaq Smallcap Market, but no longer met certain of the listing criteria, including the minimum public float requirement. (a) Exhibits: 10.1 Eighth Waiver and Amendment, dated as of February 13, 2001, to the Loan and Security Agreement dated as of July 27, 1999 among the Company, as Borrower, the lender parties thereto, Foothill Capital Corporation and General Electric Capital Corporation, as Co-Agents, and Foothill Capital Corporation, as Agent. 10.2 Fourth Waiver, dated February 13, 2001, to the Amended and Restated Credit and Security Agreement, dated as of July 27, 1999, (the "Amended and Restated Credit and Security Agreement") among the Company, its subsidiary, Bank of America, N.A., SunTrust Bank, Atlanta and Wachovia Bank, N.A. as lenders; SunTrust Bank, Atlanta, as agent; Wachovia Bank, N.A., as agent; and SunTrust Equitable Securities Corporation, as arranger and lead manager. 13.1 Quarterly Report to Shareholders dated February 13, 2001 (b) The Company did not file any reports on Form 8-K during the three months ended December 30, 2000. 16 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. Thomaston Mills, Inc. /s/ Neil H. Hightower ----------------------------- Neil H. Hightower President and Chief Date: February 13, 2001 Executive Officer /s/ A. William Ott ----------------------------- A. William Ott Treasurer and Chief Date: February 13, 2001 Financial Officer

(Dollars in Thousands except Share and Per Share Data) 13 WEEKS 13 Weeks ENDED Ended SEPTEMBER 30, 2000 October 2, 1999 ------------------ --------------- Numerator: Net income (loss) from continuing operations $ (4,024) $ (1,584) ---------- ---------- Numerator for basic and diluted earnings per share $ (4,024) $ (1,584) ---------- ---------- Denominator: Denominator for basic earnings per share - Weighted average shares 6,540,046 6,540,046 Dilutive effect of potential common shares - Employee stock options N/A N/A Warrants N/A N/A ---------- ---------- Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 6,540,046 6,540,046 ---------- ---------- Basic loss per share $ (0.62) $ (0.24) ---------- ---------- Diluted loss per share $ (0.62) $ (0.24) ---------- ---------- Potentially dilutive common shares related to options and warrants outstanding: Not considered in calculation due to net loss 733,545 551,810 ---------- ---------- Not considered in calculation due to exercise price of options exceeding average price of Company's common stock 762,063 810,871 ---------- ----------

(Dollars in Thousands) NET SALES PROFIT PERFORMANCE 13 WEEKS 13 Weeks 13 WEEKS 13 Weeks ENDED Ended ENDED Ended SEPTEMBER 30, 2000 October 2, 1999 SEPTEMBER 30, 2000 October 2, 1999 ------------------ --------------- ------------------ --------------- Reportable segments: Consumer products $ 24,422 $ 27,381 $ (1,400) $ 244 Apparel fabrics 12,211 13,343 (319) 314 ---------- ----------- --------- --------- Segment total $ 36,633 $ 40,724 (1,719) 558 ========== =========== Interest expense 2,154 2,068 Other non-segment 151 74 --------- --------- Consolidated (loss) from continuing operations $ (4,024) $ (1,584) ========= =========

VOTES FOR VOTES AGAINST WITHHELD ----------------- ----------------- ----------------- ELECTION OF DIRECTORS Thomas D. Adams, Jr. 1,403,663 34,270 30,590 C. Ronald Barfield 1,439,433 0 29,090 Archie H. Davis 1,437,933 0 30,590 H. Stewart Davis 1,439,433 0 29,090 George H. Hightower 1,439,433 0 29,090 George H. Hightower, Jr. 1,439,433 0 29,090 Neil H. Hightower 1,439,433 0 29,090 Rosser R. Raines 1,439,433 0 29,090 Dr. Jerry M. Williamson 1,437,933 0 30,590 Dom H. Wyant 1,439,433 0 29,090 SELECTION OF ERNST & YOUNG LLP 1,468,468 0 55

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