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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 1-13421
DAN RIVER INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1854637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2291 Memorial Drive 24541
Danville, Virginia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (434) 799-7000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /x/
Number of shares of common stock outstanding as of June 28, 2003:
Class A: 20,320,250 Shares
Class B: 2,062,070 Shares
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, December 28,
2003 2002
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 3,233 $ 2,832
Accounts receivable, net 54,420 71,292
Inventories 162,902 151,586
Prepaid expenses and other current assets 10,368 4,175
Deferred income taxes 12,937 15,492
----------- -----------
Total current assets 243,860 245,377
Property, plant and equipment 479,900 508,637
Less accumulated depreciation and amortization (260,684) (260,462)
----------- -----------
Net property, plant and equipment 219,216 248,175
Goodwill, net 91,701 91,701
Other assets 18,456 10,269
----------- -----------
$ 573,233 $ 595,522
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, December 28,
2003 2002
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,427 $ 241,231
Accounts payable 18,606 25,802
Accrued compensation and related benefits 24,995 23,693
Other accrued expenses 14,834 8,944
----------- -----------
Total current liabilities 66,862 299,670
Other liabilities:
Long-term debt 239,500 10,792
Deferred income taxes 12,937 15,257
Other liabilities 41,523 40,766
Shareholders' equity:
Preferred stock, $.01 par value; authorized
50,000,000 shares; no shares issued -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued
and outstanding 20,320,250 shares
(20,362,773 shares at December 28, 2002) 203 204
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; issued
and outstanding 2,062,070 shares 21 21
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; no shares
outstanding -- --
Additional paid-in capital 209,787 209,952
Retained earnings 17,033 33,688
Accumulated other comprehensive loss (14,342) (14,387)
Unearned compensation--restricted stock (291) (441)
------------ -----------
Total shareholders' equity 212,411 229,037
------------ -----------
$ 573,233 $ 595,522
============ ===========
See accompanying notes.
5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 116,348 $ 153,942 $ 263,720 $ 312,360
Costs and expenses:
Cost of sales 101,662 123,874 221,314 260,539
Selling, general
and administrative
expenses 15,285 17,150 33,255 34,965
Other operating
costs, net 12,189 (310) 11,749 (310)
--------- --------- --------- ---------
Operating income (loss) (12,788) 13,228 (2,598) 17,166
Other income (expense) (334) 148 (195) 207
Interest expense (8,079) (7,146) (13,627) (14,528)
--------- --------- --------- ---------
Income (loss) before
income taxes and
cumulative effect of
accounting change (21,201) 6,230 (16,420) 2,845
Provision (benefit) for
income taxes (1,796) 2,572 235 4,322
--------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change (19,405) 3,658 (16,655) (1,477)
Cumulative effect of
accounting change,
net of tax -- -- -- (20,701)
--------- --------- --------- ---------
Net income (loss) $ (19,405)$ 3,658 $ (16,655) $ (22,178)
========= ========= ========= =========
6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
Earnings (loss) per
share--basic:
Income (loss)
before cumulative
effect of
accounting change $ (0.88)$ 0.17 $ (0.76) $ (0.07)
Cumulative effect
of accounting
change, net of tax -- -- -- (0.95)
--------- --------- --------- ---------
Net income (loss) $ (0.88)$ 0.17 $ (0.76) $ (1.02)
========= ========= ========= =========
Earnings (loss) per
share-diluted:
Income (loss)
before cumulative
effect of
accounting change $ (0.88)$ 0.16 $ (0.76) $ (0.07)
Cumulative effect
of accounting
change, net of tax -- -- -- (0.95)
--------- --------- --------- ---------
Net income (loss) $ (0.88)$ 0.16 $ (0.76) $ (1.02)
========= ========= ========= =========
See accompanying notes.
7
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
---------------------------
June 28, June 29,
2003 2002
------------ ------------
(in thousands)
Cash flows from operating activities:
Net loss $ (16,655) $ (22,178)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Noncash interest expense 1,423 1,376
Depreciation and amortization of
property, plant and equipment 18,879 18,819
Amortization of restricted stock
compensation 150 146
Deferred income taxes 235 10,022
Writedown/disposal of assets 52 19
Other operating costs, net 11,749 (310)
Write-off of unamortized debt costs 1,325 --
Cumulative effect of accounting
change, net of tax -- 20,701
Changes in operating assets and liabilities:
Accounts receivable 17,156 (3,449)
Inventories (11,451) 13,205
Prepaid expenses and other assets (306) (5,001)
Accounts payable and accrued expenses (803) 4,409
Other liabilities 387 253
---------- ----------
Net cash provided by operating
activities 22,141 38,012
---------- ----------
Cash flows from investing activities:
Capital expenditures (7,567) (5,337)
Proceeds from sale of assets -- 325
---------- ----------
Net cash used by investing activities (7,567) (5,012)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (257,479) (5,602)
Proceeds from issuance of long-term debt 254,568 --
Debt issuance costs (9,902) (33)
Revolving credit facilities-borrowings 65,000 44,500
Revolving credit facilities-payments (66,363) (79,000)
Proceeds from exercise of stock options 3 --
---------- ----------
Net cash used by financing activities (14,173) (40,135)
---------- ----------
Net increase (decrease) in cash and
cash equivalents 401 (7,135)
Cash and cash equivalents at beginning of period 2,832 8,316
---------- ----------
Cash and cash equivalents at end of period $ 3,233 $ 1,181
========== ==========
See accompanying notes.
8
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned
subsidiaries, (collectively, the "Company"). In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results for the interim
periods presented have been included. Interim results are not
necessarily indicative of results for a full year. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 28, 2002.
2. Stock-Based Compensation
The Company's stock-based compensation plans are accounted for based on
the intrinsic value method set forth in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Compensa-
tion for restricted stock awards is recognized ratably over the vesting
period, based on the fair value of the stock on the date of grant. No
compensation expense has been recognized relative to stock option
awards, as all options granted under the Company's stock option plans
have an exercise price equal to the market value of the underlying stock
on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock options granted:
9
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Net income (loss):
As reported $ (19,405)$ 3,658 $ (16,655) $ (22,178)
Less: pro forma expense
related to stock
options (135) (174) (273) (372)
--------- ------- -------- --------
Pro forma $ (19,405)$ 3,484 $ (16,928) $ (22,550)
========= ========= ========= ==========
Per share:
As reported-
Basic $ (0.88)$ 0.17 $ (0.76) $ (1.02)
Diluted (0.88) 0.16 (0.76) (1.02)
Pro forma--
Basic $ (0.89)$ 0.16 $ (0.77) (1.03)
Diluted (0.89) 0.16 (0.77) (1.03)
3. Cumulative Effect of Accounting Change
Effective as of the beginning of fiscal 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." This standard
eliminates the amortization of goodwill and intangible assets with
indefinite useful lives. Instead these assets must be tested at least
annually for impairment. In addition, SFAS No. 142 requires that a
transitional impairment test of goodwill be performed as of the first
day of the year of adoption. As a result of the transitional impairment
test, which the Company completed in the third quarter of fiscal 2002, a
non-cash charge of $20,701,000 was recorded, representing goodwill
impairment of $23,433,000, less the deferred tax effect of $2,732,000
million. The transitional impairment writedown was primarily
attributable to differences between the fair value approach required
under SFAS No. 142 and the undiscounted cash flow approach that was used
to evaluate goodwill under previous accounting guidance. The charge was
reported as a cumulative effect of a change in accounting principle
retroactive to the first day of fiscal 2002, and therefore increased the
previously reported net loss per share for the first quarter of fiscal
2002 from $0.24 to $1.19.
10
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories
The components of inventory are as follows:
June 28, December
2003 28, 2002
---------- ---------
(in thousands)
Finished goods $ 58,955 $ 52,088
Work in process 91,718 85,827
Raw materials 3,598 3,348
Supplies 8,631 10,323
-------- --------
Total Inventories $162,902 $151,586
======== ========
5. Long-Term Debt
On April 15, 2003 the Company completed the refinancing of substantially
all of its outstanding long-term debt. The refinancing included the
sale, at 95.035% of par, of $157 million aggregate principal amount of
the Company's 12-3/4% senior notes due 2009, yielding 14%, in a private
offering pursuant to Rule 144A and Regulation S under the Securities Act
of 1933. In addition, the Company entered into a senior secured credit
facility, consisting of a five-year $40 million term loan and a five-
year $160 million revolving credit facility. The revolving credit
facility includes borrowing availability of up to $25 million for
letters of credit.
The net proceeds from the senior notes offering, together with
borrowings under the senior credit facility, were used to: (i) repay all
borrowings outstanding under the Company's existing credit agreement;
(ii) redeem all of the Company's outstanding 10-1/8% senior subordinated
notes due 2003 for $120 million (par value) plus accrued interest; and
(iii) pay related fees and expenses.
A registration statement on Form S-4 with respect to the senior notes
has been filed with the Securities and Exchange Commission, but is not
yet effective. The senior notes are callable subject to a make-whole
provision. Subject to certain conditions, the Company may be required
by the indenture governing the senior notes to offer to repurchase a pro
rata portion of the senior notes with a portion of excess cash flow, as
defined in the indenture. In addition,the indenture restricts, among
other things, additional indebtedness,restricted payments, lien creation,
asset sales, and mergers. Interest is payable on the senior notes semi-
annually on October 15 and April 15.
11
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The credit facility is secured by substantially all of the Company's
assets. Availability under the revolving credit facility is based upon a
borrowing base determined by reference to eligible accounts receivable
and inventory. Amounts outstanding under the senior credit facility bear
interest at either a prime rate or LIBOR, at the Company's option, plus
a margin. The margin is dependent on the Company's leverage ratio, and
ranges from 1.0-2.0% on prime rate loans and 2.0-3.0% on LIBOR loans. In
addition, the Company is obligated to pay a 0.375% commitment fee on the
unused line. At the April 15, 2003 inception of the new senior credit
facility, in addition to the $40 million term loan, $65,363,000 was out-
standing under the revolving credit facility.
Under the credit facility, the Company is required to maintain a minimum
fixed charge ratio and a maximum leverage ratio. The senior credit
facility also imposes restrictions relating to, among other things,
capital expenditures, asset sales, incurrence or guarantees of debt,
acquisitions, sale or discount of receivables, certain payments and
investments, affiliate and subsidiary transactions, payment of dividends
and repurchases of stock, derivatives, and excess cash.
The term loan requires scheduled quarterly principal payments of
$1,428,572 that began on June 30, 2003, with a final scheduled
amortization payment of $11,428,570 on the April 15, 2008 maturity. In
addition, mandatory prepayments on the term loan are required if annual
cash flow exceeds certain limits or for certain events, such as the sale
of assets and the issuance of capital securities or indebtedness. Once
the term loan is paid in full, the senior notes will be secured by a
second priority lien on substantially all of the Company's real
property, equipment and other fixed assets.
The Company incurred fees and expenses of approximately $10 million in
connection with the refinancing, which are being amortized to interest
expense over the terms of the related debt. Unamortized fees and
expenses of $1,325,000 relating to its previously outstanding credit
agreement and 10-1/8% senior subordinated notes that were paid off in
connection with the refinancing were written off and charged to "other
expense" in the second quarter of fiscal 2003.
12
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt at June 28, 2003 consisted of the following (in
thousands):
Senior notes, net of unamortized original
issue discount $ 149,384
Revolving credit facility 47,000
Term loan 40,000
Capital leases and other borrowings 11,543
----------
247,927
Less: current maturities 8,427
----------
Total long-term debt $ 239,500
==========
At June 28, 2003, the average interest rate on borrowings under the
revolving credit facility and term loan were 3.82% and 4.00%,
respectively. Also at June 28, 2003, $4,000,000 of letters of credit
were outstanding and $56,870,000 was unused and available for borrowing
under the revolving credit facility.
6. Other Operating Costs, Net
Other operating costs, net for the first six months of fiscal 2003
consisted of a $12,189,000 pre-tax charge relating to the closure of two
manufacturing facilities, recorded in the second quarter, and a $440,000
gain from the sale of surplus equipment, recorded in the first quarter.
On June 11, 2003 the Company announced that it would be closing a home
fashions weaving facility located in Greenville, South Carolina and a
comforter sewing plant in Ft. Valley, Georgia, in order to rationalize
capacity in its home fashions business. In connection with the
closings, a $12,189,000 pre-tax charge was recorded in the second
quarter of fiscal 2003, consisting of a $10,238,000 non-cash writedown
of fixed assets, and $1,951,000 of other exit costs, primarily severance
and benefits associated with the termination of 630 employees. The
Company expects that the shutdown of the plants will be completed in the
third quarter of fiscal 2003, and that the payout of severance and other
exit costs will be completed in fiscal 2004.
Certain equipment from the closed facilities will be moved to facilities
in Danville, Virginia and Morven, North Carolina, and will be put back
into operation when demand for the Company's home fashions products
returns to more normalized levels. Prior to June 28, 2003 the Company
began to actively market the Greenville and Ft. Valley real estate and
surplus equipment from the closed plants through real estate brokers and
other channels. The total fair value of the assets less costs to sell,
estimated to be $5,850,000, is included under "Prepaid expenses and
other current assets" on the condensed consolidated balance sheet as of
June 28, 2003.
13
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Other operating costs, net for the first six months of fiscal 2002
consisted of a $310,000 million pre-tax gain from the reversal of a
portion of the loss recorded in the prior fiscal year relating to the
plant consolidation program announced in December 2001. The gain
resulted from the receipt of $360,000 in net proceeds from the sale of
the Company's Newnan, Georgia facility and surplus equipment, compared
to a carrying value of $50,000.
7. Income Taxes
A reconciliation of the differences between the provision (benefit) for
income taxes and income taxes computed using the statutory federal
income tax rate of 35% follows:
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Amount computed using
the statutory rate $ (7,420) $ 2,181 $ (5,747) $ 996
Increase (decrease) in
taxes resulting from:
State taxes (760) 237 (573) 140
Credits lost due to
loss carryback -- -- -- 2,800
Change in valuation
allowance-foreign 138 155 308 386
Change in valuation
allowance-
domestic 6,460 -- 6,460 --
Other (214) (1) (213) --
--------- -------- --------- ---------
Provision (benefit) for
income taxes $ (1,796) $ 2,572 $ 235 $ 4,322
========= ======== ========= =========
The Company recorded a $6,460,000 valuation allowance against U.S. and
state deferred tax assets in the second quarter of fiscal 2003,
effectively eliminating the tax benefit for losses incurred in the first
six months of fiscal 2003. The realization of these tax benefits is
ultimately dependent on the generation of taxable income in the future.
Given the current business environment and the near term outlook, the
Company is precluded from recognizing these benefits currently. The
Company believes that it will ultimately generate sufficient taxable
income to offset these losses, at which time it will be able to
14
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
recognize such tax benefits by reducing income tax expense in future
years.
The income tax provision for the six months ended June 29, 2002 includes
an increase to income tax expense of $2,800,000 attributable to the Job
Creation and Worker Assistance Act of 2002. The Act changed the period
for carrying back taxable losses generated in fiscal 2001 from 2 to 5
years, which resulted in the Company receiving a $5,500,000 refund of
taxes in July 2002. However, the carryback also freed up investment
credits that had previously offset tax in the carryback years. A
$2,800,000 increase to the income tax provision was recorded in the
first quarter of fiscal 2002, representing the amount of these freed up
credits that could not be utilized to offset tax before their
expiration.
8. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
Accumu-
lated Unearned
Addi- Other Compen- Total
tional Compre- sation- Share-
Common Stock Paid-in Retained hensive Restricted holders'
Class A Class B Capital Earnings Loss Stock Equity
------- ------- -------- -------- ------- -------- --------
(in thousands)
Balance at
December 28,
2002 $ 204 $ 21 $ 209,952 $ 33,688 $(14,387)$ (441) $ 229,037
Comprehensive loss:
Net loss -- -- -- (16,655) -- -- (16,655)
Unrealized gain
on securities -- -- -- -- 45 -- 45
--------
Comprehensive
loss (16,610)
--------
Exercise of
stock options -- -- 3 -- -- -- 3
Retirement of
common stock (1) -- (168) -- -- -- (169)
Amortization of
unearned
compensation -- -- -- -- -- 150 150
------- ------ --------- -------- -------- ------- --------
Balance at
June 28, 2003 $ 203 $ 21 $ 209,787 $ 17,033 $(14,342) $ (291)$ 212,411
======= ====== ========= ======== ========= ======= =======
15
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
per share:
Income (loss)
before cumulative
effect of
accounting change $ (19,405)$ 3,658 $ (16,655) $ (1,477)
Cumulative effect
of accounting
change -- -- -- (20,701)
--------- --------- --------- ----------
Net income (loss) $ (19,405)$ 3,658 $ (16,655) $ (22,178)
========= ========= ========= ==========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 22,028 21,840 21,969 21,815
Effect of dilutive
securities:
Employee stock
options and
restricted
stock awards -- 495 -- --
--------- --------- --------- ----------
Denominator for
diluted earnings
per share--weighted
average shares
adjusted for
dilutive securities 22,028 22,335 21,969 21,815
======== ========= ========= =========
16
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Six Months Ended
----------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Earnings (loss) per share:
Basic
Income (loss)
before cumulative
effect of
accounting change $ (0.88)$ 0.17 $ (0.76) $ (0.07)
Cumulative effect
of accounting
change -- -- -- (0.95)
--------- --------- --------- ----------
Net income (loss) $ (0.88)$ 0.17 $ (0.76) (1.02)
========= ========= ========= =========
Diluted:
Income (loss)
before cumulative
effect of
accounting change $ (0.88)$ 0.16 $ (0.76) $ (0.07)
Cumulative effect
of accounting
change -- -- -- (0.95)
--------- --------- --------- ----------
Net income (loss) $ (0.88)$ 0.16 $ (0.76) $ (1.02)
========= ========= ========= =========
The effect of potentially dilutive securities is computed using the treasury
stock method. Options to purchase 2,080,000 shares of the Company's common
stock were excluded from the computation of diluted earnings per share for
the second quarter of 2002 because their exercise prices were greater than
the average market price of the common stock during the period. Because the
Company reported a loss before the cumulative effect of an accounting change
for all other periods presented, all outstanding restricted stock and stock
options were excluded from the computation of diluted loss per share, as their
inclusion would have been antidilutive.
17
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Other Income (Expense)
Other income (expense) consists of interest income, gains on sales of
nonoperating assets and other miscellaneous items of income and expense.
Other income (expense) for the three- and six-month periods ended June
28, 2003 includes a $1,325,000 expense for the write-off of unamortized
costs associated with debt retired in connection with the Company's re-
financing completed in April 2003, and a $609,000 gain on a life insur-
ance policy.
11. Segment Information
Summarized information by reportable segment is shown in the following
tables:
Three Months Ended Six Months Ended
----------------------- ---------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands)
Net sales:
Home fashions $ 77,416 $ 107,194 $ 185,831 $ 223,202
Apparel fabrics 30,045 36,951 59,103 68,882
Engineered products 8,887 9,797 18,786 20,276
--------- --------- --------- ---------
Consolidated net
sales $ 116,348 $ 153,942 $ 263,720 $ 312,360
========= ========= ========= =========
Operating income (loss):
Home fashions $ 788 $ 12,211 $ 12,311 $ 17,525
Apparel fabrics (514) 1,323 (1,149) (253)
Engineered products (616) (307) (1,468) (610)
Corporate items not
allocated to
segments:
Other operating
costs, net (12,189) 310 (11,749) 310
Other (257) (309) (543) 194
--------- --------- --------- ---------
Consolidated operating
income (loss) $ (12,788)$ 13,228 $ (2,598)$ 17,166
========= ========= ========= =========
18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
OVERVIEW
We had a net loss of $19.4 million, or $0.88 per share, in the second quarter
of fiscal 2003, compared to net income of $3.7 million, or $0.16 per diluted
share, in the second quarter of fiscal 2002. For the first six months of
fiscal 2003, we had a net loss of $16.7 million, or $0.76 per share. This
compares to a net loss of $1.5 million, or $0.07 per share, for the first six
months of fiscal 2002, before the effect of an accounting change related to
goodwill.
The deterioration in results for the second quarter of fiscal 2003 was due to
several factors. The primary cause was lack of sales volume. All three of
our business segments experienced significant sales declines during the
quarter. We believe that the sales declines in our home fashions and apparel
fabrics segments reflect a weak retail environment. We also believe that
home fashions sales were impacted by retailers' attempts to reduce their
inventory levels. The low sales volumes led to manufacturing inefficiencies.
In order to keep inventory levels in line with demand, we reduced plant
running schedules and, in some cases, curtailed operations. This resulted in
underabsorbed overhead, and thus higher per-unit costs. The end result of
the low sales volumes and related underabsorbed overhead was that our
business segments lost $0.3 million in the second quarter of fiscal 2003,
compared to operating income of $13.2 million in the second quarter of fiscal
2002.
Operating income in the second quarter of fiscal 2003 was also burdened with
a $12.2 million pre-tax charge related to the closure of two home fashions
manufacturing facilities, which we announced on June 11, 2003. The closures
will help to bring our capacities in line with current demand and reduce
manufacturing costs. The shutdown of both facilities is expected to be
completed in the third quarter of fiscal 2003.
Other significant items that contributed to the loss for the second quarter
of fiscal 2003, all of which are discussed in more detail below, include:
- the write-off of $1.3 million in unamortized costs related to
debt that was repaid in connection with our refinancing
completed in April;
- $1.0 million of additional interest expense we incurred in the 30-day
period after completion of the refinancing when both our 10-1/8%
senior subordinated notes due 2003 and our newly issued 12-3/4% notes
due 2009 were outstanding; and
- a $6.5 million increase in the valuation allowance against deferred
tax assets, which effectively resulted in no income tax benefits being
recorded against the year-to-date loss for fiscal 2003.
19
Although we believe that there will be an upturn in business in the second
half of fiscal 2003, we have yet to see concrete evidence of such an upturn.
An increase in sales to more traditional levels is necessary in order for us
to return to profitability.
Comparison of Three Months Ended June 28, 2003 and June 29, 2002
NET SALES
Net sales for the second quarter of fiscal 2003 were $116.3 million, a
decrease of $37.6 million or 24.4% from the second quarter of fiscal 2002.
Net sales of home fashions products were $77.4 million for the second quarter
of fiscal 2003, a decrease of $29.8 million or 27.8% from the second quarter
of fiscal 2002. The decrease was caused by lower unit volume across all
distribution channels, reflecting reduced consumer demand. In addition, we
believe that sales were negatively impacted by retailers' attempts to reduce
their inventory levels.
Net sales of apparel fabrics for the second quarter of fiscal 2003 were $30.0
million, down $6.9 million or 18.7% from the second quarter of fiscal 2002.
The decrease was caused by lower unit volume in most product categories. The
most significant decreases were in sales of sportswear fabrics which
decreased by $4.5 million, mostly due to low reorder activity related to pant
fabric programs that were first introduced in fiscal 2002, and in sales of
men's shirting fabrics, which decreased by $1.4 million, reflecting the weak
retail environment. Net sales from our commission finishing operations
decreased by $0.8 million from the second quarter of fiscal 2002, reflecting
the overall weakness in the textile industry. These decreases were offset in
part by a $1.1 million increase in sales through our operations in Mexico,
mostly due to higher unit sales of finished shirts to career apparel
customers.
Net sales of engineered products for the second quarter of fiscal 2003 were
$8.9 million, a decrease of $0.9 million or 9.3% from the second quarter of
fiscal 2002. The decrease was caused by lower unit sales of industrial
yarns, reflecting soft demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $15.3 million for the
second quarter of fiscal 2003 (13.1% of net sales), a decrease of $1.9
million or 10.9% from $17.2 million (11.1% of net sales) for the second
quarter of fiscal 2002. The decrease is mostly attributable to a $1.7
million decline in incentive compensation expense.
OPERATING INCOME
We had a consolidated operating loss of $12.8 million in the second quarter
of fiscal 2003, compared to $13.2 million in operating income for the second
quarter of fiscal 2002.
20
Segment Operating Income:
Operating income for the home fashions segment was $0.8 million for the
second quarter of fiscal 2003, compared to $12.2 million in the second
quarter of fiscal 2002. The decrease in operating income in the second
quarter of fiscal 2003 was primarily due to the significant drop in sales
volume and related higher per-unit costs resulting from reduced plant running
schedules and production curtailments that were necessary to keep inventory
levels in line with demand.
The apparel fabrics segment had a $0.5 million operating loss for the second
quarter of fiscal 2003, compared to $1.3 million in operating income for the
second quarter of fiscal 2002. The decrease in operating income in the
second quarter of fiscal 2003 is attributable to the lower sales volume,
discussed above, and related higher per-unit costs associated with
underabsorbed overhead.
The engineered products segment had a $0.6 million operating loss in the
second quarter of fiscal 2003, compared to a $0.3 million operating loss in
the second fiscal quarter of 2002. Operating results in both periods were
hampered by low sales volume and inefficient manufacturing performance. The
increased operating loss in the second quarter of fiscal 2003 was caused by a
further decrease in sales volume.
Corporate Items:
Corporate items not allocated to segments in the second quarter of fiscal
2003 consisted of idle facility costs and other expenses totaling $0.3
million, and a $12.2 million pre-tax charge relating to the closure of two
manufacturing facilities reported under "Other operating costs, net."
On June 11, 2003 we announced that, in order to rationalize capacity in our
home fashions business, we would be closing a home fashions weaving facility
located in Greenville, South Carolina and a comforter sewing plant in Ft.
Valley, Georgia. In connection with the closings, we recorded a $12.2
million pre-tax charge, consisting of a $10.2 million non-cash writedown of
fixed assets and $2.0 million of other exit costs, primarily severance and
benefits associated with the termination of 630 employees. We expect that
the shutdown of the plants will be completed in the third quarter of fiscal
2003, and that the payout of severance and other exit costs will be completed
in fiscal 2004.
Certain equipment from the closed facilities will be moved to facilities in
Danville, Virginia and Morven, North Carolina, and will be put back into
operation when demand for our home fashions products returns to more
normalized levels. We are actively marketing the Greenville and Ft. Valley
real estate as well as surplus equipment from the closed plants. "Prepaid
expenses and other current assets" on the condensed consolidated balance
sheet as of June 28, 2003 includes $5.9 million for these assets,
representing their estimated fair values less costs to sell.
Corporate items not allocated to segments in the second quarter of fiscal
2002 consisted of idle facility costs and other expenses totaling $0.3
million and a $0.3 million pre-tax gain reported under "Other operating
21
costs, net." The gain resulted from the reversal of a portion of the loss
recorded in the prior fiscal year relating to the plant consolidation program
announced in December 2001, and is attributable to our receiving $350,000 in
net proceeds from the sale of our Newnan, Georgia facility and surplus
equipment, compared to a carrying value of $50,000.
INTEREST EXPENSE
Interest expense was $8.1 million for the second quarter of fiscal 2003, an
increase of $0.9 million from $7.1 million for the second quarter of fiscal
2002. The increase is attributable to additional interest expense associated
with the 30-day period following the completion of our refinancing on April
15, 2003 (see discussion below under "Liquidity and Capital Resources") when
both our 10-1/8% senior subordinated notes due 2003, with an aggregate
principal amount of $120 million, and our newly issued 12-3/4% senior notes
due 2009 were outstanding. Approximately $1.0 million of interest accrued on
the 10-1/8% senior subordinated notes between April 15, 2003, when funds were
put into escrow to redeem the notes, and May 15, 2003, the date the
redemption was completed. The 12-3/4% senior notes were issued at a discount
to yield an effective interest rate of 14% on $157 million aggregate princi-
pal, which resulted in a higher average interest rate on our debt beginning
on April 15, 2003, when the notes were issued. Except for the 30-day overlap
period discussed above, the impact of the higher average rate was offset by
lower debt levels in the second quarter of fiscal 2003.
OTHER INCOME (EXPENSE)
Other income (expense) was $0.3 million (expense) for the second quarter
of fiscal 2003, compared to $0.1 million (income) for the second quarter of
fiscal 2002. The amount for the second quarter of fiscal 2003 includes a
$1.3 million expense for the write-off of unamortized costs associated with
debt retired in connection with our refinancing completed in April 2003,
offset in part by a $0.6 million gain on a life insurance policy, interest
income of $0.2 million, and various other income items totaling $0.2 million.
No individually significant items were included under "Other income
(expense)" for the second quarter of fiscal 2002.
INCOME TAX PROVISION
We recorded a $1.8 million income tax benefit for the second quarter
of fiscal 2003, compared to a $2.6 million income tax provision for the
second quarter of fiscal 2002. A reconciliation of the differences between
the provision (benefit) for income taxes and income taxes computed using the
statutory federal income tax rate of 35% follows:
22
Three Months Ended
---------------------
June 28, June 29,
2003 2002
--------- --------
(in millions)
Amount computed using the statutory
rate $ (7.4) $ 2.2
Increase (decrease) in taxes
resulting from:
State taxes (0.8) 0.2
Change in valuation
allowance-foreign 0.1 0.2
Change in valuation
allowance-domestic 6.5 --
Other (0.2) --
--------- --------
Provision (benefit) for income taxes $ (1.8) $ 2.6
========= ========
The $6.5 million change in the valuation allowance against domestic deferred
tax assets that is reflected in the reconciliation above effectively resulted
in no tax benefit being recorded against losses incurred in the first six
months of fiscal 2003. The realization of these tax benefits is ultimately
dependent on the generation of taxable income in the future. Given the
current business environment and the near term outlook, we are precluded from
recognizing these benefits currently. We believe that we will ultimately
generate sufficient taxable income to offset these losses, at which time we
will be able to recognize such tax benefits by reducing income tax expense in
future years.
Comparison of Six Months Ended June 28, 2003 and June 29, 2002
NET SALES
Net sales for the first six months of fiscal 2003 were $263.7 million, a
decrease of $48.6 million or 15.6% from the first six months of fiscal 2002.
Net sales of home fashions products were $185.8 million for the first six
months of fiscal 2003, a decrease of $37.4 million or 16.7% from the first
six months of fiscal 2002. The decrease was caused by lower unit volume
across all distribution channels, particularly in the second quarter of
fiscal 2003, reflecting reduced consumer demand. In addition, we believe
that sales were negatively impacted by retailers' attempts to reduce their
inventory levels.
Net sales of apparel fabrics for the first six months of fiscal 2003 were
$59.1 million, a decrease of $9.8 million or 14.2% from the first six months
of fiscal 2002. The decrease was caused by lower unit volume in most product
categories. The most significant decreases were in sales of sportswear
23
fabrics, which decreased by $6.6 million, mostly due to low reorder activity
related to pant fabric programs that were first introduced in fiscal 2002,
and in sales of men's dress shirting fabrics, which decreased by $2.4
million, reflecting the weak retail environment. These decreases were offset
in part by a $1.9 million increase in sales through our operations in Mexico,
mostly due to higher unit sales of finished shirts to career apparel
customers.
Net sales of engineered products were $18.8 million for the first six months
of fiscal 2003, a decrease of $1.5 million or 7.3% from the first six months
of fiscal 2002. The decrease was caused by lower unit sales of industrial
yarns, reflecting soft demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $33.3 million for the first
six months of fiscal 2003 (12.6% of net sales), a decrease of $1.7 million
from $35.0 million (11.2% of net sales) for the first six months of fiscal
2002. Bad debt expense decreased by $1.2 million in the first six months of
fiscal 2003, compared to the corresponding period of fiscal 2002, which
included $1.4 million attributable to Kmart Corporation's January 2002
bankruptcy filing. The remainder of the decrease in selling, general and
administrative expenses is mostly attributable to a $0.8 million decrease in
incentive compensation expense, which more than offset various other expense
increases.
OPERATING INCOME
We had a consolidated operating loss of $2.6 million in the first six months
of fiscal 2003, compared to $17.2 million in operating income for the first
six months of fiscal 2002.
Segment Operating Income:
Operating income for the home fashions segment was $12.3 million for the
first six months of fiscal 2003, a decrease of $5.2 million from $17.5
million in operating income earned in the first six months of fiscal 2002.
When the six month period comparison is viewed as a whole, the lower
operating income is due primarily to the lower sales volume in the first six
months of fiscal 2003 and related higher per-unit costs associated with
underabsorbed overhead. However, the six-month periods included fiscal
quarters with very different operating results. In the first quarter of
fiscal 2003, the home fashions segment generated $11.5 million in operating
income on $108.4 million in sales, compared to $5.3 million in operating
income on $116.0 million in sales for the first quarter of fiscal 2002. The
improved operating results in the first quarter of fiscal 2003 were due to a
more profitable sales mix, lower raw material prices and the benefits of a
plant consolidation program that began to favorably impact overhead costs in
the second quarter of fiscal 2002. In the second quarter of fiscal 2003, the
home fashions segment generated only $0.8 million of operating income on
$77.4 million in sales, compared to $12.2 million in operating income on
$107.2 million in sales for the second quarter of fiscal 2002. The lower
profitability in the second quarter of fiscal 2003 was primarily due to the
significant drop in sales volume and related higher per-unit costs resulting
from reduced plant running schedules and production curtailments that were
necessary to keep inventory levels in line with demand.
24
The apparel fabrics segment had a $1.1 million operating loss for the first
six months of fiscal 2003, compared to a $0.3 million operating loss for the
first six months of fiscal 2002. Operating results in both periods were
hampered by low sales volume. In general, the higher operating loss in the
first six months of fiscal 2003 was due to the $9.8 million drop in sales.
The effect of the sales decrease was partially offset by lower manufacturing
costs in the first quarter of fiscal 2003 compared to the first quarter of
fiscal 2002 due to lower raw material costs and cost savings resulting from
the plant consolidation program announced in December 2001. This program was
completed in fiscal 2002, but did not result in cost savings until the second
quarter of fiscal 2002.
The engineered products segment had a $1.5 million operating loss for the
first six months of fiscal 2003, compared to a $0.6 million operating loss
for the first six months of fiscal 2002. Operating results in both periods
were hampered by low sales volume and inefficient manufacturing performance.
The higher loss in the first six months of fiscal 2003 was primarily caused
by the decrease in sales.
Corporate Items:
Other operating costs, net for the first six months of fiscal 2003 consisted
of the $12.2 million pre-tax charge relating to the closure of two
manufacturing facilities discussed above and a $0.4 million gain from the
sale of surplus equipment. Other operating costs, net for the first six
months of fiscal 2002 consisted of a $0.3 million pre-tax gain from the
reversal of a portion of the loss recorded in the prior fiscal year relating
to the plant consolidation program announced in December 2001 as discussed
above.
Other items not allocated to segments totaled $0.5 million (expense) for the
first six months of fiscal 2003, compared to $0.2 million (income) for the
first six months of fiscal 2002. The amount for the first six months of
fiscal 2003 consists of idle facility costs and other expenses. The amount
for the first six months of fiscal 2002 includes income items of $0.2 million
related to a litigation settlement and $0.5 million from a net decrease in
intersegment profits remaining in inventory, offset in part by idle facility
costs and other expenses totaling $0.5 million.
INTEREST EXPENSE
Interest expense was $13.6 million for the first six months of fiscal 2003, a
decrease of $0.9 from $14.5 million for the first six months of fiscal 2002.
The decrease reflects the effects of lower debt levels for most of the first
six months of fiscal 2003, which more than offset approximately $0.6 million
in increased interest attributable to a higher average interest rate on our
debt and approximately $1.0 in additional interest we incurred during a 30-
day period in which both our 10-1/8% senior subordinated notes due 2003, with
an aggregate principal amount of $120 million, and our newly issued 12-3/4%
senior notes due 2009 were outstanding. The higher average rate was
attributable to the 12-3/4% senior notes, which were issued in connection
with our refinancing completed on April 15, 2003 (see discussion below under
"Liquidity and Capital Resources"). The notes were issued at a discount to
yield an effective interest rate of 14% on $157 million aggregate principal
amount.
25
OTHER INCOME (EXPENSE)
Other income (expense) was $0.2 million (expense) for the first six
months of fiscal 2003, compared to $0.2 million (income) for the first six
months of fiscal 2002. The fiscal 2003 amount includes $1.3 million in
expense for the write-off of unamortized costs associated with debt retired
in connection with our refinancing completed in April 2003, offset in part by
a $0.6 million gain on a life insurance policy, interest income of $0.2
million and various other income items totaling $0.3 million. No individual-
ly significant items are included in "Other income (expense)" for the
first six months of fiscal 2002.
INCOME TAX PROVISION
We recorded a $0.2 million income tax provision for the first six months of
fiscal 2003, compared to a $4.3 million income tax provision for the first
six months of fiscal 2002. A reconciliation of the differences between the
provision for income taxes and income taxes computed using the statutory
federal income tax rate of 35% follows:
Six Months Ended
---------------------
June 28, June 29,
2003 2002
--------- --------
(in millions)
Amount computed using the statutory
rate $ (5.7) $ 1.0
Increase (decrease) in taxes
resulting from:
State taxes (0.6) 0.1
Credits lost due to loss carryback -- 2.8
Change in valuation
allowance-foreign 0.3 0.4
Change in valuation
allowance-domestic 6.5 --
Other (0.3) --
--------- -------
Provision for income taxes $ 0.2 $ 4.3
========= =======
The $6.5 million change in the valuation allowance against domestic deferred
tax assets that is reflected in the above reconciliation effectively resulted
in no tax benefit being recorded against losses incurred in the first six
months of fiscal 2003. The realization of these tax benefits is ultimately
dependent on the generation of taxable income in the future. Given the
current business environment and the near term outlook, we are precluded from
recognizing these benefits currently. We believe that we will
ultimately generate sufficient taxable income to offset these losses, at
which time we will be able to recognize such tax benefits by reducing income
tax expense in future years.
26
The $2.8 million increase in taxes reflected in the reconciliation above for
the six months ended June 29, 2002, was attributable to the Job Creation and
Worker Assistance Act of 2002. The Act changed the period for carrying back
taxable losses generated in fiscal 2001 from 2 to 5 years, which resulted in
our receiving a $5.5 million refund of taxes in July 2002. However, the
carryback also freed up investment credits that had previously offset tax in
the carryback years. A $2.8 million increase to the income tax provision was
recorded in the first quarter of fiscal 2002, representing the amount of
these freed up credits that could not be used to offset tax before their
expiration.
ADOPTION OF NEW ACCOUNTING STANDARD
Effective as of the beginning of fiscal 2002, we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." This standard eliminates the
amortization of goodwill and intangible assets with indefinite useful lives.
Instead these assets must be tested at least annually for impairment. In
addition, SFAS No. 142 requires that a transitional impairment test of
goodwill be performed as of the first day of the year of adoption. As a
result of the transitional impairment test, which we completed in the third
quarter of fiscal 2002, we recorded a non-cash charge of $20.7 million,
representing goodwill impairment of $23.4 million, less the deferred tax
effect of $2.7 million. The transitional impairment writedown was primarily
attributable to differences between the fair value approach required under
SFAS No. 142 and the undiscounted cash flow approach that was used to
evaluate goodwill under previous accounting guidance. The charge was reported
as a cumulative effect of a change in accounting principle retroactive to the
first day of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
General
We rely on internally generated cash flow, supplemented by borrowings under
our borrowing base facility, to meet our working capital needs, capital
improvements and debt service requirements. Our total debt to total capital
ratio at June 28, 2003 was 53.9%.
Credit Facilities and Senior Notes
In order to finance our 1998 acquisition of the Bibb Company, we entered into
a five-year secured credit facility, which originally consisted of a $125
million amortizing term loan and a $150 million working capital line of
credit. Subsequent amendments modified the facility to increase the term loan
by $12.9 million and to implement additional limitations on mergers and
consolidations, affiliated transactions, incurrence of liens, disposal of
assets and investments. In December of 2001 the credit facility was amended
again to partially defer amortization of the term loan, to convert the
working capital line of credit into an asset-based line, and to establish new
performance covenants. All of the outstanding indebtedness under this credit
facility and our $120 million 10-1/8% senior subordinated notes was due at
maturity on September 30, 2003 and December 15, 2003, respectively. On April
15, 2003, we completed the refinancing of this indebtedness. This refinancing
included:
27
- the sale at 95.035% of par of $157 million aggregate principal of our
12-3/4% senior notes due 2009, yielding 14%, in a private offering
pursuant to Rule 144A and Regulation S under the Securities Act of
1933; and
- a senior secured credit facility, consisting of a five-year $40
million term loan and a five-year $160 million revolving credit
facility. The revolving credit facility includes borrowing avail-
ability of up to $25 million for letters of credit.
The net proceeds from the notes offering, together with borrowings under the
credit facility, were used to: (i) repay all borrowings outstanding under our
existing credit agreement; (ii) redeem all of our outstanding 10-1/8% senior
subordinated notes due 2003 for an aggregate redemption price of $120 million
(100% of the principal amount thereof) plus accrued and unpaid interest of
approximately $5.1 million; and (iii) pay related fees and expenses.
A registration statement on Form S-4 with respect to the senior notes has
been filed with the Securities and Exchange Commission, but is not yet
effective. The senior notes are callable subject to a make-whole provision.
Interest is payable on the senior notes semi-annually on October 15 and April
15. Subject to certain conditions, we may be required by the indenture
governing the senior notes to offer to repurchase a pro rata portion of the
senior notes with a portion of our excess cash flow, as defined in the
indenture. When we repay our term loan in full, the senior notes will be
secured by a second priority lien on substantially all of our real property,
equipment and other fixed assets. In addition, the indenture restricts, among
other things, additional indebtedness, restricted payments, lien creation,
asset sales and mergers.
Our credit facility is secured by substantially all of our assets.
Availability under the revolving credit facility is based upon a borrowing
base determined by eligible accounts receivable and inventory, as defined.
Amounts outstanding under the senior credit facility will bear interest at
either a prime rate or LIBOR plus, in each case, a spread based on our
leverage ratio. During at least the first six months of the new facility, the
margin on the term loan is fixed at 1.75% on prime rate loans or 2.75% on
LIBOR loans, at our option. For that same time period, the margin on the
revolving credit facility is fixed at 1.50% on prime rate loans or 2.50% on
LIBOR loans, at our option. Thereafter, the margin on pricing will be
adjusted quarterly based on our leverage ratio, ranging from 1.25% to 2.00%
on prime rate or 2.25% to 3.00% on LIBOR for the term loan, and ranging from
1.00% to 1.75% on prime rate or 2.00% to 2.75% on LIBOR for the revolving
credit facility. We are obligated to pay a 0.375% commitment fee for the
unused line. As of June 28, 2003, in addition to the $40 million term loan,
we had $47.0 million outstanding under the revolving credit facility and $4.0
million of outstanding letters of credit. On June 30, 2003, subsequent to
the end of the second quarter of fiscal 2003, we made our first scheduled
principal payment on the term loan of approximately $1.4 million.
28
As of August 5, 2003:
- we had $53.5 million of borrowings outstanding under the revolving
credit facility and $4.4 million of letters of credit outstanding;
- we had availability of $38.5 million under the revolving credit
facility; and
- our $38.6 million term loan and $53.5 million in borrowings
outstanding under the revolving credit facility bore interest at
average rates of 3.85% and 3.72%, respectively.
The credit facility imposes certain restrictions on our activities,
including, among others, restrictions on: capital expenditures; incurrence of
debt, liens or guarantees in respect to obligations of any other person; sale
of assets; acquisitions; sale/lease-back transactions; sale or discount of
receivables; certain payments and investments; affiliate and subsidiary
transactions; restrictions on payment of dividends and on repurchases of
stock; derivatives; and excess cash. We are required to maintain a minimum
fixed charge coverage ratio and we cannot exceed a maximum leverage ratio.
For the remainder of fiscal 2003, these ratios are 1.15 to 1.00 and 4.25 to
1.00, respectively.
We were in compliance with all covenants of our credit facility as of
June 28, 2003. Based on information currently available, we anticipate we
should be able to meet the covenant requirements for the third fiscal
quarter, but achieving the required performance levels in the fourth fiscal
quarter will require significant improvement in current business activity.
As noted above, we see little evidence of such improvement at this time. If
our performance does not improve sufficiently, we will likely be in violation
of the financial covenants contained in the credit facility. In
such case, we will seek an amendment to the credit facility or waivers of the
covenants. If the lenders do not grant a waiver or amendment, we will be in
default under the credit facility. If such a default occurs and is not
waived by the lenders, the lenders could seek remedies against us,
including acceleration of the debt outstanding, as set forth in the credit
agreement. Any such default or acceleration could also give rise to a
default under or acceleration of our other debt obligations, including the
senior notes.
Under the credit agreement, scheduled amortization of the term loan began on
June 30, 2003, in the quarterly amount of approximately $1.4 million, with a
final scheduled amortization payment of approximately $11.4 million at
maturity on April 15, 2008. In addition, mandatory prepayments of the term
loan are required to be made from the lesser of (1) 75% of our excess cash
flow, as defined in the credit agreement, determined at the end of each
fiscal year, or (2) the amount which, after giving effect to such payment,
would cause the average excess availability under the revolving credit
facility over the prior 30-day period to equal $15.0 million. Mandatory
prepayments are also required under the credit agreement in connection with
certain events, such as the sale of assets, the issuance of capital
securities or any indebtedness, and the receipt of insurance and condemnation
award proceeds. Once the term loan is paid in full, the senior notes will be
secured by a second priority lien on substantially all of our real property,
equipment and other fixed assets.
29
We incurred fees and expenses of approximately $10 million in connection with
the refinancing, which are being amortized to interest expense over the terms
of the related debt. Unamortized fees and expenses of $1.3 million relating
to the existing credit agreement and 10-1/8% senior subordinated notes that
were paid off in connection with the refinancing were written off and charged
to "Other expense" in the second quarter of fiscal 2003.
During the second quarter of fiscal 2003, there was a 30-day period prior to
the redemption of the senior subordinated notes during which interest accrued
on both the senior subordinated notes and the senior notes. This additional
interest cost of approximately $1.0 million was paid in the second quarter of
fiscal 2003.
Working Capital
Net cash generated from operating activities in the six months ended June 28,
2003 was $22.1 million. This amount includes cash from operating assets and
liabilities of $5.0 million, comprised of a $4.9 million source from
operating working capital (accounts receivable - $17.2 million source,
inventories - $11.5 million use, and accounts payable and accrued expenses -
$0.8 million use) and a $0.1 million source of cash for prepaid expenses and
other assets and other liabilities.
Net cash generated from operating activities was $38.0 million in the six
months ended June 29, 2002. This amount includes a source of cash from
operating assets and liabilities of $9.4 million, comprised of a $14.2
million source of operating working capital (accounts receivable - $3.4
million use, inventories - $13.2 million source, and accounts payable and
accrued expenses - $4.4 million source) and a $4.7 million use of cash for
prepaid expenses and other assets and other liabilities.
Investing Activities
During the first six months of fiscal 2003, we purchased $7.6 million in
equipment and manufacturing improvements.
30
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the federal securities laws. Statements that are not
historical facts, including statements about our beliefs and expectations,
are forward-looking statements. Forward-looking statements include
statements generally preceded by, followed by or that include the words
"believe," "expect," "anticipate," "plan," "estimate" or similar expressions.
These statements include, among others, statements regarding our expected
business outlook, anticipated financial and operating results, strategies,
contingencies, financing plans, working capital needs, sources of liquidity,
estimated amounts and timing of capital expenditures, environmental
compliance costs and other expenditures, and expected outcomes of litigation.
Forward-looking statements reflect our current expectations and are not
guarantees of performance. These statements are based on our management's
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking
statements include, among others, assumptions regarding demand for our
products, expected pricing levels, raw material costs, the timing and cost of
planned capital expenditures, the estimated cost of environmental compliance,
expected outcomes of pending litigation, competitive conditions and general
economic conditions. These assumptions could prove inaccurate. Forward-
looking statements also involve risks and uncertainties, which could cause
actual results to differ materially from those contained in any forward-
looking statement. Many of these factors are beyond our ability to control or
predict. Such factors include, but are not limited to, the factors set forth
in Exhibit 99.1, "Cautionary Statements relating to Forward Looking
Statements," filed with our Annual Report on Form 10-K for the year ended
December 28, 2002, which are incorporated herein by this reference, and the
following:
- general economic conditions and the cyclicality of the textile
industry;
- the effect of the war in Iraq and any future armed conflict or
terrorist activities;
- competitive conditions in the textile industry;
- our ability to achieve manufacturing cost reductions;
- fluctuations in the price of raw materials or shortages of the supply
of raw materials;
- our ability to maintain or acquire licenses;
- our ability to identify and respond to fashion trends;
- our ability to fund our capital expenditure requirements needed to
maintain our competitive position;
- the effect of U.S. governmental policies regarding imports on our
competitiveness;
- our ability to identify and complete acquisitions;
- our compliance with environmental, health and safety laws and
regulations;
31
- changes in our relationships with our large customers;
business-related difficulties of our customers, including Kmart
Corporation;
- risks associated with our operations in Mexico;
- our dependence on outside production sources;
- our ability to compete with foreign imports;
- our reliance on key management personnel;
- our relationships with the unions representing some of our employees;
and
- the influence of our principal shareholders.
Specific forward looking statements contained in this Quarterly Report
include, among others, our expectations concerning our future sales and
profitability, and our compliance with financial covenants in our credit
facility. These forward looking statements are found in Part I, Item 2.
There can be no assurance that our assumptions are correct. You should not
place undue reliance on any forward-looking statements, which are based on
current expectations. Further, forward-looking statements speak only as of
the date they are made, and we undertake no obligation to update publicly any
of them in light of new information or future events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures.
During the 90-day period prior to the filing date of this report, management,
including our chief executive officer and chief financial officer, evaluated
the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon, and as of the date of, that evaluation,
our chief executive officer and chief financial officer concluded that the
disclosure controls and procedures were effective to ensure that all
information required to be disclosed in the reports we file and submit under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported as and when required.
There have been no significant changes in the company's internal controls or
in other factors that could significantly affect internal controls subsequent
to the date the company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
and, therefore, no corrective actions were taken.
32
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on April 25, 2003.
The following is a brief description of each matter voted upon at
the meeting and the number of votes cast for, against or withheld,
as well as the number of abstentions and broker non-votes, as to
each such matter.
1. Election of Directors
Election of Group B Director, Rainer H. Mimberg to hold office
until the Annual Meeting of Shareholders in 2005, or until his
successor is elected and qualified:
For: 28,743,987 Withheld: 60,424
Election of Group C Directors Edward J. Lill and John F.
Maypole to hold office until the Annual Meeting of Shareholders in
2006, or until their successors are elected and qualified:
Edward J. Lill For: 28,738,498 Withheld: 65,913
John F. Maypole For: 28,742,098 Withheld: 62,313
Continuing directors are Donald J. Keller, Joseph L. Lanier,
Jr. and Richard L. Williams.
2. To adopt and approve the 2003 Long-Term Incentive Plan.
For: 26,797,084 Against: 1,868,715 Abstained: 138,612
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The exhibits to this Quarterly Report on Form 10-Q are listed
in the accompanying Exhibit Index.
(b) Reports on Form 8-K:
(i) On April 16, 2003, we filed a Current Report on Form 8-K
reporting under Item 5 the closing of the refinancing of our senior
credit facility and our 10-1/8% senior subordinated notes.
(ii) On April 25, 2003, we filed a Current Report on Form 8-K
reporting under Item 12 our first quarter earnings and other
financial information with respect to fiscal 2003.
(iii) On June 12, 2003, we filed a Current Report on Form 8-K
reporting under Item 5 the closing of two manufacturing facilities
and a restructuring charge in the second quarter, as well as
earnings expectations for the second quarter and the remainder of
the fiscal year.
33
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.
DAN RIVER INC.
Date: August 12, 2003 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Amended and Restated Articles of Incorporation
of Dan River Inc. (incorporated by reference
to Exhibit 3.1 in Amendment No. 1 to
Registration Statement on Form S-1 (File
No. 333-36479)).
3.2 Bylaws of Dan River Inc. (incorporated by
reference to Exhibit 3.2 in Amendment No. 1
to Registration Statement on Form S-1 (File
No. 333-36479)).
4 Indenture dated April 15, 2003 between Dan River
Inc. and HSBC Bank USA (including Form of Note)
trustee (incorporated by reference to Exhibit 4
in Dan River's Quarterly Report on Form 10-Q for
the quarter ended March 29, 2003).
10 Credit Agreement dated as of April 15, 2003
among Dan River Inc., as Borrower, The Lenders
signatory thereto from time to time, as Lenders,
and Deutsche Bank Trust Company Americas, as
Agent, Fleet Capital Corporation, as Syndication
Agent, and Wachovia Bank, National Association,
as Documentation Agent trustee (incorporated
by reference to Exhibit 10 in Dan River's
Quarterly Report on Form 10-Q for the quarter
ended March 29, 2003).
11 Statement regarding Computation of
Earnings per share (incorporated by
reference to Note 9 to the Unaudited
Condensed Consolidated Financial
Statements included in this
Quarterly Report on Form 10-Q)
31.1* Rule 13a-14(a)/15d-14(a) Certification of Joseph L.
Lanier, Jr.
31.2* Rule 13a-14(a)/15d-14(a) Certification of Barry F. Shea
32* Certification Pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- ------------------
*Filed herewith