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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 September 27, 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 September 27, 2003:
Class A: 20,432,875 Shares
Class B: 2,062,070 Shares
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 27, December 28,
2003 2002
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,147 $ 2,832
Accounts receivable, net 50,994 71,292
Inventories 159,789 151,586
Prepaid expenses and other current assets 11,417 4,175
Deferred income taxes 10,333 15,492
----------- -----------
Total current assets 234,680 245,377
Property, plant and equipment 484,291 508,637
Less accumulated depreciation and amortization (271,168) (260,462)
----------- -----------
Net property, plant and equipment 213,123 248,175
Goodwill, net -- 91,701
Other assets 18,676 10,269
----------- -----------
$ 466,479 $ 595,522
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 27, December 28,
2003 2002
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 246,556 $ 241,231
Accounts payable 16,805 25,802
Accrued compensation and related benefits 17,735 23,693
Other accrued expenses 17,520 8,944
------------ -----------
Total current liabilities 298,616 299,670
Other liabilities:
Long-term debt 6,872 10,792
Deferred income taxes 10,333 15,257
Other liabilities 41,649 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 20,432,875 shares
(20,362,773 shares at December 28, 2002) 204 204
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 210,019 209,952
Retained earnings (deficit) (86,502) 33,688
Accumulated other comprehensive loss (14,300) (14,387)
Unearned compensation-restricted stock (433) (441)
------------ -----------
Total shareholders' equity 109,009 229,037
------------ -----------
$ 466,479 $ 595,522
============ ===========
See accompanying notes.
5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
--------- ----------- --------- ----------
(in thousands, except per share data)
Net sales $ 103,728 $ 147,411 $ 367,448 $ 459,771
Costs and expenses:
Cost of sales 94,936 116,470 316,250 377,010
Selling, general
and administrative
expenses 13,840 16,441 47,095 51,406
Impairment of
goodwill 91,701 -- 91,701 --
Other operating
costs, net 800 -- 12,549 (310)
--------- --------- --------- ---------
Operating income (loss) (97,549) 14,500 (100,147) 31,665
Other income (expense) 1,144 (103) 949 105
Interest expense (7,130) (6,450) (20,757) (20,978)
--------- --------- --------- ---------
Income (loss) before
income taxes and
cumulative effect
of accounting
change (103,535) 7,947 (119,955) 10,792
Provision for
income taxes -- 3,248 235 7,570
--------- --------- --------- ---------
Income (loss) before
cumulative effect of
accounting change (103,535) 4,699 (120,190) 3,222
Cumulative effect of
accounting change,
net of tax -- -- -- (20,701)
--------- --------- --------- ---------
Net income (loss) $(103,535)$ 4,699 $(120,190) $ (17,479)
========= ========= ========= =========
See accompanying notes.
6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
--------- --------- --------- ----------
Earnings (loss) per
share--basic:
Income (loss) before
cumulative effect
of accounting
change $ (4.70) $ 0.22 $ (5.47) $ 0.15
Cumulative effect of
accounting change,
net of tax -- -- -- (0.95)
--------- --------- --------- --------
Net Income (loss) $ (4.70) $ 0.22 $ (5.47) $ (0.80)
========= ========= ========= ========
Earnings (loss) per share
--diluted:
Income (loss) before
cumulative effect
of accounting
change $ (4.70) $ 0.21 $ (5.47) $ 0.15
Cumulative effect of
accounting change,
net of tax -- -- -- (0.94)
--------- --------- --------- --------
Net income (loss) $ (4.70) $ 0.21 $ (5.47) $ (0.79)
========= ========= ========= ========
See accompanying notes.
7
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
---------------------------
Sept. 27, Sept. 28,
2003 2002
------------ ------------
(in thousands)
Cash flows from operating activities:
Net loss $ (120,190) $ (17,479)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Noncash interest expense 2,041 2,064
Depreciation and amortization of
property, plant and equipment 27,674 28,339
Amortization of restricted stock compensation 241 221
Deferred income taxes 235 12,520
Writedown/disposal of assets 102 42
Other operating costs, net 12,549 (310)
Write-off of unamortized debt costs 1,299 --
Impairment of goodwill 91,701 --
Cumulative effect of accounting change,
net of tax -- 20,701
Changes in operating assets and liabilities:
Accounts receivable 20,325 (2,681)
Inventories (8,338) 5,124
Prepaid expenses and other assets (2,182) 668
Accounts payable and accrued expenses (7,596) 3,474
Other liabilities 456 336
---------- ----------
Net cash provided by operating activities 18,317 53,019
---------- ----------
Cash flows from investing activities:
Capital expenditures (9,856) (8,587)
Proceeds from sale of assets 48 642
---------- ----------
Net cash used by investing activities (9,808) (7,945)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (259,186) (5,897)
Proceeds from issuance of long-term debt 254,568 --
Debt issuance costs (10,207) (34)
Revolving credit facilities--borrowings 92,000 70,500
Revolving credit facilities-payments (86,372) (115,500)
Proceeds from exercise of stock options 3 --
---------- ----------
Net cash used by financing activities (9,194) (50,931)
---------- ----------
Net decrease in cash and cash equivalents (685) (5,857)
Cash and cash equivalents at beginning of period 2,832 8,316
---------- ----------
Cash and cash equivalents at end of period $ 2,147 $ 2,459
========== ==========
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 Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
--------- -------- -------- --------
(in thousands, except per share data)
Net income (loss):
As reported $(103,535) $ 4,699 $(120,190) $ (17,479)
Less: pro forma expense
related to stock
options (159) (186) (432) (558)
--------- ------- --------- ---------
Pro forma $(103,694) $ 4,513 $(120,622) $ (18,037)
========= ======== ========= =========
Per share:
As reported-
Basic $ (4.70) $ 0.22 $ (5.47) $ (0.80)
Diluted (4.70) 0.21 (5.47) (0.79)
Pro forma--
Basic $ (4.71) $ 0.21 $ (5.49) $ (0.83)
Diluted (4.71) 0.20 (5.49) (0.81)
3. Goodwill
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
In the third quarter of fiscal 2003, the Company recorded a $91,701,000
charge for impairment of goodwill, which represented the write-off of
the entire remaining balance of goodwill, all of which relates to the
home fashions bedding business unit. Due to the recent deterioration in
the performance of this business, which is considered an indication of
possible impairment under accounting guidelines, the Company evaluated
goodwill for impairment in the third quarter of fiscal 2003, rather than
waiting for the annual impairment review that is normally performed in
the fourth quarter of the fiscal year. With the assistance of an
outside consultant, the Company has completed the first step of the
review, which, based on a comparison of the fair value of the home
fashions bedding business unit to its book value, indicated that the
goodwill is, in fact, impaired. For this purpose, the fair value of the
business unit was determined primarily by a discounted cash flow
approach. The second step of the review, which involves valuing the
business unit's identifiable assets and liabilities, will be finalized
in the fourth quarter. However, based on work performed to date, the
Company estimates that the goodwill is completely impaired.
Accordingly, the write-off of the balance of goodwill was recorded in
the third quarter of fiscal 2003. If the actual amount of impairment,
based on finalization of the second step of the review, differs from the
estimated amount, the difference will be reflected in results for the
fourth quarter of fiscal 2003.
4. Inventories
The components of inventory are as follows:
Sept. 27, December
2003 28, 2002
---------- ---------
(in thousands)
Finished goods $ 52,654 $ 52,088
Work in process 95,107 85,827
Raw materials 3,626 3,348
Supplies 8,402 10,323
-------- --------
Total Inventories $159,789 $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 approximately 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 new
senior secured credit facility, consisting of a five-year $40 million
11
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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) provide for the redemption, on May 15, 2003, 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 has been filed with the Securities
and Exchange Commission with respect to the senior notes, but is not yet
effective. In accordance with the registration rights agreement entered
into in connection with the offering of the notes, the coupon rate on
the notes has been temporarily increased by 25 basis points pending the
consummation of the exchange offer contemplated by the registration
statement. If the registration statement is not declared effective by
December 11, 2003, or the Company does not consummate the exchange offer
by January 10, 2004, the coupon rate will increase by an additional 25
basis points until such time as the registration statement is declared
effective or the exchange offer is consummated, as the case may be. 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.
The new 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 pays a 0.375% commitment fee on the unused line.
Under the senior credit facility, the Company is required to maintain a
minimum fixed charge ratio and not to exceed a maximum leverage ratio.
The senior credit facility also imposes restrictions relating to, among
other things, capital expenditures, asset sales, incurrence or guarantee
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
12
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 other than through a refinancing, 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. At
that time, the Company is required to offer to repurchase a pro rata
portion of the senior notes if annual cash flow exceeds certain limits.
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 $1,299,000 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."
Prior to the end of the third quarter of fiscal 2003, the Company
advised its senior secured lenders that it expected to violate the
covenant specifying the maximum leverage ratio at the end of the
quarter. Subsequent to the end of the third fiscal quarter, the Company
entered into an amendment and waiver agreement with the lenders pursuant
to which the lenders permanently waived this covenant violation. The
Company paid an amendment fee in the amount of $250,000. The amendment
and waiver agreement also contains, among other provisions, new
requirements specifying minimum levels of excess availability under the
revolving credit facility and monthly operating EBITDA during the fiscal
fourth quarter.
Based on information currently available, the Company believes that it
should be able to meet the monthly covenant requirements in the fourth
fiscal quarter, and accordingly, anticipates that it will have
sufficient liquidity under the credit facility to provide for
anticipated working capital needs and debt service obligations during
the fourth quarter of fiscal 2003. The Company anticipates that it will
need relief from the minimum fixed charge ratio and maximum leverage
ratio covenants contained in the credit facility as of the end of the
fourth quarter of fiscal 2003 and for some period thereafter. The
Company expects to work with its lending group to negotiate such further
amendments or waivers as will be necessary to maintain compliance with
the terms of the credit facility. If the Company experiences violations
of the monthly or quarterly covenants discussed above, and the lenders
do not grant such additional forbearance, waivers or amendments as may
be required with respect to the credit agreement, the Company will be in
default, the Company will be unable to borrow under the credit facility,
and the lenders could seek remedies against it, including acceleration
of the debt outstanding, as set forth in the credit agreement. An
acceleration could also give rise to a default under or acceleration of
other debt obligations, including the senior notes.
13
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Because it is probable that the Company will violate the covenants
specifying minimum fixed charge and maximum leverage ratios at the end
of the fourth quarter, the Company is required to report its senior
secured debt as long-term debt due currently. Additionally, all senior
debt which would be subject to cross acceleration in the event the
senior secured lenders elected to accelerate the debt under the senior
credit facility has been reported as current, notwithstanding the fact
that no default has occurred with respect to this debt, which consists
primarily of the 12 3/4% senior notes.
Long-term debt at September 27, 2003 consists of the following (in
thousands):
Senior notes, net of unamortized original
issue discount $ 149,600
Revolving credit facility 53,992
Term loan 38,571
Capital leases and other borrowings 11,265
----------
253,428
Less: current maturities 246,556
----------
Total long-term debt $ 6,872
==========
At September 27, 2003, the average interest rate on borrowings under the
revolving credit facility and term loan were 3.83% and 3.87%,
respectively. Also at September 27, 2003, $3,504,000 of letters of
credit were outstanding and $40,780,000 was unused and available for
borrowing under the revolving credit facility.
6. Other Operating Costs, Net
Other operating costs, net for the first nine months of fiscal 2003
consisted of a $12,189,000 pre-tax charge relating to the closure of two
manufacturing facilities, $800,000 in severance and benefits expense
relating to staff reductions, and a $440,000 gain from the sale of
surplus equipment.
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
shutdown of the plants was substantially completed in the third quarter
14
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of fiscal 2003. Through September 27, 2003, $434,000 of the severance
and other exit costs had been paid. The Company expects that the
remainder will be paid out by the end of the first quarter of fiscal
2004.
Except as disclosed in Note 12, certain equipment from the closed
facilities is being 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 as well as surplus equipment from
the closed plants. The total fair value of the remaining assets less
costs to sell, estimated to be $5,618,000, is included under "Prepaid
expenses and other current assets" on the condensed consolidated balance
sheet as of September 27, 2003.
On August 22, 2003 the Company announced that, in order to reduce
overhead costs, it had eliminated approximately 80 salaried positions
throughout the Company's operations. Estimated annual savings from the
staff reductions are $4.3 million, which will impact cost of sales and
selling, general and administrative expenses on an approximately equal
basis. A pre-tax charge of $800,000 was recorded in the third quarter
of fiscal 2003, representing the estimated severance and employee
benefit costs associated with the staff reductions. Through September
27, 2003, $227,000 of the severance and benefit costs had been paid, and
the Company expects that the remainder will be paid out by the end of
the first quarter of fiscal 2004.
Other operating costs, net for the first nine months of fiscal 2002
consisted of a $310,000 pre-tax gain from the reversal of a portion of
the loss recorded in the prior year relating to the plant consolidation
program announced in December 2001. The gain is attributable to the
receipt by the Company of $360,000 in net proceeds from the sale of its
Newnan, Georgia facility and surplus equipment, compared to a carrying
value of $50,000.
7. Income Taxes
No income tax benefits were recorded against the pre-tax losses for the
three- and nine- month periods ended September 27, 2003. A substantial
portion of the losses was caused by impairment of goodwill, which is not
deductible for tax purposes. In addition, the Company recorded
increases to the valuation allowance against deferred tax assets of
$3,784,000 and $10,552,000, for the three- and nine-month periods ended
September 27, 2003, respectively, which resulted in the Company's net
deferred tax assets being fully offset by the valuation allowance at
September 27, 2003. The increases were necessary because, in light of
the Company's recent operating performance, it is management's opinion
that it is more likely than not that a portion of the deferred tax
benefits will not be realized. Realization of certain of these tax
benefits, including potential tax savings of approximately $16,500,000
from the use of net operating loss and tax credit
15
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
carryforwards, is generally dependent on the generation of taxable
income in the future. The Company will continue to assess the valuation
allowance, and to the extent it is determined that all or a portion of
the allowance is no longer required, the tax benefits relating to the
net deferred tax assets will be recognized in the future.
The income tax provision for the nine months ended months ended Septem-
ber 28, 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 Retained Compre- sation- Share
Common Stock Paid-in Earnings hensive Restricted holders'
Class A Class B Capital (deficit) 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 -- -- -- (120,190) -- -- (120,190)
Unrealized gain
on securities -- -- -- -- 87 -- 87
------- ------ --------- -------- -------- ------- --------
Comprehensive
loss (120,103)
Exercise of
stock options -- -- 3 -- -- -- 3
Restricted stock
awards 1 -- 232 -- -- (233) --
Retirement of
common stock (1) -- (168) -- -- -- (169)
Amortization of
unearned compen-
sation -- -- -- -- -- 241 241
------- ------ -------- -------- ------- -------- --------
Balance at
September 27,
2003 $ 204 $ 21 $ 210,019 $ (86,502) $(14,300) $ (433) $ 109,009
======= ====== ========= ========= ======== ======== =========
16
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 Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
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 $(103,535) $ 4,699 $(120,190) $ 3,222
Cumulative effect of
accounting change -- -- -- (20,701)
--------- --------- --------- ---------
Net income (loss) $(103,535) $ 4,699 $(120,190) $ (17,479)
========= ========= ========= =========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 22,016 21,840 21,985 21,823
Effect of dilutive
securities:
Employee stock
options and
restricted
stock awards -- 459 -- 316
--------- --------- --------- ---------
Denominator for
diluted earnings
per share--weighted
average shares
adjusted for
dilutive securities 22,016 22,299 21,985 22,139
========= ========= ========= =========
Earnings (loss) per share:
Basic:
Income (loss) before
cumulative effect of
accounting change $ (4.70) $ 0.22 $ (5.47) $ 0.15
Cumulative effect of
accounting change -- -- -- (0.95)
--------- --------- --------- ---------
Net income (loss) $ (4.70) $ 0.22 $ (5.47) $ (0.80)
========= ========= ========= =========
17
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Share, continued
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
--------- -------- -------- --------
Diluted:
Income (loss) before
cumulative effect of
accounting change $ (4.70) $ 0.21 $ (5.47) $ 0.15
Cumulative effect of
accounting change -- -- -- (0.94)
--------- --------- --------- ---------
Net income (loss) $ (4.70) $ 0.21 (5.47) $ (0.79)
========= ========= ========= =========
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.
The majority of other income (expense) for the third quarter of fiscal
2003 consists of gains related to life insurance policies. Significant
items included in other income (expense) for the first nine months of
fiscal 2003, were $1,560,000 in gains related to life insurance
policies, interest income of $293,000 and $1,299,000 in expense for the
write-off of unamortized costs associated with debt retired in
connection with the Company's refinancing completed in April 2003.
18
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information
Summarized information by reportable segment is shown in the following
tables:
Three Months Ended Nine Months Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003
2002
--------- -------- -------- --------
(in thousands)
Net sales:
Home fashions $ 76,389 $ 105,857 $ 262,220 $ 329,059
Apparel fabrics 20,549 31,272 79,652 100,154
Engineered products 6,790 10,282 25,576 30,558
--------- --------- --------- --------
Consolidated net
sales $ 103,728 $ 147,411 $ 367,448 $ 459,771
========= ========= ========= ========
Operating income (loss):
Home fashions $ (142) $ 13,632 $ 12,169 $ 31,157
Apparel fabrics (3,242) 1,681 (4,391) 1,427
Engineered products (1,029) (531) (2,497) (1,141)
Corporate items not
allocated to segments:
Impairment of
goodwill (91,701) -- (91,701) --
Other operating
costs, net (800) -- (12,549) 310
Other (635) (282) (1,178) (88)
--------- --------- --------- --------
Consolidated
operating
income (loss) $ (97,549) $ 14,500 $(100,147) $ 31,665
========= ========= ========= =========
12. Subsequent Events
On November 10, 2003 the Company announced that it would close its
apparel fabrics weaving facility in Sevierville, Tennessee and its home
fashions distribution center in Juliette, Georgia. The plant closures
will affect approximately 440 employees. The Company also announced
that it no longer intends to install a significant portion of the
equipment from its Greenville, South Carolina home fashions weaving
facility, which was closed earlier in fiscal 2003, in its facility in
Danville, Virginia (see Note 6). Instead, certain equipment from the
Sevierville facility will be transferred to Danville. In connection
with these actions, the Company expects to record a pre-tax charge,
primarily non-cash, of up to $17,000,000 million in the fourth quarter
of fiscal 2003.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
OVERVIEW
We had a net loss of $103.5 million, or $4.70 per diluted share, in the third
quarter of fiscal 2003, which includes a $91.7 million non-cash charge for
impairment of goodwill. This compares to net income of $4.7 million, or
$0.21 per diluted share, for the third quarter of fiscal 2002. For the first
nine months of fiscal 2003, we had a net loss of $120.2 million, or $5.47 per
diluted share, compared to net income of $3.2 million, or $0.15 per diluted
share, for the first nine months of fiscal 2002, before the effect of an
accounting change related to goodwill.
Our three business segments had operating losses totaling $4.4 million in the
third quarter of fiscal 2003, compared to operating income of $14.8 million
in the third quarter of fiscal 2002. For the first nine months of fiscal
2003, segment operating income was $5.2 million, compared to $31.4 million in
the first nine months of fiscal 2002. The deterioration in segment operating
results was primarily the result of low sales volume. All three of our
business segments have experienced significant sales declines. We believe
that the sales declines in our home fashions and apparel fabrics segments
reflect a weak retail environment for our product categories. We also
believe that home fashions sales were impacted by retailers' attempts to
reduce their inventory levels. Due to the low level of demand, we reduced
plant running schedules, and in some cases, curtailed operations, both of
which caused manufacturing inefficiencies. This resulted in underabsorbed
overhead, and thus higher per-unit costs.
Consolidated operating income for the first-nine months 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 recorded in the second
quarter. The closures will help to bring our capacities in line with current
demand and reduce manufacturing costs. The shutdown of both facilities was
substantially completed in the third quarter. In addition, we recorded a
$0.8 million pre-tax charge in the third quarter of fiscal 2003 for severance
and benefits costs relating to the elimination of 80 salaried positions.
Other significant items that contributed to the loss for the first nine
months of fiscal 2003 include:
- the write-off of $1.3 million in unamortized costs related to debt that
was prepaid in connection with our refinancing transactions 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
20
- increases in the valuation allowance against deferred tax assets, which
effectively resulted in no income tax benefits being recorded against the
losses for the third quarter and first nine months of fiscal 2003.
As we look to the fourth quarter of fiscal 2003, we expect net sales to be at
approximately the same levels as they were in the third quarter. Due to
continuing sluggish sales, we have scheduled several weeks of production
curtailments during the fourth quarter in order to reduce inventories. The
combination of the low level of sales and the production downtime we have
scheduled will adversely affect operating results.
In order to further reduce costs, on November 10, 2003 we announced that we
are closing our apparel fabrics weaving facility in Sevierville, Tennessee
and our home fashions distribution center in Juliette, Georgia. In addition,
we no longer intend to install a large portion of the equipment from the
Greenville, South Carolina home fashions weaving facility, which was closed
earlier in fiscal 2003, in our facility in Danville, Virginia. Instead,
certain equipment from the Sevierville facility will be transferred to
Danville. In connection with these actions, we expect to record a pre-tax
charge, primarily non-cash, of up to $17 million in the fourth quarter of
fiscal 2003. Expected annual savings from this consolidation, which will not
be realized until fiscal 2004, are in the range of $6 to $7 million.
Comparison of Three Months Ended September 27, 2003 and September 28,
2002
NET SALES
Net sales for the third quarter of fiscal 2003 were $103.7 million, a
decrease of $43.7 million or 29.6% from the third quarter of fiscal 2002.
Net sales of home fashions products were $76.4 million for the third quarter
of fiscal 2003, a decrease of $29.5 million or 27.8% from the third quarter
of fiscal 2002. The decrease was caused by lower sales across all retail
distribution channels, reflecting reduced consumer demand, and, we believe,
retailers' attempts to reduce their inventory levels. Lower unit volume and
a less profitable sales mix each contributed approximately equally to the
sales decline.
Net sales of apparel fabrics for the third quarter of fiscal 2003 were $20.5
million, down $10.7 million or 34.3% from the third quarter of fiscal 2002.
The decrease was caused by lower unit volume in most product categories. The
most significant decreases were in sales of men's dress shirting fabrics,
which decreased by $4.1 million, reflecting the weak retail environment, and
in sales of sportswear fabrics, which decreased by $3.2 million, mostly due
to the discontinuation of certain pant fabric programs that were first
introduced in fiscal 2002.
Net sales of engineered products for the third quarter of fiscal 2003 were
$6.8 million, a decrease of $3.5 million or 34.0% from the third quarter of
fiscal 2002. The decrease was caused by lower unit sales in all product
categories, reflecting generally soft demand, and, we believe, attempts by
our customers to reduce their inventories.
21
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $13.8 million for the third
quarter of fiscal 2003 (13.3% of net sales), a decrease of $2.6 million or
15.8% from $16.4 million (11.2% of net sales) for the third quarter of fiscal
2002. Approximately one half of the decrease is attributable to lower
incentive compensation expense due to the failure to meet operating income
targets. The remainder of the decrease reflects generally lower expenses due
to our efforts to control costs, including the effects of the staff
reductions that we announced in August 2003 which are discussed below.
OPERATING INCOME
We had a consolidated operating loss of $97.5 million in the third quarter of
fiscal 2003, including a $91.7 million charge for impairment of goodwill,
compared to $14.5 million in operating income for the third quarter of fiscal
2002.
Segment Operating Income:
The home fashions segment had a $0.1 million operating loss for the third
quarter of fiscal 2003, compared to $13.6 million in operating income for the
third quarter of fiscal 2002. The decrease in operating income in the third
quarter of fiscal 2003 was primarily due to the drop in sales, and higher per-
unit costs resulting from reduced plant running schedules and production
curtailments in order to reduce inventory levels.
The apparel fabrics segment had a $3.2 million operating loss for the third
quarter of fiscal 2003, compared to $1.7 million in operating income for the
third quarter of fiscal 2002. The decrease in operating income in the third
quarter of fiscal 2003 was generally attributable to the lower sales volume
discussed above and related higher per-unit costs associated with
underabsorbed overhead.
The engineered products segment had a $1.0 million operating loss in the
third quarter of fiscal 2003, compared to a $0.5 million operating loss in
the third fiscal quarter of 2002. Operating results in both periods were
hampered by low sales volume and inefficient manufacturing performance. The
larger increased operating loss in the third quarter of fiscal 2003 was
caused primarily by a further decrease in sales volume.
Corporate Items:
Corporate items not allocated to segments in the third quarter of fiscal 2003
consisted of a $91.7 million charge for impairment of goodwill, $0.8 million
in severance and benefits relating to staff reductions (reported as "Other
operating costs, net,") and idle facility costs and other expenses totaling
$0.6 million. Corporate items not allocated to segments in the third quarter
of fiscal 2002 consisted of idle facility costs and other expenses totaling
$0.3 million.
The goodwill impairment charge represents the write-off of the entire
remaining balance of goodwill, all of which relates to our home fashions
bedding business unit. Due to the recent deterioration in the performance of
this business, which is considered an indication of possible impairment under
22
accounting guidelines, we evaluated goodwill for impairment in the third
quarter of fiscal 2003, rather than waiting for the annual impairment review
that is normally performed in the fourth quarter of the fiscal year. With
the assistance of an outside consultant, we have completed the first step of
the review, which indicated that the goodwill is, in fact, impaired. The
second step of the review, which involves valuing the business unit's
identifiable assets and liabilities, will be completed in the fourth quarter.
However, based on our preliminary analysis, we estimate that the goodwill is
completely impaired. Accordingly, we recorded a $91.7 million impair-ment
charge in the third quarter of fiscal 2003. If the actual amount of
impairment, based on completion of the second step of the review, differs
from the estimated amount, the difference will be reflected in our results
for the fourth quarter of fiscal 2003.
On August 22, 2003, we announced that, in order to reduce overhead costs, we
have eliminated approximately 80 salaried positions throughout our
operations. We estimate the annual savings from the staff reductions to be
$4.3 million, which will impact our cost of sales and selling, general and
administrative expenses on an approximately equal basis. We recorded a pre-
tax charge of $0.8 million in the third quarter of fiscal 2003, representing
the estimated severance and employee benefit costs associated with the staff
reductions. Substantially all of the severance and benefits will be paid out
by the end the first quarter of fiscal 2004.
INTEREST EXPENSE
Interest expense was $7.1 million for the third quarter of fiscal 2003, an
increase of $0.7 million from $6.4 million for the third quarter of fiscal
2002. The increase reflects the effect of higher average interest rates in
the third quarter of fiscal 2003, offset in part by a $0.5 million reduction
in interest due to lower average debt levels. The higher average rate was
attributable to our 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.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $1.1 million (income) for the third quarter
of fiscal 2003, compared to $0.1 million (expense) for the third quarter of
fiscal 2002. Substantially all of the fiscal 2003 amount is attributable to
gains related to life insurance policies.
INCOME TAX PROVISION
We did not record an income tax benefit against the pre-tax loss for the
third quarter of fiscal 2003. A substantial portion of the loss was caused
by impairment of goodwill, which is not deductible for tax purposes. In
addition, we recorded a $3.8 million increase to the valuation allowance
against deferred tax assets during the quarter, which resulted in our net
deferred tax assets being fully offset by the valuation allowance at
September 27, 2003. The increase was necessary because, in light of the
Company's recent operating performance, it is management's opinion that it is
more likely than not that a portion of the deferred tax benefits will not be
23
realized. Realization of certain of these tax benefits, including potential
tax savings of approximately $16.5 million from the use of net operating loss
and tax credit carryforwards, is generally dependent on the generation of
taxable income in the future. We will continue to assess the valuation
allowance, and to the extent it is determined that all or a portion of the
allowance is no longer required, the tax benefits relating to the net
deferred tax assets will be recognized in the future.
The income tax provision was $3.2 million (40.9% of pre-tax income) for the
third quarter of fiscal 2002. The relatively high effective rate is due to
losses from our Mexican operations, for which no tax benefit was provided.
Comparison of Nine Months Ended September 27, 2003 and September 28, 2002
NET SALES
Net sales for the first nine months of fiscal 2003 were $367.4 million, a
decrease of $92.3 million or 20.1% from net sales of $459.8 million for the
first nine months of fiscal 2002.
Net sales of home fashions products were $262.2 million for the first nine
months of fiscal 2003, a decrease of $66.8 million or 20.3% from the first
nine months of fiscal 2002. The decrease was caused primarily by lower unit
volume across all distribution channels, reflecting reduced consumer demand,
and, we believe, retailers' attempts to reduce their inventory levels.
Net sales of apparel fabrics for the first nine months of fiscal 2003 were
$79.7 million, a decrease of $20.5 million or 20.5% from the first nine
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 fabrics, which decreased by $9.8 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 $6.4 million, reflecting the weak retail environment.
Net sales of engineered products were $25.6 million for the first nine months
of fiscal 2003, a decrease of $5.0 million or 16.3% from the first nine
months of fiscal 2002. The decrease was caused by lower unit sales in all
product categories, particularly in sales of industrial yarns, reflecting
soft demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $47.1 million for the first
nine months of fiscal 2003 (12.8% of net sales), a decrease of $4.3 million
from $51.4 million (11.2% of net sales) for the first nine months of fiscal
2002. The decrease is primarily attributable to lower incentive compensation
expense ($2.0 million) and lower bad debt expense ($1.7 million). Bad debt
expense for the first nine months of fiscal 2002 included $1.4 million
attributable to Kmart Corporation's January 2002 bankruptcy filing. The
remainder of the decrease in selling, general and administrative expenses for
the first nine months of fiscal 2003 reflects generally lower expenses due to
our efforts to control costs, including the effects of the staff reductions
that we announced in August 2003, which are discussed above.
24
OPERATING INCOME
We had a consolidated operating loss of $100.1 million in the first nine
months of fiscal 2003, compared to $31.7 million in operating income for the
first nine months of fiscal 2002.
Segment Operating Income:
Operating income for the home fashions segment was $12.2 million for the
first nine months of fiscal 2003, a decrease of $19.0 million from $31.2
million in operating income in the first nine months of fiscal 2002. The
decrease in operating income in the first nine months of fiscal 2003 was
primarily due to the significant drop in sales volume and related higher per-
unit costs that resulted from reduced plant running schedules and production
curtailments in order to reduce inventories.
The apparel fabrics segment had a $4.4 million operating loss for the first
nine months of fiscal 2003, compared to $1.4 million in operating income for
the first nine months of fiscal 2002. The decrease in operating income in
the first nine months of fiscal 2003 was generally attributable to the lower
sales volume and related higher per-unit costs associated with underabsorbed
overhead.
The engineered products segment had a $2.5 million operating loss for the
first nine months of fiscal 2003, compared to a $1.1 million operating loss
for the first nine 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 nine months of fiscal 2003 was generally caused
by the decrease in sales.
Corporate Items:
As discussed above, we recorded a $91.7 million charge for impairment of
goodwill in the third quarter of fiscal 2003, which represents the write-off
of the entire remaining balance of goodwill, all of which relates to our home
fashions bedding business unit.
Other operating costs, net for the first nine months of fiscal 2003 consisted
of a $12.2 million pre-tax charge relating to the closure of two
manufacturing facilities, $0.8 million in severance and benefits expense
relating to staff reductions which is discussed above and a $0.4 million gain
from the sale of surplus equipment.
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. The shutdown of
the plants was substantially completed in the third quarter of fiscal 2003,
and the payout of severance and other exit costs will be completed in fiscal
2004.
25
Certain equipment from the closed facilities is being 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 (but see "Overview" above, regarding potential additional
writedowns). Our intention is to sell the Greenville and Ft. Valley real
estate as well as surplus equipment from the closed plants. At September 27,
2003, "prepaid expenses and other current assets" on our condensed consoli-
dated balance sheet includes $5.6 million for these assets, representing the
estimated sales proceeds, less disposal costs.
Other operating costs, net for the first nine 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 year relating to our plant consolidation program
announced in December 2001. The gain is attributable to our receipt of
$360,000 in net proceeds from the sale of our Newnan, Georgia facility and
surplus equipment, compared to a carrying value of $50,000.
Other items not allocated to segments totaled $1.2 million (expense) for the
first nine months of fiscal 2003 compared to $0.1 million (expense) for the
first nine months of fiscal 2002. The amount for the first nine months of
fiscal 2003 consists of idle facility costs and other expenses. The amount
for the first nine months of fiscal 2002 consists of idle facility costs and
other expenses totaling $0.8 million, offset by 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.
INTEREST EXPENSE
Interest expense was $20.8 million for the first nine months of fiscal 2003,
a decrease of $0.2 million from the first nine months of fiscal 2002. The
decrease was caused by the effect of lower average debt levels in the first
nine months of fiscal 2003, substantially offset by the effect of higher
average interest rates. Lower average debt levels in the first nine months
of fiscal 2003 caused approximately a $1.6 million decrease in interest
expense, approximately $1.0 million 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 discount to
yield an effective interest rate of 14% on $157 million aggregate principal
amount.
OTHER INCOME (EXPENSE), NET
Other income(expense), net was $0.9 million (income) for the first nine
months of fiscal 2003, compared to $0.1 million (income) for the first nine
months of fiscal 2002. The amount for the first nine months of fiscal 2003
consists of $1.6 million in gains related to life insurance policies,
interest income of $0.3 million and various other income items of $0.3
million, offset in part by 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.
26
INCOME TAX PROVISION
No income tax benefit was recorded against the pre-taxes loss for the first
nine months of fiscal 2003. A substantial portion of the loss was caused by
impairment of goodwill, which is not deductible for tax purposes. In
addition, we recorded a $10.6 million increase to the valuation allowance
against deferred tax assets during the first nine months of fiscal 2003,
which resulted in our net deferred tax assets being fully offset by the
valuation allowance at September 27, 2003. The increase was necessary
because, in light of the Company's recent operating performance, it is
management's opinion that it is more likely than not that a portion of the
deferred tax benefits will not be realized. Realization of certain of these
tax benefits, including potential tax savings of approximately $16.5 million
from the use of net operating loss and tax credit carryforwards, is generally
dependent on the generation of taxable income in the future. We will
continue to assess the valuation allowance, and to the extent it is
determined that all or a portion of the allowance is no longer required, the
tax benefits relating to the net deferred tax assets will be recognized in
the future.
The tax provision for the first nine months of fiscal 2002 was $7.6 million,
or 70.1% of pre-tax income. The high effective rate is due to losses from our
Mexican operations, for which no tax benefit was provided, and a $2.8 million
increase to income tax expense 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 $5.5 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 utilized 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 guidelines. The charge was
reported as a cumulative effect of a change in accounting principle
retroactive to the first day of fiscal 2002.
27
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 September 27, 2003 was 69.9%.
Credit Facilities and Senior Notes
On April 15, 2003, we completed the refinancing of substantially all of our
then outstanding long-term debt. This refinancing included:
- the sale at 95.035% of par of $157 million aggregate principal of our
12-3/4% senior notes due 2009 in a private offering pursuant to Rule
144A and Regulation S under the Securities Act of 1933; and
- a new 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 notes offering, together with borrowings under the
credit facility, were used to: (i) repay all borrowings outstanding under our
then 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. In accordance with the registration rights agreement entered into
in connection with the offering of the notes, the coupon rate on the notes
has been temporarily increased by 25 basis points pending the consummation of
the exchange offer contemplated by the registration statement. If the
registration statement is not declared effective by December 11, 2003, or the
exchange offer is not consummated by January 10, 2004, the coupon rate will
increase by an additional 25 basis points until such time as the registration
statement is declared effective or the exchange offer is consummated, as the
case may be. 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. The first of such interest payments was made on October 15, 2003. In
addition, the indenture restricts, among other things, additional indebted-
ness, 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
our option at either a prime rate or LIBOR plus, in each case, a spread based
on our leverage ratio. The margin on pricing will be adjusted quarterly based
28
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. Under this
pricing schedule, effective December 1, 2003, the margin on the term loan
will increase from 1.75% and 2.75% on prime rate and LIBOR loans,
respectively, to 2.00% and 3.00%, respectively. Also on December 1, 2003, the
margin on the revolving credit facility will increase from 1.50% and 2.50% on
prime rate and LIBOR loans, respectively, to 1.75% and 2.75%, respectively.
We are obligated to pay a 0.375% commitment fee for the unused line. At
September 27, 2003, in addition to the $38.6 million balance remaining on the
term loan, we had $54.0 million outstanding under the revolving credit
facility and $3.5 million of outstanding letters of credit. At November 5,
2003, we had $67.7 million borrowings outstanding under the revolving credit
facility, $4.6 million of letters of credit outstanding, and a balance on the
term loan of $37.1 million. Borrowings under the revolving credit facility
and the term loan bore interest at average rates of 3.75% and 3.87%,
respectively, and we had availability of $32.2 million under the revolving
credit facility at November 5, 2003; however, $15 million of that amount may
not be available due to the minimum excess availability limitation contained
in the amendment discussed below.
The senior credit agreement 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.
Under the senior 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 on the April 15, 2008 maturity. 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. At that time we will be
required to offer to repurchase a pro rata portion of the senior notes if
annual cash flow exceeds certain limits.
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."
29
Prior to the end of the third quarter of fiscal 2003, we advised our senior
secured lenders that we expected that we would violate the covenant specify-
ing the maximum leverage ratio at the end of the quarter. Subsequent to the
end of our third fiscal quarter, we entered into an amendment and waiver
agreement with our lenders pursuant to which the lenders permanently waived
this covenant violation. We paid an amendment fee in the amount of $250,000.
The amendment and waiver agreement also contains, among other provisions, new
requirements specifying minimum levels of excess availability under our
revolving credit facility and monthly operating EBITDA (as defined in the
credit agreement) during the fourth fiscal quarter.
Based on information currently available, we believe that we should be able
to meet the monthly covenant requirements in the fourth fiscal quarter, and
accordingly, we anticipate that we will have sufficient liquidity under our
credit facility to provide for our anticipated working capital needs and debt
service obligations during the quarter; however, we anticipate that we will
need relief from the minimum fixed charge ratio and maximum leverage ratio
covenants as of the end of the fourth quarter of fiscal 2003 and for some
period thereafter. We expect to work with our lending group to negotiate
such further amendments or waivers as will be necessary to maintain
compliance with the terms of our credit facility.
If we experience violations of the monthly or quarterly covenants discussed
above, and the lenders are unwilling to grant such additional forbearance,
waivers or amendments as may be required with respect to the credit
agreement, we would be in default, we would be unable to borrow under our
credit facility, and the lenders could seek remedies against us, including
acceleration of the debt outstanding, as set forth in the credit agreement.
An acceleration could also give rise to a default under or acceleration of
our other debt obligations, including the senior notes.
Because we expect that we will violate the covenants specifying the maximum
leverage ratio and minimum fixed charge ratio at the end of the fourth fiscal
quarter, we are required to report our senior secured debt as long term debt
due currently. Additionally, we have reported as current all senior debt
which would be subject to cross acceleration in the event the senior secured
lenders elected to accelerate the debt under our senior credit facility,
notwithstanding the fact that no default has occurred with respect to such
debt, which consists primarily of the 12-3/4% senior notes.
Working Capital
Operating activities generated $18.3 million in net cash for the first nine
months of fiscal 2003, of which $2.7 million was attributable to changes in
operating assets and liabilities. The net source of cash from operating
assets and liabilities is comprised of a $4.4 million source from operating
working capital (accounts receivable - $20.3 million source, inventories -
$8.3 million use, and accounts payable and accrued expenses - $7.6 million
use) and a $1.7 million net use of cash from prepaid expenses and other
assets and other liabilities.
30
During the comparable nine month period ended September 28, 2002, net cash
generated by operating activities was $53.0 million. This amount includes a
source of cash from operating assets and liabilities of $6.9 million,
comprised of a $5.9 million source from operating working capital (accounts
receivable - $2.7 million use, inventories - $5.1 million source, and
accounts payable and accrued expenses - $3.5 million source) and a $1.0
million source of cash for prepaid expenses and other assets and other
liabilities.
Investing Activities
During the first nine months of fiscal 2003, we purchased $9.9 million of
equipment and manufacturing improvements.
31
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 compliance with our
covenants in our lending agreements and outcome of negotiations with lenders,
assumptions regarding demand for our products, expected pricing levels, raw
material costs, the timing and cost of planned capital expenditures, timing
and amount of cost savings realized from consolidation of facilities and
personnel reductions, 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:
- assumptions regarding demand for and acceptance of our products at
retail;
- timing and amount of cost savings realized from consolidation of
facilities and personnel reductions;
- assumptions regarding compliance with covenants in our lending
agreements and outcome of negotiations with our lenders;
- 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;
32
- 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;
- changes in our relationships with our large customers and
business-related difficulties of our customers;
- 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, projected demand for and acceptance of our products at retail,
effects of and savings derived from facilities consolidations and personnel
reductions, our ability to obtain products and product components from third
parties, 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.
33
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
Item 4. Controls and Procedures
Our 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 as of September 27, 2003. 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 within the time
periods specified in Securities and Exchange Commission rules and forms.
There have been no significant changes in our internal control over financial
reporting during the fiscal quarter ended September 27, 2003 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
34
PART II - OTHER INFORMATION
Items 1-5. No disclosure required.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The Exhibits listed as applicable on the accompanying Exhibit
Index are filed as part of this Quarterly Report.
(b) Reports on Form 8-K.
(i) On July 23, 2003, we filed a Current Report on
Form 8-K reporting under item 12 a news release
concerning results for the fiscal quarter and six months
ended June 28, 2003.
(ii) On August 22, 2003, we filed a Current Report on
Form 8-K reporting under item 5 concerning the
elimination of approximately 80 salaried positions
throughout our operations.
(iii) On August 28, 2003, we filed a Current Report on
Form 8-K reporting under item 5 personnel and
organizational changes related to the retirement of
Richard L. Williams, our President and Chief Operating
Officer.
(iv) On September 9, 2003, we filed a Current Report on
Form 8-K/A amending item 5 of our Current Report on Form
8-K filed on February 4, 2003.
35
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: November 10, 2003 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
36
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)).
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