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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 March 29, 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 [X] No [_]
As of March 29, 2003, the registrant had 20,364,439 and 2,062,070 shares of
Class A Common Stock and Class B Common Stock outstanding, respectively.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
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DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 29, December 28,
2003 2002
------------ ------------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,206 $ 2,832
Accounts receivable, net 75,738 71,292
Inventories 159,394 151,586
Prepaid expenses and other current assets 4,363 4,175
Deferred income taxes 15,573 15,492
------------ -----------
Total current assets 257,274 245,377
Property, plant and equipment 510,325 508,637
Less accumulated depreciation and amortization (269,132) (260,462)
------------ -----------
Net property, plant and equipment 241,193 248,175
Goodwill, net 91,701 91,701
Other assets 10,825 10,269
------------ -----------
$ 600,993 $ 595,522
============ ===========
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DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 29, December 28,
2003 2002
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 7,017 $ 241,231
Accounts payable 24,545 25,802
Accrued compensation and related benefits 26,414 23,693
Other accrued expenses 12,083 8,944
------------ -----------
Total current liabilities 70,059 299,670
Other liabilities:
Long-term debt 241,216 10,792
Deferred income taxes 16,589 15,257
Other liabilities 41,187 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 20,364,439 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 210,032 209,952
Retained earnings 36,438 33,688
Accumulated other comprehensive loss (14,387) (14,387)
Unearned compensation--restricted stock (366) (441)
------------ -----------
Total shareholders' equity 231,942 229,037
------------ -----------
$ 600,993 $ 595,522
============ ===========
See accompanying notes.
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DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
---------------------------------------
March 29, March 30,
2003 2002
--------- ---------
(in thousands, except per share data)
Net sales $ 147,372 $ 158,418
Costs and expenses:
Cost of sales 119,653 136,664
Selling, general and
administrative expenses 17,968 17,815
Other operating costs, net (440) --
--------- ---------
Operating income 10,191 3,939
Other income 137 59
Interest expense (5,547) (7,383)
--------- ---------
Income (loss) before income taxes
and cumulative effect of accounting
change 4,781 (3,385)
Income tax provision 2,031 1,750
--------- ---------
Income (loss) before cumulative
effect of accounting change 2,750 (5,135)
Cumulative effect of accounting
change, net of tax -- (20,701)
--------- ---------
Net income (loss) $ 2,750 $ (25,836)
========= =========
See accompanying notes.
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DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Three Months Ended
---------------------------------
March 29, March 30,
2003 2002
--------- ---------
Earnings (loss) per share--basic:
Income (loss) before cumulative
effect of accounting change $ 0.13 $ (0.24)
Cumulative effect of accounting
change, net of tax -- (0.95)
--------- ---------
Net Income (loss) $ 0.13 $ (1.19)
========= =========
Earnings (loss) per share--diluted:
Income (loss) before cumulative
effect of accounting change $ 0.12 $ (0.24)
Cumulative effect of accounting
change, net of tax -- (0.95)
--------- ---------
Net income (loss) $ 0.12 $ (1.19)
========= =========
See accompanying notes.
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DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
-------------------------------------
March 29, March 30,
2003 2002
------------ -----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 2,750 $ (25,836)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Noncash interest expense 688 690
Depreciation and amortization of
property, plant and equipment 9,439 9,306
Amortization of restricted stock
compensation 75 85
Deferred income taxes 1,331 7,450
Writedown/disposal of assets 46 2
Other operating costs, net (440) --
Cumulative effect of accounting change,
net of tax -- 20,701
Changes in operating assets and liabilities:
Accounts receivable (4,162) (26,869)
Inventories (7,807) 14,708
Prepaid expenses and other assets (625) (4,973)
Accounts payable and accrued expenses 6,021 6,849
Other liabilities 192 98
---------- ----------
Net cash provided by operating
activities 7,508 2,211
---------- ----------
Cash flows from investing activities:
Capital expenditures (3,748) (2,623)
Proceeds from sale of assets -- 1
---------- ----------
Net cash used by investing activities (3,748) (2,622)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (3,290) (2,805)
Financing costs (596) (77)
Net payments - working capital
facility (500) (2,500)
---------- ----------
Net cash used by financing activities (4,386) (5,382)
---------- ----------
Net decrease in cash and cash equivalents (626) (5,793)
Cash and cash equivalents at beginning of period 2,832 8,316
---------- ----------
Cash and cash equivalents at end of period $ 2,206 $ 2,523
========== ==========
See accompanying notes.
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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.
Compensation 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:
Three Months Ended
---------------------------
March 29, March 30,
2003 2002
--------- ---------
(in thousands, except per
share data)
Net income (loss):
As reported $ 2,750 $ (25,836)
Less: pro forma expense
related to stock options (138) (198)
--------- ---------
Pro forma $ 2,612 $ (26,034)
========= =========
Per share:
As reported--
Basic $ 0.13 $ (1.19)
Diluted 0.12 (1.19)
Pro forma--
Basic 0.12 (1.19)
Diluted 0.12 (1.19)
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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 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.
4. Inventories
The components of inventory are as follows:
March 29, December 28,
2003 2002
----------- ------------
(in thousands)
Finished goods $ 58,530 $ 52,088
Work in process 86,523 85,827
Raw materials 4,785 3,348
Supplies 9,556 10,323
-------- --------
Total Inventories $159,394 $151,586
======== ========
5. Other Operating Costs, Net
Other operating costs, net for the first quarter of fiscal 2003
consists of a $440,000 pre-tax gain from the sale of surplus equipment
in connection with the plant consolidation program announced by the
Company in December 2001. The plant consolidation is complete except
for the payment of remaining severance and benefits, estimated to be
$68,000 as of March 29, 2003.
6. Income Taxes
The income tax provision for the first quarter of fiscal 2002 includes
a one-time 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 our receiving a $5,500,000 refund of
taxes in July 2002. However, the carryback also freed up investment
credits
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that had previously offset tax in the carryback years. A $2,800,000 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. Excluding this one-time
adjustment, the tax benefit for the first quarter of fiscal 2002 was
$1,050,000, or 31.0% of the pretax loss.
7. 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
Net income -- -- -- 2,750 -- -- 2,750
Amortization of
unearned compen-
sation -- -- -- -- -- 75 75
Restricted stock
tax benefits -- -- 80 -- -- -- 80
------- ------ --------- -------- -------- ------- ---------
Balance at
March 29, 2003 $ 204 $ 21 $ 210,032 $ 36,438 $(14,387) $ (366) $ 231,942
======= ====== ========= ======== ======== ======= =========
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8. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
---------------------------------
March 29, March 30,
2003 2002
--------- ---------
(in thousands, except per share data)
Numerator for basic and diluted earnings
per share:
Income (loss) before cumulative
effect of accounting change $ 2,750 $ (5,135)
Cumulative effect of accounting
change -- (20,701)
--------- ---------
Net income (loss) $ 2,750 $ (25,836)
========= =========
Denominator:
Denominator for basic earnings
per share--weighted-average
shares 21,909 21,790
Effect of dilutive securities:
Employee stock options and
restricted stock awards 382 --
--------- ---------
Denominator for diluted earnings
per share--weighted average shares
adjusted for dilutive
securities 22,291 21,790
========= =========
Earnings (loss) per share:
Basic:
Income (loss) before cumulative
effect of accounting change $ 0.13 $ (0.24)
Cumulative effect of
accounting change -- (0.95)
--------- ---------
Net income (loss) $ 0.13 $ (1.19)
========= =========
Diluted:
Income (loss) before cumulative
effect of accounting change $ 0.12 $ (0.24)
Cumulative effect of
accounting change -- (0.95)
--------- ---------
Net income (loss) $ 0.12 $ (1.19)
========= =========
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The effect of potentially dilutive securities is computed using the
treasury stock method. Options to purchase 1,991,000 shares of the
Company's common stock were outstanding during the first quarter of
fiscal 2003 but were not included in the computation of diluted
earnings per share 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 in the first quarter of fiscal 2002, all outstanding restricted
stock and stock options were excluded from the computation of diluted
loss per share, as their inclusion would have been antidilutive.
9. Segment Information
Summarized information by reportable segment is shown in the following tables:
Three Months Ended
-------------------------------------
March 29, March 30,
2003 2002
----------- -----------
(in thousands)
Net sales:
Home fashions $ 108,414 $ 116,009
Apparel fabrics 29,059 31,930
Engineered products 9,899 10,479
----------- -----------
Consolidated net sales $ 147,372 $ 158,418
=========== ===========
Operating income (loss):
Home fashions $ 11,525 5,314
Apparel fabrics (636) (1,576)
Engineered products (852) (303)
Corporate items not allocated to segments:
Other operating costs, net 440 --
Other (286) 504
----------- -----------
Consolidated operating income $ 10,191 $ 3,939
=========== ===========
10. Subsequent Event-Refinancing
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, 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
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.
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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.
The senior notes are callable subject to a make-whole provision.
Interest on the senior notes is payable semi-annually on October 15 and
April 15. The Company is required to register the notes within 60 days
after the April 15, 2003 closing of the refinancing.
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. At the April 15, 2003 inception of
the new senior credit facility, in addition to the $40 million term
loan, $65,363,000 was outstanding under the revolving credit facility
and $3,378,000 in letters of credit were outstanding. Available and
undrawn at that date was $53,727,000.
Under the senior 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 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.
Additionally, the indenture governing the senior notes contains various
restrictions, including limitations on additional indebtedness,
restricted payments, lien creation, asset sales, and mergers.
The term loan requires scheduled quarterly principal payments of
$1,428,572 beginning 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. At that time, the Company
is required to offer to repurchase senior notes if annual cash flow
exceeds certain limits.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
NET SALES
Net sales for the first quarter of fiscal 2003 were $147.4 million, a decrease
of $11.0 million or 7.0% from the first quarter of fiscal 2002.
Net sales of home fashions products were $108.4 million for the first quarter of
fiscal 2003, a decrease of $7.6 million or 6.5% from the first quarter of fiscal
2002. Most of the decrease was in sales of adult bedding products to department
and specialty stores, reflecting the generally weak retail environment. Sales to
the hospitality industry also decreased, consistent with the low occupancy rates
experienced by hotels during the period.
Net sales of apparel fabrics for the first quarter of fiscal 2003 were $29.1
million, down $2.9 million or 9.0% from the first quarter of fiscal 2002. The
decrease was due to lower sales of dress shirting fabrics, pant fabrics and home
textiles fabrics, reflecting the generally weak economic conditions. Partially
offsetting these decreases were higher sales of fabrics for career apparel and
of finished shirts through our operations in Mexico.
Net sales of engineered products for the first quarter of fiscal 2003 were $9.9
million, a decrease of $0.6 million or 5.5% from the first quarter of fiscal
2002. The decrease was caused by lower sales of industrial yarns, reflecting a
competitive pricing environment and generally weak economic conditions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $18.0 million for the first
quarter of fiscal 2003 (12.2% of net sales), compared to $17.8 million (11.2% of
net sales) for the first quarter of fiscal 2002. Higher incentive compensation
and home fashions marketing and design costs in the first quarter of fiscal 2003
offset lower bad debt expense. Bad debt expense for the first quarter of fiscal
2002 included $1.4 million attributable to Kmart Corporation's January 2002
bankruptcy filing.
OPERATING INCOME
Consolidated operating income for the first quarter of fiscal 2003 was $10.2
million, compared to $3.9 million in the first quarter of fiscal 2002.
Segment Operating Income:
Operating income for the home fashions segment was $11.5 million for the first
quarter of fiscal 2003, compared to $5.3 million in the first quarter of fiscal
2002. The improved operating results were due to a more profitable sales mix,
lower raw material prices and manufacturing savings attributable to the plant
consolidation program completed during fiscal 2002.
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The apparel fabrics segment had a $0.6 million operating loss in the first
quarter of fiscal 2003, including a $0.5 million operating loss attributable to
our shirt manufacturing facility in Mexico, compared to a $1.6 million operating
loss in the first quarter of fiscal 2002, which included a $0.6 million
operating loss from our Mexican operations. The improved operating results for
our domestic apparel fabrics business reflect better gross profit margins due to
lower raw material prices and manufacturing savings from the plant consolidation
completed in 2002, offset in part by consulting expenses related to an
initiative to increase manufacturing efficiencies and reduce lead time. Although
sales volume for our Mexican operations began to increase in the first quarter
of fiscal 2003, manufacturing inefficiencies and shipping disruptions, due in
part to the ramp up of production, impeded profitability.
The engineered products segment had a $0.9 million operating loss in the first
quarter of fiscal 2003, compared to a $0.3 million operating loss in the first
quarter of fiscal 2002. The loss for both periods reflects low sales volume and
inefficient manufacturing performance. In addition, profitability for the first
quarter of fiscal 2003 was hampered by a competitive pricing environment and
start-up issues related to the installation of a new shop floor, cost and
inventory control system.
Corporate Items:
Other operating costs, net for the first quarter of fiscal 2003 consisted of a
$0.4 million pre-tax gain from the sale of surplus equipment.
Other items not allocated to segments in the first quarter of fiscal 2003
consisted of idle facility costs and other expenses totaling $0.3 million. In
the first quarter of fiscal 2002, items not allocated to segments amounted to
$0.5 million (income) and consisted of 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 by idle facility costs and other expenses
totaling $0.2 million.
INTEREST EXPENSE
Interest expense was $5.5 million for the first quarter of fiscal 2003, a
decrease of $1.8 million from the first quarter of fiscal 2002. The decrease was
attributable to lower debt levels, and to a lesser extent, lower average
interest rates.
INCOME TAX PROVISION
We recorded a $2.0 million (42.5% of pre-tax income) income tax provision for
the first quarter of fiscal 2003. The relatively high effective rate was due to
losses from our Mexican operations, for which no tax benefit was provided. We
recorded a $1.8 million income tax provision in the first quarter of fiscal
2002, which included a one-time increase to income tax expense of $2.8 million
attributable to the Job Creation and Worker Assistance Act, enacted in March,
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
tax provision was recorded in the first quarter of fiscal
16
2002, representing the amount of these freed up credits that expired without
being utilized. Excluding the one-time tax adjustment discussed above, the tax
benefit for the first quarter of fiscal 2002 was $1.1 million, or 31.0% of the
pre-tax loss. The relatively low tax benefit as a percentage of the pre-tax loss
for the first quarter of fiscal 2002 is attributable to losses from our Mexican
operations, for which no tax benefit was provided.
NET INCOME AND EARNINGS PER SHARE
Net income was $2.8 million or $0.12 per diluted share for the first quarter of
fiscal 2003. Before the cumulative effect of an accounting change related to
goodwill (discussed below) we reported a loss of $5.1 million or $0.24 per
diluted share for the first quarter of fiscal 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
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 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.
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, capital improvements and
debt service requirements. Our total debt to total capital ratio at March 29,
2003 was 51.7%.
Credit Facilities
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. This working capital line was non-amortizing and the borrowing base
was determined weekly by valuation of the eligible inventories and accounts
receivable. We were required to make interest payments on a monthly basis for
all outstanding loans, and to meet a minimum cumulative
17
EBITDA covenant (as defined) and an interest coverage ratio covenant (as
defined) on a monthly basis. The loans under the credit facility could bear
interest at prime rate or LIBOR, at our option, and the interest rate margin on
the loans was established by our leverage ratio, as defined.
Following a prepayment of $3 million during the first quarter of fiscal 2003,
the term loan had an outstanding principal balance of $53.9 million at March 29,
2003. Early in the second quarter of fiscal 2003, an additional $3 million
prepayment and a scheduled $10 million amortization payment further reduced the
outstanding term loan to $40.9 million. As of March 29, 2003, $62.5 million was
outstanding under the working capital loan and $61.1 million was unused and
available for borrowing. The average interest rate on debt outstanding under the
term loan and the working capital loan was 3.75% and 3.67%, respectively.
In addition, at March 29, 2003 we had an aggregate of $120 million outstanding
of our 10-1/8% senior subordinated notes due 2003. All of the outstanding
indebtedness under our credit facility and our 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 substantially all of our
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 new
senior credit facility, were used to: (i) repay all borrowings outstanding under
our existing credit agreement; (ii) provide for the redemption, on May 15, 2003,
of 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. During the second quarter of 2003, we will
incur one-time, pre-tax charges of approximately $1.3 million ($0.8 million
after tax) associated with the write-off of unamortized financing costs relating
to the issuance of our 10 1/8% senior subordinated notes and our existing credit
facility.
The senior notes have not been registered under the Securities Act of 1933 or
the securities laws of any state and may not be offered or sold in the United
States or outside the United States absent registration or an applicable
exemption from the registration requirements under the Securities Act and any
applicable state securities laws. We are required to file a registration
statement registering the senior notes within 60 days after the April 15, 2003
closing. 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 are required by the indenture governing
the senior notes to offer to repurchase senior notes
18
with a portion of our excess cash flow, as defined in the indenture. In
addition, 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.
Our new 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 will pay a 0.375%
commitment fee for the unused line. At the April 15, 2003 inception of the new
facility, in addition to the $40 million term loan, we had $65.4 million
outstanding under the revolving credit facility and $3.4 million of outstanding
letters of credit.
As of April 29, 2003:
. we had $56.5 million borrowings outstanding under the revolving credit
facility and $3.4 million of letters of credit outstanding;
. we had availability of $62.5 million under the revolving credit
facility; and
. our $40 million term loan and our borrowings outstanding under the
revolving credit facility bore interest at average rates of 4.72% and
4.21%, respectively.
The senior 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.
Additionally, the indenture governing the senior notes restricts, among other
things, additional indebtedness, restricted payments, lien creation, asset
sales, and mergers.
Under the senior credit agreement, scheduled amortization of the term loan
begins 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 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 the excess
cash flow, as defined in the credit agreement, determined
19
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 for 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.
During the second quarter of 2003, there will be a 30-day period prior to the
redemption of the senior subordinated notes during which interest will accrue on
both the senior subordinated notes and the senior notes. This additional
interest cost of approximately $1.0 million will be paid and recognized in the
second quarter of 2003.
Working Capital
Net cash generated from operating activities in the three months ended March
29,2003 was $7.5 million. The net income, adjusted for noncash expense items,
net, generated $13.9 million of cash. This was offset by a $6.4 million use of
cash by operating assets and liabilities, comprised of a $5.9 million use from
operating working capital (accounts receivable - $4.2 million use, inventories -
$7.8 million use, and accounts payable and accrued expenses - $6.0 million
source) and a $0.4 million use of cash for prepaid expenses and other assets and
other liabilities.
In the first quarter of fiscal 2002, net cash generated from operating
activities was $2.2 million. The net loss for that period, adjusted for noncash
expense items, net, generated $12.4 million of cash. This was offset by a $10.2
million use of cash by operating assets and liabilities, comprised of a $5.3
million use of cash from operating working capital (accounts receivable - $26.9
million use, inventories - $14.7 million source, and accounts payable and
accrued expenses - $6.8 million source) and a $4.9 million use of cash for
prepaid expenses and other assets and other liabilities.
Investing Activities
During the first three months of fiscal 2003, we purchased $3.7 million in
equipment and manufacturing improvements.
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, in all material respects,
20
to ensure that 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.
21
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 and political 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;
22
. 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;
. 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 shareholder.
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.
23
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On April 15, 2003, we entered into a new $200 million senior secured
credit facility and we sold $157 million aggregate principal amount of
12-3/4% senior notes due 2009, at 95.035% of par, in a private
placement pursuant to Rule 144A and Regulation S under the Securities
Act of 1933, as amended. The credit facility and the indenture
governing the senior notes each contains covenants which restrict
working capital and the payment of dividends. Borrowings under the new
senior credit facility and proceeds from the sale of the new senior
notes were used to retire our existing senior secured credit facility
and to provide for the redemption of our existing $120 million
aggregate principal amount of 10 1/8% senior subordinated notes due
2003. See Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
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 February 4, 2003, we filed a Current Report on Form 8-K
reporting under Item 5 our fourth quarter and full year earnings
for fiscal 2002.
(ii) On March 17, 2003, we filed a Current Report on Form 8-K under
Item 5 concerning the refinancing of our credit facility and our 10
1/8% senior subordinated notes due 2003.
24
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: May 7, 2003 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
25
CERTIFICATIONS
I, Joseph L. Lanier, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dan River Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
26
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003
/s/ Joseph L. Lanier, Jr.
----------------------------
Joseph L. Lanier, Jr., Chief
Executive Officer
27
CERTIFICATIONS
I, Barry F. Shea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dan River Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
28
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 7, 2003
/s/ Barry F. Shea
------------------------------
Barry F. Shea, Chief Financial Officer
29
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)
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
11 Statement regarding Computation of Earnings per share
(incorporated by reference to Note 8 to the Unaudited
Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q)
99* Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- -----------------
*Filed herewith.