1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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: (804) 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
Number of shares of common stock outstanding as of June 30, 2001:
Class A: 19,928,689 Shares
Class B: 2,062,070 Shares
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<Page> 2
Forward Looking Statements.
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This Quarterly Report contains forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities and Exchange Act of 1934.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those included in such forward
looking statements. The words "believes," "expects," "intends," "estimates"
or "anticipates" and similar expressions, as well as future or conditional
verbs such as "will," "should," "would," and "could," are intended to
identify forward-looking statements. Specific forward looking statements
contained in this Quarterly Report include, among others, statements
regarding adequacy of our liquidity and capital resources. These forward
looking statements are found in Part I, Item 2. There can be no assurance
that our assumptions are correct.
The forward looking statements in this Quarterly Report are also subject to
certain risks and uncertainties including, among others, that our performance
in future periods may be adversely impacted by the cyclical nature of the
textile industry, intense competition within the textile industry from both
foreign imports and domestic sources of supply, fluctuations in the price and
availability of cotton and other raw materials, our inability to make capital
improvements necessary to maintain competitiveness, our inability to increase
prices in order to recover increased energy, raw material, labor or other
costs, possible adverse changes in governmental regulation regarding the
import of cotton and textile products, difficulties in integrating acquired
businesses and achieving cost savings, changes in environmental regulations,
deterioration of relationships with or the loss of material customers, and
adverse changes in general market and industry conditions, including but not
limited to high inventory levels at retail or within the textile industry
generally.
We believe that the forward looking statements in this Quarterly Report are
reasonable; however, such statements are based on current expectations and
undue reliance should not be placed on such statements. We undertake no
obligation to update publicly any forward-looking statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
<Page> 3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
June 30, December 30,
2001 2000
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,171 $ 3,675
Accounts receivable, net 86,979 84,726
Inventories 177,531 206,227
Prepaid expenses and other current assets 6,870 6,254
Deferred income taxes 15,716 16,656
----------- -----------
Total current assets 288,267 317,538
Property, plant and equipment 523,953 508,498
Less accumulated depreciation and amortization (234,859) (216,035)
----------- -----------
Net property, plant and equipment 289,094 292,463
Goodwill, net 114,985 115,011
Other assets 7,705 20,461
----------- -----------
$ 700,051 $ 745,473
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
June 30, December 30,
2001 2000
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 42,296 $ 25,872
Accounts payable 23,641 27,622
Accrued compensation and related benefits 18,623 20,437
Other accrued expenses 12,223 11,233
------------ ------------
Total current liabilities 96,783 85,164
Other liabilities:
Long-term debt 305,797 343,399
Deferred income taxes 21,090 28,583
Other liabilities 11,815 11,135
Shareholders' equity:
Preferred stock, $.01 par value; authorized
50,000 shares; no shares issued -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued
and outstanding 19,928,689 shares
(19,703,439 shares at December 30, 2000) 199 197
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; issued
and outstanding 2,062,070 shares 21 21
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; no shares
outstanding -- --
Additional paid-in capital 209,785 209,096
Retained earnings 55,219 67,878
Unearned compensation--restricted stock (658) --
------------ ------------
Total shareholders' equity 264,566 277,192
------------ ------------
$ 700,051 $ 745,473
============ ============
</Table>
See accompanying notes.
<Page> 5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<caption>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 161,858 $ 157,232 $ 325,859 $ 322,181
Costs and expenses:
Cost of sales 144,515 125,378 292,460 259,430
Selling, general
and administrative
expenses 16,846 18,066 33,666 34,036
Amortization of
goodwill 889 810 1,694 1,522
--------- --------- --------- ---------
Operating income (loss) (392) 12,978 (1,961) 27,193
Other income (expense) (113) 153 48 352
Equity in loss of
joint venture (177) -- (244) --
Interest expense (8,407) (7,869) (17,055) (15,207)
--------- --------- --------- ---------
Income (loss) before
income taxes (9,089) 5,262 (19,212) 12,338
Provision (benefit) for
income taxes (2,950) 2,303 (6,553) 5,306
--------- --------- --------- ---------
Net income (loss) $ (6,139) $ 2,959 $ (12,659) $ 7,032
========= ========= ========= =========
Basic and diluted earnings
(loss) per share: $ (0.28) $ 0.13 $ (0.58) $ 0.32
========= ========= ========= =========
</Table>
See accompanying notes
<Page>6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<caption> Six Months Ended
---------------------------
June 30, July 1,
2001 2000
------------ ------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (12,659) $ 7,032
Adjustments to reconcile net income to net
cash provided by operating activities:
Noncash interest expense 574 376
Depreciation and amortization of
property, plant and equipment 19,763 18,652
Amortization of goodwill 1,694 1,522
Amortization of restricted stock compensation 33 --
Deferred income taxes (6,553) 4,006
Writedown/disposal of assets 153 (244)
Changes in operating assets and liabilities:
Accounts receivable (2,044) (5,607)
Inventories 29,086 (36,724)
Prepaid expenses and other assets 1,039 (5,179)
Accounts payable and accrued expenses (1,698) 11,316
Other liabilities 436 (99)
---------- ----------
Net cash provided (used) by operating
activities 29,824 (4,949)
---------- ----------
Cash flows from investing activities:
Capital expenditures (12,055) (19,657)
Proceeds from sale of assets 80 450
Acquisition of business -- (15,456)
Investment in subsidiary (3,566) --
---------- ----------
Net cash used by investing activities (15,541) (34,663)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (14,178) (11,100)
Issuances of long-term debt -- 16,410
Borrowings against cash surrender value of life
insurance 5,404 --
Finance costs (1,013) (365)
Net borrowings (payments)-working capital
facility (7,000) 41,500
Proceeds from exercise of stock options -- 36
Repurchase of common stock -- (4,599)
---------- ----------
Net cash provided (used) by
financing activities (16,787) 41,882
---------- ----------
Net increase (decrease) in cash and cash
equivalents (2,504) 2,270
Cash and cash equivalents at beginning of period 3,675 2,084
---------- ----------
Cash and cash equivalents at end of period $ 1,171 $ 4,354
========== ==========
</Table>
<Page> 7
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 30, 2000.
2. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations." This standard, which will apply to all
business combinations initiated after June 30, 2001, requires that the
purchase method of accounting be used for all business combinations.
The standard also provides criteria for the recognition and measurement
of goodwill and other acquired intangible assets.
Also in July 2001, the Financial Accounting Standards Board issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under this standard,
goodwill and intangible assets with indefinite lives will be measured
for impairment on at least an annual basis instead of being amortized.
The Company will adopt SFAS in January 2002, but has not yet determined
the effect that the standard will have on its financial condition or
results of operations.
3. Derivative Instruments and Hedging Activities
Effective as of the beginning of fiscal 2001, the Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended, which requires that derivative instruments be reported on
the balance sheet at fair value. The standard also establishes criteria
for designation and effectiveness of hedging relationships.
In connection with the purchasing of cotton for anticipated
manufacturing requirements, the Company may enter into cotton futures
and option contracts in order to reduce the risk associated with future
price fluctuations. Under SFAS 133, certain cotton futures and option
contracts will no longer be accounted for as hedges. Due to the
insignificance of such contracts and the absence of other derivative
instruments subject to SFAS 133, the adoption of the new standard did
not have a material impact on the Company's financial position or
results of operations.
8
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Inventories
The components of inventory are as follows:
<Table>
<Caption>
June 30, December 30,
2001 2000
------------ ------------
(in thousands)
Finished goods $ 70,777 $ 78,597
Work in process 91,016 110,591
Raw materials 3,153 3,215
Supplies 12,585 13,824
-------- --------
Total Inventories $177,531 $206,227
======== ========
</Table>
5. Credit Facility
The Company maintains a credit facility comprised of a term loan and a
$150 million secured working capital line of credit. This credit
facility is secured by the Company's accounts receivable, inventories
and real and personal property. The working capital line is non-
amortizing and any amounts outstanding are due at the final maturity of
September 30, 2003. As of June 30, 2001, $108.1 million was used and
$41.9 million was unused and available for borrowing. The term loan had
an outstanding principal balance of $104.9 million at June 30, 2001.
Scheduled amortization payments for fiscal 2001 on the term loan total
$23.0 million, of which $13.0 million was paid in the first half of the
year.
The credit facility is provided pursuant to a loan agreement which
contains certain covenants, including the maintenance of certain
interest coverage ratio and maximum debt levels and limitations on
mergers and consolidations, affiliated transactions, incurring liens,
disposing of assets and limitations on investments. An event of default
under the loan agreement includes Change of Control (as defined) as well
as non-compliance with certain other provisions.
The Company was in compliance with all covenants of the credit facility
as of June 30, 2001, but anticipates that it may not be in compliance
with certain financial covenants as of September 29, 2001. The Company
has so notified the agent bank for the credit agreement and has
initiated discussions regarding a potential waiver or amendment. While
the Company can make no assurances, it believes that it will be able to
obtain such waivers or amendment. If the financial or other covenants
contained in the credit facility are violated and a waiver or amendment
is not obtained, the Company would be in default under the credit
facility and other debt obligations. If such a default occurs and is
not waived by the lenders, the lenders could seek remedies against the
Company as set forth in those agreements.
9
6. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
<Table>
<Caption>
Unearned
Compen- Total
Additional sation- Share-
Common Stock Paid-in Retained Restricted holders'
Class A Class B Capital Earnings Stock Equity
------- ------- --------- --------- -------- --------
(in thousands)
Balance at December
30, 2000 $ 197 $ 21 $ 209,096 $ 67,878 $ -- $ 277,192
Net Loss -- -- -- (12,659) -- (12,659)
Restricted stock awards 2 -- 689 -- (691) --
Amortization of unearned
compensation -- -- -- -- 33 33
------- ------ --------- -------- --------- ---------
Balance at June 30, 2001 $ 199 $ 21 $ 209,785 $ 55,219 $ (658) $ 264,566
======= ====== ========= ========= ========= =========
<Page> 10
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- -------- -------- --------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
per share -- net
income (loss) $ (6,139) $ 2,959 $ (12,659) $ 7,032
========= ========= ========= =========
Denominator for basic
and diluted earnings
per share--
weighted-average
shares 21,766 22,063 21,766 22,282
========= ========= ========= =========
Earnings (loss) per
share--basic and
diluted: $ (0.28) $ 0.13 $ (0.58) $ 0.32
========= ========= ========= ==========
</Table>
In May 2001, the Company issued 225,250 shares of restricted Class A
common stock. These shares, all of which were nonvested as of June 30, 2001,
could potentially dilute earnings per share in the future, but were not
included in the earnings per share computations for the three or six months
ended June 30, 2001 because they were antidilutive.
11
8. Segment Information
Summarized information by reportable segment is shown in the following
tables:
<Table>
<caption>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- -------- -------- --------
(in thousands)
Net sales:
Home fashions $ 116,962 $ 105,624 $ 237,493 $ 219,997
Apparel fabrics 33,835 38,261 66,036 75,212
Engineered products 11,061 13,347 22,330 26,972
--------- --------- --------- ---------
Consolidated net
sales $ 161,858 $ 157,232 $ 325,859 $ 322,181
========= ========= ========= =========
Operating income (loss):
Home fashions $ 2,675 $ 10,152 $ 3,160 $ 22,392
Apparel fabrics (1,777) 3,175 (2,274) 6,407
Engineered products (340) 822 (737) 1,572
Corporate items not
allocated to
segments:
Amortization of
goodwill (889) (810) (1,694) (1,522)
Other (61) (361) (416) (1,656)
--------- --------- --------- ---------
Consolidated operating
income (loss) $ (392) $ 12,978 $ (1,961) $ 27,193
========= ========= ========= =========
</Table>
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2001 and July 1, 2000
NET SALES
Net sales for the second quarter of fiscal 2001 were $161.9 million, an
increase of $4.6 million or 2.9% over the second quarter of fiscal 2000.
Home Fashions
Net sales of home fashions products were $117.0 million for the second
quarter of fiscal 2001, up $11.3 million or 10.7% from the second quarter of
fiscal 2000. The increase is attributable to higher sales to mass merchants,
which more than offset the effects of the otherwise generally soft demand for
our home fashions products in other retail trade classes and in the
hospitality and healthcare markets.
Apparel Fabrics
Net sales of apparel fabrics for the second quarter of fiscal 2001 were $33.8
million, a decrease of $4.4 million or 11.6% from the second quarter of
fiscal 2000. Most of the decrease is attributable to lower sales of dress
shirting and uniform fabrics, and to lower sales of greige (unfinished)
fabrics to converters. We believe these decreases reflect the weak retail
environment, rising unemployment in the service sector, and foreign
competition.
Engineered Products
Net sales of engineered products for the second quarter of fiscal 2001 were
$11.1 million, a decrease of $2.3 million or 17.1% from the second quarter of
fiscal 2000. Most of the decrease was in sales of automotive and industrial
hose yarns.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $16.8 million for the
second quarter of fiscal 2001 (10.4% of net sales), a decrease of $1.2
million or 6.8% from $18.1 million (11.5% of net sales) for the second
quarter of fiscal 2000. The decrease is attributable to lower incentive
compensation expense and lower home fashions design costs.
OPERATING INCOME
The Company generated a consolidated operating loss of $0.4 million in the
second quarter of fiscal 2001, compared to $13.0 million in operating income
for the second quarter of fiscal 2000.
13
Segment Operating Income:
Operating income for the home fashions segment was $2.7 million for the
second quarter of fiscal 2001, compared to $10.2 million in the second
quarter of fiscal 2000. Although sales volume increased during the quarter,
a less favorable product mix, including promotional pricing due to our focus
on inventory reduction, adversely impacted profit margins. In addition,
profitability was negatively impacted by higher raw material costs, and by
production curtailments which were necessary in order to attain targeted
reductions in inventory levels.
The apparel fabrics segment generated a $1.8 million operating loss for the
second quarter of fiscal 2001, compared to $3.2 million in operating income
for the second quarter of fiscal 2000. The lower profitability reflects the
lower sales volume, a competitive pricing environment, higher raw material
costs, and the effects of unfavorable running schedules and production
curtailments, which were necessary to keep inventories in line with demand
for our products. In addition, the operating loss for the current quarter
includes a $0.4 million loss from our shirt manufacturing subsidiary in
Mexico, which only recently became operational. Prior to the Company's
buyout of its joint venture partner in fiscal 2001, results from this
business were reported as "Equity in loss of joint venture."
The engineered products segment generated a $0.3 million operating loss in
the second quarter of fiscal 2001, compared to $0.8 million in operating
income in the second quarter of fiscal 2000. The decrease in profitability
reflects both the lower sales volume and a less favorable sales mix. In
addition, manufacturing operations during the current quarter were hindered
by downtime and other inefficiencies during the installation of new equipment
and related plant layout changes.
Corporate expenses not allocated to segments totaled $1.0 million in the
second quarter of fiscal 2001, including $0.9 million in amortization of
goodwill. This compares to $1.2 million in expenses not allocated to
segments in the second quarter of fiscal 2000, which included $0.8 million in
amortization of goodwill. The higher amortization in fiscal 2001 is
attributable to goodwill resulting from the acquisition of the remaining
interest in the shirt manufacturing operation in Mexico.
INTEREST EXPENSE
Interest expense was $8.4 million for the second quarter of fiscal 2001, up
$0.5 million over the second quarter of fiscal 2000. Most of the increase
was attributable to higher average interest rates.
INCOME TAX PROVISION
The Company recorded a $3.0 million income tax benefit (32.5% of the pre-tax
loss) for the second quarter of fiscal 2001, compared to a $2.3 million
provision (43.8% of pre-tax income) for the second quarter of fiscal 2000.
The effect of nondeductible goodwill amortization decreased the income tax
benefit for the second quarter of fiscal 2001 by 3.4% of the pre-tax loss and
increased the income tax provision in the second quarter of fiscal 2000 by
5.2% of pre-tax income. Losses attributable to our Mexican operations in the
second quarter of fiscal 2001, for which no tax benefit was provided,
decreased the income tax benefit by 2.7% of the pre-tax loss.
14
NET INCOME AND EARNINGS PER SHARE
The net loss for the second quarter of fiscal 2001 was $6.1 million or $0.28
per share compared to net income of $3.0 million or $0.13 per share for the
second quarter of fiscal 2000. Weighted average diluted shares outstanding
decreased to 21.8 million for the second quarter of fiscal 2001 from 22.1
million for the second quarter of fiscal 2000, due to the repurchase of
shares during the first half of fiscal 2000 under the Company's stock
repurchase program.
Comparison of Six Months Ended June 30, 2001 and July 1, 2000
NET SALES
Net sales for the first six months of fiscal 2001 were $325.9 million, an
increase of $3.7 million or 1.1% over net sales of $322.2 million for the
first six months of fiscal 2000.
Net sales of home fashions products were $237.5 million for the first six
months of fiscal 2001, up $17.5 million or 8.0% from the first six months of
fiscal 2000. Excluding $1.6 million in incremental sales attributable to the
Import Specialists business that we acquired in April 2000, net sales
increased by $15.9 million. The increase is attributable to higher sales to
mass merchants, which more than offset the effects of the otherwise generally
soft demand for our home fashions products in other retail trade classes and
in the hospitality and healthcare markets.
Net sales of apparel fabrics for the first six months of fiscal 2001 were
$66.0 million, down $9.2 million or 12.2% from the first six months of fiscal
2000. Most of the decrease is attributable to lower sales of dress shirting
and uniform fabrics, and to lower sales of greige (unfinished) fabrics to
converters. We believe these decreases reflect the weak retail environment,
rising unemployment in the service sector, and foreign competition.
Net sales of engineered products were $22.3 million for the first six months
of fiscal 2001, down $4.6 million or 17.2% from the first six months of
fiscal 2000. Most of the decrease was in sales of automotive and industrial
hose yarns.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $33.7 million for the first
six months of fiscal 2001 (10.3% of net sales), compared to $34.0 million
(10.6% of net sales) for the first six months of fiscal 2000. The slight
decrease was caused by lower incentive compensation in the current year,
offset in part by incremental expenses associated with the Import Specialists
business, which we acquired in April, 2000.
OPERATING INCOME
The Company recorded a consolidated operating loss of $2.0 million in the
first six months of fiscal 2001, compared to $27.2 million in operating
income for the first six months of fiscal 2000.
15
Segment Operating Income:
Operating income for the home fashions segment was $3.2 million for the first
six months of fiscal 2001, compared to $22.4 million in operating income
earned in the first six months of fiscal 2000. Although sales volume
increased during the first six months of fiscal 2001, a less favorable
product mix, including promotional pricing due to our focus on inventory
reduction, adversely impacted profit margins. In addition, profitability was
negatively impacted by higher energy and raw material costs, and by
production curtailments which were necessary in order to attain targeted
reductions in inventory levels.
The apparel fabrics segment generated a $2.3 million operating loss for the
first six months of fiscal 2001, compared to $6.4 million in operating income
for the first six months of fiscal 2000. The lower profitability in the
first six months of fiscal 2001 reflects the lower sales volume, a
competitive pricing environment, higher energy and raw material costs, and
the effects of unfavorable running schedules and production curtailments,
which were necessary to keep inventories in line with demand for our
products. In addition, the current year operating loss includes a $0.4
million loss from our shirt manufacturing subsidiary in Mexico, which only
recently became operational. Prior to the Company's buyout of its joint
venture partner in fiscal 2001, results from this business were reported as
"Equity in loss of joint venture."
The engineered products segment generated a $0.7 million operating loss for
the first six months of fiscal 2001, compared to $1.6 million in operating
income for the first six months of fiscal 2000. The decrease in profitability
reflects both the lower sales volume and a less favorable sales mix. In
addition, manufacturing operations during the first six months of fiscal 2001
were hindered by downtime and other inefficiencies during the installation of
new equipment and related plant layout changes.
Corporate Items:
Amortization of goodwill was $1.7 million in the first six months of fiscal
2001 compared to $1.5 million in the first six months of fiscal 2000. The
increase in fiscal 2001 is attributable to goodwill resulting from our April
2000 acquisition of Import Specialists and our fiscal 2001 acquisition of the
remaining interest in the shirt manufacturing operation in Mexico.
Other expenses not allocated to segments totaled $0.4 million in the first
six months of fiscal 2001 compared to $1.7 million in the first six months of
fiscal 2000. The fiscal 2000 amount includes $1.2 million attributable to
depreciation on the write-up of the Company's fixed assets from its
acquisition in 1989. The vast majority of the write-up was for manufacturing
equipment that is now fully depreciated.
INTEREST EXPENSE
Interest expense was $17.1 million for the first six months of fiscal 2001,
up $1.8 million over the first six months of fiscal 2000. The increase was
caused by both higher average debt levels and higher average interest rates.
16
INCOME TAX PROVISION
The Company recorded a $6.6 million income tax benefit (34.1% of the pre-tax
loss) for the first six months of fiscal 2001, compared to a $5.3 million
provision (43.0% of pre-tax income) for the first six months of fiscal 2000.
The effect of nondeductible goodwill amortization decreased the income tax
benefit for the first six months of fiscal 2001 by 3.0% of the pre-tax loss
and increased the income tax provision in the first six months of fiscal 2000
by 4.4% of pre-tax income. Losses attributable to our Mexican operations in
the first six months of fiscal 2001, for which no tax benefit was provided,
decreased the income tax benefit by 1.4% of the pre-tax loss.
NET INCOME AND EARNINGS PER SHARE
The net loss for the first six months of fiscal 2001 was $12.7 million or
$0.58 per share compared to net income of $7.0 million or $0.32 per share for
the first six months of fiscal 2000. Weighted average outstanding decreased
to 21.8 million for the first six months of fiscal 2001 from 22.3 million for
the first six months of fiscal 2000 due to the repurchase of shares during
the first half of fiscal 2000 under the Company's stock repurchase program.
LIQUIDITY AND CAPITAL RESOURCES
General
We believe that internally generated cash flow, supplemented by borrowings
under our working capital line of credit, will be sufficient to meet our
foreseeable debt service requirements, capital expenditures, and working
capital needs. We had a debt to total capital ratio of 56.8% at June 30,
2001.
Credit Facilities
We maintain a credit facility comprised of a term loan and a $150 million
secured working capital line of credit. This credit facility is secured by
our accounts receivable, inventories and real and personal property. The
credit facility bears interest at the Base Rate plus applicable percentage,
as defined (8.50% as of August 7, 2001) or LIBOR plus applicable percentage,
as defined (6.71% as of August 7, 2001), for periods of one, two, three or
six months, at our option.
The working capital line is non-amortizing and any amounts outstanding are
due at the final maturity of September 30, 2003. As of June 30, 2001, $108.1
million was used and $41.9 million was unused and available for borrowing.
The term loan had an outstanding principal balance of $104.9 million at June
30, 2001. Scheduled amortization payments for fiscal 2001 on the term loan
total $23.0 million, of which $13.0 million was paid in the first half.
17
The credit facility is provided pursuant to a loan agreement which contains
certain covenants, including the maintenance of certain interest coverage
ratio and maximum debt levels and limitations on mergers and consolidations,
affiliated transactions, incurring liens, disposing of assets and limitations
on investments. An event of default under the loan agreement includes Change
of Control (as defined) as well as non-compliance with certain other
provisions.
We were in compliance with all covenants of the credit facility as of June
30, 2001. However, we anticipate that we may not be in compliance with
certain financial covenants as of September 29, 2001. We have so notified the
agent bank for our credit agreement and have initiated discussions regarding
a potential waiver or amendment. While we can make no assurances, we believe
we will be able to obtain such waivers or amendments. If the financial or
other covenants contained in the credit facility are violated and we have not
obtained a waiver or amendment, the Company would be in default under the
credit facility and other debt obligations. If such a default occurs and is
not waived by the lenders, the lenders could seek remedies against the
company as set forth in those agreements.
Working Capital
Net cash generated from operating activities in the six months ended June 30,
2001 was $29.8 million. Included in that amount is cash from operating assets
and liabilities of $26.8 million, comprised of a $25.3 million source from
operating working capital (accounts receivable - $2.0 million use,
inventories - $29.1 million source, and accounts payable and accrued expenses
- - $1.7 million use) and a $1.5 million source of cash for prepaid expenses
and other assets and other liabilities.
During the comparable six month period ended July 1, 2000, net cash used in
operating activities was $4.9 million. Included in that amount is a use of
cash from operating assets and liabilities of $36.3 million, comprised of a
$31.0 million use of operating working capital (accounts receivable - $5.6
million use, inventories - $36.7 million use, and accounts payable and
accrued expenses - $11.3 million source) and a $5.3 million use of cash for
prepaid expenses and other assets and other liabilities. The inventory
buildup was due primarily to the rollout of a major new home fashions program
which began shipping during the third quarter of 2000.
Investing Activities
During the first six months of fiscal 2001, we purchased $12.1 million in
equipment and manufacturing improvements. Additionally, we invested $3.6
million in our Mexican garment manufacturing operations, including $3.2
million paid in connection with the purchase of our joint venture partner's
interest.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
<Page> 18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's Annual Meeting of Shareholders was held on April
19, 2001. The following is a brief description of each matter
voted upon at the meeting and the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-
votes, as to each such matter.
1. Election of Directors
Election of Donald J. Keller and Joseph L. Lanier, Jr. to hold
office until the Annual Meeting of Shareholders in 2004, or until
their successors are elected and qualified:
1. Donald J. Keller For: 26,037,168 Withheld: 200,480
2. Joseph L. Lanier, Jr. For: 25,853,873 Withheld: 383,775
Continuing directors are Edward J. Lill, John F. Maypole and
Richard L. Williams.
3. To ratify the appointment of Ernst & Young LLP as our independent
auditors for fiscal 2001.
For: 26,131,913 Against: 98,731 Abstained: 7,004
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(The exhibits to this Form 10-Q are listed in the accompanying
index to Exhibits.)
(b) Reports on Form 8-K: None
<Page> 19
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.
<Table>
Date: August 13, 2001 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
</Table>
20
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- -------
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 4 to the Unaudited
Condensed Consolidated Financial
Statements included in this
Quarterly Report on Form 10-Q)