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 March 30, 2002
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
Number of shares of common stock outstanding as of March 30, 2002:
Class A: 20,371,939 Shares
Class B: 2,062,070 Shares
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<Page> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
<Page> 3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
March 30, December 29,
2002 2001
------------ ------------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,523 $ 8,316
Accounts receivable, net 101,898 75,029
Inventories 141,799 156,508
Prepaid expenses and other current assets 12,798 7,577
Deferred income taxes 16,520 17,530
------------ -----------
Total current assets 275,538 264,960
Property, plant and equipment 524,056 524,959
Less accumulated depreciation and amortization (258,173) (251,224)
------------ -----------
Net property, plant and equipment 265,883 273,735
Goodwill, net 115,134 115,134
Other assets 11,751 12,540
------------ -----------
$ 668,306 $ 666,369
============ ===========
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DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
March 30, December 29,
2002 2001
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 23,860 $ 26,375
Accounts payable 21,975 22,911
Accrued compensation and related benefits 23,848 21,064
Other accrued expenses 14,083 10,247
------------ -----------
Total current liabilities 83,766 80,597
Other liabilities:
Long-term debt 296,234 299,024
Deferred income taxes 16,158 9,709
Other liabilities 26,860 26,701
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 20,371,939 shares 204 199
(19,926,189 shares at December 29, 2001)
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 209,962 209,778
Retained earnings 41,874 47,009
Accumulated other comprehensive loss (6,121) (6,121)
Unearned compensation--restricted stock (652) (548)
------------ -----------
Total shareholders' equity 245,288 250,338
------------ -----------
$ 668,306 $ 666,369
============ ===========
</Table>
See accompanying notes.
<Page> 5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Three Months Ended
--------------------------
March 30, March 31,
2002 2001
--------- ---------
(in thousands, except per share data)
Net sales $ 158,418 $ 164,000
Costs and expenses:
Cost of sales 136,664 147,944
Selling, general and
administrative expenses 17,815 16,821
Amortization of goodwill -- 806
--------- ---------
Operating income (loss) 3,939 (1,571)
Other income 59 164
Equity in loss of joint venture -- (67)
Interest expense (7,383) (8,648)
--------- ---------
Loss before income taxes (3,385) (10,122)
Income tax provision (benefit) 1,750 (3,603)
--------- ---------
Net loss $ (5,135) $ (6,519)
========= =========
Loss per share:
Basic and diluted $ (0.24) $ (0.30)
========= =========
</Table>
See accompanying notes.
<Page> 6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<caption>
Three Months Ended
---------------------------
March 30, March 31,
2002 2001
------------ -----------
(in thousands)
Cash flows from operating activities:
Net loss $ (5,135) $ (6,519)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Noncash interest expense 690 265
Depreciation and amortization of
property, plant and equipment 9,306 9,765
Amortization of goodwill -- 806
Amortization of restricted stock
compensation 85 --
Deferred income taxes 7,450 (3,603)
Writedown/disposal of assets 2 96
Equity in loss of joint venture -- 67
Changes in operating assets and liabilities:
Accounts receivable (26,869) (4,169)
Inventories 14,708 14,637
Prepaid expenses and other assets (4,973) 1,233
Accounts payable and accrued expenses 6,849 9,698
Other liabilities 98 265
---------- ----------
Net cash provided by operating
activities 2,211 22,541
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Cash flows from investing activities:
Capital expenditures (2,623) (6,913)
Proceeds from sale of assets 1 22
Acquisitions -- (3,748)
---------- ----------
Net cash used by investing activities (2,622) (10,639)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (2,805) (7,090)
Finance costs (77) (843)
Net payments - working capital
facility (2,500) (5,500)
---------- ----------
Net cash used by financing activities (5,382) (13,433)
---------- ----------
Net decrease in cash and cash equivalents (5,793) (1,531)
Cash and cash equivalents at beginning of period 8,316 3,675
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Cash and cash equivalents at end of period $ 2,523 $ 2,144
========== ==========
</Table>
See accompanying notes.
<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 29, 2001.
2. Adoption of New Accounting Standards
Effective as of the beginning of fiscal 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." This new standard
prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Instead these assets must be tested at least
annually for impairment. In accordance with SFAS No. 142 the Company
will complete a test in the second quarter of fiscal 2002 which will
determine whether potential impairment of goodwill existed at the
beginning of the year. If required, a second test, to determine the
amount of impairment, must be completed prior to the end of fiscal 2002.
Any impairment charge resulting from these transitional tests will be
reflected as the cumulative effect of a change in accounting principle
in fiscal 2002.
Under SFAS No. 142, prior period amounts are not restated. Had SFAS No.
142 been in effect for the quarter ended March 31, 2001, the net loss,
adjusted for the exclusion of goodwill amortization, would have been
$5,750,000 or $0.26 per share.
Also as of the beginning of fiscal 2002, the Company adopted SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supercedes SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of
the new standard did not materially effect the Company's financial
position or results of operations.
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3. Inventories
The components of inventory are as follows:
<Table>
<Caption>
March 30, December 29,
2002 2001
------------ ------------
(in thousands)
Finished goods $ 46,914 $ 56,194
Work in process 80,546 85,936
Raw materials 3,181 2,987
Supplies 11,158 11,391
-------- --------
Total Inventories $141,799 $156,508
======== ========
</Table>
4. 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, enacted on March 9,
2002. The Act changed the period for carrying back taxable losses
generated in fiscal 2001 from 2 to 5 years, which will allow the Company
to receive an estimated $5,700,000 refund of taxes. However, the
carryback will also free up investment credits that had previously
offset tax in the carryback years. A $2,800,000 tax provision has been
recorded in the first quarter of fiscal 2002, representing the estimated
amount of these freed up credits that expire during the carryback period
without being utilized. 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.
5. Reserves for Exit Costs
In the fourth quarter of fiscal 2001 the Company recorded a $4,722,000
pre-tax charge relating to a plant consolidation program announced by
the Company in December 2001. The charge consisted of a $3,292,000 non-
cash writedown of fixed assets, $1,324,000 for severance and benefits
associated with the termination of approximately 380 employees, and
other exit costs of $107,000. The Company expects to complete all
significant aspects of the consolidation of operations during the second
quarter of fiscal 2002 and anticipates that the payout of severance and
benefits will be substantially completed by the end of the fiscal year.
Following is a summary of the reserve account activity during the first
quarter of fiscal 2002 related to the consolidation (in thousands):
Balance at beginning of the period $1,431
Expenditures (411)
------
Balance at end of the period $1,020
======
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6. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
<Table>
<Caption>
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 29,
2001 $ 199 $ 21 $ 209,778 $ 47,009 $ (6,121) $ (548) $ 250,338
Net loss -- -- -- (5,135) -- -- (5,135)
Restricted stock
awards 5 -- 184 -- -- (189) --
Amortization of
unearned compen-
sation -- -- -- -- -- 85 85
------- ------ --------- -------- -------- ------- --------
Balance at
March 30, 2002 $ 204 $ 21 $ 209,962 $ 41,874 $ (6,121) $ (652) $ 245,288
======= ====== ========= ========= ========= ========= =========
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
Three Months Ended
--------------------------
March 30, March 31,
2002 2001
------------ -----------
Numerator for basic and diluted earnings
per share -- net loss $(5,135,000) $(6,519,000)
=========== ===========
Denominator for basic and diluted earnings
per share--weighted average shares 21,789,987 21,765,509
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Basic and diluted loss per share $ (0.24) $ (0.30)
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</Table>
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8. Segment Information
Summarized information by reportable segment is shown in the following
tables:
<Table>
<Caption>
Three Months Ended
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March 30, March 31,
2002 2001
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(in thousands)
Net sales:
Home fashions $ 116,009 $ 120,529
Apparel fabrics 31,930 32,202
Engineered products 10,479 11,269
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Consolidated net sales $ 158,418 $ 164,000
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Operating income (loss):
Home fashions $ 5,314 485
Apparel fabrics (1,576) (497)
Engineered products (303) (398)
Corporate items not allocated to segments:
Amortization of goodwill -- (806)
Other 504 (355)
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Consolidated operating income (loss) $ 3,939 $ (1,571)
=========== ===========
</Table>
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 2002 were $158.4 million, a
decrease of $5.6 million or 3.4% from the first quarter of fiscal 2001.
Home Fashions
Net sales of home fashions products were $116.0 million for the first quarter
of fiscal 2002, a decrease of $4.5 million or 3.8% from the first quarter of
fiscal 2001. The decrease reflects the generally soft demand for our adult
bedding products at the beginning of fiscal 2002. Shipments to all retail
channels picked up significantly in the last several weeks of the quarter,
during which sales of home fashions products exceeded the levels of a year
earlier.
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Apparel Fabrics
Net sales of apparel fabrics for the first quarter of fiscal 2002 were $31.9
million, a slight decrease from the $32.2 million in sales reported for the
first quarter of fiscal 2001. Sales of sportswear fabrics, primarily pant
fabrics, increased by $3.8 million in the first quarter of fiscal 2002,
almost offsetting the declines in sales of dress shirting and military
uniform fabrics.
Engineered Products
Net sales of engineered products for the first quarter of fiscal 2002 were
$10.5 million, a decrease of $0.8 million or 7.0% from the first quarter of
fiscal 2001. Most of the decline is attributable to lower industrial fabric
sales, which reflects continuing price pressure from domestic and offshore
competition, and soft demand for conveyor belt fabric.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $17.8 million for the first
quarter of fiscal 2002 (11.2% of net sales), an increase of $1.0 million or
5.9% from $16.8 million (10.3% of net sales) for the first quarter of fiscal
2001. All of the increase is due to higher bad debt expense in the first
quarter of fiscal 2002, which included a $1.4 million provision attributable
to the January, 2002 Chapter 11 filing of Kmart Corporation.
OPERATING INCOME
Total operating income was $3.9 million for the first quarter of fiscal 2002,
compared to an operating loss of $1.6 million for the first quarter of fiscal
2001.
Segment Operating Income:
Operating income for the home fashions segment was $5.3 million for the first
quarter of fiscal 2002, compared to $0.5 million in the first quarter of the
prior year. Operating margins were unusually low in the first quarter of
fiscal 2001 due to a combination of factors, including promotional pricing
resulting from our focus on inventory reduction, high energy and raw material
costs, and the effects of production curtailments. The improved
profitability in the first quarter of fiscal 2002 is mostly attributable to
improved manufacturing performance, offset in part by $1.4 million in bad
debt expense attributable to Kmart Corporation's Chapter 11 filing.
The apparel fabrics segment generated a $1.6 million operating loss for the
first quarter of fiscal 2002, compared to a $0.5 million operating loss for
the first quarter of fiscal 2001. The fiscal 2002 results include a $0.6
million operating loss from our shirt manufacturing subsidiary in Mexico.
The poor operating performance for both periods reflects low sales volumes, a
competitive pricing environment and high per-unit manufacturing costs
resulting from reduced running schedules.
The engineered products segment generated a $0.3 million operating loss in
the first quarter of fiscal 2002, compared to a $0.4 million operating loss
in the first quarter of fiscal 2001. The lack of profitability for both
periods was caused by low sales volume and poor manufacturing performance.
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Corporate Items:
Amortization of goodwill was $0.8 million in the first quarter of fiscal
2001. In accordance with SFAS No. 142, beginning in the first quarter of
fiscal 2002 we discontinued the amortization of goodwill.
Other items not allocated to segments totaled $0.5 million (income) in the
first quarter of fiscal 2002 compared to $0.4 million (expense) in the first
quarter of fiscal 2001. The fiscal 2002 amount includes income items of $0.2
million related to a litigation settlement and $0.5 million from a net
decrease in intersegment profits remaining in inventory.
INTEREST EXPENSE
Interest expense was $7.4 million for the first quarter of fiscal 2002, down
$1.3 million from the first quarter of fiscal 2001. The decrease reflects
both lower debt levels and lower average interest rates.
INCOME TAX PROVISION
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 of 2002,
enacted on March 9, 2002. The Act changed the period for carrying back
taxable losses generated in fiscal 2001 from 2 to 5 years, which will allow
us to receive an estimated $5.7 million refund of taxes. However, the
carryback will also free up investment credits that had previously offset tax
in the carryback years. A $2.8 million tax provision has been recorded in
the first quarter of fiscal 2002, representing the estimated amount of these
freed up credits that expire during the carryback period 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 pretax
loss, compared to $3.6 million, or 35.6% of the pretax loss, for the first
quarter of fiscal 2001. The low effective rate in fiscal 2002 is mostly
attributable to losses from our Mexican operations for which no tax benefits
were provided. The effect of nondeductible goodwill amortization decreased
the income tax benefit for the first quarter of fiscal 2001 by 2.7%.
NET INCOME AND EARNINGS PER SHARE
The net loss for the first quarter of fiscal 2002 was $5.1 million or $0.24
per share compared to a net loss of $6.5 million or $0.30 per share for the
first quarter of fiscal 2001. Results for the first quarter of fiscal 2002
were affected by the following one-time or unusual items (discussed above):
a $2.8 million income tax provision related to the Job Creation and
Worker Assistance Act of 2002; and
$1.4 million in bad debt expense ($0.8 million after tax) relating to
Kmart Corporation's bankruptcy filing.
Together the above items increased the net loss for the first quarter of
fiscal 2002 by $3.6 million or $0.17 per share.
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The net loss for the first quarter of fiscal 2001 included goodwill
amortization of $0.8 million or $0.04 per share. In accordance with SFAS No.
142, goodwill amortization was discontinued at the beginning of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
General
We generally rely on internally generated cash flow, supplemented by
borrowings under our working capital line of credit, to meet debt service
requirements, capital expenditures, and working capital needs. We had a debt
to total capital ratio of 56.6% at March 30, 2002.
Credit Facilities
We maintain a credit facility comprised of a term loan and a 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 (7.75%
as of May 6, 2002) or LIBOR plus applicable percentage (6.09% as of May 6,
2002), for periods of one, two, three or six months, at our option.
The working capital line has a borrowing base and is non-amortizing. Any
amounts outstanding are due at the final maturity of September 30, 2003. As
of March 30, 2002, $107.0 million was used and $36.7 million was unused and
available for borrowing. The term loan had an outstanding principal balance
of $82.4 million at March 30, 2002. Scheduled amortization payments for
fiscal 2002 on the term loan total $25.0 million, $2.5 million of which was
paid in the first quarter.
The borrowing base is determined weekly by evaluation of the eligible
inventories and accounts receivable and is limited to a fixed amount each
month, which reaches $150 million in June of 2002. Interest payments are
required to be made on a monthly basis for all outstanding loans and we are
required to meet a minimum cumulative EBITDA covenant (as defined) and an
interest coverage ratio covenant (as defined) on a monthly basis.
In addition to the covenants described above, the credit facility contains
limitations on mergers and consolidations, affiliated transactions, incurring
liens, disposal of assets and investments. An event of default under the
credit facility includes change of control (as defined in the credit
facility) as well as non-compliance with certain other provisions.
Working Capital
Net cash generated from operating activities in the three months ended March
30, 2002 was $2.2 million. The net loss, 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
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.
14
In the first quarter of fiscal 2001, net cash generated from operating
activities was $22.5 million. The net loss for that period, adjusted for
noncash expense items, net, generated $0.8 million of cash. An additional
$21.7 million was generated by operating assets and liabilities, comprised of
a $20.2 million source from operating working capital (accounts receivable -
$4.2 million use, inventories - $14.6 million source, and accounts payable
and accrued expenses - $9.7 million source) and a $1.5 million source of cash
for prepaid expenses and other assets and other liabilities.
Investing Activities
During the first three months of fiscal 2002, we purchased $2.6 million in
equipment and manufacturing improvements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
<Page> 15
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. None.
<Page> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAN RIVER INC.
<Table>
Date: May 10, 2002 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
</Table>
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EXHIBIT INDEX
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Exhibit No. Description of Exhibit Page
- ----------- ---------------------- ----
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 7 to the Unaudited
Condensed Consolidated Financial
Statements included in this
Quarterly Report on Form 10-Q)