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