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 July 3, 2004
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/
As of July 3, 2004, the registrant had 20,912,357 and 1,596,089 shares of
Class A Common Stock and Class B Common Stock outstanding, respectively.
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2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
3
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
July 3, January 3,
2004 2004
------------ ------------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,834 $ 1,630
Accounts receivable, net 57,887 50,111
Inventories 136,814 148,248
Assets held for sale 7,513 9,796
Prepaid expenses and other current assets 9,077 8,417
Deferred income taxes 7,024 8,993
------------ -----------
Total current assets 220,149 227,195
Property, plant and equipment 438,355 443,230
Less accumulated depreciation and amortization (270,283) (256,139)
------------ -----------
Net property, plant and equipment 168,072 187,091
Other assets 8,903 18,180
------------ -----------
$ 397,124 $ 432,466
============ ===========
4
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<caption>
July 3, January 3,
2004 2004
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt currently due $ 106,843 $ 259,096
Accounts payable 8,924 15,804
Accrued compensation and related benefits 17,602 20,101
Other accrued expenses 10,336 11,381
------------ -----------
Total current liabilities 143,705 306,382
Other liabilities:
Long-term debt -- 5,593
Deferred income taxes 7,024 8,993
Other liabilities 22,396 32,013
------------ -----------
Total liabilities not subject to compromise 173,125 352,981
Liabilities subject to compromise 193,071 --
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 20,912,357 shares
(20,418,504 shares at January 3, 2004) 209 204
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; issued
and outstanding 1,596,089 shares
(2,062,070 shares at January 3, 2004) 16 21
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; no shares
outstanding -- --
Additional paid-in capital 210,147 210,090
Accumulated deficit (167,990) (119,340)
Accumulated other comprehensive loss (11,204) (11,197)
Unearned compensation--restricted stock (250) (293)
------------ -----------
Total shareholders' equity 30,928 79,485
------------ -----------
$ 397,124 $ 432,466
============ ===========
</Table>
See accompanying notes.
5
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Three Months Ended Six Months Ended
----------------------- --------------------
July 3, June 28, July 3 , June 28,
2004 2003 2004 2003
--------- --------- ------- -------
(in thousands, except per share data)
Net sales $ 110,026 $ 116,348 $ 231,068 $ 263,720
Cost of sales 105,782 101,662 222,257 221,314
--------- --------- --------- ---------
Gross profit 4,244 14,686 8,811 42,406
Selling, general
and administra-
tive expenses 13,314 15,285 30,022 33,255
Other operating
costs, net 8,395 12,189 8,395 11,749
--------- --------- --------- ---------
Operating loss (17,465) (12,788) (29,606) (2,598)
Other expense, net (85) (334) (311) (195)
Interest expense
(contractual interest
of $8,362 and $15,949
for the three and six
months ended July 3,
2004, respectively) (2,740) (8,079) (10,078) (13,627)
--------- --------- --------- ---------
Loss before
reorganization
items and income taxes (20,290) (21,201) (39,995) (16,420)
Reorganization items (6,903) -- (8,655) --
--------- --------- --------- ---------
Loss before income taxes (27,193) (21,201) (48,650) (16,420)
Income tax provision
(benefit) -- (1,796) -- 235
--------- --------- --------- ---------
Net loss $ (27,193) $ (19,405) $ (48,650) $ (16,655)
========= ========= ========= =========
Loss per share:
Basic and diluted $ (1.22) $ (0.88) $ (2.19) $ (0.76)
========= ========= ========= =========
</Table>
See accompanying notes.
6
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<caption> Six Months Ended
--------------------------
July 3, June 28,
2004 2003
------------ -----------
(in thousands)
Cash flows from operating activities:
Net loss $ (48,650) $ (16,655)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Noncash interest expense 1,591 1,423
Depreciation and amortization of
property, plant and equipment 15,592 18,879
Amortization of restricted stock
compensation 133 150
Deferred income taxes -- 235
Writedown/disposal of assets 79 52
Other operating costs, net 8,395 11,749
Write-off of unamortized debt costs 2,802 1,325
Changes in operating assets and liabilities:
Accounts receivable (7,776) 17,156
Inventories 11,435 (11,451)
Prepaid expenses and other assets (519) (306)
Accounts payable and accrued expenses 18,606 (803)
Other liabilities 15 387
---------- ----------
Net cash provided by operating
activities 1,703 22,141
---------- ----------
Cash flows from investing activities:
Capital expenditures (1,581) (7,567)
Proceeds from sale of assets 1,416 --
---------- ----------
Net cash used by investing activities (165) (7,567)
---------- ----------
</Table>
See accompanying notes.
7
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<caption>
Six Months Ended
--------------------------
July 3, June 28,
2004 2003
------------ -----------
(in thousands)
Cash flows from financing activities:
DIP credit facility-borrowings 114,805 --
DIP credit facility-payments (42,605) --
Revolving credit facility-borrowings 112,770 65,000
Revolving credit facility-payments (182,070) (66,363)
Payments of long-term debt (4,297) (257,479)
Proceeds from issuance of long-term debt -- 254,568
Borrowings against cash surrender value of life
insurance 2,263 --
Debt issuance costs-DIP credit facility (2,200) --
Debt issuance costs-revolving credit facility
and term loan -- (9,902)
Proceeds from exercise of stock options -- 3
---------- ----------
Net cash used by financing activities (1,334) (14,173)
---------- ----------
Net increase in cash and cash equivalents 204 401
Cash and cash equivalents at beginning of period 1,630 2,832
---------- ----------
Cash and cash equivalents at end of period $ 1,834 $ 3,233
========== ==========
</Table>
See accompanying notes.
8
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Chapter 11 Filing
On March 31, 2004 (the "Petition Date"), Dan River Inc. and its domestic
subsidiaries (the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Georgia. Since that date,
the Debtors have been operating their businesses as debtors-in-
possession pursuant to the Bankruptcy Code.
In conjunction with the commencement of the Chapter 11 cases, the
Debtors sought and obtained several orders from the Bankruptcy Court
which were intended to enable the Debtors to operate to the extent
possible in the normal course of business during the Chapter 11 process.
The most significant of these orders:
. permit the Debtors to operate their consolidated cash management system
during the Chapter 11 cases in substantially the same manner as it was
operated prior to the commencement of the Chapter 11 cases,
. authorize payment of certain pre-petition employee salaries, wages, and
benefits and reimbursement of pre-petition employee business expenses,
. authorize payment of pre-petition sales, payroll, and use taxes owed by
the Debtors,
. authorize payment of certain pre-petition obligations to customers and
certain customs brokers, common carriers and warehousemen, and
. authorize payment of certain pre-petition obligations to critical
vendors to aid the Debtors in maintaining operation of their business.
On May 28, 2004, the Bankruptcy Court granted final approval for the
Debtors to enter into a $145.0 million debtor-in-possession financing
facility (the "DIP Facility") with Deutsche Bank Trust Company Americas
as agent for a syndicate of financial institutions comprised of certain
of the Company's pre-petition senior secured lenders. See Note 5 for a
further discussion regarding the DIP Facility.
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to continue
to operate its business in the ordinary course and to reorganize its
business for the benefit of its creditors. A debtor-in-possession under
Chapter 11 may not engage in transactions outside of the ordinary
course of business without the approval of the Bankruptcy Court, after
notice and an opportunity for a hearing.
9
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Bankruptcy Code, pre-petition obligations of the
Debtors, including obligations under debt instruments, generally may not
be enforced against the Debtors. In addition, any actions to collect pre-
petition indebtedness are automatically stayed unless the stay is lifted
by the Bankruptcy Court. While under bankruptcy protection, the Debtors
have not paid and do not expect to pay the interest obligations on the
12 3/4% senior notes due 2009 unless ordered to do so by the Bankruptcy
Court.
As debtors-in-possession, the Debtors have the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or
reject executory contracts and unexpired leases. In this context,
"assumption" means that the Debtors agree to perform their obligations
and cure all existing defaults under the contract or lease, and
"rejection" means that the Debtors are relieved from their obligations
to perform further under the contract or lease, but are subject to a
claim for damages for the breach thereof. Any damages resulting from
rejection of executory contracts and unexpired leases will be treated as
general unsecured claims in the Chapter 11 process, unless such claims
had been secured on a pre-petition basis. The Bankruptcy Court has
approved the rejection of certain executory contracts and leases, and
the Debtors are in the process of reviewing their remaining executory
contracts and unexpired leases to determine which, if any, they will
reject. The Debtors cannot presently determine or reasonably estimate
the ultimate liability that may result from rejecting contracts or
leases or from the filing of claims for any rejected contracts or
leases, and no provisions have yet been made for these items.
Since the petition date, the Debtors have conducted business in the
ordinary course to the extent permitted by the Bankruptcy Code. The
Debtors are in the process of evaluating their operations as part of the
development of a plan of reorganization. The Debtors filed a Plan of
Reorganization with the Bankruptcy Court on July 28, 2004 and are
actively engaged in discussions with a number of potential providers of
exit financing. The Debtors expect to seek the requisite acceptance of
the plan by impaired creditors and confirmation of the plan by the
Bankruptcy Court, all in accordance with the applicable provisions of
the Bankruptcy Code.
The accompanying condensed consolidated financial statements are
presented in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code" ("SOP 90-7"), and have been
prepared in accordance with accounting principles generally accepted in
the United States applicable to a going concern, which principles
assume, except as disclosed, that assets will be realized and
liabilities will be discharged in the ordinary course of business. The
Debtors are currently operating as debtors-in-possession under Chapter
11 of the Bankruptcy Code, and their continuation as a going concern is
contingent upon, among other things, their ability to gain approval of
the plan of reorganization by the requisite parties under the Bankruptcy
10
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Code and have the plan confirmed by the Bankruptcy Court, comply with
the DIP Facility, return to profitability, generate sufficient cash
flows from operations and obtain financing sources to meet future
obligations. There can be no assurance that the Debtors will be able to
achieve any of these results. The accompanying condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might result from the
outcome of these uncertainties.
While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements. In
addition, the amounts reported on the condensed consolidated balance
sheet could materially change because of various factors, including
changes in business strategies and the effects of any proposed plan or
reorganization. In the Chapter 11 proceedings, substantially all
unsecured liabilities as of the Petition Date are subject to compromise
or other treatment under a plan of reorganization which must be
confirmed by the Bankruptcy Court after submission to any required vote
by affected parties. Generally, all actions to enforce or otherwise
effect repayment of prepetition liabilities, as well as all pending
litigation against the Debtors, are stayed while the Debtors continue
their business operations as debtors-in-possession. The ultimate amount
of and settlement terms for such liabilities are not presently
determinable. Under SOP 90-7, those liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11
proceedings have been segregated and classified as liabilities subject
to compromise on the condensed consolidated balance sheet. The
principal categories of liabilities subject to compromise as of July 3,
2004 are as follows (in thousands):
<Table>
12 3/4% senior notes due 2009, net of unamortized
discount and deferred financing costs $ 145,198
Other borrowings and capital lease obligations 6,579
Accrued interest 9,643
Accounts payable and other accrued expenses 21,609
Nonqualified deferred compensation 10,042
---------
$ 193,071
=========
</Table>
11
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to SOP 90-7, professional fees associated with the Chapter 11
proceedings are expensed as incurred and reported as reorganization
items. Interest expense is reported only to the extent that it will be
paid during the Chapter 11 proceedings or that it is probable that it
will be an allowed claim. During the first six months of fiscal 2004,
the Company recognized charges of $8,655,000 for reorganization items,
including $5,258,000 for professional fees related to the Chapter 11
proceedings, $2,802,000 for the non-cash write-off of a portion of the
deferred financing costs associated with the prepetition credit
agreement (Note 5), and $595,000 related to employee retention
incentives for services rendered through July 3, 2004.
Assets of Dan River Inc.'s foreign subsidiaries, which are not included
in the bankruptcy proceedings, totaled $6,130,000 as of July 3, 2004, or
1.5% of total assets included on the accompanying condensed consolidated
balance sheet. Net sales of the foreign subsidiaries were $3,144,000,
or 1.4% of consolidated net sales for the first six months of fiscal
2004.
2. 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 normal recurring adjustments 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 January 3, 2004.
3. 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:
12
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<caption>
Three Months Ended Six Months Ended
----------------------- --------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------- --------- -------- ---------
(in thousands, except per share data)
Net loss:
As reported $ (27,193) $ (19,405) $(48,650) $(16,655)
Pro forma expenses
Related to
stock options (68) (135) (128) (273)
--------- --------- --------- --------
Pro forma $ (27,261) $ (19,540) $(48,778) $(16,928)
========= ========= ========= ========
Per share:
As reported--
Basic and diluted (1.22) $ (0.88) $ (2.19) $ (0.76)
Pro forma--
Basic and diluted (1.23) (0.89) (2.20) (0.77)
</Table>
4. Inventories
The components of inventory are as follows:
<Table>
<Caption>
July 3, January 3,
2004 2004
------------ ------------
(in thousands)
Finished goods $ 44,418 $ 48,385
Work in process 81,296 86,932
Raw materials 3,055 5,131
Supplies 8,045 7,800
-------- --------
Total Inventories $136,814 $148,248
======== ========
</Table>
13
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Indebtedness
Indebtedness is as follows (in thousands):
Indebtedness not subject to compromise:
<Table>
<Caption>
July 3, January 3,
2004 2004
---------- ------------
Senior notes, net of
unamortized discount $ -- $149,847
Borrowing base facility -- 69,300
Term loan 31,639 35,714
DIP facility 72,200 --
Other borrowings and
capital lease obligations 3,004 9,828
-------- --------
106,843 264,689
Less amount reported
as long-term debt currently
due 106,843 259,096
-------- --------
Total long-term debt $ -- $ 5,593
-------- --------
</Table>
Indebtedness subject to compromise:
<Table>
<Caption>
July 3,
2004
---------
Senior notes, net of
unamortized discount and
deferred finance costs $145,198
Other borrowings and
capital lease obligations 6,579
--------
$151,777
========
</Table>
14
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 1 above, on May 28, 2004, the Bankruptcy Court
approved the $145 million DIP Facility. On May 27, 2004, the Debtors
entered into an amendment which, among other things, revised the Minimum
Operating EBITDA which they were required to maintain during the term of
the DIP Facility and revised the cash budget which they were required to
meet. On July 20, 2004, the Debtors entered into a second amendment to
the DIP Facility which, among other things, required that revolving
loans under the DIP Facility could not exceed $73 million during the
period from July 20, 2004 through July 31, 2004. On July 31, 2004, the
Debtors entered into a third amendment to the DIP Facility which, among
other things, provided that during the period from July 31, 2004 through
August 21, 2004, revolving loans under the DIP Facility could not exceed
$75 million. On August 18, 2004, the Debtors entered into a fourth
amendment to the DIP Facility. The fourth amendment waives until
November 6, 2004 a default of the financial covenant pertaining to
minimum operating EBITDA for the fiscal month ended July 3, 2004, and
establishes new monthly operating EBITDA covenants through the fiscal
month ending October 2, 2004. The amendment also provides that
commencing on the date of the amendment and ending on November 6, 2004,
outstanding Revolving Loans cannot exceed $75 million and the aggregate
amount of Letter of Credit Obligations and Revolving Loans together
cannot exceed $82 million. In addition to certain business plans and
other information and analyses that the Debtors must deliver to the
Agent on or before September 15, 2004, the Debtors must provide a
commitment letter for exit financing which is acceptable to the Agent
and the Majority Lenders no later than September 30, 2004. Finally, the
amendment increases interest rates by 100 basis points on all loans
outstanding under the DIP Facility during the period from the date of
the amendment until November 6, 2004. The amendment requires that
Bankruptcy Court approval of the Amendment be obtained no later than
August 31, 2004.
The Debtors' access to financing necessary for their operations is
presently limited to borrowings under the DIP Facility. If in the
future they were unable to maintain compliance with the covenants
contained in the DIP Facility, as amended, there can be no assurance
that they would be able to reach agreement with the lenders
concerning further amendments or waivers. If the Company did not have
access to the DIP Facility for its working capital there can be no
assurance that the Bankruptcy Court would permit access to cash
collateral, or that cash available would be sufficient to continue
the Debtor's operations in the ordinary course of business.
The DIP financing order authorized the Debtors to grant first priority
mortgages, security interests, liens, and superpriority claims on
substantially all of the assets of the Debtors to secure the DIP
Facility.
Pursuant to the Bankruptcy Court's final order on May 28, 2004,
the Debtors repaid $34.3 million on the term loan which was
outstanding at the Petition Date with proceeds from a $34.3
million term loan included in the DIP Facility. The remaining
15
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
prepetition revolving credit balance of $4.8 million was also repaid
with proceeds of the DIP Facility.
Amounts borrowed under the DIP Facility will bear interest, at the option
of the Debtors, at the rate of the London Interbank Offering Rate
("LIBOR") plus 3.50% (4.85% as of July 3, 2004), or the Alternate Base
Rate plus 2.50% (6.75% as of July 3, 2004), for borrowings under the
revolving credit, and at the rate LIBOR plus 3.75% (5.10% as of
August 12, 2004), or the Alternate Base Rate plus 2.75% (7.00% as of
August 12, 2004), for borrowings under the Term Loan. In addition,
there is a fee of 0.50% on the unused commitment and a fee of 3.50%
on letters of credit outstanding. The DIP Facility is secured by
substantially all of the Debtors' assets. The DIP Facility contains
financial covenants requiring the Debtors to maintain minimum
levels of earnings before certain corporate items, interest, taxes,
depreciation, and amortization ("Operating EBITDA"), as defined. In
addition, the DIP Facility imposes restrictions relating to, among other
things, capital expenditures, asset sales, incurrence or guarantee of
debt, acquisitions, sale of receivables, certain payments and
investments, affiliate and subsidiary transactions, payment of dividends
and repurchases of stock, derivatives, and excess cash. The DIP Facility
also requires that proceeds from sales of certain assets be used to
repay specified borrowings and permanently reduce the commitment amount
under the facility. Availability under the revolving credit of the DIP
Facility is based upon a borrowing base determined by reference to
eligible accounts receivable and inventory, as defined. At July 3,
2004, there was $72.2 million outstanding in borrowings under the
revolving credit facility at an average interest rate of 5.03%, and
$5.0 million in letters of credit. Also at August 12, 2004, a total
of $31.6 million was outstanding under the term loan, at an average
interest rate of 5.02%. The DIP Facility requires strict adherence
with a weekly cash flow budget.
In connection with the finalization of the DIP Facility, and in
accordance with Emerging Issues Task Force Issue No. 98-14, "Debtor's
Accounting for Changes in Line-of-Credit or Revolving-Debt Arrange-
ments," the Company wrote off $2,802,000 of unamortized deferred
financing costs related to the prepetition borrowing base facility. The
write-off, which represented the portion of unamortized costs associated
with the decrease in borrowing capacity resulting from the refinancing
of the borrowing base facility into the DIP Facility, was included under
"Reorganization items" on the Condensed Consolidated Statement of
Operations.
6. Other Operating Costs, Net
Other operating costs, net for the three and six months ended July 3,
2004 totaled $8,395,000 and consisted of pre-tax charges of $3,903,000
relating to the closure of the Company's manufacturing operations in
Mexico; $2,590,000 resulting from an adjustment to the carrying value of
assets held for sale; and $1,902,000 for severance and benefits
associated with staff reductions and shift eliminations.
PAGE> 16
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the second quarter of fiscal 2004, the Company decided to close its
garment manufacturing operations in Mexico because of the continuing
losses generated by these operations. In connection with the closure, a
$3,903,000 pre-tax charge was recorded, consisting of a $3,385,000 non-
cash writedown of fixed assets and $518,000 for severance and benefits
associated with the termination of approximately 350 employees. The
shutdown of the operations and payment of severance and benefits is
expected to be substantially completed in the third quarter of fiscal
2004.
The $2,590,000 adjustment to the carrying value of assets held for sale
recorded in the second quarter of fiscal 2004 represents a reduction in
the Company's estimate of proceeds that will be realized from the future
sale of the its plants in Greenville, South Carolina, Fort Valley,
Georgia, and Juliette, Georgia, which were closed in fiscal 2003. The
reduction in estimated proceeds is based on the market conditions which
currently exist for textile facilities.
On June 22, 2004, in order to reduce overhead, the Company commenced a
reduction in force that resulted in the termination of approximately 320
employees through staff reductions and shift eliminations. The
estimated cost of severance and benefits associated with these termina-
tions is $1,902,0000, most of which is expected to be paid by the end of
fiscal 2004.
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 Fort Valley, Georgia, in order to rationalize
capacity in its home fashions business. In connection with the
closings, a $12,189,000 pre-tax charge was recorded in the second
quarter of fiscal 2003, consisting of a $10,238,000 non-cash writedown
of fixed assets, and $1,951,000 of other exit costs, primarily severance
and benefits associated with the termination of 630 employees. The
shutdown of the plants was substantially completed in the third quarter
of fiscal 2003, and substantially all severance and exit costs were paid
prior to the end of the first quarter of fiscal 2004.
Following is a summary of the reserve account activity relating to exit
costs for the first six months of fiscal 2004 (in thousands):
Balance at January 3, 2004 $2,283
Expenses accrued 2,420
Expenditures (888)
------
Balance at July 3, 2004 $3,815
======
PAGE> 17
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
No income tax benefits were recorded against the pre-tax losses for the
three and six months ended July 3, 2004, as potential future tax
benefits associated with the losses for these periods were fully offset
by increases to the valuation allowance against deferred tax assets.
Additions to the valuation allowance were $10,300,000 and $18,500,000,
respectively, for the three and six months ended July 3, 2004. In the
second quarter of fiscal 2003 the Company recorded a $6,460,000
valuation allowance against deferred tax assets, effectively
eliminating the tax benefit for losses incurred in the first six months
of fiscal 2003. As of June 28, 2003, and as of the end of each fiscal
period thereafter, the Company's net deferred tax assets have been
fully offset by the valuation allowance. The valuation allowance is
necessary because, in light of the Company's recent history of
operating losses and other available evidence, management does not
believe that it is more likely than not that the tax benefits
associated with the deferred tax assets, to the extent they exceed the
deferred tax liabilities, will be realized.
8. Pension Plans
The Company sponsors qualified noncontributory defined benefit pension
plans that cover the majority of its full-time employees. In fiscal 2001
the Company adopted nonqualified supplemental retirement plans covering
certain key management employees. These supplemental plans are unfunded
and provide participants with retirement benefits in excess of qualified
plan limitations. The Company has suspended benefit accruals under the
supplemental plans pending the results of the bankruptcy proceedings.
18
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost included the following components:
<Table>
<caption>
Three Months Ended Six Months Ended
-------------------- -------------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------- --------- -------- --------
(in thousands)
Qualified pension plans:
Service cost $ 770 $ 965 $ 1,723 $ 1,929
Interest cost 1,097 1,030 2,179 2,058
Expected return on
assets (931) (719) (1,882) (1,436)
Prior service cost
amortization 2 2 4 3
Actuarial loss 433 508 809 1,016
--------- -------- -------- ---------
Net periodic benefit
cost $ 1,371 $ 1,786 $ 2,833 $ 3,570
========= ======== ========= =========
Supplemental pension plans:
Service cost $ -- $ 80 $ 52 $ 161
Interest cost -- 80 81 159
Prior service cost
amortization -- 56 57 111
Actuarial loss -- -- -- 1
--------- -------- -------- ---------
Net periodic benefit
cost $ -- $ 216 $ 190 $ 432
========= ========= ======== =========
</Table>
19
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company contributed $3,811,000 to its pension plans in the first six
months of fiscal 2004 and estimates that it will contribute an additional
$3,400,000 to the plans in the remainder of fiscal 2004.
9. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
<Table>
<Caption>
Accumu-
lated Unearned
Addi- Other Compen- Total
tional Accumu- Compre- sation- Share-
Common Stock Paid-in lated hensive Restricted holders'
Class A Class B Capital Deficit Loss Stock Equity
------- ------- -------- -------- ------- -------- --------
(in thousands)
Balance at
January 3,
2004 $ 204 $ 21 $ 210,090 $(119,340) $(11,197)$ (293) $79,485
Comprehensive loss:
Net loss -- -- -- (48,650) -- -- (48,650)
Unrealized loss on
securities -- -- -- -- (7) -- (7)
---------
Comprehensive loss (48,657)
---------
Retirement of
common stock -- -- (33) -- -- -- (33)
Restricted stock
awards -- -- 90 -- -- (90) --
Amortization of
unearned
compensation -- -- -- -- -- 133 133
Conversion of
shares 5 (5) -- -- -- -- --
------- ------ --------- ------- -------- ------- ---------
Balance at
July 3, 2004$ 209 $ 16 $ 210,147 $(167,990) $(11,204)$ (250) $ 30,928
======= ====== ========= ========= ========= ======== =========
20
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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
----------------------- ----------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
--------- --------- ------ --------
(in thousands, except per share data)
Numerator for basic
and diluted loss
per share-net loss $ (27,193) $ (19,405) $(48,650) $(16,655)
========= ========= ======== ========
Denominator for basic
and diluted loss
per share-weighted
average shares 22,228 22,028 22,181 21,969
========= ========= ======== ========
Loss per share:
Basic and diluted $ (1.22) $ (0.88) $ (2.19) $ (0.76)
========= ========= ======== ========
</Table>
The effect of potentially dilutive securities is computed using the
treasury stock method. Because the Company reported a loss in each of
the periods presented, all outstanding restricted stock and stock
options were excluded from the computations of diluted loss per share,
as their inclusion would have been antidilutive.
21
DAN RIVER INC.
(DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information
Summarized information by reportable segment is shown in the following
tables:
<Table>
<Caption>
Three Months Ended Six Months Ended
------------------------- -----------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
----------- ----------- ------- --------
(in thousands)
Net sales:
Home fashions $ 73,108 $ 77,416 $ 159,667 $ 185,831
Apparel fabrics 28,183 30,045 53,864 59,103
Engineered products 8,735 8,887 17,537 18,786
--------- ---------- --------- ---------
Consolidated net sales $ 110,026 $ 116,348 $ 231,068 $ 263,720
========= ========== ========= =========
Operating income (loss):
Home fashions $ (4,264) $ 788 $ (9,602) $ 12,311
Apparel fabrics (3,307) (514) (8,247) (1,149)
Engineered products (96) (616) (545) (1,468)
Corporate items not allocated to segments:
Other operating
costs, net (8,395) (12,189) (8,395) (11,749)
Other (1,403) (257) (2,817) (543)
--------- ---------- --------- ---------
Consolidated operating
loss $ (17,465) $ (12,788) $ (29,606) $ (2,598)
========= ========== ========= =========
</Table>
12. Subsequent Events
On July 21, 2004 the Company adopted amendments to freeze benefit
accruals under its qualified defined benefit plans effective September
20, 2004.
On August 11, 2004 the Company commenced the closure of its finishing
and sheet sewing facility in Danville, Virginia and its warehouse in
Portsmouth, Virginia. The closures are expected to be completed in the
second half of fiscal 2004.
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CHAPTER 11 FILINGS
As more fully described in Note 1 to the condensed consolidated financial
statements, on March 31, 2004, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Georgia. The Debtors are
currently operating their businesses as debtors-in-possession pursuant to the
Bankruptcy Code.
The Debtors filed a plan of reorganization in the Bankruptcy Court on
July 28, 2004 and are actively engaged in discussions with a number of
potential providers of exit financing. The Debtors expect to seek the
requisite acceptance of the plan by creditors and third parties and
confirmation of the plan by the Bankruptcy Court, all in accordance with
the applicable provisions of the Bankruptcy Code.
As a result of the bankruptcy filing, our creditors were automatically stayed
from taking certain enforcement actions under their respective agreements
with us unless the stay is lifted by the Bankruptcy Court. In addition, the
Debtors have entered into the DIP facility, which is more fully described
below under "Liquidity and Capital Resources."
During the Chapter 11 process, we may with Bankruptcy Court approval sell
assets and settle liabilities, including for amounts other than those
reflected in our financial statements. As permitted under the Bankruptcy
Code, we have rejected certain executory contracts and leases that are not
necessary for the business going forward, and are in the process of reviewing
our remaining executory contracts and unexpired leases to determine which, if
any, we will reject. We cannot presently estimate the ultimate liability
that may result from rejecting contracts or leases or from the filing of
claims for any rejected contracts or leases, and no provisions have yet been
made for these items. The administrative and reorganization expenses
resulting from the Chapter 11 process will unfavorably affect our results of
operations. Future results of operations may also be affected by other
factors related to the Chapter 11 process.
Our condensed consolidated financial statements are presented in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"), and have been prepared in accordance with accounting
principles generally accepted in the United States applicable to a going
concern, which principles assume, except as disclosed, that assets will be
realized and liabilities will be discharged in the ordinary course of
business. The Debtors are currently operating as debtors-in-possession under
Chapter 11 of the Bankruptcy Code, and their continuation as a going concern
is contingent upon, among other things, their ability to gain approval of the
plan of reorganization by the requisite parties under the Bankruptcy Code and
have the plan confirmed by the Bankruptcy Court, comply with the DIP
facility, return to profitability, generate sufficient cash flows from
operations and obtain financing sources to meet future obligations. There can
be no assurance that the Debtors will be able to achieve any of these
results. The condensed consolidated financial statements do not include any
23
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
result from the outcome of these uncertainties.
While under the protection of Chapter 11, the Debtors may sell or otherwise
dispose of assets, and liquidate or settle liabilities, for amounts other
than those reflected in the financial statements. In addition, the amounts
reported could materially change because of various factors, including
changes in business strategies and the effects of any proposed plan or
reorganization. In the Chapter 11 proceedings, substantially all unsecured
liabilities as of the petition date are subject to compromise or other
treatment under a plan of reorganization which must be confirmed by the
Bankruptcy Court after submission to any required vote by affected parties.
Generally, all actions to enforce or otherwise effect repayment of
prepetition liabilities, as well as all pending litigation against the
Debtors, are stayed while the Debtors continue their business operations as
debtors-in-possession. The ultimate amount of and settlement terms for such
liabilities are not presently determinable. Under SOP 90-7, those
liabilities and obligations whose treatment and satisfaction is dependent on
the outcome of the Chapter 11 proceedings have been segregated and classified
as liabilities subject to compromise on the condensed consolidated balance
sheet. Pursuant to SOP 90-7, professional fees associated with the Chapter 11
proceedings are expensed as incurred and reported as reorganization items.
Interest expense is reported only to the extent that it will be paid during
the Chapter 11 proceedings or that it is probable that it will be an allowed
claim.
RESULTS OF OPERATIONS
Comparison of Three Months Ended July 3, 2004 and June 28, 2003
NET SALES
Net sales of home fashions products were $73.1 million for the second quarter
of fiscal 2004, a decrease of $4.3 million or 5.6% from the second quarter of
fiscal 2003. Net sales decreased across all channels of distribution except
in the hospitality and healthcare sheeting area, where net sales increased by
$5.1 million, reflecting improved hotel industry occupancy rates and a major
new customer. Net sales to our largest customer, Kmart, were $4.4 million
lower in the second quarter of fiscal 2004 compared to the second quarter of
fiscal 2003.
Net sales of apparel fabrics for the second quarter of fiscal 2004 were $28.2
million, down $1.9 million or 6.2% from the second quarter of fiscal 2003.
The decrease was caused by lower sales of dress shirting fabrics ($1.9
million) and home sewing fabrics ($1.2 million), reflecting generally weak
market conditions, and, in the case of home sewing fabrics, increased
competition from directly sourced imported product. Partially offsetting
these decreases were a $0.7 million increase in sales of sportswear fabrics,
which was attributable to a new pant fabric program, and a $0.5 million
increase in sales of career apparel fabrics.
Net sales of engineered products for the second quarter of fiscal 2004 were
$8.7 million, approximately the same level as sales for the second quarter of
fiscal 2003.
24
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $13.3 million for the
second quarter of fiscal 2004 (12.1% of net sales), a decrease of $2.0
million or 12.9% from $15.3 million (13.1% of net sales) for the second
quarter of fiscal 2003. Approximately one half of the decrease was from
lower salary and benefit costs, which was generally attributable to the staff
reductions that we announced in August 2003. Most of the remainder of the
decrease was from lower home fashions design, marketing and selling expenses,
reflecting reduced activity levels.
OPERATING INCOME
We had a consolidated operating loss of $17.5 million in the second quarter
of fiscal 2004, compared to a $12.8 million operating loss for the second
quarter of fiscal 2003.
Segment Operating Income:
The home fashions segment had a $4.3 million operating loss for the second
quarter of fiscal 2004, compared to $0.8 million in operating income for the
second quarter of fiscal 2003. The lower profitability in the second quarter
of fiscal 2004 reflects a $6.4 million reduction in gross profit, offset by a
$1.3 million decrease in selling, general and administrative expenses. Gross
margins decreased to 6.8% of net sales in the second quarter of fiscal 2004
from 14.6% in the second quarter of fiscal 2003, reflecting a less rich sales
mix, including more promotional sales in the most recent quarter, generally
higher manufacturing costs and under-absorption of overhead. The promotional
sales are part of our strategy to reduce inventory levels for the balance of
fiscal 2004.
The apparel fabrics segment had a $3.3 million operating loss for the second
quarter of fiscal 2004, compared to a $0.5 million operating loss for the
second quarter of fiscal 2003. The higher operating loss in the second
quarter of fiscal 2004 reflects a $3.6 million decrease in gross profit,
offset by a $0.8 decrease in selling, general and administrative expenses.
The reduction in gross profit reflects the lower sales volume and a decrease
in gross margins to 0.5% of net sales in the second quarter of fiscal 2004
from 12.3% in the second quarter of fiscal 2003. Generally higher manufac-
turing costs and additions to inventory reserves for off-quality goods
attributable to a new pant fabric program both contributed to the decrease in
gross margins.
The engineered products segment had a $0.1 million operating loss in the
second quarter of fiscal 2004, compared to a $0.6 million operating loss in
the second fiscal quarter of 2003. The improvement in profitability for the
second quarter of fiscal 2004 reflects better manufacturing performance,
which resulted in the production of less off-quality goods, and lower
depreciation expense, which is attributable to the reduced book value of
fixed assets resulting from the impairment writedown recorded in the fourth
quarter of fiscal 2003.
25
Corporate Items:
Other Operating Costs, Net
- --------------------------
Other operating costs, net for the second quarter of fiscal 2004 totaled $8.4
million, and consisted of pre-tax charges of $3.9 million relating to the
closure of our manufacturing operations in Mexico; $2.6 million resulting
from an adjustment to the carrying value of assets held for sale; and $1.9
million for severance and benefits associated with staff reductions and shift
eliminations.
In the second quarter of fiscal 2004, we decided to close our garment
manufacturing operations in Mexico because of the continuing losses generated
by these operations. In connection with the closure, a $3.9 million pre-tax
charge was recorded, consisting of a $3.4 million non-cash writedown of fixed
assets and $0.5 million for severance and benefits associated with the
termination of approximately 350 employees. The shutdown of the operations
and payment of severance and benefits is expected to be substantially
completed in the third quarter of fiscal 2004.
The $2.6 million adjustment to the carrying value of assets held for sale
recorded in the second quarter of fiscal 2004 represents a reduction in our
estimate of proceeds that will be realized from the future sale of the our
plants in Greenville, South Carolina, Fort Valley, Georgia, and Juliette,
Georgia, which were closed in fiscal 2003. The reduction in estimated
proceeds is based on the market conditions which currently exist for textile
facilities.
On June 22, 2004, in order to reduce overhead, the Company commenced a
reduction in force that resulted in the termination of approximately 320
employees through staff reductions and shift eliminations. The estimated
cost of severance and benefits associated with these terminations is $1.9
million, most of which is expected to be paid by the end of fiscal 2004.
Other operating costs, net for the second quarter of fiscal 2003 consisted of
a $12.2 million pre-tax charge relating to the closure of two manufacturing
facilities. On June 11, 2003 we announced that we would be closing a home
fashions weaving facility located in Greenville, South Carolina and a
comforter sewing plant in Fort Valley, Georgia, in order to rationalize
capacity in our home fashions business. In connection with the closings, a
$12.2 million pre-tax charge was recorded, consisting of a $10.2 million non-
cash writedown of fixed assets, and $2.0 million of other exit costs,
primarily severance and benefits associated with the termination of 630
employees. The shutdown of the plants was substantially completed in the
third quarter of fiscal 2003, and substantially all severance and exit costs
were paid prior to the end of the first quarter of fiscal 2004.
Other Corporate Items
- ---------------------
Other corporate items not allocated to segments totaled $1.4 million
(expense) for the second quarter of fiscal 2004, and consisted of a
26
$0.7 million writedown of inventories in connection with the closure of our
Mexican operations (discussed above) and $0.7 million of idle facility costs
and other expenses.
Other corporate expense items not allocated to segments totaled $0.3 million
for the second quarter of fiscal 2003 and consisted of idle facility costs
and other expenses.
OTHER EXPENSE, NET
Other expense, net was $0.1 million for the second quarter of fiscal 2004,
compared to $0.3 million for the second quarter of fiscal 2003. 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 expense, net" for the second
quarter of fiscal 2004.
INTEREST EXPENSE
For periods subsequent to our Chapter 11 filing, interest expense is reported
only to the extent that it will be paid during the bankruptcy proceedings or
that it is probable that it will be an allowed claim. Interest expense was
$2.7 million for the second quarter of fiscal 2004, compared to $8.1 million
for the second quarter of fiscal 2003. The decrease was mainly attributable
to the effects of the Chapter 11 filings. Total contractual interest for the
second quarter of fiscal 2004, including interest that was not reported
because it did not meet the criteria described above, was $8.4 million.
REORGANIZATION ITEMS
During the second quarter of fiscal 2004, we recognized charges of $6.9
million for reorganization items, including $3.5 million for professional
fees related to the Chapter 11 proceedings, $2.8 million for the non-cash
write-off of a portion of the deferred financing costs associated with the
prepetition credit agreement which was refinanced under the DIP facility, and
$0.6 million related to employee retention incentives for service rendered
through July 3, 2004.
INCOME TAX PROVISION
No income tax benefits were recorded against the pre-tax loss for the second
quarter of fiscal 2004. Potential future tax benefits associated with the
pre-tax loss were fully offset by a $10.3 million increase to the valuation
allowance against deferred tax assets. In the second quarter of fiscal 2003
we recorded a $6.5 million valuation allowance against deferred tax assets,
effectively eliminating the tax benefit for losses incurred in the first six
months of fiscal 2003. As of June 28, 2003, and as of the end of each fiscal
period thereafter, our net deferred tax assets have been fully offset by the
valuation allowance. The valuation allowance is necessary because, in light
of the our recent history of operating losses and other available evidence,
management does not believe that it is more likely than not that the tax
benefits associated with the deferred tax assets, to the extent they exceed
the deferred tax liabilities, will be realized.
27
SUBSEQUENT EVENTS
On July 21, 2004 we adopted amendments to freeze benefit accruals under our
qualified defined benefit plans effective September 20, 2004.
On August 11, 2004 we commenced the closure of our finishing and sheet sewing
facility in Danville, Virginia and our warehouse in Portsmouth, Virginia. We
expect that the closures will be completed in the second half of fiscal 2004.
Comparison of Six Months Ended July 3, 2004 and June 28, 2003
NET SALES
Net sales for the first six months of fiscal 2004 were $231.1 million, a
decrease of $32.7 million or 12.4% from the first six months of fiscal 2003.
Net sales of home fashions products were $159.7 million for the first six
months of fiscal 2004, a decrease of $26.2 million or 14.1% from the first
six months of fiscal 2003. Net sales decreased across all channels of
distribution except in the hospitality and healthcare sheeting area, where
net sales increased by $9.5 million, reflecting improved hotel industry
occupancy rates and a major new customer. Net sales to our largest customer,
Kmart, were $17.3 million lower in the first six months of fiscal 2004
compared to the first six months of fiscal 2003.
Net sales of apparel fabrics for the first six months of fiscal 2004 were
$53.9 million, a decrease of $5.2 million or 8.9% from the first six months
of fiscal 2003. The decrease reflects lower sales of dress shirting fabrics
($3.2 million) and home sewing fabrics ($1.0 million), reflecting generally
weak market conditions, and, in the case of home sewing fabrics, increased
competition from directly sourced imported product. In addition, sales of
career apparel fabrics decreased by $1.1 million in the first six months of
fiscal 2004, which we believe is attributable to our customers' attempts to
work off excess inventory. Sales of our other products lines decreased by
$0.5 million. Partially offsetting these decreases was a $0.6 million
increase in sales of sportswear fabrics, which was attributable to a new pant
fabric program.
Net sales of engineered products were $17.5 million for the first six months
of fiscal 2004, a decrease of $1.2 million or 6.6% from the first six months
of fiscal 2003. 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 $30.0 million for the first
six months of fiscal 2004 (13.0% of net sales), a decrease of $3.2 million
from $33.3 million (12.6% of net sales) for the first six months of fiscal
2003. Approximately one half of the decrease was from lower salary and
benefit costs, which was generally attributable to the staff reductions that
we announced in August 2003. Most of the remainder of the decrease was from
lower home fashions design, marketing and selling expenses, reflecting
reduced activity levels.
28
OPERATING INCOME
We had a consolidated operating loss of $29.6 million in the first six months
of fiscal 2004, compared to a $2.6 million operating loss for the first six
months of fiscal 2003.
Segment Operating Income:
The home fashions segment had an operating loss of $9.6 million for the first
six months of fiscal 2004, compared to operating income of $12.3 million for
the first six months of fiscal 2003. The lower profitability in the first
six months of fiscal 2004 reflects a $24.8 million reduction in gross profit,
offset by a $2.9 million decrease in selling, general and administrative
expenses. The reduction in gross profit reflects the lower sales volume and
a decrease in gross margins to 6.8% of net sales in the first six months of
fiscal 2004 from 19.2% in the first six months of fiscal 2003. A less
profitable product/mix assortment, generally higher manufacturing costs,
under-absorption of overhead and an increase to inventory reserves all
contributed to the decrease in gross margins. The increase to inventory
reserves is attributable to an overall review of our licensed product
inventory as of result of our Chapter 11 filing, and to our plans to quickly
dispose of slow moving inventory due to the consolidation of warehouse space.
The apparel fabrics segment had an $8.2 million operating loss for the first
six months of fiscal 2004, compared to a $1.1 million operating loss for the
first six months of fiscal 2003. The higher operating loss in the first six
months of fiscal 2004 reflects a $8.2 million decrease in gross profit,
offset by a $1.1 decrease in selling, general and administrative expenses.
The reduction in gross profit reflects the lower sales volume and a decrease
in gross margins from 12.7% of net sales in the first six months of fiscal
2003 to negative 1.4% in the first six months of fiscal 2004. Generally
higher manufacturing costs and additions to inventory reserves for off-
quality goods attributable to a new pant fabric program both contributed to
the decrease in gross margins.
The engineered products segment had a $0.5 million operating loss for the
first six months of fiscal 2004, compared to a $1.5 million operating loss
for the first six months of fiscal 2003. The improvement in profitability
for the first six months of fiscal 2004 reflects better manufacturing
performance, which resulted in the production of less off-quality goods, and
lower depreciation expense, which is attributable to the reduced book value
of fixed assets resulting from the impairment writedown recorded in the
fourth quarter of fiscal 2003.
Corporate Items:
Other Operating Costs, Net
- --------------------------
Other operating costs, net for the first six months of fiscal 2004, discussed
above, totaled $8.4 million, and consisted of pre-tax charges of $3.9
million relating to the closure of our manufacturing operations in Mexico;
$2.6 million resulting from an adjustment to the carrying value of assets
29
held for sale; and $1.9 million for severance and benefits associated with
staff reductions and shift eliminations.
Other operating costs, net for the first six months of fiscal 2003 consisted
of a $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 Corporate Items
- ---------------------
Other corporate items not allocated to segments totaled $2.8 million
(expense) for the first six months of fiscal 2004, compared to $0.5 million
(expense) for the first six months of fiscal 2003. The fiscal 2004 amount
includes $1.0 million of idle facility costs, a $0.7 million writedown of
inventories in connection with the closure of our Mexican operations
(discussed above), $0.7 million for professional fees for debt-related
matters, and $0.4 million of other expenses not directly related to segment
business.
Other corporate expense items not allocated to segments totaled $0.5 million
for the second quarter of fiscal 2003 and consisted of idle facility costs
and other expenses.
OTHER EXPENSE, NET
Other expense, net was $0.3 million for the first six months of fiscal 2004,
compared to $0.2 million for the first six months of fiscal 2003. The fiscal
2003 amount 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 $0.3 million. No individually significant items were included
under "Other expense, net" for the first six months of fiscal 2004.
INTEREST EXPENSE
For periods subsequent to our Chapter 11 filing, interest expense is reported
only to the extent that it will be paid during the bankruptcy proceedings or
that it is probable that it will be an allowed claim. Interest expense was
$10.1 million for the first six months of fiscal 2004, compared to $13.6
million for the first six months of fiscal 2003. The decrease was mainly
attributable to the effects of the Chapter 11 filings. Total contractual
interest for the first six months of fiscal 2004, including interest that was
not reported because it did not meet the criteria described above, was $15.9
million. Contractual interest for first six months of fiscal 2004 was higher
than interest expense reported for the first six months of fiscal 2003
principally because of higher average effective interest rates.
INCOME TAX PROVISION
No income tax benefits were recorded against the pre-tax loss for the first
six months of fiscal 2004. Potential future tax benefits associated with the
pre-tax loss were fully offset by a $18.5 million increase to the valuation
allowance against deferred tax assets. In the second quarter of fiscal 2003
30
we recorded a $6.5 million valuation allowance against deferred tax assets,
effectively eliminating the tax benefit for losses incurred in the first six
months of fiscal 2003. As of June 28, 2003, and as of the end of each fiscal
period thereafter, our net deferred tax assets have been fully offset by the
valuation allowance. The valuation allowance is necessary because, in light
of the our recent history of operating losses, and other available evidence,
management does not believe that it is more likely than not that the tax
benefits associated with the deferred tax assets, to the extent they exceed
the deferred tax liabilities, will be realized.
LIQUIDITY AND CAPITAL RESOURCES
General
With the filing of our Petition for reorganization on March 31, 2004, our
administrative expenses of the proceedings, working capital needs, and
capital improvements are provided for by cash from operations and the DIP
Facility, discussed below.
Working Capital
Our operations are working capital intensive. Our operating working capital
(accounts receivable and inventories less accounts payable and accrued
expenses) typically increases and decreases in relation to sales and
operating activity levels.
Net cash generated by operating activities in the six months ended July 3,
2004 was $1.7 million. The net loss, adjusted for noncash expense items, net,
used $20.1 million of cash. This was offset by a $21.7 million source of
cash from changes in operating assets and liabilities, comprised of a $22.3
million source from operating working capital (accounts receivable - $7.8
million use, inventories - $11.4 million source, and accounts payable and
accrued expenses - $18.6 million source) and a $0.5 million use of cash for
prepaid expenses and other assets and other liabilities.
In the first six months of fiscal 2003, net cash generated from operating
activities was $22.1 million. The net loss for that period, adjusted for
noncash expense items, net, generated $17.2 million of cash. Additionally,
changes in operating assets and liabilities generated $5.0 million of cash,
comprised of a $4.9 million source of cash 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 use of cash for prepaid expenses and other assets and other
liabilities.
DIP Financing Facility
On April 1, 2004, the Bankruptcy Court approved a $145 million DIP Facility
on an interim basis. The DIP Facility authorized us to grant first priority
mortgages, security interests, liens, and superpriority claims on
substantially all of the assets of the Debtors to secure the DIP Facility.
On May 27, 2004, we entered into an amendment which, among other things,
revised the Minimum Operating EBITDA which we were required to maintain
during the term of the DIP Facility and revised the cash budget which we were
31
required to meet. A final order with respect to the DIP Facility was entered
on May 28, 2004.
On July 20, 2004, we entered into a second amendment to the DIP Facility,
which among other things, required that revolving loans under the DIP Facility
could not exceed $73 million during the period from July 20, 2004 through
July 31, 2004. On July 31, 2004, we entered into a third amendment to the
DIP Facility which, among other things, provided that during the period
from July 31, 2004 through August 21, 2004, revolving loans under the DIP
Facility could not exceed $75 million. On August 18, 2004, we entered
into a fourth amendment to the DIP Facility. The fourth amendment waives
until November 6, 2004 a default of the financial covenant pertaining to
minimum operating EBITDA for the fiscal month ended July 3, 2004, and
establishes new monthly operating EBITDA covenants through the fiscal
month ending October 2, 2004. The amendment also provides that commencing
on the date of the amendment and ending on November 6, 2004, outstanding
Revolving Loans cannot exceed $75 million and the aggregate amount of
Letter of Credit Obligations and Revolving Loans together cannot exceed
$82 million. In addition to certain business plans and other information
and analyses that we must deliver to the Agent on or before September 15,
2004, we must provide a commitment letter for exit financing which is
acceptable to the Agent and the Majority Lenders no later than
September 30, 2004. Finally, the amendment increases interest rates
by 100 basis points on all loans outstanding under the DIP Facility
during the period from the date of the amendment until November 6, 2004.
The amendment requires that Bankruptcy Court approval of the amendment
be obtained no later than August 31, 2004.
Our access to financing necessary for our operations is presently limited
to borrowings under the DIP Facility. If in the future we were unable to
maintain compliance with the covenants contained in the DIP Facility,
as amended, there can be no assurance that we would be able to reach
agreement with the lenders concerning further amendments or waivers. If
we did not have access to the DIP Facility for our working capital there
can be no assurance that the Bankruptcy Court would permit access to
our cash collateral, or that cash available would be sufficient to
continue our operations in the ordinary course of business.
Pursuant to the final order on May 28, 2004 we repaid $34.3 million on the
term loan which was outstanding at the Petition Date with proceeds from
a $34.3 million term loan included in the DIP Facility. Availability
under the DIP Facility is established by a borrowing base determined
by reference to eligible accounts receivable and inventory, as defined.
At August 12, 2004, there was $69.6 million outstanding in borrowings
under the revolving credit facility at an average interest rate of
5.20%, and $6.5 million in letters of credit.
Amounts borrowed under the DIP Facility will bear interest at our option at
the rate of the London Interbank Offering Rate ("LIBOR") plus 3.50% (5.08% as
of August 12, 2004), or the Alternate Base Rate plus 2.50% (7.00% as of
August 12, 2004), for borrowings under the revolving credit facility, and
at the rate LIBOR plus 3.75% (5.33% as of August 12, 2004), or the
Alternate Base Rate plus 2.75% (7.25% as of August 12, 2004), for borrowings
under the Term Loan. The remaining prepetition revolving credit balance
of $4.8 million was also repaid with proceeds of the DIP Facility. In
addition, there is a fee of 0.50% on the unused commitment and a fee of
3.50% on letters of credit outstanding.
The DIP Facility contains financial covenants requiring us to maintain
minimum levels of earnings before certain corporate items, interest, taxes,
depreciation, and amortization ("Operating EBITDA"), as defined. In
32
addition, the DIP Facility imposes restrictions relating to, among other
things, capital expenditures, asset sales, incurrence or guarantee of debt,
acquisitions, sale or of receivables, certain payments and investments,
affiliate and subsidiary transactions, payment of dividends and repurchases
of stock, derivatives, and excess cash. The DIP Facility also requires that
proceeds from sales of certain assets be used to repay specified borrowings
and permanently reduce the commitment amount under the facility. Availability
under the revolving credit of the DIP Facility is based upon a borrowing base
determined by reference to eligible accounts receivable and inventory, as
defined. The DIP Facility requires strict adherence with a weekly cash flow
budget.
Investing Activities
During the first six months of fiscal 2004, we purchased $1.6 million in
equipment and manufacturing improvements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to the disclosure contained in our Annual
Report on Form 10-K for the fiscal year ended January 3, 2004.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, management, including our
chief executive officer and chief financial officer, evaluated the
effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon, and as of the date of, that evaluation,
our chief executive officer and chief financial officer concluded that the
disclosure controls and procedures were effective, in all material respects,
to ensure that information required to be disclosed in the reports we file
and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required.
There have been no significant changes in the company's internal control
over financial reporting that occurred during our last fiscal quarter that has
materially effected, or is reasonably likely to materially effect, our
internal control over financed reporting. There were no significant
deficiencies or material weaknesses identified in the evaluation and,
therefore, no corrective actions were taken.
33
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, the Chapter 11 process, 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, continued availability of the DIP Facility, 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 fiscal year
ended January 3, 2004, and the following:
.. general economic and political conditions and the cyclicality of the
textile industry;
.. developing, securing approval of, and implementing a successful plan
of reorganization in the Chapter 11 process;
.. competitive conditions in the textile industry;
.. our ability to operate our business under the restrictions imposed by
the Chapter 11 process and in compliance with the limitations in the DIP
Facility;
.. our ability to implement manufacturing cost reductions, efficiencies and
other improvements;
.. fluctuations in the supply of raw materials or shortages of the supply
of raw materials;
.. our ability to maintain or acquire licenses;
34
.. 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 compliance with environmental, health and safety laws and
regulations;
.. changes in our relationship with our large customers, including the
ability to maintain relationships with these customers, licensors and
other constituencies, in light of the Chapter 11 process;
.. business-related difficulties of our customers;
.. our dependence on outside production sources;
.. our ability to compete with foreign imports;
.. the significant time that will be required by management to structure
and implement a plan of reorganization;
.. our reliance on key management personnel, including the effects of the
Chapter 11 process on our ability to attract and retain key management
personnel; and
.. our relationship with the union representing some of our employees.
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.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On March 31, 2004, we and our domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Northern
District of Georgia (Case Nos. 04-10990 though 04-10993). We are
currently operating our businesses as debtors-in-possession
pursuant to the Bankruptcy Code. As a result of the filing, pre-
petition obligations of the Debtors, including obligations under
debt instruments, generally may not be enforced against the
Debtors, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy
Court. For more information about the filing, see Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
From time to time, we are a party to litigation arising in the
ordinary course of our business. We are not currently a party to
any litigation that we believe could reasonably be expected to have
a material adverse effect on our results of operations or financial
condition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The Exhibits listed as applicable on the accompanying
Exhibit Index are filed as part of this Quarterly Report.
(b) Reports on Form 8-K.
(i) On May 28, 2004, we filed a Current Report
on Form 8-K under Item 5 concerning an amendment to our Post-
Petition Credit Agreement dated April 1, 2004.
(ii) On June 8, 2004, we filed a Current
Report on Form 8-K under Item 5 concerning our Monthly
Operating Report for the month of April 2004 as filed with the
U.S. Bankruptcy Court for the Northern District of Georgia.
<Page> 36
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 23, 2004 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
</Table>
37
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Joint Plan of Reorganization of Dan River Inc., The Bibb
Company LLC, Dan River International Ltd. and Dan River
Factory Stores, Inc. (incorporated by reference to Exhibit
99.1 in Current Report on Form 8-K filed August 2, 2004 (File
No. 1-13421))
2.2 Disclosure Statement for Joint Plan of Reorganization Filed by
Dan River Inc., The Bibb Company LLC, Dan River International
Ltd. and Dan River Factory Stores, Inc. (incorporated by
Reference to Exhibit 99.2 in Current Report on Form 8-K filed
August 2, 2004 (File No. 1-13421))
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))
10.1* Second Amendment dated as of July 20, 2004 to Post-Petition
Credit Agreement dated April 1, 2004 between Dan River Inc.
and Deutsche Bank Trust Company Americas
10.2* Third Amendment dated as of July 31, 2004 to Post-Petition
Credit Agreement dated April 1, 2004 between Dan River Inc.
and Deutsche Bank Trust Company Americas
10.3* Fourth Amendment dated as of August 18, 2004 to Post-Petition
Credit Agreement dated April 1, 2004 between Dan River Inc.
and Deutsche Bank Trust Company Americas
11 Statement regarding Computation of Earnings per
share (incorporated by reference to Note 10 to the Unaudited
Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q)
31.1* Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2* Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
38
Exhibit No. Description of Exhibit
- ----------- ----------------------
32.1* Certificate of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2* Certificate of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- -----------------
*Filed herewith.