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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1997
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 33-70442
DAN RIVER INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1854637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2291 Memorial Drive 24541
Danville, Virginia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (804) 799-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
Number of shares of common stock outstanding as of March 29, 1997:
Class A: 726,454 Shares
Class B: 82,413 Shares
There are 15 pages in the sequentially numbered, manually signed original of
this report.
Exhibit Index is on page 14.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
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DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 28, March 29,
1996 1997
------------ ------------
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,042 $ 3,182
Accounts receivable, net 55,782 68,338
Inventories 72,493 87,599
Prepaid expenses and other current assets 1,275 1,786
Deferred income taxes 5,643 5,313
------------ ------------
Total current assets 140,235 166,218
Property, plant and equipment 274,698 324,535
Less accumulated depreciation and amortization (99,348) (105,970)
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Net property, plant and equipment 175,350 218,565
Other assets 5,465 6,318
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$ 321,050 $ 391,101
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 6,990 $ 10,459
Accounts payable 21,531 25,850
Accrued compensation and related benefits 13,652 15,704
Other accrued expenses 4,771 11,888
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Total current liabilities 46,944 63,901
Other liabilities:
Long-term debt 162,478 213,400
Deferred income taxes 17,857 17,827
Other deferred items 6,147 6,356
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Total other liabilities 186,482 237,583
Common stock subject to put rights 9,726 10,723
Shareholders' equity:
Common stock, Class A, $.01 par value; 1,500,000
shares authorized; 726,454 shares issued and
outstanding 7 7
Common stock, Class B, $.01 par value; 1,500,000
shares authorized; 82,413 shares issued and
outstanding 1 1
Additional paid-in capital 64,801 63,804
Retained earnings 13,698 15,691
Pension liability adjustment (609) (609)
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Total shareholders' equity 77,898 78,894
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$ 321,050 $ 391,101
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See accompanying notes.
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DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
--------------------------
March 30, March 29,
1996 1997
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(Dollars in thousands)
Net sales $ 83,738 $ 105,736
Costs and expenses:
Cost of sales 70,134 85,587
Selling, general and
administrative expenses 11,414 11,861
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Operating income 2,190 8,288
Other income 256 40
Interest expense (4,809) (5,085)
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Income (loss) before taxes (2,363) 3,243
Provisions (benefit) for
income taxes (935) 1,250
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Net income (loss) $ (1,428) $ 1,993
========= =========
See accompanying notes.
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DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
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March 30, March 29,
1996 1997
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(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) $ (1,428) $ 1,993
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Noncash interest expense 299 293
Depreciation and amortization 5,208 6,740
Deferred income taxes (860) 300
Loss on writedown/disposal of equipment 22 19
Changes in operating assets and liabilities,
net of business acquired:
Accounts receivable 6,132 4,442
Inventories 2,003 (2,379)
Prepaid expenses and other assets (223) (366)
Accounts payable and accrued expenses 996 6,119
Other liabilities (83) 209
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Net cash provided by operating
activities 12,066 17,370
Cash flows from investing activities:
Total capital expenditures (11,343) (4,469)
Plant and equipment acquired in
exchange for debt 1,199 12
Accrued equipment purchases (740) (1,012)
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Capital expenditures in cash (10,884) (5,469)
Acquisition of business -- (66,330)
Proceeds from sale of assets 1,110 73
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Net cash used by investing activities (9,774) (71,726)
Cash flows from financing activities:
Payments of long-term debt (1,505) (1,731)
Net borrowings - working capital facility 500 612
Proceeds from issuance of long-term debt -- 54,889
Payments of debt issuance costs -- (1,274)
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Net cash provided (used) by financing
activities (1,005) 52,496
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Net increase (decrease) in cash and cash equivalents 1,287 (1,860)
Cash and cash equivalents at beginning of period 1,540 5,042
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Cash and cash equivalents at end of period $ 2,827 $ 3,182
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See accompanying notes.
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DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned subsidiary,
Dan River Factory Stores, Inc. (together, 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, 1996.
2. Inventories
The components of inventory are as follows:
December 28, March 29,
1996 1997
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(Dollars in thousands)
Finished goods $ 24,558 $ 30,579
Work in process 38,274 44,328
Raw materials 2,679 3,898
Supplies 6,982 8,794
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Total Inventories $ 72,493 $ 87,599
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DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Shareholders' Equity
Activity in Shareholders' Equity is as follows:
Total
Additional Pension Share-
Common Stock Paid-In Retained Liability holders'
Class A Class B Capital Earnings Adjustment Equity
------- -------- ---------- -------- ---------- -------
(Dollars in thousands)
Balance at Decem-
ber 28, 1996 $ 7 $ 1 $64,801 $13,698 $ (609) $77,898
Change in common
stock subject to
put rights -- -- (997) -- -- (997)
Net income -- -- -- 1,993 -- 1,993
------ ------ ------- ------- -------- ------
Balance at March
29, 1997 $ 7 $ 1 $63,804 $15,691 $ (609) $78,894
======= ======= ======= ======= ========= =======
4. Income taxes
At December 28, 1996, the Company had net operating loss carryforwards of
$900,000, which expire in 2005. In addition, the Company had available a
minimum tax credit carryforward of $8,100,000, and investment credit and
other general business credit carryforwards of $5,300,000. If not used,
substantially all of the investment credit and other general business
credit carryforwards will expire in the years 1997 through 2000.
On September 3, 1991, the Company completed a financial restructuring (the
"Restructuring") which involved issuing common and preferred stock to
various parties. The Company believes that the Restructuring did not
result in a "change in ownership" under Section 382 of the Internal
Revenue Code. However, Section 382 and related regulations promulgated by
the Internal Revenue Service (IRS) are extremely complex, and the
Company's assessment of whether or not a "change in ownership" occurred
involves judgments as to certain factual issues and interpretations as to
certain legal issues for which there is little guidance.
From the date of the Restructuring through December 28, 1996, the Company
utilized an aggregate of $16,876,000 in net operating loss carryforwards
and $1,723,000 in general business credit carryforwards for federal income
tax purposes that are subject to review by the IRS. The utilization of
these carryforwards and related tax benefits could be significantly
restricted or eliminated if the Restructuring is ultimately deemed to
constitute a "change in ownership."
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5. Acquisition
On February 3, 1997, the Company acquired substantially all the assets of
The New Cherokee Corporation ("TNCC") for $65 million in cash, subject to
a working capital adjustment, and the assumption of certain operating
liabilities. The purchase price and associated fees and expenses of
approximately $2 million were funded at closing with $12.1 million of cash
on hand, and borrowings under a new working capital line of credit and
term loan of $19.9 million and $35 million, respectively. The acquisition
has been accounted for using the purchase method of accounting and the
preliminary allocation of the purchase price did not result in the
recording of goodwill.
The following summarized, unaudited pro forma results of operations assume
the acquisition of TNCC had occurred at the beginning of each period
presented. The pro forma information is presented for informational
purposes and is not indicative of results which would have occurred or
which may occur in the future.
Three Months Ended
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March 30, March 29,
1996 1997
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(Dollars in thousands)
Net sales $108,104 $114,946
Net income (loss) (1,590) 2,464
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Acquisition of The New Cherokee Corporation
On February 3, 1997, the Company acquired substantially all the assets and
assumed certain liabilities of The New Cherokee Corporation ("TNCC") for
$65 million in cash, subject to a reduction of up to $6.5 million if a
minimum working capital level (as defined) was not maintained by TNCC at the
time of purchase. TNCC sold substantially the same types of light weight
yarn dyed apparel fabrics as the Company.
The purchase included the inventory, receivables, property, plant, and
equipment of TNCC, including the Sevierville Plant located in Sevierville,
Tennessee, the Spindale Plant in Spindale, North Carolina, and the Harris
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Finishing Plant in Harris, North Carolina. The Company also assumed certain
liabilities of TNCC including trade payables and some accrued liabilities.
Funding for the acquisition is described in the Liquidity and Capital Resources
portion of this section.
General
Net Sales for the first quarter of 1997 were $105.7 million, an increase of
$22.0 million (26.3%) compared to the first quarter of 1996. Sales of home
fashions products increased $1.5 million or 2.8%, while sales of apparel
fabrics were up $20.5 million or 69.6%.
The increase in sales of home fashions products resulted from higher unit
volume offset somewhat by lower average pricing. The increase in sales of
apparel fabrics resulted primarily from the acquisition of TNCC on February 3,
1997, which increased sales approximately $14.7 million during the quarter.
Without the acquisition of TNCC, sales of apparel fabrics from the existing
Danville operations would have been up approximately $5.8 million or
approximately 20% above the levels of the first quarter of 1996. The increase
in sales of apparel fabrics from the Danville operations was due primarily to
higher unit volumes, particularly shirting fabrics, in the first quarter of
1997 as compared to the first quarter of 1996. As the product lines and
manufacturing systems of TNCC and the Company are integrated, the Company will
report product line sales without the benefit of separate TNCC sales data.
Gross profit for the first quarter of 1997 was $20.1 million, 19.1% of sales,
which is up $6.5 million, or 48.1%, from the first quarter of 1996 during which
gross profit represented 16.2% of sales. The increase in gross profit was due
to better manufacturing performance in both product areas, particularly in
apparel fabrics which had much better running schedules in the first quarter of
this year as compared to the first quarter of 1996. Additionally, increased
volume and lower raw material costs contributed to the increase in gross
profit.
Selling, general and administrative expenses for the first quarter of 1997 were
$11.9 million (11.2% of sales) as compared to $11.4 million (13.6% of sales)
during the first quarter of 1996. The increase relates to higher selling and
administrative expense associated with the acquisition of TNCC, higher
incentive compensation expense, and higher expense for the introduction of new
home fashions products.
Due to the factors described above, operating income in the first quarter of
1997 was $8.3 million, up $6.1 million or 278%, from the first quarter of 1996.
Interest expense for the first quarter of 1997 was $5.1 million, an increase of
$0.3 million or 5.7% from the first quarter of 1996. The increase in interest
expense was due to higher debt levels reflecting the acquisition of TNCC offset
somewhat by lower average rates. The lower average rates reflect the
acquisition debt related to TNCC, most of which is financed at floating rates
which are lower than the Company fixed rate public debt, thereby reducing the
average interest rate.
An income tax provision of $1.3 million was recorded in the first quarter of
1997 (38.5% of pre-tax income), compared to an income tax benefit of $0.9
10
million recorded in the first quarter of 1996. Accordingly, the Company
recorded net income of $2.0 million for the first quarter of 1997 compared to a
net loss of $1.4 million in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company believes that internally generated cash flow, supplemented by
borrowings under its revolving credit facility and vendor financing, will be
sufficient to meet its foreseeable debt service requirements, capital
expenditures, and working capital needs. The Company is considered highly
leveraged, with a debt to total capital ratio of 71.4% at March 29, 1997.
Credit Facilities and Vendor Financing
The total cash requirement to consummate the acquisition of the TNCC assets on
February 3, 1997 was $67 million. Included in this amount was an escrow
deposit of $6.5 million and approximately $2 million for fees, expenses and
certain closing items. The funds were provided by using $12.1 million of cash
on hand and borrowings of $19.9 million and $35 million, respectively, under a
new working capital credit line and term loan, described below.
In connection with the acquisition of TNCC, the Company replaced its $60
million revolving credit facility with a new four year $90 million working
capital line of credit and a $35 million four year term loan. The working
capital line of credit is tied to a borrowing base formula. The working
capital facility and the $35 million term loan are both secured by the
Company's accounts receivable and inventories, the personal property at the
three TNCC manufacturing facilities and the real property of the TNCC North
Carolina manufacturing facilities.
The working capital line of credit bears interest at the Base Rate, as defined
(8.50% as of March 29, 1997) or LIBOR plus 2% (7.81% as of March 29, 1997), for
periods of one, three or six months, at the Company's option. The working
capital line is non-amortizing and any amounts outstanding are due at the final
maturity of February 3, 2001. The initial borrowing under the line was $19.9
million on February 3, 1997. At March 29, 1997, the aggregate borrowings under
the line were $15 million, $2.7 million in letters of credit were outstanding,
and the Company had unused availability of $61.5 million under the working
capital line.
The $35 million term loan bears interest at the Base Rate or LIBOR plus 2.50%,
(8.31% as of March 29, 1997), for periods of one, three or six months, at the
Company's option. Principal payments are required in the following amounts for
each fiscal year: 1997, $1.75 million; 1998, $4.25 million, 1999, $5.0 million,
and 2000, $24.0 million, of which $20.25 million is due November 2000.
Both of the above-described facilities are provided pursuant to a Loan and
Security Agreement which contains certain covenants including requirements for
the maintenance of a certain cash interest coverage ratio and a minimum net
worth. The amount available to be borrowed under the working capital line of
credit is tied to a borrowing base formula which is dependent on the level of
eligible accounts receivable and inventories, less $10 million.
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In addition, the Company finances certain capital expenditures through vendors
of the capital assets, and will continue to utilize this method of financing
where it deems appropriate.
Working Capital
Net cash generated from operating activities was $17.4 million in the three
months ended March 29, 1997. Included in that amount is a source of cash from
operating assets and liabilities of $8.0 million, primarily comprised of a $8.2
million source from operating working capital (accounts receivable - $4.4
million source, inventories - $2.4 million use, and accounts payable and
accrued expenses - $6.1 million source).
During the comparable three month period ended March 30, 1996, net cash
generated from operating activities was $12.1 million. Included in that amount
is a source of cash from operating assets and liabilities of $8.8 million,
primarily comprised of a $9.1 million source from operating working capital
(accounts receivable - $6.1 source, inventories - $2.0 million source, and
accounts payable and accrued expenses - $1.0 million source).
Capital Improvements
During the first three months of 1997, the Company purchased $4.5 million in
equipment and manufacturing improvements. The Company expects to continue
modernizing and making capital improvements over the next several years, which
are anticipated to be financed through cash generated by operations, vendor
financing, and borrowings under the credit agreement.
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PART II - OTHER INFORMATION
Items 1 - 5. No disclosure required.
Item 6. Exhibits and Reports on Form 8-K.
(a) (The exhibits to this Form 10-Q are listed in the accompanying
index to Exhibits.
(b) Reports on Form 8-K
(1) On February 14, 1997 the Registrant filed a current Report
on Form 8-K, dated February 3, 1997, with respect to the
acquisition of substantially all of the assets of The New
Cherokee Corporation ("TNCC").
(2) On April 18, 1997, the Registrant filed a Current Report on
Form 8-K/A, Amendment No. 1 to the above-referenced Current
Report on Form 8-K. The Form 8-K/A included: (i) TNCC's
unaudited consolidated financial statements as of December
28, 1996 and for the three months ended December 28, 1996
and December 30, 1995, (ii) TNCC's audited consolidated
financial statements as of September 28, 1996 and for the
year ended September 28, 1996 and (iii) pro forma
consolidated financial information as of December 28, 1996
for the Registrant's fiscal year ended December 28, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAN RIVER INC.
Date: April 25, 1997 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Vice President-Chief Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
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EXHIBIT INDEX
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Exhibit No. Description of Exhibit Page No.
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2.1* Asset Purchase Agreement dated January 10,
1997 by and between Dan River Inc. and The New
Cherokee Corporation (incorporated by reference
to Exhibit 2.1 in Registrant's Current
Report on Form 8-K (No. 33-70442) dated
February 3, 1997).
2.2* First Amendment to Asset Purchase Agreement
between Dan River Inc. and The New Cherokee
Corporation dated as of February 2, 1997
(incorporated by reference to Exhibit 2.2
in Registrant's Current Report on Form 8-K
(No. 33-70442) dated February 3, 1997).
10.1* Loan and Security Agreement dated February 3,
1997 among the Registrant and Fleet Capital
Corporation (incorporated by reference to
Exhibit 10.1 in Registrant's Report on Form
10-K (No. 33-70442) for the fiscal year ended
December 28, 1996).
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed. 15
*Incorporated by reference to the Statement or Report indicated.