1
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission file number 1-13421
DAN RIVER INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1854637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2291 Memorial Drive 24541
Danville, Virginia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (804) 799-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No
Number of shares of common stock outstanding as of October 2, 1999:
Class A: 20,753,709 Shares
Class B: 2,062,070 Shares
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
2
Forward Looking Statements.
- --------------------------
This Quarterly Report contains forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities and Exchange Act of 1934.
These statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those included in such forward
looking statements. The words "believes," "expects," "intends," "estimates"
or "anticipates" and similar expressions, as well as future or conditional
verbs such as "will," "should," "would," and "could", are intended to
identify forward-looking statements. Specific forward looking statements
contained in this Quarterly Report include, among others, statements
regarding adequacy of the Company's liquidity and capital resources, and the
anticipated impact and cost of remediating Year 2000 problems. These forward
looking statements are found in Part I, Item 2. There can be no assurance
that the assumptions made by management are correct.
The forward looking statements in this Quarterly Report are also subject to
certain risks and uncertainties including, among others, that the Company's
performance in future periods may be adversely impacted by the cyclical
nature of the textile industry, intense competition within the textile
industry, fluctuations in the price and availability of cotton and other raw
materials, the inability of the Company to make capital improvements
necessary to maintain competitiveness, possible adverse changes in
governmental regulation regarding the import of cotton and textile products,
difficulties in integrating acquired businesses and achieving cost savings,
changes in environmental regulations, deterioration of relationships with or
the loss of material customers and adverse changes in general market and
industry conditions.
Management believes that the forward looking statements in this Quarterly
Report are reasonable; however, such statements are based on current
expectations and undue reliance should not be placed on such statements. The
Company undertakes no obligation to update publicly any forward-looking
statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See Following Pages.
3
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 2,
1999 1999
----------- -----------
(in thousands, except share
and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,581 $ 3,356
Accounts receivable, net 87,824 94,374
Inventories 166,567 175,045
Prepaid expenses and other current assets 6,250 11,283
Deferred income taxes 18,997 20,653
----------- -----------
Total current assets 281,219 304,711
Property, plant and equipment 462,145 437,771
Less accumulated depreciation and amortization (170,406) (141,131)
----------- -----------
Net property, plant and equipment 291,739 296,640
Goodwill, net 111,123 110,727
Other assets 8,739 8,132
----------- -----------
$ 692,820 $ 720,210
=========== ===========
4
DAN RIVER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 2,
1999 1999
------------ ------------
(in thousands, except share
and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 17,209 $ 2,329
Accounts payable 29,810 33,825
Accrued compensation and related benefits 23,923 27,219
Other accrued expenses 18,371 19,484
------------ ------------
Total current liabilities 89,313 82,857
Other liabilities:
Long-term debt 304,130 351,939
Deferred income taxes 18,725 15,126
Other liabilities 10,863 11,514
Shareholders' equity:
Preferred stock, $.01 par value; authorized
50,000 shares; no shares issued -- --
Common stock, Class A, $.01 par value;
authorized 175,000,000 shares; issued
and outstanding 20,753,709 shares
(21,157,198 shares at January 2, 1999) 208 212
Common stock, Class B, $.01 par value;
authorized 35,000,000 shares; issued
and outstanding 2,062,070 shares 21 21
Common stock, Class C, $.01 par value;
authorized 5,000,000 shares; no shares
outstanding -- --
Additional paid-in capital 214,433 215,906
Retained earnings 55,127 42,635
------------ ------------
Total shareholders' equity 269,789 258,774
------------ ------------
$ 692,820 $ 720,210
============ ============
See accompanying notes.
5
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
----------------------- ----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
--------- -------- -------- --------
(in thousands, except per share data)
Net sales $ 155,766 $ 118,589 $ 479,406 $ 358,128
Costs and expenses:
Cost of sales 123,001 90,768 389,899 277,124
Selling, general
and administrative
expenses 16,071 14,313 49,467 41,500
Amortization of
goodwill 728 -- 2,120 --
Other operating
costs, net (2,267) -- (2,267) (400)
--------- --------- --------- ---------
Operating income 18,233 13,508 40,187 39,904
Other income 114 4 472 421
Interest expense (6,981) (4,032) (21,310) (11,703)
--------- --------- --------- ---------
Income before
income taxes 11,366 9,480 19,349 28,622
Provision for
income taxes 3,120 3,654 6,627 10,916
--------- --------- --------- ---------
Net income $ 8,246 $ 5,826 $ 12,722 $ 17,706
========= ========= ========= =========
Earnings per share:
Basic $ 0.36 $ 0.31 $ 0.55 $ 0.94
========= ========= ========= =========
Diluted $ 0.36 $ 0.31 $ 0.54 $ 0.93
========= ========= ========= =========
See accompanying notes
6
DAN RIVER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
---------------------------
October 2, October 3,
1999 1998
------------ ------------
(in thousands)
Cash flows from operating activities:
Net income $ 12,722 $ 17,706
Adjustments to reconcile net income to net
cash provided by operating activities:
Noncash interest expense 565 592
Depreciation and amortization of
property, plant and equipment 29,669 22,457
Amortization of goodwill 2,120 --
Deferred income taxes 6,309 5,771
Writedown/disposal of assets (27) 159
Other operating costs, net (2,267) (400)
Changes in operating assets and liabilities
Accounts receivable 6,395 4,931
Inventories 5,318 (35,091)
Prepaid expenses and other assets (236) (1,678)
Accounts payable and accrued expenses (9,321) (3,149)
Other liabilities 1,268 17
---------- ----------
Net cash provided by operating
activities 52,515 11,315
---------- ----------
Cash flows from investing activities:
Capital expenditures (26,075) (29,843)
Proceeds from sale of assets 7,490 2,189
---------- ----------
Net cash used by investing activities (18,585) (27,654)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (1,773) (651)
Net borrowings (payments) - working
capital facility (31,000) 16,500
Proceeds from exercise of stock options 1,082 --
Repurchase of common stock (4,014) --
---------- ----------
Net cash provided (used) by
financing activities (35,705) 15,849
---------- ----------
Net decrease in cash and cash equivalents (1,775) (490)
Cash and cash equivalents at beginning of period 3,356 1,759
---------- ----------
Cash and cash equivalents at end of period $ 1,581 $ 1,269
========== ==========
See accompanying notes.
7
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned
subsidiaries, (collectively, the "Company"). In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results for the interim
periods presented have been included. Interim results are not
necessarily indicative of results for a full year. For further
information, refer to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended January 2, 1999.
2. Inventories
The components of inventory are as follows:
October 2, January 2,
1999 1999
------------ ------------
(in thousands)
Finished goods $ 64,455 $ 60,914
Work in process 86,096 96,534
Raw materials 4,583 4,007
Supplies 11,433 13,590
-------- --------
Total Inventories $166,567 $175,045
======== ========
3. During the quarter ended October 2, 1999 the Company finalized the
valuation of assets acquired and liabilities assumed in connection with
the October 14, 1998 acquisition of The Bibb Company. The purchase
price exceeded the fair value of the net assets acquired by
approximately $113.8 million and has been recorded as goodwill which is
being amortized on a straight-line basis over 40 years.
8
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Shareholders' Equity
In August, 1999 the Board of Directors approved a share repurchase
program authorizing the Company to spend up to $10 million to repurchase
shares of Class A common stock. Shares repurchased pursuant to this
program are retired and constitute authorized but unissued shares. As
of October 2, 1999 the Company had repurchased 576,739 shares for
$4,015,000.
Activity in Shareholders' Equity is as follows:
Total
Additional Share-
Common Stock Paid-In Retained holders'
Class A Class B Capital Earnings Equity
------- -------- ---------- -------- ----------
(in thousands)
Balance at Janu-
ary 2, 1999 $ 212 $ 21 $215,906 $42,635 $258,774
Net income -- -- -- 12,722 12,722
Stock option
activity, net 2 -- 2,536 (230) 2,308
Repurchase of
common stock (6) -- (4,009) -- (4,015)
------ ------ -------- ------- --------
Balance at Octo-
ber 2, 1999 $ 208 $ 21 $214,433 $55,127 $269,789
======= ====== ======== ======= ========
5. Other Operating Costs, Net
During 1999 the Company donated its Riverside Long Mill to a local
nonprofit historical organization for future renovation and development
into a multi-use retail and residential facility. The Long Mill is one
of two mill complexes which make up the Company's Riverside Apparel
Fabrics weaving facilities in Danville, VA, that were shut down in 1997.
At the time of the donation, approximately $1.8 million remained in
reserves established in 1997, principally for demolition of the
Riverside buildings. Due to the donation of the Long Mill, it is no
longer anticipated that the remaining Riverside property will be
demolished. Accordingly, the Company recorded a $1.8 million pre-tax
gain from reversal of the remaining reserves in the third quarter of
1999.
Also in the third quarter of fiscal 1999, the Company recorded a $0.5
million pre-tax gain due to a better than anticipated recovery on
equipment written down in 1998 in connection with the closure of the
Company's Apparel Fabrics weaving facility in Spindale, NC.
In the nine months ended October 3, 1998, the Company recorded a $0.4
million pre-tax gain from the early termination of a lease.
9
DAN RIVER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Income Taxes
The tax provision for the three and nine month periods ended October 2,
1999 includes a $1.5 million tax benefit from the charitable donation of
the Company's Riverside Long Mill (see Note 5).
7. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
----------------------- ----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
--------- -------- -------- --------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
per share -- net
income $ 8,246 $ 5,826 $ 12,722 $ 17,706
========= ========= ========= =========
Denominator:
Denominator for
basic earnings
per share--
weighted-average
shares 23,148 18,825 23,291 18,832
Effect of dilutive
securities:
Employee stock
options 29 182 120 240
--------- --------- --------- ---------
Denominator for
diluted earnings
per share--weighted
average shares
adjusted for
dilutive securities 23,177 19,007 23,411 19,072
========= ========= ========= =========
Earnings per share:
Basic $ 0.36 $ 0.31 $ 0.55 $ 0.94
========= ========= ========= =========
Diluted $ 0.36 $ 0.31 $ 0.54 $ 0.93
========= ========= ========= =========
10
8. Segment Information
Summarized information by reportable segment is shown in the following
tables:
Three Months Ended Nine Months Ended
----------------------- ----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
--------- -------- -------- --------
(in thousands)
Net sales:
Home Fashions $ 109,822 $ 71,354 $ 330,592 $ 211,039
Apparel Fabrics 34,410 47,235 114,032 147,089
Engineered Products 11,534 -- 34,782 --
--------- --------- --------- ---------
Consolidated net
sales $ 155,766 $ 118,589 $ 479,406 $ 358,128
========= ========= ========= =========
Operating income:
Home Fashions $ 15,854 $ 9,234 $ 39,818 $ 23,750
Apparel Fabrics 2,063 5,771 3,238 19,846
Engineered Products 459 -- 2,031 --
Corporate items not
allocated to
segments:
Amortization of
goodwill (728) -- (2,120) --
Other operating
costs, net 2,267 -- 2,267 400
Depreciation (1,427) (1,339) (4,162) (3,761)
Other (255) (158) (885) (331)
--------- --------- --------- ---------
Consolidated
operating income $ 18,233 $ 13,508 $ 40,187 $ 39,904
========= ========= ========= ==========
9. Recent Accounting Pronouncements
Effective January 3, 1999, the Company prospectively adopted Statement
of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that certain costs incurred in connection with developing or obtaining
software for internal use be capitalized and amortized over the
estimated useful life of the software. The effect of adopting SOP was
to increase net income for the nine months ended October 2, 1999 by $0.5
million.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended October 2, 1999 and October 3, 1998
NET SALES
Net sales for the third quarter of fiscal 1999 were $155.8 million, an
increase of $37.2 million or 31.3%, from net sales of $118.6 million in the
third quarter of fiscal 1998.
Net sales of Home Fashions Products for the third quarter of fiscal 1999 were
$109.8 million, up $38.5 million or 53.9% from the third quarter of fiscal
1998. The increase was attributable to incremental sales from the
acquisition of The Bibb Company ("Bibb") in October 1998.
Net sales of Apparel Fabrics for the third quarter of fiscal 1999 were $34.4
million, down $12.8 million or 27.2% from the third quarter of fiscal 1998.
The decrease was due to lower volumes and lower prices in virtually all
product categories. The most significant decline was in the segment's
largest product category, shirting fabrics, where sales were down $8.4
million.
Net sales of Engineered Products were $11.5 million in the third quarter of
fiscal 1999. The Company began operating in this segment in October 1998
with the acquisition of Bibb.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $16.l million in the third
quarter of fiscal 1999 or 10.3% of net sales, an increase of $1.8 million or
12.3% from the third quarter of fiscal 1998, during which they represented
12.1% of net sales. Substantially, all of the increase can be attributed to
incremental expenses resulting from the acquisition of Bibb.
OPERATING INCOME
Consolidated operating income for the third quarter of fiscal 1999 was $18.2
million (11.7% of net sales) compared to $13.5 million (11.4% of net sales)
for third quarter of fiscal 1998.
Segment Operating Income:
Operating income for the Home Fashions segment was $15.9 million for the
third quarter of fiscal 1999, compared to $9.2 million for the third quarter
of fiscal 1998. Operating income was favorably impacted by higher sales as a
result of the acquisition of Bibb, lower manufacturing costs as a result of
decreased usage of outside suppliers, lower raw material prices, and cost
savings from the integration of Bibb.
Operating income for the Apparel Fabrics segment was $2.1 million for the
third quarter of fiscal 1999, a decrease of $3.7 million or 64.3% from the
third quarter of fiscal 1998. The decrease in operating income reflects the
12
lower sales volume, a very competitive pricing environment, and higher per
unit manufacturing costs resulting from reduced capacity utilization offset
somewhat by favorable raw material costs. Cost savings associated with the
closure of the Spindale greige mill in the first quarter of fiscal 1999
partially mitigated the under-absorption of fixed costs.
The Engineered Products segment generated $0.5 million in operating income
for the third quarter of fiscal 1999.
Corporate Items:
Amortization of goodwill, which is entirely attributable to the October, 1998
acquisition of Bibb, was $0.7 million in the third quarter of fiscal 1999.
Other operating costs, net for the third quarter of fiscal 1999 included a
$1.8 million pre-tax gain from reversal of reserves established in a prior
year, primarily for demolition of the Company's Riverside Apparel Fabrics
weaving facilities in Danville, VA. During 1999 the Company donated the
Riverside Long Mill, one of two mill complexes which make up the Riverside
facilities, to a local nonprofit historical organization for future
renovation and development into a multi-use retail and residential facility.
Due to the donation of the Long Mill, it is no longer anticipated that the
remaining Riverside property will be demolished. Also included in Other
operating costs, net for the third quarter of fiscal 1999 is a $0.5 million
pre-tax gain that was realized due to a better than anticipated recovery on
equipment that was written down in 1998 in connection with the closure of the
Company's Apparel Fabrics weaving facility in Spindale, NC.
Depreciation not allocated to the Company's business segments totaled $1.4
million for the third quarter of fiscal 1999, compared to $1.3 million for
the third quarter of fiscal 1998, and is attributable to depreciation on the
write-up of the Company's fixed assets from when it was acquired in 1989.
Other items not allocated to the Company's business segments, which totaled
$0.3 million and $0.2 million for the third quarter of fiscal 1999 and 1998,
respectively, include idle facility costs and sundry other items not related
to business segment operations.
INTEREST EXPENSE
Interest expense for the third quarter of fiscal 1999 was $7.0 million, up
$2.9 million or 73.1% from the third quarter of fiscal 1998. The increase in
interest expense was due to higher debt levels as a result of the acquisition
of Bibb, offset somewhat by lower average interest rates.
INCOME TAX PROVISION
The income tax provision was $3.1 million in the third quarter of fiscal 1999
(27.5% of pre-tax income) compared to $3.7 million (38.5% of pre-tax income)
in the third quarter of fiscal 1998. The lower effective tax rate in the
third quarter of fiscal 1999 is mainly attributable to a $1.5 million tax
benefit from the charitable donation of the Company's Riverside Long Mill,
which reduced the tax provision by 13.2% of pre-tax income. This was offset
in part by the effect of nondeductible goodwill amortization, which increased
the effective tax rate by approximately 2.5% of pre-tax income.
13
NET INCOME AND EARNINGS PER SHARE
Net income for the third quarter of fiscal 1999 was $8.2 million or $0.36 per
share (diluted), compared to $5.8 million or $0.31 per share (diluted) for
the third quarter of fiscal 1998. The current quarter results were affected
by the following one-time items (discussed above) that, together, increased
net income by $2.9 million, or $0.13 per diluted share: a $1.5 million tax
benefit from the charitable donation of the Riverside Long Mill; a $1.8
million pre-tax gain ($1.1 million after-tax) from reversal of certain prior
year reserves associated with the Riverside plant closure; and a $0.5 million
pre-tax gain ($0.3 million after-tax) from the sale of equipment written down
in 1998 in connection with the Spindale plant closure.
Weighted average shares outstanding increased from 19.0 million in the third
quarter of fiscal 1998 to 23.2 million in the third quarter of fiscal 1999,
primarily as a result of shares issued in connection with the acquisition of
Bibb, offset by shares purchased under the Company's $10.0 million share
repurchase program announced August 9, 1999.
Comparison of Nine Months Ended October 2, 1999 and October 3, 1998
NET SALES
Net sales for the first nine months of fiscal 1999 were $479.4 million, an
increase of $121.3 million or 33.9% from net sales of $358.1 million in the
first nine months of fiscal 1998.
Net sales of Home Fashions Products for the first nine months of fiscal 1999
were $330.6 million, up $119.6 million or 56.6% from the first nine months of
fiscal 1998. The increase was attributable to incremental sales from the
acquisition of The Bibb Company.
Net sales of Apparel Fabrics for the first nine months of fiscal 1999 were
$114.0 million, down $33.1 million or 22.5% from the first nine months of
fiscal 1998. The decrease was primarily due to lower sales of shirting
fabric, the segment's largest product category, for which both unit volumes
and average pricing decreased from the prior year.
Net sales of Engineered Products were $34.8 million in the first nine months
of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $49.5 million in the first
nine months of fiscal 1999 or 10.3% of net sales, an increase of $8.0 million
or 19.2% from the first nine months of fiscal 1998, during which they
represented 11.6% of net sales. Substantially all of the increase can be
attributed to incremental expenses resulting from the acquisition of Bibb.
OPERATING INCOME
Consolidated operating income for the first nine months of fiscal 1999 was
$40.2 million (8.4% of net sales) compared to $39.9 million (11.1% of net
sales) for the first nine months of fiscal 1998.
14
Segment Operating Income:
Operating income for the Home Fashions segment was $39.8 million for the
first nine months of fiscal 1999, compared to $23.8 million for the first
nine months of fiscal 1998. The increase in operating income generally
parallels the increase in sales. Operating income was also favorably
impacted by lower raw material costs and lower manufacturing costs as a
result of decreased usage of outside suppliers and cost savings from the
integration of Bibb. This was offset by the sale of a less favorable mix of
products in the first nine months of fiscal 1999 compared to the first nine
months of fiscal 1998.
Operating income for the Apparel Fabrics segment decreased to $3.2 million in
the first nine months of fiscal 1999 from $19.8 million in the first nine
months of fiscal 1998. The decrease in operating income reflects lower sales
volume, a very competitive pricing environment, and higher per unit
manufacturing costs resulting from reduced capacity utilization, offset
somewhat by favorable raw material costs. Cost savings associated with the
closure of the Spindale greige mill in the first quarter of fiscal 1999
partially mitigated the under-absorption of fixed costs.
The Engineered Products segment generated $2.0 million in operating income
for the first nine months of fiscal 1999.
Corporate Items:
Amortization of goodwill, which is entirely attributable to the October, 1998
acquisition of Bibb, was $2.1 million for the first nine months of fiscal
1999.
Other operating costs, net for the first nine months of fiscal 1999 consisted
of the net gains recorded in the third quarter (discussed above) related to
the reversal of the Riverside reserves ($1.8 million pre-tax) and the sale of
equipment that was written down in 1998 ($0.5 million pre-tax). Other
operating costs, net for the first nine months of fiscal 1998 consisted of a
$0.4 million pre-tax gain from the early termination of a lease.
Depreciation not allocated to the Company's business segments totaled $4.2
million for the first nine months of fiscal 1999, compared to $3.8 million
for the first nine months of fiscal 1998, and is attributable to depreciation
on the write-up of the Company's fixed assets from when it was acquired in
1989.
Other items not allocated to the Company's business segments, which totaled
$0.9 million and $0.3 million for the first nine months of fiscal 1999 and
1998, respectively, include idle facility costs and sundry other items not
related to business segment operations.
INTEREST EXPENSE
Interest expense for the first nine months of fiscal 1999 was $21.3 million,
up $9.6 million or 82.1% from the first nine months of fiscal 1998. The
increase in interest expense was due to higher debt levels as a result of the
acquisition of Bibb, offset somewhat by lower average interest rates.
15
INCOME TAX PROVISION
The income tax provision was $6.6 million in the first nine months of fiscal
1999 (34.2 % of pre-tax income) compared to $10.9 million (38.1% of pre-tax
income) in the first nine months of fiscal 1998. The lower effective tax
rate in the first nine months of fiscal 1999 is mainly attributable to a $1.5
million tax benefit from the charitable donation of the Company's Riverside
Long Mill, which reduced the tax provision by 7.8% of pre-tax income. This
was offset in part by the effect of nondeductible goodwill amortization,
which increased the effective tax rate by approximately 4.2% of pre-tax
income.
NET INCOME AND EARNINGS PER SHARE
Net income for the first nine months of fiscal 1999 was $12.7 million or
$0.54 per share (diluted), compared to $17.7 million or $0.93 per share
(diluted) for the first nine months of fiscal 1998. Results for the first
nine months of fiscal 1999 were affected by the following one-time items
(discussed above) that, together, increased net income by $2.9 million, or
$0.12 per diluted share: a $1.5 million tax benefit from the charitable
donation of the Riverside Long Mill; a $1.8 million pre-tax gain ($1.1
million after-tax) from reversal of certain prior year reserves associated
with the Riverside plant closure; and a $0.5 million pre-tax gain ($0.3
million after-tax) from the sale of equipment written down in 1998 in
connection with the Spindale plant closure. Results for the first nine
months of fiscal 1998 include a $0.4 million pre-tax gain ($0.2 million
after-tax, or $0.01 per diluted share) from the early termination of a lease.
Weighted average shares outstanding increased from 19.1 million in the first
nine months of fiscal 1998 to 23.4 million in the first nine months of fiscal
1999, primarily as a result of shares issued in connection with the
acquisition of Bibb, offset by shares purchased under the Company's share
repurchase program announced August 9, 1999.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company believes that internally generated cash flow, supplemented by
borrowings under its working capital line of credit, will be sufficient to
meet its foreseeable debt service requirements, capital expenditures, and
working capital needs. The Company had a debt to total capital ratio of
54.4% at October 2, 1999.
Credit Facilities
The Company maintains a $150 million secured working capital line of credit.
The working capital line of credit is secured by the Company's accounts
receivable and inventories. As of October 2, 1999, $62.6 million was used
and $87.4 million was unused and available for borrowing.
The working capital line of credit bears interest at the Base Rate plus
applicable percentage, as defined (8.50% as of November 9, 1999) or LIBOR
plus applicable percentage (7.56% as of November 9, 1999), for periods of
16
one, two, 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 September 30, 2003.
The working capital line of credit is provided pursuant to a loan agreement
which contains certain covenants, including the maintenance of a certain
interest coverage ratio and maximum debt levels, and limitations on mergers
and consolidations, affiliated transactions, incurring liens, disposing of
assets and limitations on investments. An event of default under the loan
agreement includes Change of Control (as defined) as well as non-compliance
with certain other provisions.
Working Capital
Net cash generated from operating activities in the nine months ending
October 2, 1999 was $52.5 million, of which $49.1 million was generated by
net income plus noncash items (net). Operating assets and liabilities
generated an additional $3.4 million, primarily comprised of a $2.4 million
source for operating working capital (accounts receivable - $6.4 million
source, inventories - $5.3 million source, and accounts payable and accrued
expenses - $9.3 million use) and a $1.0 million net source of cash for
prepaid expenses and other assets, and other liabilities.
During the comparable nine month period ended October 3, 1998, net cash
generated from operating activities was $11.3 million. Included in that
amount is a use of cash for operating assets and liabilities of $35.0
million, primarily comprised of a $33.3 million use for operating working
capital (accounts receivable - $4.9 million source, inventories - $35.1
million use, and accounts payable and accrued expenses - $3.1 million use)
and a $1.7 million use of cash for prepaid expenses and other assets, and
other liabilities.
Capital Improvements
During the first nine months of 1999, the Company purchased $26.1 million in
equipment and manufacturing improvements.
Share Repurchase
In August, 1999 the Board of Directors approved a share repurchase program
authorizing the Company to spend up to $10 million to repurchase shares of
Class A common stock. Shares repurchased pursuant to this program are
retired and constitute authorized but unissued shares. As of October 2, 1999
the Company had repurchased 576,739 shares for $4,015,000.
IMPACT OF YEAR 2000
Much attention has been given to a serious problem that exists in many
computer programs in use today, a problem that arose from the earliest days
of computing when systems had very limited memory storage capacities. To
save space and data entry time, only the last two digits of a year were used
when performing date calculations and, consequently, these systems may not be
able to properly recognize dates beginning with the Year 2000. The failure
of a computer system to accurately recognize the Year 2000 could result in
17
system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Like most owners of computer software, the Company is replacing or modifying
a significant portion of its computer software to handle the Year 2000
problem. This includes business applications and embedded systems such as
manufacturing equipment, voice and data communications and Enterprise
Resource Planning ("ERP") systems. Through fiscal 1998, the Company had
spent approximately $7.0 million, and expects to spend approximately $10
million in fiscal 1999, in connection with modifying its computer information
systems to ensure the proper processing of transactions relating to Year 2000
and beyond. Most of these amounts are expenditures to implement certain new
or improved systems which not only achieve Year 2000 compliance, but
significantly improve and expand operational capabilities of certain of the
Company's computer systems and, therefore, are being capitalized. Costs
associated strictly with the Company's Year 2000 remediation program
(excluding costs relating to capital improvements to systems that are not
directly related to remediating Year 2000 problems in such systems) are being
expensed as incurred. All amounts are being funded with cash from operations
or borrowings under the Company's working capital line of credit. There can
be no assurance that the cost of the Company's Year 2000 program will not
materially exceed expectations.
Specifically, the Company has successfully implemented SAP R.3 for corporate
financial and material management systems, which are warranted by the vendor
to be Year 2000 compliant and are operational. It has successfully
implemented the SAP R.3 Enterprise Resource Planning (ERP) System for its
Home Fashions operations for customer order management, inventory management
and distribution. Four manufacturing operations in Danville, Virginia will
be converted to SAP R.3 by the end of November 1999. All Bibb systems were
converted to SAP R.3 with the exception of Engineered Products Division
systems. Engineered Products Division systems will be converted to SAP R.3
on December 5, 1999. Required modifications and testing of the Apparel
Fabrics ERP system (Datatex) for Year 2000 compliance are complete.
The Company is dependent upon the successful efforts of its customers and
suppliers of goods, services and essential utilities to identify and
remediate their Year 2000 problems and could be materially and adversely
affected by the failure of one or more of these efforts. The Company has
communicated with its major suppliers and customers. Efforts include the
collection and evaluation of voluntary representations made or provided by
those parties. Although the Company will continue to take reasonable care to
gather information about external parties, such information is not always
provided voluntarily, is not otherwise available, or may not be reliable.
While the Company obtains its goods (including raw materials) and services
from a number of suppliers and sells its products to a large number of
customers, if a sufficient number of these suppliers or customers experience
Year 2000 problems that prevent or substantially impair their ability to
continue to transact business with the Company as they currently do, the
Company would be required to find alternative suppliers and/or customers for
its products. Any delay or inability in finding such alternatives could have
a material adverse effect on the Company's results of operations, financial
condition and cash flow.
18
Based on analysis of its own systems and discussions with and surveys of its
key vendors and customers, management currently believes that Company
information systems affected by Year 2000 issues have been or will be timely
identified and that its implementation plans will render all material systems
Year 2000 compliant on a timely basis; however, should other entities upon
whose systems the Company relies fail to properly address Year 2000
compliance issues, or should key resources required to achieve the
initiatives described herein become unavailable or prove to be unreliable,
the Company's effectiveness in achieving Year 2000 compliance could be
delayed, which could have a material adverse effect on the Company's results
of operations, financial condition and cash flow.
The Company has developed and continues to refine a contingency plan and
recovery procedures to deal with potential problems ranging from inoperable
systems to failure of a critical utility or a supplier. The contingency plan
reflects the Company's best efforts to identify mission critical elements of
its operations and provide for alternatives that would be expected to
minimize Year 2000-related disruptions to those operations. Areas of
particular attention include, for example, appropriate inventory levels of
critical raw materials, supplies and work in process, alternative sources of
supply, and action plans in the event of the failure of certain systems.
Notwithstanding these efforts, there are certain systems, for example,
certain distribution and warehouse systems, for which there exists in the
Company's judgment no feasible alternative, and the Company believes that
failure of these systems would, if not promptly remedied, have a material
adverse effect on the Company's results of operations. Accordingly, the
Company is focusing on identifying these critical systems, insuring that they
are thoroughly tested for Year 2000 compliance, and being prepared to
address any Year 2000 failure in a manner so as to minimize disruption of the
Company's operations. There can be no assurance that these efforts will be
successful, or that notwithstanding these efforts, the Company will not
experience a Year 2000-related disruption which has a material adverse effect
on its financial condition, and results of operations and cash flow.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
19
PART II - OTHER INFORMATION
Items 1. Legal Proceedings.
In its Annual Report on Form 10-K for the 1998 fiscal year and in its
Quarterly Report on Form 10-Q for the quarterly period ended April 3, 1999,
the Company reported on related law suits styled WestPoint Stevens, Inc. and
The Bibb Company v. Panda-Rosemary Corporation and Panda Energy Corporation
(filed on June 5, 1998 in the General Court of Justice, Superior Court
Division, Halifax County, North Carolina) (the "North Carolina Action") and
Panda-Rosemary, L.P., and Panda Energy Corporation v. WestPoint Stevens,
Inc., The Bibb Company and Dan River Inc. (filed October 27, 1998 in the
County Court at Law No. 2, Dallas County, Texas) (the "Texas Action").
Pursuant to agreement, the litigants have filed to dismiss the Texas Action,
and the North Carolina Action has been transferred to the North Carolina
Business Court, sitting in Guilford County, North Carolina, in an action
styled WestPoint Stevens, Inc. and The Bibb Company v. Panda-Rosemary
Corporation and Panda-Rosemary, L.P., Case No. 99-CVS9918. As a result,
Panda Energy Corporation and Dan River Inc. are not parties to the action in
the Business Court. The Bibb Company, a wholly-owned subsidiary of Dan River
Inc., remains a party.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The Exhibits listed as applicable on the accompanying Exhibit
Index are filed as part of this Quarterly Report.
(b) Reports on Form 8-K. None.
20
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: November 12, 1999 /s/ Barry F. Shea
-----------------------------------
Barry F. Shea
Executive Vice President-Chief
Financial Officer
(Authorized Signing Officer and
Principal Financial Officer)
21
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page
No.
- ----------- ---------------------- -------
3.1 Amended and Restated Articles of Incorporation
of Dan River Inc. (incorporated by reference
to Exhibit 3.1 in Amendment No. 1 to
Registration Statement on Form S-1 (File
No. 333-36479)).
3.2 Bylaws of Dan River Inc. (incorporated by
reference to Exhibit 3.2 in Amendment No. 1
to Registration Statement on Form S-1 (File
No. 333-36479)).
11 Statement regarding Computation of
Earnings per share (incorporated by
reference to Note 7 to the Unaudited
Condensed Consolidated Financial
Statements included in this Quarterly
Report on Form 10-Q)
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
- ------------------