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EXHIBIT 13
Management's Discussion and Analysis
Revenues By Line of Business
1997 1996 1995
---- ---- ----
(in millions)
Home fashions . . . . . . . . . . . $ 255.8 $ 243.2 $ 231.8
Apparel fabrics . . . . . . . . . . 220.6 136.4 153.0
------- ------- -------
Total net sales . . . . . . . . . . $ 476.4 $ 379.6 $ 384.8
======= ======= =======
RESULTS OF OPERATIONS
Comparison of 53 Weeks Ended January 3, 1998 ("fiscal 1997") to 52 Weeks Ended
December 28, 1996, ("fiscal 1996")
Net sales for the 53 weeks in fiscal 1997 were $476.4 million, an
increase of $96.9 million or 25.5% compared to $379.6 million for the 52 weeks
in fiscal 1996. Net sales of home fashion products in fiscal 1997 were $255.8
million, an increase of $12.6 million or 5.2% compared to $243.2 million in
fiscal 1996. Net sales of apparel fabrics in fiscal 1997 were $220.6 million,
an increase of $84.3 million or 61.8% compared to $136.4 million in fiscal
1996. The increase in net sales of home fashion products was due to higher
unit volume aided somewhat by higher average pricing reflecting an improved
product mix. The increase in net sales of apparel fabrics resulted primarily
from the acquisition of The New Cherokee Corporation ("Cherokee"), which was
consummated on February 3, 1997. Apparel fabrics unit volumes were up
significantly as a result of the acquisition, offset somewhat by lower average
pricing reflecting a sales mix that included a higher proportion of lower
priced greige fabrics that were sold to the converter trade (purchasers of
unfinished fabric who contract out the finishing to third parties) and higher
commission finishing sales.
Gross profit in fiscal 1997 was $104.3 million (21.9% of net sales),
an increase of $32.1 million or 44.5% from gross profit of $72.2 million (19.0%
of net sales) for fiscal 1996. The increase in gross profit was due to higher
unit volumes, lower raw material prices, and better manufacturing performance
in apparel fabrics where there were increased activity levels and reduced costs
as a result of the acquisition of Cherokee.
Selling, general and administrative expenses for fiscal 1997 were
$54.2 million (11.4% of net sales) an increase of $8.6 million or 18.7% from
$45.7 million (12.0% of net sales) for fiscal 1996. The increase was caused by
increased selling and administrative expenses as a result of the acquisition of
Cherokee, increased product design and roll-out costs associated with the
introduction of the "Nautica" brand of home fashions products, and higher
incentive compensation expense.
The Company incurred a one-time charge in fiscal 1997 as a result of
its decision to close its Riverside apparel fabrics weaving operations in
Danville, Virginia, and a one-time gain as a result of its sale of the Wetumpka
yarn operation in Wetumpka, Alabama. The net charge for the closure of
Riverside was $7.6 million ($4.7 million after tax; $0.32 per share); it
includes $0.4 million for severance and other employee benefit costs. The
remainder of the charge relates principally to writedowns and other costs
associated with the divestiture of real estate and equipment. This was offset
by a gain of $583,000 ($358,000 after tax; $0.02 per share) on the sale of the
Company's Wetumpka yarn operation in December 1997. These items are reflected
under "Other Operating Costs, Net".
For the reasons described above, operating income for fiscal 1997 was
$43.0 million (9.0% of net sales), an increase of $16.1 million or 59.8% from
$26.9 million for fiscal 1996. Excluding the Other Operating Costs, Net,
operating income would have been $50.1 million (10.5% of net sales), an
increase of $23.5 million or 88.8% compared to fiscal 1996.
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Other income (expense), net for fiscal 1997 includes $0.6 million of
costs related to fees and expenses incurred in connection with a proposed
business combination that did not materialize, offset in part by miscellaneous
items of income.
Interest expense was $21.1 million for fiscal 1997, an increase of
$3.0 million or 16.3% from $18.2 million for fiscal 1996. The increase in
interest expense was due to higher debt levels for most of the year arising
from the acquisition of Cherokee, offset somewhat by lower average interest
rates. The Company completed an initial public offering of its stock on
November 20, 1997, (the "Offering"), raising $64.5 million in net proceeds for
the Company, all of which was used to reduce outstanding debt. Included in the
amounts paid off was the Company's outstanding Term Loan of $34.1 million. As
a result of the Term Loan being prepaid and the writeoff of the associated debt
issuance costs, the Company recognized an extraordinary loss of $243,000 after
tax ($0.01 per share).
The income tax provision was $8.4 million (38.6% of pre-tax income)
for fiscal 1997, an increase of $4.8 million compared to an income tax
provision of $3.6 million (38.6% of pre-tax income) recorded for fiscal 1996.
Accordingly, net income for fiscal 1997 was $13.0 million or $0.89 per
basic share on 14.7 million shares outstanding compared to $5.7 million or
$0.40 per basic share for fiscal 1996 on 14.2 million shares outstanding.
Comparison of 52 Weeks Ended December 28, 1996 ("fiscal 1996") to 52 Weeks
Ended December 30, 1995, ("fiscal 1995")
Net sales for the 52 weeks in fiscal 1996 were $379.6 million, a
decrease of $5.2 million or 1.4% compared to $384.8 million for the 52 weeks in
fiscal 1995. Net sales of home fashions products were $243.2 million in fiscal
1996, an increase of $11.3 million or 4.9% when compared to $231.8 million for
fiscal 1995. Net sales of apparel fabrics were $136.4 million, a decrease of
$16.6 million or 10.8% compared to $153.0 million in fiscal 1995. The increase
in sales of home fashions products was due to higher unit volume partially
offset by lower average pricing reflecting a competitive pricing environment.
The decrease in sales of apparel fabrics reflects lower unit volume of shirting
fabrics, particularly commodity white and blue oxfords, due to a sluggish
retail environment for these products during the first half of the year.
Gross profit for fiscal 1996 was $72.2 million or 19.0% of sales, a
decrease of $5.7 million or 7.4% from gross profit of $77.9 million (20.2% of
sales) for fiscal 1995. The decrease in gross profit was due to lower sales of
apparel fabrics, higher cotton costs and poor manufacturing performance
associated with abbreviated running schedules during the first half of the year
because of the weak order position for apparel fabrics during that period.
Selling, general and administrative expenses for fiscal 1996 were
$45.7 million (12.0% of sales) an increase of $0.8 million or 1.8% from $44.9
million (11.7% of net sales) in fiscal 1995. The increase in these expenses
relates primarily to higher rent expense for the Company's New York office and
showrooms and higher incentive compensation, offset by lower costs from the
operation of fewer factory stores and lower general and administrative expense
for the year.
Other Operating Costs, Net, reflects a net credit of $0.4 million in
fiscal 1996, compared to $9.0 million of net charges in fiscal 1995. Fiscal
1995 charges include $4.4 million in writedowns of fixed assets relating to the
Company's ongoing modernization program, $3.0 million of costs associated with
the Company's decision to discontinue manufacturing and marketing a line of
apparel fabrics, and $1.6 million of costs associated with relocation of the
Company's design, merchandising and marketing staff from office space at 111
West 40th Street to new offices at 1325 Avenue of the Americas in New York
City. Fiscal 1996 reflects the reversal of a portion of the 1995 charges
principally relating to the discontinued line of apparel fabrics ($0.9 million)
offset by $0.5 million of net charges for equipment writedowns associated with
the Company's modernization program.
Operating income for fiscal 1996 was $26.9 million (7.1% of net
sales), an increase of $2.8 million or 11.8% from $24.1 million (6.3% of net
sales), in fiscal 1995. The increase was caused by the favorable
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comparison created by the absence in fiscal 1996 of the one-time charges that
were taken in fiscal 1995 and which are described above. Excluding these
charges, operating income for fiscal 1996 would have been lower than fiscal
1995 by $6.6 million or 19.8% due to the lower sales of apparel fabrics, higher
cotton costs, and poor manufacturing performance associated with abbreviated
running schedules during the first half of the year because of the weak order
position for apparel fabrics during that period.
Interest expense was $18.2 million for fiscal 1996, a decrease of $3.8
million or 17.2% from $21.9 million in fiscal 1995. The reduction in interest
expense was due primarily to the conversion of the Company's 16.35% Convertible
Subordinated Junior Notes (the "Junior Notes") into shares of Class A common
stock in September 1995 and to a lesser extent because of lower rates and
levels for the Company's remaining debt. The decrease in those debt levels was
due to lower levels of working capital during the year.
The income tax provision was $3.6 million for fiscal 1996, or 38.6% of
pre-tax income, an increase of $1.4 million or 67.4% from the $2.1 million
(89.2% of pre-tax income) recorded for fiscal 1995. The high effective tax
rate for fiscal 1995 reflects the nondeductibility of interest on the Junior
Notes that were outstanding during the first eight months of 1995.
For the reasons described above, net income in fiscal 1996 was $5.7
million or $0.40 per basic share, an increase of $5.4 million from $0.3 million
or $0.02 per basic share for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company relies on internally generated cash flow, supplemented by
borrowings under its Working Capital Facility to meet its working capital
needs, capital improvements and debt service requirements. In the past, the
Company has maintained substantial levels of leverage. However, the Offering
resulted in a substantial reduction in that leverage. The Company's total debt
to total capital ratio at January 3, 1998 was 46.4%.
Working Capital
The Company's operations are working capital intensive. The Company's
operating working capital (accounts receivable and inventories less accounts
payable and accrued expenses) typically increases or decreases in relation to
sales and operating activity levels.
Excluding the effect of the Cherokee acquisition, operating working
capital increased $3.7 million (4.2%) during fiscal 1997 reflecting increased
sales activity. Net income plus noncash expense items (net) provided $49.4
million in cash during the year, which provided funding for $4.7 million used
by changes in operating assets and liabilities. Those changes were a $2.7
million increase in prepaid expenses and other assets, a $1.6 million decrease
in other liabilities, as well as the $3.7 million increase in operating working
capital mentioned above. As a result, net cash of $44.6 million was provided
by operating activities in fiscal 1997.
Operating working capital decreased $17.3 million (16.7%) during
fiscal 1996 reflecting improved inventory management and to a lesser extent the
1.4% decrease in net sales from fiscal 1995. Net income plus noncash expense
items (net) provided $28.4 million in cash during the year. Additionally, cash
was provided by a $16.7 million reduction in operating assets and liabilities,
principally from the reduction in operating working capital mentioned here.
Accordingly, net cash of $45.1 million was generated from operating activities
in fiscal 1996.
Operating working capital increased $5.7 million (5.8%) in fiscal 1995
reflecting the 3.6% increase in net sales from fiscal 1994. Net income plus
noncash expense items (net) provided $29.6 million in cash during the year,
which provided funding for $7.0 million used by changes in operating assets and
liabilities. As a result, $22.5 million in net cash was provided by operating
activities in fiscal 1995.
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In connection with the purchasing of cotton for anticipated
manufacturing requirements, the Company may enter into cotton futures and
option contracts in order to reduce the risk associated with future price
fluctuations. The Company generally covers open order requirements, which
average approximately three months of production, through direct purchase and
hedging transactions, and it may shorten or lengthen that period in accordance
with its perception of the direction of cotton prices. Futures and option
contracts are accounted for as hedges and, accordingly, gains or losses are
deferred and reflected in cost of sales as an element of the cost of the
finished product. Gains and losses related to hedging activity during the
three year period ended January 3, 1998 were not material to the Company's
results of operations. There were no material cotton futures or options
contracts outstanding at January 3, 1998 or December 28, 1996.
Credit Facilities and Vendor Financing
On February 3, 1997, in order to finance the Cherokee acquisition, the
Company replaced its $60.0 million revolving credit facility with a new
revolving credit facility (the "Working Capital Facility"), under which the
Company has $90.0 million aggregate borrowing availability, subject to a
borrowing base limitation, and a Term Loan Facility, under which the Company
had $35.0 million of aggregate borrowing availability, (together, the "Credit
Facilities"). The Working Capital Facility is secured by the Company's
accounts receivable and inventories.
Following the completion of the Offering in November 1997 the net
proceeds to the Company from the Offering (approximately $64.5 million) were
used to retire various debt obligations of the Company and the Credit
Facilities were amended. This resulted in the prepayment and termination of
the Term Loan Facility and a reduction in the interest rates applicable to
borrowings under the Working Capital Facility, as well as the prepayment and
termination of other obligations.
As amended, the Working Capital Facility bears interest at the Base
Rate, as defined (8.50% as of February 23, 1998) or LIBOR plus .75% (6.38% as
of February 23, 1998) for periods of one, two, three or six months, at the
Company's option. The Working Capital Facility is nonamortizing and any
amounts outstanding are due at the final maturity of February 28, 2001. At
January 3, 1998, the Company had an aggregate of $18.5 million of borrowings
and $0.2 million in letters of credit outstanding under the Working Capital
Facility and had $61.4 million in unused and available borrowings under the
Working Capital Facility.
The Working Capital Facility contains certain covenants including
requirements for the maintenance of a certain cash interest coverage ratio and
a minimum net worth and limitations on mergers and consolidations, affiliated
transactions, incurring liens, making restricted payments, entering into sale
and leaseback transactions, disposing of assets and owning, purchasing or
acquiring margin securities. An event of default under the Working Capital
Facility includes a Change in Control (as defined) as well as the Company's
default on certain of its other indebtedness. Borrowings under the Working
Capital Facility are tied to a borrowing base formula which is dependent on the
level of eligible accounts receivable and inventories, less $10 million.
In addition, the Company finances certain capital improvements through
vendors of the capital assets, and will continue to utilize this method of
financing where it deems appropriate.
Capital Improvements
The Company's capital improvements have been financed through a
variety of sources, including (i) internally generated funds and borrowings
under existing credit facilities, (ii) vendor financing and (iii) operating
leases.
During fiscal 1997, the Company made capital improvements aggregating
$24.2 million. The Company anticipates capital improvements in the range of
$30 million to $35 million in fiscal 1998, which will be used primarily for new
looms, air conditioning and other facility modernizations.
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Rental expense for fiscal 1997, 1996 and 1995 was approximately $7.4
million, $10.3 million and $13.0 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $34,000, $76,000 and $1.5
million, respectively. At January 3, 1998, the Company's future minimum lease
payments due under operating leases with noncancellable terms in excess of one
year were as follows: 1998, $4.6 million; 1999, $3.1 million; 2000, $2.3
million; 2001 and later, $18.5 million. Approximately 5% of future rental
payments relate to operating leases for machinery and equipment used to produce
the Company's products.
The table below sets forth the amount of capital improvements made
through specified financing sources during the past three fiscal years:
Fiscal Year
1997 1996 1995
------- ------ -------
(in millions)
Source of Financing:
Internal generated funds and borrowings . . . . . . . . $ 24.2 $ 28.5 $ 20.8
Vendor financings(1) . . . . . . . . . . . . . . . . . -- 6.0 7.2
Operating leases(2) . . . . . . . . . . . . . . . . . . -- 0.9 1.3
------ ------ ------
Total capital improvements . . . . . . . . . . . . . . . $ 24.2 $ 35.4 $ 29.3
====== ====== ======
- ------------------
(1) The financings provided by vendors for machinery and equipment typically
have maturities ranging from three to seven years and carry floating rates of
interest similar to the Company's Credit Facilities. The 1996 and 1995 amounts
also include $3.6 million and $1.0 million, respectively, of financing from an
Industrial Development Authority for a home fashions accessory sewing plant and
a warehouse and distribution center.
(2) Amounts reflect the fair market value of machinery and equipment which was
leased during the applicable period.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in 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.
The Company has completed a business system assessment and will have
to modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
assessment included not only a review for year 2000 compliance, but whether
existing systems were sufficient to serve as the base for the Company's future
operations. As a result of the review, the Company decided to install a new
Enterprise Resource Planning (ERP) System which is year 2000 compliant and
which would provide significant business improvements. The cost to implement
the ERP system is approximately $6 million of which $5 million is considered a
capital expenditure. In addition, the Company plans to expense as incurred
approximately $1-2 million on modifying other systems to cause them to become
year 2000 compliant.
The Company's target for completion of the ERP system installations
and modifications to other systems is December 31, 1998, which is prior to any
anticipated impact on its operating systems. The Company believes that with
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed in a timely manner, the year 2000 issue could have a material
impact on the operations of the Company.
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The Company has initiated formal communications with key suppliers and
large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to address their own
year 2000 issues. There is no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.
The costs outlined above and the date on which the Company believes it
will complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions about future
events, including the continued availability of certain resources and other
factors. There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of trained personnel, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements.
MARKET AND DIVIDEND DATA
The Company was privately held until the Offering was completed on
November 20, 1997, at which time its Class A Common Stock was listed on the New
York Stock Exchange, which is the principal United States market where the
stock is traded. The initial public offering price of the Class A Common Stock
was $15 per share, and the price on January 2, 1998, the last trading date of
the Company's fiscal year, was $16.375. There is no established trading market
for the Class B Common Stock. On February 19, 1998, there were 63 holders of
record of the Company's Class A Common Stock and eight holders of record of the
Company's Class B Common Stock.
The Company has paid no cash dividends during its two most recent
fiscal years and has no present intention to commence paying such dividends.
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DAN RIVER INC.
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and December 28, 1996
1997 1996
---- ----
(in thousands, except
share and per share data)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,759 $ 5,042
Accounts receivable (less allowance of $6,230 and $4,631) . . . . . . . . . . . 70,676 55,782
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,376 72,493
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . 5,112 1,275
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,628 5,643
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,551 140,235
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,296 6,526
Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,382 43,363
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,849 209,568
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,467 15,241
-------- --------
321,994 274,698
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . 113,866 99,348
-------- --------
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 208,128 175,350
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,616 5,465
-------- --------
$392,295 $321,050
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . $ 301 $ 6,990
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,933 21,531
Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . 16,661 13,652
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,052 4,771
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 53,947 46,944
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,455 162,478
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,182 17,857
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,881 6,147
Common stock subject to put rights . . . . . . . . . . . . . . . . . . . . . . . . -- 9,726
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 16,778,472 shares (12,712,945 shares at December 28, 1996) . . . . 168 127
Common stock, Class B, $.01 par value; authorized 35,000,000 shares; issued and
outstanding 2,062,070 shares (none at December 28, 1996) . . . . . . . . . . . 21 --
Common stock, Class C, $.01 par value; authorized 5,000,000 shares; no shares
outstanding (1,442,220 shares outstanding at December 28, 1996) . . . . . . . -- 14
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,140 64,668
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,501 13,698
Pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . -- (609)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 165,830 77,898
-------- --------
$392,295 $321,050
======== ========
See accompanying notes.
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DAN RIVER INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
---- ---- ----
(in thousands, except per share data)
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 476,448 $ 379,567 $ 384,801
Costs and expenses:
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . 372,165 307,383 306,879
Selling, general and administrative expenses . . . . . . . . . 54,231 45,673 44,860
Other operating costs, net . . . . . . . . . . . . . . . . . . 7,012 (428) 8,972
--------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 43,040 26,939 24,090
Other income (expense), net . . . . . . . . . . . . . . . . . . . (290) 485 241
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (21,135) (18,168) (21,941)
--------- ---------- ---------
Income before income taxes and extraordinary item . . . . . . . . 21,615 9,256 2,390
Provision for income taxes . . . . . . . . . . . . . . . . . . . 8,351 3,570 2,132
--------- ---------- ---------
Income before extraordinary item . . . . . . . . . . . . . . . . 13,264 5,686 258
Extraordinary item, net of income taxes:
Loss on early extinguishment of debt . . . . . . . . . . . . . (243) -- --
--------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,021 $ 5,686 $ 258
========= ========== =========
Earnings per share--basic:
Income before extraordinary item . . . . . . . . . . . . . . . $ 0.90 $ 0.40 $ 0.02
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . (0.01) -- --
--------- ---------- ---------
Net income per share--basic . . . . . . . . . . . . . . . . . $ 0.89 $ 0.40 $ 0.02
========= ========== =========
Earnings per share--diluted:
Income before extraordinary item . . . . . . . . . . . . . . . $ 0.89 $ 0.40 $ 0.02
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . (0.01) -- --
--------- ---------- ---------
Net income per share--diluted . . . . . . . . . . . . . . . . $ 0.88 $ 0.40 $ 0.02
========= ========== =========
See accompanying notes.
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DAN RIVER INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended January 3, 1998, December 28, 1996
and December 30, 1995
Class A Class B Class C Additional Pension
Common Common Common Paid-In Retained Liability
Stock Stock Stock Capital Earnings Adjustment Total
------ ------ ------ ------- -------- ---------- -----
(in thousands)
Balance at December 31, 1994 $ 99 $ -- $ 14 $ 38,943 $ 7,754 $ -- $ 46,810
Net income . . . . . . -- -- -- -- 258 -- 258
Pension liability adjustment -- -- -- -- -- (1,845) (1,845)
Conversion of junior subordinated
notes . . . . . . . . 28 -- -- 28,451 -- -- 28,479
------- ------- -------- -------- -------- --------- --------
Balance at December 30, 1995 127 -- 14 67,394 8,012 (1,845) 73,702
Net income . . . . . . -- -- -- -- 5,686 -- 5,686
Pension liability adjustment -- -- -- -- -- 1,236 1,236
Change in common stock subject to put
rights . . . . . . . -- -- -- (2,726) -- -- (2,726)
------- ------- -------- -------- ------- --------- --------
Balance at December 28, 1996 127 - 14 64,668 13,698 (609) 77,898
Net income . . . . . . -- -- -- -- 13,021 -- 13,021
Pension liability adjustment -- -- -- -- -- 609 609
Initial public offering 41 21 (14) 64,436 -- -- 64,484
Termination of put rights -- -- -- 9,726 -- -- 9,726
Tax effect of stock options
exercised . . . . . . -- -- -- 310 -- -- 310
Retirement of common stock -- -- -- -- (218) -- (218)
------- ------- -------- -------- -------- -------- ---------
Balance at January 3, 1998 $ 168 $ 21 $ -- $139,140 $ 26,501 $ -- $ 165,830
======= ======= ======== ======== ======== ======== =========
See accompanying notes.
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10
DAN RIVER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 3, 1998, December 28, 1996
and December 30, 1995
1997 1996 1995
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 13,021 $ 5,686 $ 258
Adjustments to reconcile net income to net cash provided by
operating activities:
Noncash interest expense . . . . . . . . . . . . . 1,359 1,166 4,110
Depreciation and amortization . . . . . . . . . . 27,508 20,795 19,537
Deferred income taxes . . . . . . . . . . . . . . (59) 1,842 (1,379)
Writedown/disposal of assets . . . . . . . . . . . 7,161 (1,129) 7,045
Extraordinary loss on extinguishment of debt . . . 397 -- --
Changes in operating assets and liabilities,
excluding effects of business acquired:
Accounts receivable . . . . . . . . . . . . . 473 (691) 6,578
Inventories . . . . . . . . . . . . . . . . . (8,790) 24,554 (8,423)
Prepaid expenses and other assets . . . . . . (2,701) (396) 512
Accounts payable and accrued expenses . . . . 4,646 (6,555) (3,904)
Other liabilities . . . . . . . . . . . . . . 1,632 (194) (1,796)
------- ------- --------
Net cash provided by operating activities . . . . . . . . . 44,647 45,078 22,538
------- ------- --------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . (24,231) (27,582) (24,316)
Proceeds from sale of assets . . . . . . . . . . . . 4,005 2,385 322
Acquisition of business . . . . . . . . . . . . . . . (64,583) -- --
-------- -------- --------
Net cash used by investing activities . . . . . . . . . . . (84,809) (25,197) (23,994)
------- ------- --------
Cash flows from financing activities:
Payments of long-term debt . . . . . . . . . . . . . . (89,177) (18,566) (8,453)
Net proceeds from issuance of long-term debt . . . . . 62,972 25,187 700
Net borrowings (payments)--working capital facility . (1,400) (23,000) 9,000
Net proceeds from issuance of common stock . . . . . . 64,484 -- --
------- ------- -------
Net cash provided (used) by financing activities . . . . . 36,879 (16,379) 1,247
------- ------- -------
Net increase (decrease) in cash and cash equivalents . . . (3,283) 3,502 (209)
Cash and cash equivalents at beginning of year . . . . . . 5,042 1,540 1,749
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . $ 1,759 $ 5,042 $ 1,540
======= ======= =======
See accompanying notes.
10
11
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
1. DESCRIPTION OF BUSINESS
Dan River Inc. and its former parent and sole shareholder,
Braelan Corp. ("Braelan"), were organized in 1989 to acquire and
operate Dan River Holding Company and its subsidiaries. Dan River
Inc. is a manufacturer and marketer of a variety of textile products,
primarily home fashions and apparel fabrics. Home fashions products
consist mostly of packaged bedroom furnishings which are sold to
domestic retailers. Apparel products, which include a broad range of
woven cotton and cotton-blend fabrics, are distributed primarily to
domestic clothing manufacturers.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of presentation
On December 29, 1995, Braelan was merged with and into Dan
River Inc. The consolidated balance sheets as of January 3, 1998 and
December 28, 1996, and the consolidated statements of income,
shareholders' equity and cash flows for each of the two fiscal years
in the period ended January 3, 1998, represent the consolidated
financial position, results of operations and cash flows of Dan River
Inc. and its wholly-owned subsidiary, Dan River Factory Stores, Inc.
The consolidated statements of income, shareholders' equity and cash
flows for the year ended December 30, 1995, represent the consolidated
results of operations and cash flows of Braelan and its subsidiaries.
All significant intercompany balances have been eliminated. Braelan
and its subsidiaries, and Dan River Inc. and its subsidiary are
collectively referred to as the Company.
Fiscal year
The Company's fiscal year ends on the Saturday nearest to
December 31. All references to 1997 mean the 53-week fiscal year
ended January 3, 1998, and all references to 1996, and 1995 mean the
52-week fiscal years ended December 28, 1996 and December 30, 1995,
respectively.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash equivalents
All highly liquid cash investments purchased with an initial
maturity of three months or less are considered to be cash
equivalents.
11
12
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, with
cost determined under the first-in, first-out method. Inventories at
January 3, 1998 and December 28, 1996 respectively, by component are
as follows:
1997 1996
------- --------
(in thousands)
Finished goods . . . . . . . . . . . . . . . . $25,401 $24,558
Work in process . . . . . . . . . . . . . . . 56,156 38,274
Raw materials . . . . . . . . . . . . . . . . 2,429 2,679
Supplies . . . . . . . . . . . . . . . . . . . 8,390 6,982
------- -------
Total inventories . . . . . . . . . . . . $92,376 $72,493
======= =======
Property, plant and equipment
Property, plant and equipment are stated at cost.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the related assets, ranging from 10 to 35 years for
buildings and improvements, and 3 to 14 years for machinery and
equipment. Leasehold improvements are amortized on a straight-line
basis over the lease term or estimated useful life, whichever is less.
Deferred financing fees
Debt financing fees are amortized over the term of the related
debt.
Revenue recognition
The Company generally recognizes revenues from product sales
when goods are shipped.
Stock-based compensation
The Company continues to follow the accounting method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and has presented the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
Income taxes
Deferred income taxes are accounted for under the liability
method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse.
12
13
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)
Cotton futures contracts
In connection with the purchasing of cotton for anticipated
manufacturing requirements, the Company may enter into cotton futures
and option contracts in order to reduce the risk associated with
future price fluctuations. These contracts are accounted for as
hedges and, accordingly, gains or losses are deferred and reflected in
cost of sales as an element of the cost of the finished product.
Transactions related to cotton futures and option contracts during the
three year period ended January 3, 1998 were not material.
Earnings per share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of stock options. Diluted earnings per share is similar to
fully diluted earnings per share except that the antidilutive effect
of the Company's convertible junior subordinated notes, which was
taken into consideration for purposes of calculating fully diluted
earnings per share in 1995, is not included in the calculation of
diluted earnings per share. All earnings per share amounts have been
restated to conform to the SFAS 128 requirements.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"),
effective for years beginning after December 15, 1997. SFAS 131
requires that a public company report financial and descriptive
information about its reportable operating segments pursuant to
criteria that differ from those of Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". Operating segments, as defined, are components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The
financial information to be reported includes segment profit or loss,
certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose
financial statements. SFAS 131 also requires information about
products and services, geographic areas of operation, and major
customers. The Company is required to adopt SFAS 131 at the end of
its 1998 fiscal year. The Company has not completed its analysis of
the effect of adoption on its financial statement disclosure, however,
the adoption of SFAS 131 will not affect results of operations or
financial position.
3. PUBLIC OFFERING AND CAPITALIZATION
On November 20, 1997 the Company completed an initial public
offering of its Class A common stock to the public (the "Offering"),
which included the sale of 4,700,000 shares by the Company and
2,619,200 shares by certain selling shareholders. The Company used
the net proceeds from the Offering, $64,484,000, to retire
indebtedness.
13
14
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1995, DECEMBER 28, 1996
AND JANUARY 3, 1998
3. PUBLIC OFFERING AND CAPITALIZATION--(CONTINUED)
In connection with the Offering, the shareholders of the
Company approved a multi-step recapitalization plan which became
effective on November 3, 1997 (the "Recapitalization"). Prior to the
Recapitalization, the Company's outstanding capital stock included
1,500,000 authorized shares of voting stock, par value $.01 per share
("Old Voting Stock") (726,454 shares of which were outstanding), and
1,500,000 authorized shares of nonvoting common stock, par value $.01
per share ("Old Nonvoting Stock") (82,413 shares of which were
outstanding).
The Company first amended and restated its Articles of
Incorporation (the "Restated Articles"). Upon filing of the Restated
Articles: (i) Class A Common Stock, par value $.01 per share, entitled
to one vote per share, Class B Common Stock, par value $.01 per share,
entitled to 4.39 votes per share, and Class C Common Stock, par value
$.01 per share, nonvoting, were created; (ii) each outstanding share
of Old Voting Stock was reclassified and exchanged for 17.5 shares of
Class A Common Stock of the Company ("Class A Common") and (iii) each
outstanding share of Old Nonvoting Stock was reclassified and
exchanged for 17.5 shares of Class C Common Stock of the Company
("Class C Common") (the "Reclassification"). All share and per share
amounts in the accompanying financial statements and the related notes
have been adjusted to reflect the impact of the Reclassification on
the number of shares outstanding and the per share amounts. Shares of
Class C Common automatically converted into shares of Class A Common
on a share-for-share basis upon consummation of the Offering.
Upon consummation of the Offering, the Company completed an
exchange offer (the "Exchange Offer") pursuant to which certain
members of senior management of the Company (and certain of their
family members) that held Old Voting Stock prior to the
Reclassification exchanged 2,062,070 shares of Class A Common for
shares of supervoting Class B Common Stock ("Class B Common") on a
share-for-share basis.
The Company has the option until September 2001 to purchase
the common shares held prior to the Offering by certain shareholders
at a price equal to the fair market value at the date the option is
exercised. The Company's call option may only be exercised once
during any 12-month period. Mr. Joseph L. Lanier, Jr., Chairman and
Chief Executive Officer, has a similar call option on certain issued
and outstanding common shares, which has priority to the Company's
call option. In addition, certain shareholders have the right to
require the Company to register, at its expense, their shares under
the Securities Act of 1933. Prior to the Offering, certain
shareholders had the right to require the Company to repurchase
annually a portion of their shares at the then fair market value, as
defined. As a result of certain financial covenants and other
restrictions contained in the put agreement and the Company's debt
agreements, the Company was not required to repurchase any securities.
Upon consummation of the Offering the put agreement terminated.
On September 3, 1995 the Company's convertible junior
subordinated notes (the "Junior Notes") with an outstanding balance of
$28,479,000 were converted into 2,780,173 shares of Class A Common
stock. The Junior Notes were non-amortizing, and bore interest at
16.35%, which accrued quarterly and was automatically capitalized and
added to principal.
14
15
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
4. ACQUISITION
On February 3, 1997, the Company acquired substantially all
the assets of The New Cherokee Corporation ("Cherokee"), a
manufacturer of yarn-dyed shirting and sportswear fabrics, for
$64,583,000 in cash, including transaction costs, and the assumption
of approximately $6,600,000 in operating liabilities. In addition,
liabilities aggregating $2,000,000 were recorded, primarily for
severance arrangements and the closure of Cherokee's marketing
headquarters. The majority of these liabilities were paid in 1997.
The acquisition was funded at closing with $12,100,00 of cash on hand,
and borrowings under a working capital line of credit and term loan.
The acquisition has been accounted for as a purchase and did not
result in the recording of goodwill.
The results of Cherokee's operations are reflected in the
Company's financial statements from the date of acquisition. The
following summarized, unaudited pro forma results of operations assume
the acquisition had occurred at the beginning of each year presented:
1997 1996
------- -------
(in thousands, except per share data)
Net Sales . . . . . . . . . . . . . . . . . . $485,658 $480,639
Income before extraordinary item . . . . . . . 13,735 3,306
Net income . . . . . . . . . . . . . . . . . . 13,492 3,306
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . 0.92 0.23
Diluted . . . . . . . . . . . . . . . . . 0.91 0.23
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.
5. LONG-TERM DEBT
Long-term debt at January 3, 1998 and December 28, 1996, consists of
the following:
1997 1996
------- -------
(in thousands)
Senior subordinated notes . . . . . . . . . . $120,000 $120,000
Working capital facility . . . . . . . . . . . 18,500 --
Other borrowings with various rates
and maturities . . . . . . . . . . . . . . . 5,256 49,468
-------- --------
143,756 169,468
Less current maturities . . . . . . . . . . . 301 6,990
-------- --------
Total long-term debt . . . . . . . . . . . . . $143,455 $162,478
======== ========
15
16
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
5. LONG-TERM DEBT--(CONTINUED)
The senior subordinated notes (the "Notes") consist of
$120,000,000 in nonamortizing ten-year notes issued pursuant to an
indenture dated December 15, 1993, bearing interest at 10 1/8%,
payable semi-annually.
The working capital facility as established February 3, 1997
consists of a long-term $90 million working capital line of credit,
the availability of which is tied to a defined borrowing base formula.
At January 3, 1998, $18,500,000 was outstanding under the working
capital line of credit, and $61,372,000 was available. All borrowings
under the working capital facility are nonamortizing, and are due
February 28, 2001. The borrowings bear interest at a Base Rate, as
defined, or LIBOR plus .75%, as defined, at the option of the Company.
The weighted average interest rate of the borrowings outstanding at
January 3, 1998 was 6.72%. The Company pays a commitment fee of 1/4%
per annum on the unused portion of the $90,000,000 working capital
line of credit. The working capital facility also provides for the
issuance of letters of credit up to $7,500,000 outstanding, of which
$150,000 was outstanding at January 3, 1998. The obligations of the
Company under the working capital facility are secured by a lien on
substantially all accounts receivable and inventory. This working
capital facility was established on February 3, 1997 and replaced a
$60,000,000 working capital facility terminated on that date.
The working capital facility and the Notes contain certain
restrictive covenants which, among other things, require the Company
to meet minimum net worth and earnings ratios, impose limitations on
debt incurrence and restrict certain payments, including dividends and
payments for the repurchase of capital stock. At January 3, 1998,
$6,501,000 of the Company's retained earnings was so restricted.
Other borrowings consist primarily of various industrial
development revenue and pollution control obligations as of January 3,
1998. As of December 28, 1996, it also included various notes secured
by machinery and equipment of the Company which were prepaid in
November and December 1997 with the proceeds of the Offering.
The repayment of debt obligations with the proceeds of the
Company's Offering resulted in an extraordinary loss of $396,000, less
related income taxes of $153,000.
The aggregate annual scheduled principal repayments of
long-term debt for 1998, 1999, 2000, 2001 and 2002 are $301,000,
$315,000, $324,000, $18,839,000 (including $18,500,000 under the
working capital facility) and $312,000, respectively.
Plant and equipment acquired in exchange for debt,
substantially all of which was repaid out of the proceeds from the
Offering, was $0, $5,951,000 and $7,203,000 for 1997, 1996 and 1995,
respectively.
Cash payments of interest on debt were $19,791,000,
$17,854,000 and $17,742,000 for 1997, 1996 and 1995, respectively.
16
17
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
6. INCOME TAXES
The provision for income taxes is comprised of the following:
1997 1996 1995
------- ------ -------
(in thousands)
Current:
Federal . . . . . . . . . . . . . . . . . . $ 7,395 $ 1,645 $ 3,123
State . . . . . . . . . . . . . . . . . . . 1,011 83 388
------- ------- -------
8,406 1,728 3,511
======= ======= =======
Deferred:
Federal . . . . . . . . . . . . . . . . . . (267) 1,278 (1,365)
State . . . . . . . . . . . . . . . . . . . 212 564 (14)
------- ------- -------
(55) 1,842 (1,379)
------- ------- -------
Provision for income taxes . . . . . . . . . . . $ 8,351 $ 3,570 $ 2,132
======= ======= =======
A reconciliation of the differences between the provision for
income taxes and income taxes computed using the statutory federal
income tax rate of 35% follows:
1997 1996 1995
------- ------ -------
(in thousands)
Amount computed using the statutory rate . . . . $ 7,565 $ 3,240 $ 837
Increase (decrease) in taxes resulting from:
State taxes . . . . . . . . . . . . . . . . 795 421 243
Nondeductible interest . . . . . . . . . . 82 80 1,018
Other, net . . . . . . . . . . . . . . . . (91) (171) 34
-------- ------- -------
Provision for income taxes . . . . . . . . . . . $ 8,351 $ 3,570 $ 2,132
======== ======= =======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets at January 3, 1998 and December 28, 1996 are as
follows:
17
18
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
6. INCOME TAXES--(CONTINUED)
1997 1996
------- -------
(in thousands)
Deferred tax liabilities:
Book carrying value in excess of tax
basis of property, plant and equipment $29,728 $29,389
Other . . . . . . . . . . . . . . . . . . 2,971 1,376
------- -------
Total deferred tax liabilities . . . 32,699 30,765
Deferred tax assets:
Net operating loss and credit carryforwards 11,075 13,712
Nondeductible reserves and accruals . . . 10,335 8,437
Minimum pension liability adjustment . . -- 399
Other . . . . . . . . . . . . . . . . . . 1,130 770
------- -------
Total deferred tax assets . . . . . 22,540 23,318
Valuation allowance for deferred tax assets (2,395) (4,767)
------- -------
Net deferred tax assets . . . . . . 20,145 18,551
------- -------
Net deferred tax liabilities . . . . $12,554 $12,214
======= =======
At January 3, 1998 the Company had available a minimum tax
credit carryforward of $8,100,000, and investment credit and other
general business credit carryforwards of $2,900,000. If not used, the
majority of investment credit and other general business credit
carryforwards will expire in the years 1998 through 2000.
The federal income tax returns of the Company for fiscal 1993
and prior years are closed to assessment by the Internal Revenue
Service. However, the net operating loss and credit carryforwards that
existed at the end of 1993 remain open to adjustment. The Company
believes that it has adequately provided for income taxes, and that
any potential adjustments or assessments that might be made by the
Internal Revenue Service or other taxing authorities would not have a
material impact on the Company's financial position or results of
operations.
The Company made income tax payments of $4,815,000,
$1,180,000, and $3,625,000 during 1997, 1996 and 1995, respectively.
7. BENEFIT PLANS
Retirement plans
The Company sponsors the Dan River Inc. Hourly Retirement Plan
(the "Hourly Plan") and the Dan River Inc. Salary Retirement Plan (the
"Salary Plan"). These plans are qualified noncontributory defined
benefit plans and cover substantially all of the Company's full-time
employees, other than hourly paid employees at its North Carolina and
Tennessee manufacturing facilities. Funding for the Hourly and Salary
Plans is through employer cash contributions.
18
19
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
7. BENEFIT PLANS--(CONTINUED)
Participants are generally eligible for full benefits at age
65 or upon completion of five years of vesting service, if later.
Vesting service is defined generally as years of service from hire.
Benefits of the Hourly Plan are determined based upon years of service
while benefits of the Salary Plan are determined based upon years of
service and career average earnings.
The following table sets forth the funded status of the plans
at January 3, 1998 and December 28, 1996:
Hourly Plan Salary Plan
---------------------- -------------------------
1997 1996 1997 1996
--------- --------- -------- --------
(in thousands)
Actuarial present value of benefit obligation:
Vested benefit obligation $ (10,528) $ (8,551) $ (9,064) $ (7,258)
Accumulated benefit obligation $ (10,719) $ (8,708) $ (9,966) $ (8,361)
--------- --------- --------- ---------
Projected benefit obligation $ (10,719) $ (8,708) $ (11,390) $ (9,883)
Plan assets at fair value 11,601 7,697 10,340 8,521
--------- --------- --------- ---------
Projected benefit obligation less than (in excess)
of plan assets 882 (1,011) (1,050) (1,362)
Unrecognized net loss 1,202 1,008 548 888
Minimum liability adjustment -- (1,008) -- --
--------- --------- -------- ---------
Prepaid (accrued) pension cost $ 2,084 $ (1,011) $ (502) $ (474)
========= ========= ======== =========
The Company's practice is to fund amounts which are required by
statute and applicable regulations and which are tax deductible. The
minimum liability adjustment at December 28, 1996, represents the
excess of unfunded accumulated benefit obligations over previously
recorded liabilities. A corresponding reduction is reflected in
shareholders' equity at December 28, 1996, net of the related income
tax effect of $399,000.
Net pension cost for the plans included the following
components:
1997 1996 1995
-------- ------- -------
(in thousands)
Service cost . . . . . . . . . . . . . . . . . . $ 1,501 $ 1,728 $ 1,452
Interest cost . . . . . . . . . . . . . . . . . 1,541 1,401 1,181
Actual return on assets . . . . . . . . . . . . (2,780) (1,919) (2,193)
Other, net . . . . . . . . . . . . . . . . . . . 1,216 951 1,204
------- ------- -------
Net periodic pension cost . . . . . . . . . . . $ 1,478 $ 2,161 $ 1,644
======= ======= =======
19
20
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
7. BENEFIT PLANS--(CONTINUED)
The projected benefit obligations were determined using an
assumed discount rate of 7.4% at January 3, 1998 and 7.9% at December
28, 1996. An assumed long-term rate of increase in compensation of
4.4% was used at January 3, 1998 and 4.9% at December 28, 1996. The
assumed long-term rate of return on plan assets was 9.5% at January 3,
1998, December 28, 1996 and December 30, 1995. Assets of the plans
consist of various institutional investment funds and money market
accounts.
The Company also sponsors a 401(k) plan which covers hourly
paid employees at its North Carolina and Tennessee manufacturing
facilities. Generally, all full-time hourly employees with one year
of service are eligible to participate. Participants make mandatory
salary reduction contributions to the plan and are also permitted to
make elective contributions. The plan also provides for matching
contributions by the Company, beginning in 1998.
Supplemental retirement plan
The Company sponsors an unfunded supplemental retirement plan
for certain former employees that provides for payments upon
retirement, death or disability over the longer of the employee's life
or ten years. The projected benefit obligations of $3,076,000 and
$2,960,000 at January 3, 1998 and December 28, 1996, respectively, are
accrued in the accompanying consolidated balance sheets. The Company
is a beneficiary of life insurance policies on certain participants in
this plan.
Stock option plans
In October 1997, the Company adopted stock incentive plans
(the "1997 Plans") for key employees and directors that allow for the
grant of stock options, restricted stock, stock appreciation rights
("SARs") and stock. There are 1,925,000 shares of Class A common
stock reserved for issuance under these plans. Options and SARs
granted under the 1997 Plans will expire no later than 10 years after
the date of grant, and the exercise prices of options and grant values
for SARs will be no less than 100% of the fair market value of the
Class A common stock on the date of grant. Effective with the
completion of the Offering on November 20, 1997, nonqualified options
to purchase 589,000 shares were granted to employees at an exercise
price equal to the Offering price of $15 per share. These options
vest in one-third increments annually, beginning on December 31, 1999,
and expire ten years from the date of the Offering. Directors were
granted options to purchase 10,000 shares on identical terms, except
the options vest in one-third increments annually, beginning December
31, 1997.
The Company also maintains a nonqualified stock option plan
pursuant to which options to purchase Class A common stock were
granted prior to 1997. Effective with establishment of the 1997
Plans, options are no longer granted under this plan. All options to
purchase unissued shares granted under this plan have an exercise
price of $6.85 per share, generally vest on December 31, 1999, and
expire on December 31, 2001. Prior to December 30, 1994, the plan
also provided for the granting of options to purchase shares of the
Company's Class A common stock from a certain principal shareholder at
an exercise price of $0.57 per share. All of these options were
exercisable at January 3, 1998 and expire on December 31, 1999.
20
21
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
7. BENEFIT PANS--(CONTINUED)
The Company has applied APB 25 in accounting for stock options
and, accordingly, no compensation expense has been recorded in 1997,
1996 or 1995. If the Company had determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS 123, net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
1997 1996 1995
-------- ------- -------
(in thousands, except per share data)
Net income:
As reported . . . . . . . . . . . . . . . . . $ 13,021 $ 5,686 $ 258
Pro forma . . . . . . . . . . . . . . . . . . 12,949 5,683 258
Per share:
As reported --
Basic . . . . . . . . . . . . . . . . . . . 0.89 0.40 0.02
Diluted . . . . . . . . . . . . . . . . . . 0.88 0.40 0.02
Pro forma --
Basic . . . . . . . . . . . . . . . . . . . 0.88 0.40 0.02
Diluted . . . . . . . . . . . . . . . . . . 0.87 0.40 0.02
The pro forma results reflect amortization of the fair value
of stock options over the vesting period, and only take into
consideration options granted after 1994. The weighted average fair
value of options granted in 1997, 1996 and 1995, was estimated to be
$6.63, $1.60 and $0.45, respectively. The fair value of each option
grant was estimated on the date of grant using a Black-Scholes option
pricing model, assuming a dividend yield of 0% for all years and
weighted average risk-free interest rates of 5.89%, 5.30% and 6.26%
for 1997, 1996 and 1995, respectively. A 34% volatility factor was
assumed for 1997 grants, whereas the 1996 and 1995 grants, which were
made before the Company's equity was publicly traded, were valued
assuming zero volatility.
21
22
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
7. BENEFIT PLANS--(CONTINUED)
The following is a summary of stock option activity:
Options Exercisable Options Exercisable
Against Unissued Shares Against Principal Shareholder
----------------------- -----------------------------
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
Outstanding at December 31, 1994 603,750 $ 6.85 524,300 $ 0.57
Granted 20,125 6.85
Forfeited (28,875) 6.85 (10,500) 0.57
-------- ------- -------- --------
Outstanding at December 30, 1995 595,000 6.85 513,800 0.57
Granted 13,125 6.85
Exercised (51,800) 0.57
Forfeited (13,300) 6.85 (5,250) 0.57
-------- ------- -------- --------
Outstanding at December 28, 1996 594,825 6.85 456,750 0.57
Granted 599,000 15.00
Exercised (57,250) 0.57
Forfeited (11,375) 6.85
----------- -------- ------- --------
Outstanding at January 3, 1998 1,182,450 $ 10.98 399,500 $ 0.57
=========== ======= ======= ========
Exercise prices and remaining weighted average contractural
lives for options outstanding at January 3, 1998 against unissued
shares were: $6.85 per share (583,450 shares)--4 years; and $15.00
per share (599,000 shares) - 9.9 years. At January 3, 1998, 3,333 of
these shares were exercisable at a price of $15.00 per share. All
options against shares held by the principal shareholder have been
exercisable since June 30, 1995 at a price of $0.57 per share, and had
a remaining contractural life of 2 years as of January 3, 1998.
8. OTHER OPERATING COSTS, NET
During the second quarter of 1997 the Company recorded a
charge of $7,875,000 as a result of its decision to close its
Riverside apparel fabrics weaving facilities in Danville, Virginia.
The charge included $4,194,000 for asset writedowns and $373,000 for
severance and other benefits associated with the termination of
approximately 200 employees. The remainder of the charge related
principally to estimated costs associated with the demolition and
divestitures of two mill buildings and related land. As of January 3,
1998, operations at the facilities has ceased, the termination of
affected employees was complete, and most salvageable equipment had
either been sold or was in the process of being moved to other
facilities. The Company anticipates that the demolition and
divestitures of the real estate will be completed within two years.
However, the actual timing of the disposition of these properties may
vary due to their locations and market conditions.
22
23
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
8. OTHER OPERATING COSTS, NET--(CONTINUED)
As a result of the completion of the first phase of the
Riverside facility closures, the Company reversed $281,000 of the
charge in the fourth quarter of 1997. Also in the fourth quarter of
1997, the Company sold its yarn mill in Wetumpka, Alabama, resulting
in a gain of $583,000. At January 3, 1998 the carrying value of
assets held for sale, consisting mostly of Riverside assets, was
$1,853,000.
In 1996, the Company reversed $849,000 of the prior year
charge relating to a discounted product line due to better than
anticipated recovery value of assets previously written down. In
addition, the Company reversed $84,000 of the prior year charge
relating to the relocation of its marketing headquarters, primarily
due to the early buyout of the existing lease. These reversals were
offset in part by net charges of $505,000 for writedowns and disposals
of obsolete equipment.
During 1995 charges totaling $4,391,000 were recognized for
writedowns and disposals of equipment rendered obsolete by the
Company's modernization program. Also in 1995, the Company recorded a
$1,576,000 loss for the writedown of a leasehold and other costs
related to the relocation of the Company's marketing headquarters in
New York, and a $3,005,000 charge for the writedown of assets
associated with the Company's decision to discontinue one of its
apparel fabrics product lines.
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share:
1997 1996 1995
------ ------- -------
Numerator for basic and diluted earnings per share --
income before extraordinary item (in thousands) $ $13,264 $ 5,686 $ 258
============= ============= =============
Denominator:
Denominator for basic earnings per share --
weighted-average shares 14,710,843 14,155,165 12,283,900
Effect of dilutive securities:
Employee stock options 127,943 24,889 --
------------- ------------- -------------
Denominator for diluted earnings per share --
weighted-average shares adjusted for
dilutive securities 14,838,786 14,180,054 12,283,900
============= ============= =============
Basic earnings per share $ 0.90 $ 0.40 $ 0.02
============= ============= =============
Diluted earnings per share $ 0.89 $ 0.40 $ 0.02
============= ============= =============
23
24
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing equipment, warehouses
and office facilities under operating leases that expire at various
dates through 2011. Rental expense for 1997, 1996 and 1995 amounted
to approximately $7,421,547, $10,296,000 and $13,032,000,
respectively, net of rental income on noncancelable leases and
subleases of approximately $34,000, $76,000 and $1,544,000,
respectively.
The future minimum lease payments at January 3, 1998 due under
operating leases with noncancelable terms in excess of one year are as
follows:
(in thousands)
1998 $ 4,602
1999 3,132
2000 2,282
2001 2,128
2002 2,026
Later 14,296
---------
$ 28,466
=========
Commitments for additions to plant and equipment amounted to
approximately $13,700,000 at January 3, 1998. Certain manufacturing
and warehouse leases contain renewal options at their fair rental
values.
The Company is subject to various legal proceedings and claims
which have arisen in the ordinary course of its business and have not
been finally adjudicated. It is impossible at this time for the
Company to predict with any certainty the outcome of such litigation.
However, management is of the opinion, based upon information
presently available, that it is unlikely that any such liability, to
the extent not provided for through insurance or otherwise, would be
material in relation to the Company's consolidated financial position
or results of operations.
11. FINANCIAL INSTRUMENTS
Off balance sheet risk
In connection with the purchase of cotton for anticipated
manufacturing requirements, the Company enters into cotton forward
purchase commitments, futures and option contracts in order to reduce
the risk associated with future price fluctuations. The Company does
not engage in speculation. There were no material cotton futures or
options contracts outstanding at January 3, 1998 or December 28, 1996.
See Note 2 for information on the Company's accounting policy with
respect to cotton futures and option contracts.
24
25
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
11. FINANCIAL INSTRUMENTS--(CONTINUED)
Concentrations of credit risk
Financial instruments that potentially subject the Company to
a concentration of credit risk consist principally of temporary cash
investments and trade accounts receivable. The Company places its
temporary cash investments with high credit quality financial
institutions. Concentration of credit risk with respect to trade
accounts receivable is managed by an in-house professional credit
staff. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require
collateral.
Fair values
The carrying values of cash and cash equivalents, accounts
receivable and accounts payable approximate fair values due to the
short-term nature of these instruments. The fair value of the
Company's senior subordinated notes, based on quoted market prices,
was $127,800,000 and $120,600,000 at January 3, 1998 and December 28,
1996, respectively, compared to a carrying value of $120,000,000.
Based on rates available for similar types of borrowings, the carrying
values of the Company's other debt approximated fair value at January
3, 1998 and December 28, 1996.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited consolidated results of operations are
presented below (in thousands, except per share data):
First Second Third Fourth
Year ended January 3, 1998: Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales . . . . . . . . . . . . . . . . . $105,736 $122,199 $116,254 $132,259
Gross Profit . . . . . . . . . . . . . . . 20,149 27,066 28,235 28,833
Income before extraordinary item . . . . . 1,993 321 5,009 5,941
Net income . . . . . . . . . . . . . . . . 1,993 321 5,009 5,698
Per share:
Income before extraordinary item--
Basic . . . . . . . . . . . . . . . 0.14 0.02 0.35 0.37
Diluted . . . . . . . . . . . . . . 0.14 0.02 0.35 0.36
Net income --
Basic . . . . . . . . . . . . . . . 0.14 0.02 0.35 0.35
Diluted . . . . . . . . . . . . . . 0.14 0.02 0.35 0.35
First Second Third Fourth
Year ended December 28, 1996: Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales . . . . . . . . . . . . . . . . . $83,738 $93,203 $95,090 $107,536
Gross Profit . . . . . . . . . . . . . . . 13,604 18,263 19,189 21,128
Net income (loss) . . . . . . . . . . . . . (1,428) 1,336 2,305 3,473
Per share --
Basic . . . . . . . . . . . . . . . . 0.10 0.09 0.16 0.25
Diluted . . . . . . . . . . . . . . . 0.10 0.09 0.16 0.24
25
26
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996
AND DECEMBER 30, 1995
12. QUARTERLY FINANCIAL DATA (UNAUDITED)--CONTINUED
The fourth quarter of the year ended January 3, 1998
represents a 14-week period. All other quarters presented consist of
13 weeks.
The interim earnings (loss) per share amounts were computed as
if each quarter was a discrete period. As a result, the sum of the
earnings (loss) per share by quarter will not necessarily total the
annual earnings per share.
Results for the second quarter of 1997 include a pre-tax
charge of $7,875,000 ($4,839,000 net of tax benefits, or $0.34 per
share) relating to the closure of the Company's Riverside apparel
fabrics weaving facilities. The fourth quarter results include a
pre-tax gain of $583,000 from the sale of a yarn operation, and a
reversal of $281,000 of the pre-tax charge recorded in the second
quarter. Together these items increased net income for the fourth
quarter by $531,000, or $0.03 per share. Also in the fourth quarter
of 1997, an extraordinary loss associated with the early retirement of
debt was recorded, which decreased net income by $243,000, or $0.01
per share. Results for the fourth quarter of 1996 include the
reversal of $441,000 in pre-tax charges that had been recorded in
1995, primarily relating to fixed asset writedowns. After taxes, the
reversal increased net income by $271,000, or $0.02 per share. See
Notes 5 and 8.
26
27
Report of Independent Auditors
The Board of Directors and Shareholders
Dan River Inc.
We have audited the accompanying consolidated balance sheets
of Dan River Inc. as of January 3, 1998 and December 28, 1996, and the
related consolidated statements of income, shareholders' equity, and
cash flows for the each of the three fiscal years in the period ended
January 3, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Dan River Inc. at January 3, 1998 and December 28, 1996,
and the consolidated results of its operations and its cash flows for
each of the three fiscal years in the period ended January 3, 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Greensboro, North Carolina
February 4, 1998
27
28
Five Year Summary of Selected Financial Data
(in thousands except per share data) 1997(1) 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Net sales $476,448 $379,567 $384,801 $371,534 $317,566
Cost of sales 372,165 307,383 306,879 297,460 259,148
Gross profit 104,283 72,184 77,922 74,074 58,418
Selling, general and administrative
expenses 54,231 45,673 44,860 43,908 38,550
Other operating costs, net(2) 7,012 (428) 8,972 1,534 3,039
Operating income 43,040 26,939 24,090 28,632 16,829
Other income (expense), net (290) 485 241 144 505
Interest expense 21,135 18,168 21,941 20,419 12,691
Income before extraordinary item 13,264 5,686 258 3,525 2,171
Extraordinary item (243) - - - 348
Net income 13,021 5,686 258 3,525 2,519
Redeemable preferred stock
dividends - - - - 2,091
Net income applicable to common
stock 13,021 5,686 258 3,525 428
Earnings per share--basic:
Income before extraordinary
item 0.90 0.40 0.02 0.31 0.01
Net income per share--basic 0.89 0.40 0.02 0.31 0.04
Earnings per share--diluted:
Income before extraordinary
item 0.89 0.40 0.02 0.31 0.01
Net income per share--diluted 0.88 0.40 0.02 0.31 0.04
=================================================================================================================================
Balance Sheet Data (at end of fiscal year):
Working capital $123,604 $93,291 $109,763 $103,973 $ 94,040
Total assets 392,295 321,050 330,944 329,902 289,384
Convertible junior subordinated
notes - - - 25,220 21,485
Total debt, including current
maturities 143,756 169,468 179,703 196,436 170,066
Common stock subject to put
rights - 9,726 7,000 7,000 7,000
Shareholders' equity 165,830 77,898 73,702 46,810 42,493
Common shares outstanding 18,841 14,155 14,155 11,375 11,375
=================================================================================================================================
Other Financial Data:
EBITDA(3) $77,560 $47,306 $52,599 $48,353 $36,314
Depreciation and amortization of property,
plant and equipment 27,508 20,795 19,537 18,187 16,446
Capital expenditures in cash 24,231 27,582 24,316 24,793 12,839
=================================================================================================================================
28
29
(1) Fiscal year 1997 represents a 53-week period. All other fiscal years
presented represent a 52-week period.
(2) Other Operating Costs, Net includes various non-recurring charges and
credits, the most significant of which relate to fixed asset
writedowns, plant closure costs and a discontinued product line. See
Note 8 to the Consolidated Financial Statements.
(3) EBITDA represents operating income before depreciation and
amortization, adjusted to excluded Other Operating Costs, Net. EBITDA
is presented to provide information related to the Company's ability
to service debt, and should not be considered as an alternative
measure of operating results or cash flow as determined in accordance
with generally accepted accounting principles.
29