SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 1-13421
DAN RIVER INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1854637
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
2291 Memorial Drive, Danville, Virginia 24541
(Address of principal executive offices)
(434) 799-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each
Title of Each Class Exchange on Which Registered
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Class A common stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 28, 2002 (based on the last reported closing price per
share of Class A Common Stock as reported on the New York Stock Exchange on such
date) was approximately $60,632,216.
As of January 24, 2003, the registrant had 20,362,773 and 2,062,070 shares
of Class A Common Stock and Class B Common Stock outstanding, respectively.
INDEX TO FORM 10-K
DAN RIVER INC.
Page
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References
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PART I
Item 1. Business........................................................................ 2
Item 2. Properties...................................................................... 12
Item 3. Legal Proceedings............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............................. 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...... 13
Item 6. Selected Financial Data........................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 26
Item 8. Consolidated Financial Statements and Supplementary Data....................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.................................................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 49
Item 11. Executive Compensation.......................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 58
Item 13. Certain Relationships and Related Transactions.................................. 60
Item 14. Controls and Procedures......................................................... 61
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............... 61
1
PART I
Unless otherwise indicated, references in this Annual Report to "we," "us,"
"our" or "Dan River" refer to the business of Dan River Inc. and its
subsidiaries. References to a fiscal year refer to our fiscal year, which is the
52- or 53-week period ending on the Saturday nearest to December 31. All fiscal
years presented consisted of 52 weeks.
ITEM 1. BUSINESS
General
Founded in 1882, we are a leading designer, manufacturer and marketer of
products for the home fashions and apparel fabrics markets. We design,
manufacture and market a coordinated line of value-added home fashions products
consisting of bedroom furnishings such as comforters, sheets, pillowcases,
shams, bed skirts, decorative pillows and draperies. As the pioneer of the
complete bed ensemble concept, we market our "Bed-in-a-Bag" ensembles to
retailers in all trade classes. We believe the complete bed ensemble has
achieved wide acceptance with both retailers and consumers as a highly efficient
and convenient way of purchasing in one convenient package all of the components
required to dress a bed. We believe we are the leading provider of home fashions
products for the juvenile market using a variety of well-known licensed names
and trademarks, including our own "Dan River" name and, to augment this market,
we have developed a product line targeted to the young adult demographic
segment. During fiscal 2002, sales of our complete bed ensembles and juvenile
products comprised 72% of the net sales in our home fashions business.
We also design, manufacture and market a broad range of high quality woven
cotton and cotton-blend apparel fabrics. We market our apparel fabrics to a
diverse group of customers which use our fabrics in a wide array of finished
products, including career apparel, sportswear, dress shirts, home textiles and
upholstery. Additionally, we manufacture and sell specialty engineered yarns and
woven fabrics for use in making high-pressure hoses and other industrial
products, which we refer to as engineered products.
We operate in three business segments: home fashions, apparel fabrics and
engineered products. You can find financial information for these segments, and
financial information related to our non-U.S. operations, in Note 13 to our
consolidated financial statements included in Part II, Item 8, of this Annual
Report on Form 10-K.
We are a Georgia corporation, and our principal offices are located at 2291
Memorial Drive, Danville, Virginia 24541. Our telephone number is (434)
799-7000, and our web site address is www.danriver.com. Information contained on
our web site is not incorporated by reference into and is not part of this
Annual Report on Form10-K.
Acquisitions
Bibb Acquisition. In October 1998, we purchased all the outstanding capital
stock of The Bibb Company, which we refer to as Bibb, through a merger
transaction for an aggregate purchase price of approximately $240 million. The
purchase price consisted of $86 million of cash and 4.3 million shares of our
Class A Common Stock. In connection with the acquisition, we also assumed or
repaid an aggregate of $95 million of Bibb's debt. Bibb, which was founded in
1876, was a leading domestic manufacturer of home fashions textile products.
Bibb had net sales of $249 million and a net loss of $28 million during its last
fiscal year prior to the acquisition.
The Bibb acquisition broadened our home fashions products to include
juvenile products and products for the hospitality and health care markets. As a
result of the Bibb acquisition, we believe that we are the leading manufacturer
of bedding products for the juvenile market under a number of well-known
licensed names, as well as our own "Dan River" brand. The Bibb acquisition
expanded our home fashions products manufacturing operations by approximately
50%, adding spinning and weaving operations located in Greenville, South
Carolina, finishing operations located in Brookneal, Virginia, and sewing
facilities located in Fort Valley and Newnan, Georgia, and in Brookneal,
Virginia. We also acquired our engineered products business, located in
Porterdale, Georgia, from Bibb.
Morven Plant Acquisition. In December 1998, we purchased a 315,000 square
foot sewing facility located in Morven, North Carolina, for an aggregate
purchase price of approximately $2.4 million. We purchased this facility to
reduce our dependence on outside manufacturers for the fabrication of home
fashions products.
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Mexican Operations. In January 2000, we entered into joint venture
agreements with Grupo Industrial Zaga, S.A. de C.V., which we refer to as Zaga,
for the purpose of building and operating textile and garment manufacturing
plants in Mexico. We invested approximately $750,000 in land designated for the
construction of the textile operation. Subsequent analysis suggested, however,
that certain costs, such as plant construction and utilities, were higher than
originally anticipated. These higher costs, together with generally weak apparel
fabrics market conditions, reduced anticipated returns from the textile
manufacturing plant to a level we considered unacceptable. As a result, we
suggested to Zaga that we should not proceed with construction of the Mexican
textile manufacturing plant.
We did, however, proceed with the construction of the garment manufacturing
plant at Jilotepec in the State of Mexico. This facility is presently
manufacturing shirts primarily for sale to the career apparel and retail trades
and includes laundry facilities to complement the sewing operations. We produce
most of the apparel fabrics used by the plant. We believe this facility creates
an additional source of demand for our apparel fabrics and will position us to
better serve and respond to customers that seek a single source for garment
design and manufacture in the Western Hemisphere.
We held approximately a 50% interest in the textile and garment joint
ventures at the time they were formed. We and Zaga negotiated an amicable
termination of both joint ventures in February 2001, at which time we bought
Zaga's interest in the garment joint venture for $3.2 million in cash and the
transfer of the land previously acquired for the textile plant.
ISI Acquisition. In April 2000, we purchased substantially all of the
assets of Import Specialists, Inc., which we refer to as ISI, for $15.4 million
in cash and the assumption of certain operating liabilities. ISI, an importer of
home fashions products complementary to our customer base, including doormats,
throws, and rugs manufactured primarily in China and India, became a part of our
home fashions business.
Additional Danville Distribution Facility. In May 2000, we acquired an
additional 301,200 square foot warehouse and distribution facility adjacent to
our Riverpointe distribution facility in Danville, Virginia for $4.3 million.
This facility was necessary to service increased demand for our home fashions
products.
Manufacturing Consolidations
In 2002, we completed a consolidation which included the closure of the
Newnan, Georgia home fashions sewing plant and consolidation of its capacity
primarily into our Brookneal and Danville, Virginia sewing operations.
Additionally, we are continuing to reduce our apparel fabrics weaving capacity
by relocating certain looms from our weaving facility in Danville to the
Sevierville, Tennessee plant and replacing those looms with newer, modern looms
utilized primarily for weaving home fashions products. In connection with the
installation of the newer home fashions looms in Danville, we closed a portion
of our home fashions weaving operation at the Greenville, South Carolina plant,
resulting in a modest reduction in home fashions weaving capacity.
Together with our ongoing capital expenditure programs, we believe these
consolidations provide us with better capacity utilization and reduce our fixed
manufacturing costs.
Home Fashions Products
Products. Our home fashions products include bedroom furnishings such as
comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and
draperies that we market under our "Dan River" name, as well as under private
labels of our major retail customers and under licenses from, among others,
"Colours by Alexander Julian" and "Lilly Pulitzer." We also market home fashions
products for the juvenile market under the "Dan River" name, as well as a number
of licensed names and trademarks, including:
o "Barbie," o "NASCAR,"
o "Blue's Clues," o "NFL,"
o "Bob The Builder," o "Powerpuff Girls,"
o "Clifford The Big Red Dog," o "Scooby-Doo,"
o "Dora The Explorer," o "Sagwa, The Chinese Siamese Cat,"
o "Looney Tunes," o "Sesame Street,"
o "Major League Baseball," o "Seventeen,"
3
o "Spider-Man," o "Stuart Little 2," and
o "Star Wars," o "Thomas and Friends."
We are also utilizing our expertise in juvenile licensing to introduce
licensed products in the young adult market. Through a licensing agreement with
Seventeen Magazine, we seek to make successful in-roads into the teenage
markets, where we strive for the same kind of attractive margins found in our
other branded product lines.
We had net sales attributable to home fashions products of:
o $441.2 million in fiscal 2002,
o $469.9 million in fiscal 2001, and
o $469.8 million in fiscal 2000.
We offer home fashions products in a wide variety of styles and patterns,
including fashion designs and, to a lesser extent, solid colors. Products range
from a 120-thread count muslin sheet of blended polyester and cotton to a
top-of-the-line 300 thread count percale 100% cotton sheet. Our acquisition of
ISI expanded our home fashions product line and enables us to market such niche
products as doormats, throws and rugs.
We believe we have established ourselves as an innovator in merchandising
home fashions products. We were a leader in introducing the complete bed
ensemble to retailers, which we market under the name "Bed-in-a-Bag." The
"Bed-in-a-Bag" complete bed ensemble consists of a comforter with matching
sheets, pillowcases, shams and a dust ruffle. We further believe that our
ability to manufacture wide-width, yarn-dyed fabrics in short runs in a wide
variety of innovative styles, such as woven plaids, for use in home fashions
products differentiates us from our competitors.
Customers. We design and manufacture our home fashions products to meet the
needs of retail, hospitality and healthcare markets. We distribute home fashion
products through key retailers in all retail trade classes including:
o mass merchants,
o department stores,
o specialty home fashions stores,
o national chains,
o regional discounters, and
o direct marketers.
We also sell home fashions products to the hospitality and healthcare markets
primarily through distributors.
During fiscal 2002 we marketed our home fashions products to approximately
700 active customers. We have pursued and established strategic relationships
with large, high volume retailers including:
o Kmart Corporation,
o Wal-Mart Stores, Inc.,
o Target Corporation,
o J.C. Penney Company, Inc.,
o Linens n' Things, Inc.,
o Federated Department Stores, Inc.; and
o Kohl's Corporation
Sales of home fashions products to Kmart Corporation and Wal-Mart Stores,
Inc. accounted for approximately 19% and 13%, respectively, of our net sales in
fiscal 2002. No other home fashions products customer accounted for more than 6%
of our net sales in fiscal 2002. As a supplement to our primary distribution
channels, one of our subsidiaries operates factory outlet stores which sell home
fashions products directly to consumers. During fiscal 2002, sales of home
fashions products to customers outside the United States accounted for
approximately 3% of our net sales.
In January 2002, Kmart Corporation filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code and subsequently announced the closing of
approximately 13% of its stores. In 2003, Kmart announced the expected closing
of an additional 15% of its original stores. We experienced a very slight
decrease in our sales to Kmart during fiscal 2002; however, taking into
consideration certain new programs planned for introduction in fiscal 2003, we
do not currently anticipate a further decrease in sales to Kmart during 2003 as
4
a result of the additional store closings. Nevertheless, there can be no
assurance that the Kmart bankruptcy and related events will not in the future
result in significantly reduced sales to Kmart or otherwise have a material
adverse effect on our financial condition and results of operations. For a
further discussion of the Kmart filing please see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Sales and Marketing. The home fashions products sales and marketing staff
consists of approximately 115 persons. They are headquartered in New York City
and have satellite offices in the Atlanta, Chicago, Dallas, Los Angeles,
Portsmouth, San Francisco, and Toronto, Canada areas. These marketing
professionals, stylists and product development personnel work as early as one
year in advance of a retail selling season to develop new fabrics, styles,
colors, constructions and finishes. Together with the marketing group, stylists
often work directly with our customers and our licensors to create fabrics and
styles that respond to rapidly changing fashion trends and customer needs. New
styles are also developed internally for the April and October bed and bath home
textile trade shows, where they are shown to buyers and are placed in production
based on customer acceptance. Orders for home fashions products are filled from
inventory or, if inventory is not available, products are manufactured and
generally shipped within three to four weeks of order placement.
Apparel Fabrics
Products. We manufacture a broad range of high quality woven cotton and
cotton-blend fabrics, which we market primarily to manufacturers of men's,
women's and children's clothing. The specific markets are career apparel,
government and military, sportswear and dress shirts. Our yarn-dyed and
piece-dyed apparel fabrics include:
o oxford cloth,
o pinpoint oxford cloth,
o fancy broad cloth,
o seersuckers,
o mid and light weight denim,
o twills,
o chambrays, and
o pant fabrics.
We also manufacture and distribute (1) fabrics for use in decorating,
crafts and garment sewing, (2) 100% cotton and cotton-blend upholstery fabrics
and (3) greige (unfinished) fabrics to converters. We had net sales attributable
to apparel fabrics products of:
o $131.5 million in fiscal 2002,
o $118.9 million in fiscal 2001, and
o $143.6 million in fiscal 2000.
We believe that we enjoy a reputation as a leader in creating new fabric
styles and designs within the apparel fabrics market. Our product development
professionals work independently as well as directly with customers to develop
new fabric styles and constructions to respond to retailers' and consumers'
needs and direction. Our development strategy is focused on a variety of novel,
functional fabrics and finishes.
We believe that we are a leader in wrinkle resistant technology for
shirting fabrics, including "Dri-Don" blended easy care fabrics and 100% cotton
"Wrinkl-Shed" fabrics. We also manufacture and market fabrics utilizing "Tencel"
lyocell, an innovative natural fiber which has been used primarily in
manufacturing women's sportswear. Our current product development efforts
involve fabrics which incorporate new product finishes for end uses such as
stain defense, antimicrobial and odor control, and comfort stretch and other
innovative fabrics for use in pants and other product categories outside of our
traditional shirting lines. Additionally, we manufacture shirts for career
apparel, as well as sport and dress shirts, at our Mexican sewing plant.
Customers. We distribute our apparel fabrics primarily to domestic
manufacturers of men's, women's and children's clothing which, in turn, operate
sewing plants throughout the United States, Mexico, Central America and the
Caribbean. We market our apparel fabrics to in excess of 1,000 customers, none
of which accounted for more than 3% of our total net sales in fiscal 2002.
Customers market clothing manufactured from our apparel fabrics under such brand
names as:
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o Arrow,
o Brooks Brothers,
o Group B/Democracy,
o Health-Tex,
o L.L. Bean,
o Land's End,
o Lee,
o Levi/Dockers,
o Savane,
o Van Heusen, and
o Wrangler,
as well as under private labels through retailers such as Belk Inc., J.C. Penney
Company, Inc., Kohl's Corporation and Mervyn's Inc. We market career apparel
fabrics to customers such as Cintas Corporation, Kazoo and VF Corporation. We
manufacture a significant percentage of the fabrics utilized in army and air
force dress shirts and navy workshirts. We also distribute apparel fabrics to
home sewing retailers such as Wal-Mart Stores, Inc., Jo-Ann Stores, Inc., The
Longaberger Company, Waverly Fabrics and through various wholesale distributors,
for use in decorating and crafts, as well as garment sewing. Our upholstery
fabrics are sold primarily to furniture manufacturers such as Broyhill Furniture
Industries, Inc. and Craftmaster. During fiscal 2002, sales of apparel fabrics
to customers located outside the United States accounted for approximately 2% of
our net sales.
During its start-up phase, production from our new Mexican sewing plant
has been sold primarily to off-price distributors. The operation is now shipping
to career apparel and retail accounts as well.
Sales and Marketing. Our apparel fabrics sales and marketing staff consists
of approximately 45 full time persons as well as commission agents. They are
headquartered in New York City and have satellite offices in Atlanta, Chicago,
Dallas, Danville, High Point (North Carolina) and Los Angeles. Apparel fabrics
are generally "made to order" products which are manufactured and shipped within
six to eight weeks of order placement. Orders for apparel fabrics are based on
customer selections from offerings of color, content, construction, design and
finish, and fabrics are made to customer specifications, which may be developed
jointly with the customer. Presently two individuals based in Boonesville,
Mississippi are primarily responsible for marketing the production of the
Mexican sewing plant.
Engineered Products
Products. Our engineered products consist of coated yarns and woven fabrics
that are manufactured to customer specification for use in such products as high
pressure hoses for the automotive industry, conveyer belts and other industrial
applications. We are the only U.S. producer to provide both water- and
solvent-based adhesive systems. We had net sales attributable to engineered
products of:
o $40.3 million in fiscal 2002,
o $42.3 million in fiscal 2001, and
o $50.1 million in fiscal 2000.
Customers. We sell our engineered products primarily to companies serving
the automotive industry, which in turn utilize them as components in their own
products. We believe our ability to meet stringent industrial certification
standards and to provide domestic sourcing to customers has helped us establish
strong relationships with our customers. During fiscal 2002, we marketed our
engineered products to approximately 90 customers, none of which accounted for
more than 3% of our net sales in fiscal 2002. During fiscal 2002, substantially
all of our sales of engineered products were to domestic customers.
Sales and Marketing. We have established close working relationships with
our engineered products customers in the development of products to meet their
specific needs. Sales and marketing of our engineered products is based in the
Atlanta, Georgia area.
6
Manufacturing Process
We are a vertically integrated manufacturer involved in all aspects of the
woven textile manufacturing process, from spinning and weaving to dyeing,
finishing, and sewing.
In addition to the expansion of our manufacturing operations through
acquisitions, we have made significant investments in facility modernization
focused on advanced manufacturing technologies in an effort to be the low cost
manufacturer in the industry. Within our home fashions operations, we have
installed:
o modern, high-speed air-jet looms,
o automatic sheet cutting, hemming and folding equipment,
o lower cost open-end and air-jet spinning equipment, and
o computerized comforter equipment.
Additionally, within the past several years, we have built:
o a new home fashions accessory sewing plant,
o a new distribution center, and
o a new graphics printing facility primarily for production of home
fashions packaging materials.
We built these facilities in Danville, Virginia. They are in close
proximity to our other Danville home fashions facilities and our Brookneal,
Virginia finishing and sewing operations. During fiscal 2002, we closed our
Newnan, Georgia sewing plant and a significant portion of the weaving operations
at our Greenville, South Carolina greige mill. Most of this manufacturing
capacity was relocated to the Danville and Brookneal facilities. We believe the
proximity of our principal home fashions manufacturing and distribution
facilities provides competitive advantages, in that our "Bed-in-a-Bag" complete
bed ensembles require the combination into one package of products manufactured
at several different facilities. We believe our acquisition, modernization and
consolidation activities have positioned us to better and more efficiently
service our home fashions customers and accommodate further growth of our home
fashions business.
Within our apparel fabrics operations, we have installed high speed looms
and modernized our yarn preparation processes through the installation of more
efficient, lower cost, open-end spinning, carding, drawing and combing
equipment. Our capital improvement programs modernized and streamlined
substantially all significant components of our apparel fabrics manufacturing
process.
In addition to modernizing operations, we have consolidated our apparel
fabrics manufacturing operations to improve operating costs. In fiscal 1997, we
closed our Riverside apparel fabrics weaving facility in Danville and
consolidated these operations into an existing facility located in Danville. In
January 1999, we closed our Spindale, North Carolina weaving facility and
consolidated these operations into our existing Danville, Virginia and
Sevierville, Tennessee apparel fabrics manufacturing plants. Finally, during
fiscal 2002, we consolidated a significant portion of our apparel fabrics greige
operations into Sevierville, which resulted in an approximately 20% reduction in
overall apparel fabrics weaving capacity. Together, these actions have aided our
efforts to fully utilize our most cost-effective equipment in the manufacture of
apparel fabrics.
In fiscal 2000, we began manufacturing shirts at our new Mexican sewing
plant. This plant includes an industrial laundry and warehouse facilities from
which we can ship a complete, packaged, finished garment to our targeted
customers.
Our engineered products facilities include specialty coating equipment for
yarns and fabrics, looms, and yarn processing equipment, which we continue to
enhance with more modern technology. These facilities have achieved ISO 9001
certification.
We have engineered our management information systems and manufacturing
processes to meet the quick response delivery requirements of our customers.
Quick response techniques reduce the time required to process a particular
order, which improves customer service and production efficiency. Furthermore,
we have the capability to offer electronic data interchange programs to all of
our significant customers. These programs minimize the lead time for customer
orders and permit a more efficient, targeted manufacturing schedule, as well as
improvements in efficiency, communications, planning and processing times at
each stage of production. We have electronic data interchange programs in place
with most of our major home fashions products customers.
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Raw Materials
We use substantial quantities of cotton in our manufacturing operations. By
law, U.S. textile companies are generally prohibited from importing cotton,
subject to certain exceptions that take effect primarily when U.S. cotton prices
exceed world cotton prices for a period of time. Cotton is an agricultural
product subject to weather conditions and other factors affecting agricultural
markets. Accordingly, the price of cotton is subject to considerable
fluctuation.
We purchase cotton primarily in the domestic market directly from merchants
or through brokers. Generally, we seek to purchase sufficient amounts of cotton
to cover existing order commitments. We may purchase cotton in advance of orders
on terms that we deem advantageous, and while we do not speculate on the price
of cotton, we may hedge prices from time to time through forward contracts and
in the futures and options markets. Although we attempt to buy more cotton when
we believe, based on our experience, that prices are relatively low, we still
buy cotton continuously throughout the year, which tends to mitigate the effects
of price fluctuations over time. Additionally, our general focus on
lighter-weight fabrics tends to lessen the impact on our business of
fluctuations in cotton prices. We also use significant quantities of polyester,
which is available from several sources.
Although we have always been able to obtain sufficient supplies of both
cotton and polyester, any shortage or interruption in the supply or variations
in the quality of either could have a material adverse effect on our business.
Additionally, unusual fluctuations in cotton and polyester prices could
significantly affect our profitability, particularly on a short term basis,
since we cannot always mirror such fluctuations in the prices of our products.
We also use various other raw materials, such as dyes and chemicals, in our
manufacturing operations. We believe these materials are readily available from
a number of sources.
Outside Sourcing
To supplement our internal manufacturing capabilities and expand our
product offerings, we intend to source a larger proportion of our finished
products from both domestic and foreign manufacturers to the extent we find
products available at attractive prices which meet our quality and delivery
requirements. We currently supplement our internal manufacturing capabilities by
purchasing yarn and unfinished fabrics from outside sources and by contracting
with third parties for various manufacturing services, including certain
printing and sewing operations. Excluding certain home fashions niche products
which we import as a result of the ISI acquisition, we purchased approximately
13% of our manufacturing requirements during fiscal 2002 from outside sources,
based on cost of sales, substantially all of which were yarn and greige fabrics.
Trademarks and Licenses
We hold licenses to produce and sell home fashions products under:
o "Barbie," o "NFL,"
o "Blue's Clues," o "Powerpuff Girls,"
o "Bob The Builder," o "Sagwa, The Chinese Siamese Cat,"
o "Clifford The Big Red Dog," o "Scooby-Doo,"
o "Colours by Alexander Julian," o "Sesame Street,"
o "Dora The Explorer," o "Seventeen,"
o "Lilly Pulitzer," o "Spider-Man,"
o "Looney Tunes," o "Star Wars,"
o "Major League Baseball," o "Stuart Little 2," and
o "NASCAR," o "Thomas and Friends,"
as well as other names or marks, and to use certain designs on our home fashions
products. Such licenses provide that we have the right for a limited period,
generally three years subject to renewal for additional periods, to use the
respective brand name and/or design in the sale of certain types of products in
certain geographic regions. We also hold licenses with respect to the use and
advertising of certain processes or synthetic fibers or fabrics. We believe that
no single license or trademark other than "Dan River" is material to our
business.
8
Competition
Our competitive position varies by product line. Competitive factors
include:
o price,
o product styling and differentiation,
o quality,
o flexibility of production and finishing,
o delivery time, and
o customer service.
We sell our products primarily to domestic customers and compete with both
large, vertically integrated textile manufacturers and numerous smaller
companies specializing in limited segments of the market. Our competitors
include both domestic and foreign companies, a few of which are larger in size
and/or have significantly greater financial resources than we do. We believe
that over 70% of the apparel fabrics, much of which are imported in the form of
garments, and over 25% of the home fashions products sold in the U.S. are
manufactured overseas. Most sport shirts sold in the U.S. are manufactured
outside of the U.S. Due in significant part to the competitive environment, the
U.S. textile industry has experienced significant consolidation over the past
several years, with a number of companies, some of which are our competitors in
various aspects of our business, seeking bankruptcy protection or going out of
business. We have sought and continue to seek opportunities under these
circumstances to focus our operations on various value-added businesses that, by
their nature, are resistant to imports.
We are one of several domestic manufacturers of home fashions products.
Although the Bibb acquisition increased our sales of home fashions products, and
some of our competitors in this business have filed for bankruptcy protection or
have gone out of business, certain of our competitors still have a significantly
greater share of the domestic market, including WestPoint Stevens Inc. and
Springs Industries, Inc., which we believe collectively account for over 50% of
the home fashions bedding products market. Nevertheless, we believe the
proximity of our principal home fashions manufacturing and distribution
facilities, along with our prudent capital spending programs, provide
competitive advantages over certain of our domestic and foreign competitors. Our
"Bed-in-a-Bag" complete bed ensembles require the combination of products
manufactured at several different facilities into one package. Substantially all
of our components are manufactured in facilities located in relatively close
proximity in the Virginia and North Carolina piedmont, whereas facilities of our
competitors are generally scattered over a wider area, thus increasing product
costs and shipping times and, we believe, impeding their ability to respond
quickly to customer demands for product replenishment. We believe this situation
is exacerbated for importers, who must either maintain substantial inventories
at their risk or deal with much longer lead times for supplying their customers.
We further believe our investments in state of the art business management
computer systems, such as the SAP enterprise resource planning and i2 production
planning systems, and our investments in modern, less labor intensive
manufacturing equipment enable us to manufacture complex, value-added products
at attractive price points, "just in time" in order to meet customers'
requirements, thus enhancing customer service while controlling cost. We believe
these capabilities provide a sustainable competitive advantage versus importers
and other providers of commodity products.
We believe that we are the last full line producer of finished light weight
yarn-dyed woven cotton and cotton-blend apparel fabrics in the U.S. With respect
to men's shirtings, based on net sales, we believe we are the largest producer
of oxford cloth and pinpoint oxford cloth and the leading producer of light
weight yarn-dyed shirting fabrics in the Western Hemisphere. In the sportswear
and upholstery fabrics markets, we are one of a number of domestic producers. In
the sport shirt market, we are one of many world-wide producers.
We believe we are in a unique position to service the core demand for
fabrics by garment manufacturers desiring to maintain a manufacturing base in
the Western Hemisphere. The NAFTA and CBI trade initiatives, as well as our
proximity and ability to respond promptly to their needs, help make our products
attractive to these core customers in comparison to imported fabrics from other
parts of the world. Additionally, certain of our customers, such as career
apparel manufacturers, remain focused on a domestic source of supply and are a
growing part of our apparel fabrics business. We are actively enhancing our core
product offerings through our product development efforts as we create new
product finishes, often for special end uses such as stain defense,
antimicrobial and odor control, and as we develop comfort stretch and other
innovative products for use in pants and other fabric categories outside of our
9
traditional shirting lines. Additionally, we believe our design expertise and
our emphasis on shortening production and delivery times allow us to respond
more quickly to changing fashion trends and to our domestic customers' delivery
schedules than can producers located outside the Western Hemisphere. We believe
our Mexican garment operation not only provides an additional outlet for our
U.S. manufactured apparel fabrics but enables us to better serve customers who
desire garment packages in which they can specify both fabric and garment design
through one single source.
Trade Regulation
The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and continues to be, subject to considerable
domestic political deliberation. NAFTA, which was entered into by the U.S.,
Canada and Mexico, has created the world's largest free-trade zone. The
agreement contains safeguards sought by the U.S. textile industry, including a
rule of origin requirement that products be processed in one of the three
countries in order to benefit from NAFTA. NAFTA phases out all trade
restrictions and tariffs on textiles and apparel among the three countries. In
addition, NAFTA requires merchandise to be made from yarns and fabrics
originating in North America in order to avoid trade restrictions. Thus, not
only must apparel be made from North American fabric, but the fabric must be
woven from North American spun yarn. Although we believe that we benefit from
NAFTA, there can be no assurance that the removal of these barriers to trade
will not in the future have a material adverse effect on our business.
We benefit from protections afforded to apparel manufacturers based in
certain Caribbean and Central American countries which ship finished garments
into the U.S. under Item 9802.00.80 of the Harmonized Tariff Schedule of the
U.S. as authorized by the Caribbean Basin Recovery Act, which we refer to as
CBI. Item 9802.00.80 reduces certain tariffs which would otherwise apply to
apparel garments manufactured outside the U.S. and shipped into the U.S.,
provided that the garments are manufactured from fabric produced and cut
domestically. The Caribbean Basin Trade Partnership Act, which we refer to as
CBTPA, became law in 2000. The CBTPA expands the current CBI program by allowing
duty-free and quota-free treatment for imports of certain apparel from the
Caribbean Basin, and by extending NAFTA-equivalent tariff treatment to a number
of other products previously excluded from the CBI program. Specifically, under
the CBTPA, garments assembled in one or more CBTPA designated countries from
fabrics wholly formed in the U.S. from yarns wholly formed in the U.S., would be
eligible for such favorable treatment. CBI, as modified by CBTPA, is beneficial
for us and other domestic producers of apparel fabrics, because it creates an
attractive manufacturing base for apparel in close proximity to the U.S.
In 1995, the World Trade Organization, or WTO, established mechanisms to
progressively liberalize world trade in textiles and clothing by eliminating
quotas and reducing duties over a 10-year period beginning in January 1995. The
selection of products at each phase is made by each importing country and must
be drawn from each of the four main textile groups: tops and yarns, fabrics,
made-up textile products and apparel. In 2000, Congress passed and the President
signed the African Growth and Opportunity Act, which we refer to as the AGOA,
which is intended to promote growth and economic prosperity of certain
sub-Saharan African countries through, among other things, greater duty-free
access to U.S. markets. The elimination of quotas and the reduction of tariffs
under the WTO, together with the effects of the AGOA, may result in increased
imports of certain textile products and apparel into North America. These
factors could make our products less competitive against low cost imports from
developing countries. Additionally, macroeconomic factors such as the strength
of the dollar versus foreign currencies (particularly Asian currencies) have had
and could continue to have an adverse effect on our ability to compete with
foreign imports.
Environmental Regulation
We must comply with various federal, state and local environmental laws and
regulations limiting the discharge of pollutants and the storage, handling and
disposal of a variety of substances. In particular, our dyeing and finishing
operations result in the discharge of substantial quantities of wastewater and
in emissions to the atmosphere. We must comply with the federal Clean Water and
Clean Air Acts, and related state and local laws and regulations. Our operations
also are governed by laws and regulations relating to workplace safety and
worker health, principally the Occupational Safety and Health Act and
regulations thereunder, which, among other things, establish cotton dust,
formaldehyde, asbestos, noise standards, and regulate the use of hazardous
chemicals in the workplace. We believe that we currently comply in all material
respects with applicable environmental or health and safety laws and
regulations.
We are currently evaluating recent regulatory initiatives under the Clean
Air Act which pertain to nitrogen oxide air emissions and hazardous air
pollutant emissions. These initiatives could potentially require some
combination of process changes or limitations, or additional air emissions
monitoring or control equipment at certain of our facilities which, in turn,
could require capital expenditures, increase operating costs or limit our
10
operations. Based on the information presently available, we do not believe that
the cost of, or any operational constraints or modifications required to, assure
future compliance with the above-described laws, regulations and initiatives, or
to remediate existing environmental contamination, will have a material adverse
effect on our results of operations or financial condition. However, there can
be no assurance that:
o upon further evaluation, we will not determine that the Clean Air Act
initiatives described above will be more costly or more restrictive to
our operations than we now believe,
o environmental requirements will not become more stringent in the
future,
o the position taken by various regulatory agencies in respect of
regulatory matters or allegedly contaminated sites will not change in
a manner materially adverse to us,ntaminated sites will not change in
a manner materially adverse to us,
o claims in material amounts will not be brought by regulatory agencies
or third parties,
o additional sites which are alleged to have been contaminated by us or
our predecessors will not be discovered,
o assessments as to extent or nature of contamination or need for
clean-up of sites will not change, or
o we will not incur material costs in order to address any such matters.
During our due diligence at the Morven, North Carolina facility, which we
acquired in December 1998, we discovered low levels of groundwater contamination
from perchloroethylene. Prior to purchasing the facility, our personnel met with
regulatory authorities regarding the options for dealing with this
contamination. As a result of those discussions, we elected to pursue a
brownfields agreement for the property with the State of North Carolina. Under
the North Carolina brownfields program, contaminated industrial sites are placed
into productive use by allowing owners to perform less intensive cleanups than
would be required for residential sites or drinking water sources. A final
agreement with the State of North Carolina has not been completed at this time.
At our closed Abbeville, South Carolina facility, which we plan to dispose
of, Bibb previously worked with the South Carolina Department of Health and
Environmental Control, which we refer to as DHEC, to identify the source of low
levels of freon and certain other volatile organic compounds which were found in
a water supply well located on-site. No active on-site remediation is being
required by the State at this time; however, DHEC has been conducting further
studies of the site in an attempt to confirm origin of the contamination, and
there can be no assurance that DHEC will not determine that further studies or
remediation are required with respect to this site.
Order Backlog
Our order backlog was approximately $138 million at December 28, 2002, as
compared to approximately $121 million at December 29, 2001. Substantially all
of the orders on hand at December 28, 2002 are expected to be filled within four
months of that date.
Employees
At December 28, 2002, we had approximately 7,000 employees, of which
approximately 5,900 were hourly employees. Of these hourly employees,
approximately 3,000 are located in our Danville, Virginia operations and
represented by a collective bargaining agreement that expires in June 2005. We
believe that our relations with our employees are good.
Where You Can Find More Information
We make our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to such reports filed pursuant
to Section 13(a) or 15(d) of the Exchange Act, available (free of charge) on or
through our web site located at www.danriver.com, as soon as reasonably
practicable after they are filed with or furnished to the SEC.
11
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the federal securities laws. Statements that are not historical
facts, including statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
generally preceded by, followed by or that include the words "believe,"
"expect," "anticipate," "plan," "estimate" or similar expressions. These
statements include, among others, statements regarding our expected business
outlook, anticipated financial and operating results, strategies, contingencies,
financing plans, working capital needs, sources of liquidity, estimated amounts
and timing of capital expenditures, environmental compliance costs and other
expenditures, and expected outcomes of litigation.
Forward-looking statements reflect our current expectations and are not
guarantees of performance. These statements are based on our management's
beliefs and assumptions, which in turn are based on currently available
information. Important assumptions relating to these forward-looking statements
include, among others, assumptions regarding demand for our products, expected
pricing levels, raw material costs, the timing and cost of planned capital
expenditures, the estimated cost of environmental compliance, expected outcomes
of pending litigation, competitive conditions and general economic conditions.
These assumptions could prove inaccurate. Forward-looking statements also
involve risks and uncertainties, which could cause actual results to differ
materially from those contained in any forward-looking statement. Many of these
factors are beyond our ability to control or predict. Such factors include, but
are not limited to, the factors set forth in Exhibit 99.1, "Cautionary
Statements relating to Forward Looking Statements," filed with this Annual
Report on Form 10-K, and the following:
o general economic and political conditions and the cyclicality of the
textile industry;
o competitive conditions in the textile industry;
o our ability to implement manufacturing cost reductions, efficiencies
and other improvements;
o fluctuations in the supply of raw materials or shortages of the supply
of raw materials;
o our ability to maintain or acquire licenses;
o our ability to fund our capital expenditure requirements needed to
maintain our competitive position;
o the effect of U.S. governmental policies regarding imports on our
competitiveness;
o our ability to identify and complete acquisitions;
o our compliance with environmental, health and safety laws and
regulations;
o changes in our relationship with our large customers;
o business-related difficulties of our customers, including Kmart
Corporation;
o risks associated with our operations in Mexico;
o our dependence on outside production sources;
o our ability to compete with foreign imports;
o our reliance on key management personnel;
o our relationship with the unions representing some of our employees;
and
o the influence of our principal shareholder.
You should not place undue reliance on any forward-looking statements,
which are based on current expectations. Further, forward-looking statements
speak only as of the date they are made, and we undertake no obligation to
update publicly any of them in light of new information or future events.
ITEM 2. PROPERTIES
Our home fashions manufacturing and warehousing facilities consist of
approximately 5.6 million square feet of space located in Georgia, North
Carolina, South Carolina and Virginia. Of this space we own approximately 5.0
million square feet and lease the remainder. We also lease warehouse and office
space near Toronto, Canada.
Our apparel fabrics manufacturing and warehousing facilities consist of
approximately 2.6 million square feet of space located in North Carolina,
Tennessee and Virginia. We own these facilities with the exception of our
Sevierville, Tennessee, manufacturing plant, which we lease with an option to
purchase for nominal consideration in 2018. We also own an apparel manufacturing
plant in Jilotepec, State of Mexico.
Our engineered products are manufactured at a 600,000 square foot facility
in Georgia which we own.
12
We own most of our office space in Danville, Virginia, including corporate
and home fashions and apparel fabrics divisional offices. We lease additional
office space in Danville, as well as each of our marketing and sales offices,
and we lease five outlet stores in Florida, Georgia, South Carolina and
Tennessee. These stores average approximately 6,000 square feet of total space
each. We own our factory outlet store in Danville, Virginia.
Substantially all of our owned manufacturing, warehousing and office
facilities (including the real property and the machinery, equipment,
furnishings and fixtures) are subject to security interests in favor of our
senior lenders. Additionally, our Sevierville, Tennessee manufacturing plant and
our Portsmouth, Virginia office and warehouse facility are subject to leasehold
deeds of trust, also in favor of our senior lenders.
Our manufacturing facilities generally operate on a 24 hour, five, six or
seven day schedule depending on the nature of the operations and demand for
specific products, as well as other factors.
We believe that our existing facilities are adequate to service existing
demand for our products. We consider our plants and equipment to be in good
condition.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to litigation arising in the ordinary
course of our business. We are not currently a party to any litigation that we
believe could reasonably be expected to have a material adverse effect on our
results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our Class A Common Stock is listed on the New York Stock Exchange, or the
NYSE, under the symbol "DRF." There is no established trading market for the
Class B Common Stock. On January 24, 2003, there were approximately 285 holders
of record of our Class A Common Stock and nine holders of record of our Class B
Common Stock.
We have not paid cash dividends during our two most recent fiscal years.
Our credit agreement prohibits payment of cash dividends or repurchases of
stock.
The following table sets forth for the calendar quarter indicated the high
and low closing prices per share of our Class A Common Stock as reported in
composite trading on the NYSE.
High Low
---- ---
2001:
First Quarter................................... $3.23 $1.90
Second Quarter.................................. 3.10 1.91
Third Quarter................................... 2.75 1.00
Fourth Quarter.................................. 1.02 0.49
2002:
First Quarter................................... $1.85 $0.20
Second Quarter.................................. 5.44 1.45
Third Quarter................................... 5.14 2.00
Fourth Quarter.................................. 3.40 1.56
13
For information concerning Class A Common Stock to be issued in
connection with our equity compensation plans, see Part III, Item 12, of this
Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year
-------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ----------
(in thousands, except per share data)
Statement of Income Data:
Net sales................................................. $612,949 $631,072 $663,467 $628,899 $517,443
Cost of sales............................................. 500,351 562,606 541,063 512,977 406,619
Gross profit.............................................. 112,598 68,466 122,404 115,922 110,824
Selling, general and administrative expenses.............. 68,805 67,910 67,335 64,547 58,410
Amortization of goodwill.................................. -- 3,617 3,137 2,859 589
Other operating costs, net (1)............................ (550) 4,282 -- (2,267) 5,347
Operating income (loss)................................... 44,343 (7,343) 51,932 50,783 46,478
Other income, net......................................... 455 694 226 603 334
Equity in loss of joint venture........................... -- (244) (226) -- --
Interest expense.......................................... 26,884 32,063 32,931 28,416 18,713
Income (loss) before extraordinary item and
cumulative effect of accounting change ............... 7,380 (20,869) 10,773 14,715 17,101
Extraordinary item........................................ -- -- -- -- (405)
Cumulative effect of accounting change(2)................. (20,701) -- -- -- --
Net income (loss)......................................... (13,321) (20,869) 10,773 14,715 16,696
Earnings (loss) per share--basic:
Income (loss) before extraordinary item and
cumulative effect of accounting change......... 0.34 (0.96) 0.49 0.64 0.86
Net income (loss) per share--basic.................. (0.61) (0.96) 0.49 0.64 0.84
Earnings (loss) per share--diluted:
Income (loss) before extraordinary item and
cumulative effect of accounting change......... 0.33 (0.96) 0.49 0.63 0.85
Net income (loss) per share--diluted................. (0.60) (0.96) 0.49 0.63 0.83
Balance Sheet Data (at end of fiscal year):
Working capital........................................... $(54,293) $184,363 $232,374 $174,365 $221,854
Total assets.............................................. 595,522 666,369 745,473 684,582 720,210
Total debt, including current maturities.................. 252,023 325,399 369,271 314,784 354,268
Shareholders' equity...................................... 229,037 250,338 277,192 270,952 258,774
Common shares outstanding................................. 22,425 21,988 21,766 22,636 23,219
Other Financial Data:
Depreciation and amortization of property, plant and
equipment.............................................. $ 37,860 $ 39,451 $ 37,210 $ 38,912 $ 30,220
Capital expenditures in cash.............................. 12,384 18,246 33,743 36,729 39,454
(1) Other operating costs, net includes various non-recurring charges and
credits. The fiscal 2002 and 2001 amounts relate primarily to the plant
consolidation program that we announced in December 2001. In connection
with the consolidation we recorded a $4.7 million pre-tax charge in fiscal
2001. We reversed $0.6 million of the pre-tax charge in fiscal 2002. See
Note 8 to the Consolidated Financial Statements. In fiscal 1999, the
primary component of other operating costs, net was a $1.8 million pre-tax
gain from the reversal of reserves associated with the closure of certain
of our facilities in fiscal 1997. In fiscal 1998, the primary component of
other operating costs, net was a $5.7 million pre-tax charge associated
with the closing of one of our apparel fabrics weaving facilities.
(2) The cumulative effect of accounting change represents the non-cash
writedown of goodwill as of the first day of fiscal 2002 in connection with
our adoption of SFAS No. 142. See Note 2 to the Consolidated Financial
Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
General. Our strategy is to expand our home fashions business through
internal growth and strategic acquisitions while maintaining and enhancing our
niche position as a leading producer of light weight yarn-dyed apparel fabrics.
In our home fashions business, we emphasize customer specific marketing
supported by superior design, excellent systems, and flexible, low-cost
manufacturing in order to supply our customers with compelling product when they
need it in order to meet the needs of a discerning consumer. In our apparel
fabrics business, we focus on diversifying our product offerings into specific
product areas that are less vulnerable to import competition, while maintaining
our leadership in our core light weight yarn-dyed fabric business. We work
continuously to develop new apparel fabrics or finishes to differentiate
ourselves from our worldwide competitors. We continue to implement cost
reductions throughout all areas of our operations, which we believe are critical
in order to remain competitive in the global marketplace.
Home Fashions. More than ten years ago we made the strategic decision to
focus on our home fashions products business, which generally is less cyclical
than other textile businesses (including our apparel fabrics business), is less
import sensitive and has attractive margins. Consistent with this strategy, we
acquired Bibb in October 1998, which significantly increased the size of our
home fashions products business. As a result of the Bibb acquisition, more than
two-thirds of our net sales are now attributable to sales of home fashions
products. We believe our increased critical mass has made us more attractive to
our home fashions products customers, who need large suppliers to satisfy their
requirements.
Operating profits from our home fashions segment were $43.6 million in
fiscal 2002, up from $10.9 million in fiscal 2001, despite a 6% sales decrease
in fiscal 2002. This was achieved due to a series of strategic initiatives
started in fiscal 2001. We streamlined our manufacturing operations through the
consolidation of our Newnan, Georgia sewing plant into our Virginia operations
and eliminated a weaving operation in Greenville, South Carolina. In addition,
inventory levels were brought in line with sales, leading to significantly
better running schedules and an improved absorption of fixed costs. These
operating improvements, coupled with lower raw material costs and an improved
selling mix, led to the dramatic improvement in operating profit in fiscal 2002.
We believe our fiscal 2001 results were an anomaly. Our decline in
profitability from fiscal 2000 to 2001 was directly attributable to a build-up
in our home fashions inventories. The installation of our new SAP system, and an
unusually dramatic drop in consumer demand for home fashions products, were
primary causes of the abnormal inventory levels. At the close of fiscal 2000,
our home fashions inventories were at $165.9 million, a number that was, in
hindsight, excessive in light of the lackluster demand we would experience in
fiscal 2001. Accordingly, during fiscal 2001 we worked diligently on reducing
inventory, utilizing two methods which, while effective, had a negative
short-term impact on our profitability. First, we curtailed operations in our
facilities to bring inventories in line with declining demand, and second, we
sold off excess finished goods at promotional prices. These practices,
compounded by higher raw material costs (primarily polyester and cotton) and bad
debt expense associated with the Kmart bankruptcy, led to our poor operating
results in fiscal 2001.
We were successful in our inventory control efforts in fiscal 2001 and our
return to profitability in fiscal 2002. At the end of fiscal 2001, our home
fashions inventories were $122.5 million, down 26% from the end of fiscal 2000.
We were then able to take advantage of our improved capacity utilization and
inventory control practices to greatly improve operating profit in fiscal 2002.
We believe that the operating improvements discussed above will continue to
enhance our long-term profitability.
Apparel Fabrics. Historically, our apparel fabrics business has been more
sensitive to downturns within the textile industry. As a result, operating
income attributable to the apparel fabrics segment has fluctuated more than
operating income attributable to the home fashions segment. For example, in
fiscal 2002, operating income attributable to apparel fabrics was $2.2 million
compared to an operating loss of $8.6 million in fiscal 2001 and operating
income of $10.9 million in fiscal 2000. In recent years we have taken several
steps to improve the performance of our apparel fabrics operations, including:
(1) the replacement of older manufacturing equipment; (2) the acquisition of
Cherokee at the beginning of fiscal 1997, which gave us greater critical mass in
our apparel fabrics operations; (3) the closure and consolidation of our
Riverside Plant, which was the least efficient of our apparel fabrics plants, at
the end of fiscal 1997; (4) the closure of our Spindale Plant in January 1999;
and (5) the downsizing of apparel fabrics weaving capacity by approximately 20%
during fiscal 2001 and 2002.
15
Due to the high fixed costs associated with our manufacturing operations in
the apparel fabrics business, we seek to maintain reasonably full manufacturing
schedules, which enables us to run our facilities at high operating rates.
Better capacity utilization and lower raw material costs accounted for increased
operating income attributable to our apparel fabrics segment in fiscal 2002
compared to fiscal 2001. During fiscal 2001, we were unable to maintain full
manufacturing schedules due to weak demand in the U.S. resulting from the
recessionary environment and the impact of the strong dollar in comparison to
Asian currencies. As a result, we operated our apparel fabrics facilities at
approximately 66% of capacity during fiscal 2001, resulting in under absorption
of fixed costs. In fiscal 2002, we experienced increased demand for our apparel
fabrics, particularly new bottom weight sportswear product offerings, enabling
us to run our apparel fabrics facilities at 88% of capacity during fiscal 2002,
which positively impacted the profitability of the apparel fabrics segment.
Mexican Operations. In January 2000, we formed a joint venture to build and
operate a manufacturing plant in Mexico, including sewing and laundry
operations, for the production of finished garments, primarily sport shirts for
sale to apparel and retail customers. These products were targeted to compete
with Asian imports. In February 2001, we purchased our joint venture partner's
interest in the facility, which became fully operational in mid-2001. Because of
the recessionary environment and the strong U.S. dollar and peso, we were unable
to fully use the capacity of the plant and, as a result, these operations
suffered an operating loss of $2.0 million in fiscal 2002. We believe that these
operations can achieve profitability if we can obtain a reasonably consistent
flow of similar products to manufacture. Accordingly, during fiscal 2002, we
expanded our focus and began producing career apparel shirts in addition to
sport shirts. This improved capacity utilization and should allow us to
significantly improve the operating results of our Mexican operations in fiscal
2003. We further believe that long-term prospects of our Mexican operations are
promising, as our customers continue to seek more packaged garments.
Outlook. Currently, the demand for our home fashions products and apparel
fabrics is stable, which should permit both our home fashions and apparel
fabrics businesses to experience operating rates in fiscal 2003 similar to those
in fiscal 2002. With reasonable operating rates and capacity utilization, we
anticipate that fiscal 2003 will be a year similar to fiscal 2002 from a sales
and operating profit standpoint, unless there is a dramatic improvement or
decline in current economic activity levels.
Our expectation regarding our results of operations for fiscal 2003 assumes
that the bankruptcy of Kmart Corporation, our largest customer, will not have a
material adverse effect on our home fashions segment. Kmart has recently
announced it will close an additional 317 stores. We do not currently believe
that the closure of these stores will materially affect our results of
operations during fiscal 2003 because of our scheduled new product introductions
in existing Kmart stores during fiscal 2003. However, should Kmart continue to
downsize and reduce the number of its stores beyond currently announced closures
or make other material changes in its operations, such changes could have a
material adverse effect on our results of operations.
Performance By Segment
We operate in three industry segments: products for the home fashions
markets, products for the apparel fabrics markets and engineered products for
the automotive and industrial markets. The following table sets forth segment
results for fiscal 2002, 2001 and 2000.
16
Fiscal Fiscal Fiscal
2002 2001 2000
-------- -------- --------
(in thousands)
Net Sales
Home fashions....................................... $441,157 $469,862 $469,758
Apparel fabrics..................................... 131,482 118,881 143,639
Engineered products................................. 40,310 42,329 50,070
-------- -------- --------
Total..................................... $612,949 $631,072 $663,467
======== ======== ========
Operating Income (Loss)
Home fashions....................................... $43,634 $10,922 $43,344
Apparel fabrics..................................... 2,158 (8,579) 10,930
Engineered products................................. (1,474) (830) 2,341
-------- -------- --------
Total segment operating income............ 44,318 1,513 56,615
Corporate items not allocated to segments:
Amortization of goodwill....................... -- (3,617) (3,137)
Other operating costs, net..................... 550 (4,282) --
Other expenses not allocated to segments....... (525) (957) (1,546)
-------- -------- --------
Total operating income (loss)............. $44,343 $(7,343) $51,932
======= ======== =======
Results of Operations
Comparison of 52 Weeks Ended December 28, 2002 ("fiscal 2002") to 52 Weeks Ended
December 29, 2001 ("fiscal 2001")
Net Sales
Net sales for fiscal 2002 were $612.9 million, a decrease of $18.1 million
or 2.9% from net sales of $631.1 million for fiscal 2001.
Home Fashions. Net sales of home fashions products were $441.2 million for
fiscal 2002, down $28.7 million or 6.1% from net sales of $469.9 million for
fiscal 2001. This decline reflected sluggish consumer demand and the lack of
aggressive inventory reduction efforts in fiscal 2002 in comparison with fiscal
2001. Sales of juvenile bedding products increased in fiscal 2002, however the
increase was more than offset by lower sales of adult bedding products to mass
merchants.
Apparel Fabrics. Net sales of apparel fabrics for fiscal 2002 were $131.5
million, up $12.6 million or 10.6% from net sales of $118.9 million for fiscal
2001. The increase was attributable to higher sales of sportswear fabrics,
primarily pant fabrics, partially offset by a modest decline in sales of
shirting fabrics.
Engineered Products. Net sales of engineered products were $40.3 million
for fiscal 2002, down $2.0 million or 4.8% from net sales of $42.3 million for
fiscal 2001. The decrease reflected soft demand from the industrial fabrics
sector and a very competitive pricing situation in the market for yarns used in
the automotive sector.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $68.8 million for fiscal
2002 (11.2% of net sales), an increase of $0.9 million or 1.3% from $67.9
million (10.8% of net sales) for fiscal 2001. The increase was due to higher
incentive compensation, offset in part by lower bad debt expense. In fiscal
2001, we recorded $3.5 million in bad debt expense attributable to Kmart
Corporation's January 2002 bankruptcy filing, based on our estimated loss on
receivables from Kmart that were outstanding at year end. In fiscal 2002, bad
debt expense attributable to pre-bankruptcy receivables from Kmart was $1.6
million.
Operating Income
Consolidated operating income was $44.3 million for fiscal 2002, compared
to a $7.3 million operating loss for fiscal 2001.
17
Home Fashions. Operating income for the home fashions segment increased to
$43.6 million in fiscal 2002 from $10.9 million in fiscal 2001. Operating
margins were low in fiscal 2001 due to a combination of factors, including the
effects of unfavorable manufacturing performance (caused by uneven running
schedules and production curtailments), and promotional pricing, both of which
resulted from our focus on inventory reduction. In addition, high raw material
costs negatively impacted profit margins in fiscal 2001. The improved
profitability in fiscal 2002 reflects better plant capacity utilization, cost
savings from the plant consolidation program implemented earlier in the year
(discussed below) and lower raw material costs. These factors, along with an
improved product mix due to the absence of aggressive promotional pricing in
fiscal 2002, more than offset the effects of the lower sales volume.
Apparel Fabrics. Operating income for the apparel fabrics segment was $2.2
million in fiscal 2002, including a $2.0 million operating loss attributable to
our shirt manufacturing facility in Mexico, compared to an operating loss of
$8.6 million in fiscal 2001, which included a $1.7 million operating loss from
our Mexican operations. Prior to the buyout of our joint venture partner in the
first quarter of fiscal 2001, results from this business were reported as
"Equity in loss of joint venture." The return to profitability in our domestic
apparel fabrics business during fiscal 2002 was attributable to higher sales
volume and lower per-unit manufacturing costs. The lower costs reflected much
better capacity utilization, due in part to the plant consolidation program
implemented earlier this year, as well as to lower raw material costs. The
losses from our Mexican operations were caused by low sales volume. Despite
intense marketing efforts, building sales volume to an acceptable level has been
difficult in the current economic environment. In the third quarter of fiscal
2002, we began to receive significant orders of shirts for the career apparel
market. Shipments on most of these orders are scheduled for the first quarter of
fiscal 2003.
Engineered Products. The engineered products segment had a $1.5 million
operating loss for fiscal 2002, compared to a $0.8 million operating loss for
fiscal 2001. Profitability in both periods was hampered by low sales volume, a
competitive pricing environment and inefficient manufacturing performance.
Corporate Items. Amortization of goodwill was $3.6 million in fiscal 2001.
In accordance with SFAS No. 142, we discontinued amortization of goodwill
beginning in the first quarter of fiscal 2002 (see discussion below under
"Adoption of New Accounting Standard").
Other operating costs, net for fiscal 2001 totaled $4.3 million, consisting
of a $4.7 million pre-tax charge relating to a plant consolidation program, and
a $0.4 million pre-tax gain from reversal of the unused portion of a reserve
established in 1995 for environmental and equipment removal costs associated
with an idle research facility.
The plant consolidation program was announced in December 2001. In
connection with the consolidation, we closed a home fashions cut and sew
facility in Newnan, Georgia, and a portion of a home fashions weaving facility
in Greenville, South Carolina. In addition, we idled apparel looms in Danville,
Virginia and transferred looms from Danville to Sevierville, Tennessee,
resulting in a net reduction in apparel fabric weaving capacity of approximately
20%. The vacant space in the Danville plant created by these moves is being
utilized by the installation of modern home fashions sheeting looms which, with
the capacity reduction noted above, resulted in a slight reduction in home
fashions weaving capacity. In connection with the consolidation, we recorded a
pre-tax charge of $4.7 million in fiscal 2001, including a $3.3 million non-cash
writedown of fixed assets, $1.3 million for severance and benefits associated
with the termination of approximately 380 employees, and other exit costs of
$0.1 million.
We completed substantially all aspects of the plant consolidation in fiscal
2002, including the payment of all but $0.1 million of severance and benefits.
Due to better than anticipated proceeds from the sale of the Newnan plant and
lower than expected healthcare continuation costs for employees severed in
connection with the consolidation, we reversed $0.6 million of the prior year
charge in fiscal 2002.
Other items not allocated to segments totaled $0.5 million (expense) for
fiscal 2002 compared to $1.0 million (expense) for fiscal 2001. The fiscal 2002
amount included $1.2 million of idle facility costs and other expenses not
directly related to segment business, offset by income items of $0.2 million
related to a litigation settlement and $0.5 million from a net decrease in
intersegment profits remaining in inventory. The fiscal 2001 amount consists of
idle facility costs and other expenses.
18
Interest Expense
Interest expense was $26.9 million for fiscal 2002, a decrease of $5.2
million from fiscal 2001. The decrease was attributable to lower debt levels,
and to a lesser extent, lower average interest rates.
Income Tax Provision
We recorded a $10.5 million income tax provision in fiscal 2002, which
included a one-time increase to income tax expense of $2.8 million attributable
to the Job Creation and Worker Assistance Act, enacted in March, 2002. The Act
changed the period for carrying back taxable losses generated in fiscal 2001
from 2 to 5 years, which resulted in our receiving a $5.5 million refund of
taxes in July 2002. However, the carryback also freed up investment credits that
had previously offset tax in the carryback years. A $2.8 million tax provision
was recorded in the first quarter of fiscal 2002, representing the amount of
these freed up credits that expired without being utilized.
Excluding the one-time tax adjustment discussed above, the tax provision
for fiscal 2002 was $7.7 million, or 43.2% of pre-tax income. The relatively
high effective rate was due to losses from our Mexican operations, for which no
tax benefit was provided.
For fiscal 2001, we recorded an $18.1 million income tax benefit, which
included a $5.0 million benefit for the reversal of income tax liabilities
recorded in prior years. During the third quarter of fiscal 2001, the Internal
Revenue Service completed its examination of our federal income tax returns
through tax year 1999. Based on the results of the examination and a review of
our tax position, the $5.0 benefit referred to above was recorded.
Excluding the one-time $5.0 million income tax benefit discussed above, the
income tax benefit for fiscal 2001 was $13.1 million (33.6% of the pre-tax
loss). The relatively low tax benefit as a percentage of the pre-tax loss is
attributable to nondeductible goodwill amortization and losses from our Mexican
operations, for which no tax benefit was provided.
Net Income and Earnings Per Share
For fiscal 2002, we reported a loss of $13.3 million or $0.60 per diluted
share. Before the cumulative effect of the accounting change for goodwill
impairment (discussed below) net income was $7.4 million or $0.33 per diluted
share in fiscal 2002, compared to a net loss of $20.9 million or $0.96 per
diluted share for fiscal 2001.
Adoption of New Accounting Standard
Effective as of the beginning of fiscal 2002, we adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." This new standard eliminates the
amortization of goodwill and intangible assets with indefinite useful lives.
Instead these assets must be tested at least annually for impairment. For
purposes of this test, we have selected the first day of our fourth fiscal
quarter as the annual testing date.
SFAS No. 142 also requires that a transitional impairment test of goodwill
be performed as of the first day of the year of adoption. With the assistance of
an outside consultant, we completed the transitional impairment review of
goodwill during the third quarter of fiscal 2002, and determined that goodwill
in our apparel fabrics, engineered products and import specialty businesses was
impaired. As a result, we recorded a non-cash charge of $20.7 million,
representing goodwill impairment of $23.4 million, less the deferred tax effect
of $2.7 million. The charge has been reported as a cumulative effect of a change
in accounting principle retroactive to the first day of fiscal 2002, and
therefore increased the previously reported net loss per share for the first
quarter of fiscal 2002 from $0.24 to $1.19. The carrying value of goodwill
remaining after the transitional impairment charge is $91.7 million, all of
which is allocable to our home fashions bedding products business.
As required by SFAS No. 142, we have also completed the annual impairment
test of goodwill for fiscal 2002, and have determined that no additional
impairment exists.
19
Comparison of 52 Weeks Ended December 29, 2001 ("fiscal 2001") to 52 Weeks Ended
December 30, 2000 ("fiscal 2000")
Net Sales
Net sales for fiscal 2001 were $631.1 million, a decrease of $32.4 million
or 4.9% from net sales of $663.5 million for fiscal 2000.
Home Fashions. Net sales of home fashions products for fiscal 2001 were
$469.9 million, virtually unchanged from fiscal 2000. Increased sales to mass
merchants in fiscal 2001 offset lower sales of home fashions products to other
retail trade classes and to the hospitality and healthcare markets.
Apparel Fabrics. Net sales of apparel fabrics for fiscal 2001 were $118.9
million, down $24.8 million or 17.2% from net sales of $143.6 million for fiscal
2000. Sales of dress shirting and career apparel fabrics, and sales of greige
(unfinished) fabrics to converters, were all significantly lower in fiscal 2001,
reflecting the weak retail environment and the increase in unemployment in the
service sector. Partially offsetting these decreases were higher sales of
sportswear fabrics, primarily pant fabrics.
Engineered Products. Net sales of engineered products were $42.3 million
for fiscal 2001, down $7.7 million or 15.5% from net sales of $50.1 million for
fiscal 2000. Most of the decrease was in sales of automotive and industrial hose
yarns, reflecting the generally weak economic environment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 2001 were $67.9
million (10.8% of net sales), compared to $67.3 million (10.1% of net sales) for
fiscal 2000. Decreases in incentive compensation and home fashions marketing and
selling expenses for 2001 were more than offset by $3.5 million in bad debt
expense that was recorded due to the January 2002 bankruptcy filing by Kmart
Corporation.
Operating Income
We had a $7.3 million operating loss for fiscal 2001, compared to $51.9
million of operating income for fiscal 2000.
Home Fashions. Operating income for the home fashions segment was $10.9
million for fiscal 2001, compared to $43.3 million for fiscal 2000. Although
total sales were virtually the same for both years, fiscal 2001 profits were
adversely impacted by higher per-unit manufacturing costs, a less favorable
sales mix, higher raw material costs and the $3.5 million in bad debt expense
attributable to Kmart, discussed above. The less favorable sales mix was caused
in large part by promotional pricing due to our focus on inventory reduction.
The higher per-unit manufacturing costs also primarily relate to our efforts to
reduce inventories, which resulted in production curtailments and unfavorable
running schedules.
Apparel Fabrics. The apparel fabrics segment generated an $8.6 million
operating loss for fiscal 2001, compared to $10.9 million in operating income
for fiscal 2000. The unprofitable operating results for fiscal 2001 reflect the
lower sales volume, a competitive pricing environment, higher raw material
costs, and higher per-unit costs due to production curtailments and unfavorable
running schedules, which were necessary to keep inventories in line with demand
for our products. In addition, the operating loss for fiscal 2001 includes $1.7
million in startup losses from our shirt manufacturing operations in Mexico. By
the end of fiscal 2001, construction of the manufacturing facility was complete
and we had begun to actively market programs to major retailers. Prior to the
buyout of our joint venture partner in fiscal 2001, results from this business
were reported as "Equity in loss of joint venture."
Engineered Products. The engineered products segment generated a $0.8
million operating loss for fiscal 2001, compared to $2.3 million in operating
income for fiscal 2000. The lower profitability reflects both the lower sales
volume in fiscal 2001 and less efficient manufacturing performance.
Corporate Items. Amortization of goodwill was $3.6 million in fiscal 2001,
compared to $3.1 million in fiscal 2000. The increase in fiscal 2001 is
attributable to goodwill resulting from the acquisition of the remaining
interest in the shirt manufacturing operation in Mexico and a $2.1 million
increase in goodwill resulting from an adjustment to deferred taxes associated
20
with our fiscal 1998 acquisition of The Bibb Company (see discussion below under
"Income Taxes").
Other operating costs, net for fiscal 2001 (discussed in detail above)
totaled $4.3 million, and included a $4.7 million pre-tax charge relating to a
plant consolidation program, and a $0.4 million pre-tax gain from reversal of
the unused portion of a reserve established in 1995 for environmental and
equipment removal costs associated with an idle research facility.
Other expenses not allocated to our business segments were $1.0 million in
fiscal 2001 and $1.5 million in fiscal 2000, and consisted of idle facility
costs and other items not directly related to segment business.
Interest Expense
Interest expense for fiscal 2001 was $32.1 million, a decrease of $0.9
million or 2.6% from fiscal 2000. The decrease is mostly attributable to lower
average debt levels.
Income Tax Provision
We recorded an $18.1 million income tax benefit for fiscal 2001. Included
in that amount is a $5.0 million benefit for the reversal of income tax
liabilities recorded in prior years. During the third quarter of fiscal 2001,
the Internal Revenue Service completed its examination of our federal income tax
returns through tax year 1999. The examination resulted in the assessment of
$0.9 million in taxes and interest, all of which was offset against overpaid
taxes for tax year 2000. Based on the results of the examination and a review of
our tax position, the $5.0 million benefit referred to above was recorded. Also
as a result of this review, we recorded a $2.1 million decrease in certain
deferred tax assets associated with our fiscal 1998 acquisition of The Bibb
Company and a corresponding increase in goodwill.
Excluding the one-time $5.0 million income tax benefit discussed above, the
income tax benefit for fiscal 2001 was $13.1 million (33.6% of the pre-tax
loss). The relatively low tax benefit as a percentage of the pre-tax loss is
attributable to nondeductible goodwill amortization and losses from our Mexican
operations, for which no tax benefit was provided. In fiscal 2000 we recorded an
$8.2 million income tax provision (43.3% of pre-tax income). The high effective
rate as a percentage of pre-tax income is due primarily to the effect of
nondeductible goodwill amortization.
Net Income and Earnings Per Share
The net loss for fiscal 2001 was $20.9 million or $0.96 per share, compared
to net income of $10.8 million or $0.49 per share for fiscal 2000.
Liquidity and Capital Resources
General. We rely on internally generated cash flow, supplemented by
borrowings under our borrowing base facility, to meet our working capital needs,
capital improvements and debt service requirements. Our total debt to total
capital ratio at December 28, 2002 was 52.4%.
Working Capital. Our operations are working capital intensive. Our
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.
During fiscal 2002, operating working capital generated $12.6 million of
cash primarily due to reductions of inventories and receivables levels and
increases in accounts payable. Net income plus noncash expense items (net)
generated $63.3 million in cash during the year, and changes in operating assets
and liabilities generated $16.1 million. Those changes in operating assets and
liabilities were the $12.6 million decrease in working capital described above,
a decrease of $2.6 million of prepaid expenses and other assets and a $1.0
million increase in other liabilities. As a result, operating activities in
fiscal 2002 provided net cash of $79.5 million.
During fiscal 2001, operating working capital generated $56.8 million of
cash due primarily to reductions of inventories and accounts receivable. The net
loss plus noncash expense items (net) generated $10.3 million in cash during the
year, and changes in operating assets and liabilities contributed $58.4 million.
Those changes in operating assets and liabilities were the $56.8 million
decrease in working capital described above, a decrease of $0.9 million of
21
prepaid expenses and other assets and a $0.7 million increase in other
liabilities. As a result, operating activities in fiscal 2001 provided net cash
of $68.7 million.
In connection with purchasing cotton for anticipated manufacturing
requirements, we may enter into cotton futures and option contracts in order to
reduce the risk associated with future price fluctuations. We generally cover
open order requirements, which average approximately three months of production,
through direct purchase, futures and options transactions, and we may shorten or
lengthen that period in accordance with our perception of the direction of
cotton prices. Effective as of the beginning of fiscal 2001, we adopted SFAS No.
133, as amended, which requires that derivative instruments be reported on the
balance sheet at fair value. Gains and losses related to futures and options
during the three year period ended December 28, 2002 were not material to our
results of operations. There were no material cotton futures or options
contracts outstanding at December 28, 2002, December 29, 2001, and December 30,
2000.
Credit Facilities. On October 14, 1998, in order to finance the Bibb
acquisition, we replaced our $90 milion revolving credit facility with a new
$275 million credit facility. Under the original terms, this credit facility
consisted of a $125 million amortizing term loan and a $150 million
non-amortizing revolving working capital facility.
The credit facility was amended during fiscal 2000 to permit our planned
joint ventures in Mexico and to add $12.9 million of new debt to the term loan.
In February 2001, a subsequent amendment modified the interest coverage and
leverage covenants for the fourth quarter of fiscal 2000 and subsequent fiscal
quarters and increased the interest rate on all loans by 100 basis points. The
amendment also placed restrictions on the permitted investment in non-guarantor
subsidiaries, capital expenditures, repurchase of capital stock, and payment of
dividends. In addition to the existing security provided by our inventories and
accounts receivable, we further secured the credit facility with substantially
all of our real and personal property.
In December 2001, a further amendment to the credit agreement waived any
financial covenant defaults on or prior to the effective date of this amendment,
modified the covenant measures as of the third fiscal quarter of 2001 and
subsequent fiscal quarters, and replaced the working capital credit line of $150
million with a working capital borrowing base. The borrowing base is determined
weekly by evaluation of the eligible inventories and accounts receivable and is
limited to a fixed amount which cannot exceed $150 million. Modifications to the
amortization schedule of the term loan were made to defer $15 million of the $20
million of payments scheduled for the first and second quarters of fiscal 2002
until September 2003, and to make the June and December scheduled payments due
on the 15th instead of at the end of those respective months. A new pricing tier
was added, increasing the interest margin by 100 basis points at that time. The
agreement was modified to require that interest payments be made on at least a
monthly basis for all outstanding loans. We are required to meet a minimum
cumulative EBITDA covenant (as defined) on a monthly basis and an interest
coverage ratio covenant (as defined) on a monthly basis. The covenant on
leverage was eliminated. We have remained in compliance with the credit
agreement, as amended. Any further modification or waiver to the agreement
concerning financial covenants will require a larger supporting vote of the
lenders, up from the previous 51% supporting vote. The amendment also prohibited
any payment of dividends or additional repurchases of capital stock and
implemented additional reporting of financial projections and results,
restrictions on capital expenditures, continued limitations on dispositions of
assets, a requirement that excess liquidity be used to prepay the term loan
under certain conditions, and requires most cash management services to be moved
to the agent bank. Fees and expenses of $3.7 million were paid in 2001 in
connection with the February and December 2001 amendments.
Borrowings under the borrowing base facility bear interest at a base rate
plus the applicable percentage, as defined (5.50 % as of January 30, 2003) or
LIBOR plus the applicable percentage, as defined (3.84 % as of January 30, 2003)
for periods of one, two, three or six months, at our option. The applicable
percentage is based on our leverage ratio, as defined. Due to our successful
reduction in debt levels during the year, the applicable percentage was reduced
in both the third and fourth quarters of 2002 by a total of 175 basis points. As
a result of the leverage ratio as of December 28, 2002, a further reduction of
25 basis points was implemented in the first quarter of fiscal 2003.
The term loan was fully borrowed at inception and has scheduled
amortization payments. In fiscal 2002, $25 million of scheduled amortization was
paid. In addition, a $3 million prepayment was made at September 30, 2002, under
the terms of the December 2001 amendment to the credit agreement which specifies
such a prepayment if $23 million or more is available under the working capital
line as of quarter end. With the addition of $12.9 million of new debt to the
term loan in fiscal 2000 and the amendment in December of 2001, as of December
28, 2002, the required remaining principal amortization is $56.9 million in
fiscal 2003, with a final maturity of September 30, 2003. At the beginning of
fiscal 2003 we made an additional $3 million prepayment which was required due
22
to our liquidity position in excess of $23 million. The borrowing base facility
is non-amortizing with any borrowings outstanding due at final maturity on
September 30, 2003. At December 28, 2002, we had aggregate borrowings of $63.0
million and $5.0 million in letters of credit outstanding under the borrowing
base facility and had $55.5 million unused and available for borrowing.
In addition to the covenants as described above, the credit facility
contains limitations on mergers and consolidations, affiliated transactions,
incurring liens, disposal of assets and investments. An event of default under
the credit facility includes change of control (as defined in the credit
facility) as well as non-compliance with certain other provisions. Compliance
with these provisions is subject to certain risks and uncertainties that may
affect our performance in the future, including, among others
o deterioration of relationships with or the loss of material customers,
as described in Item 7, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Overview,"
o our ability or the inability of our customers to compete effectively
with imported textile products, and
o adverse changes in general market and industry conditions.
In addition, at December 28, 2002, we had an aggregate of $120.0 million
outstanding for our 10 1/8% senior subordinated notes due 2003. Interest on
these notes is payable semi-annually on June 15 and December 15 of each year.
The notes mature on December 15, 2003. The indenture relating to our 10 1/8%
senior subordinated notes restricts certain payments and imposes certain
restrictions on incurrence of debt.
Payments of outstanding indebtedness under our credit facility and our
notes are due at maturity on September 30, 2003, and December 15, 2003,
respectively. This indebtedness must be refinanced on or before the respective
maturity dates. Although we believe we will be successful in refinancing these
obligations prior to maturity, there can be no assurance that conditions will
permit the required refinancing, or that refinancing will be available on terms
that we consider to be in the best interest of our shareholders. If the
indebtedness is not refinanced, we will be in default, and the holders of such
indebtedness will be entitled to the remedies provided in the respective debt
instruments. Such an event would have a material adverse effect on our financial
condition and results of operations. Our success in refinancing this
indebtedness will be dependent upon a number of factors, including, for example,
our operating performance, operating performance of our peers in the textile and
apparel industries, perception of our industry in the capital markets, general
economic and political conditions and the general condition of the capital
markets, including specifically the high yield debt markets.
Long-Term Debt and Lease Obligations
The following summarizes our long-term debt and lease obligations at
December 28, 2002.
Payments Due by Period
----------------------
Less than Over
Total 1-Year 1-3 Years 4-5 Years 5 Years
------ ------ --------- --------- -------
(in millions)
Long-term debt, excluding capital lease obligations.. $246.6 $240.3 $ 0.9 $ 2.1 $ 3.3
Capital lease obligations............................ 5.4 0.9 4.4 -- 0.1
Operating lease obligations.......................... 31.5 5.6 9.5 5.8 10.6
------ ------ ----- ----- -----
Total................................................ $283.5 $246.8 $14.8 $ 7.9 $14.0
====== ====== ===== ===== =====
Acquisitions. In January 2000, we entered into joint venture agreements
with Grupo Industrial Zaga, S.A. de C.V. ("Zaga") for the purpose of building
and operating plants in Mexico to manufacture apparel fabrics and garments. A
new garment manufacturing facility has been constructed at Jilotepec in the
State of Mexico and is presently manufacturing shirts for sale primarily to
career apparel manufacturers and to retailers. However, based on the generally
weak apparel fabrics market conditions, and higher than expected construction
and other costs, the joint venture partners decided not to proceed with
construction of the apparel fabrics manufacturing plant.
We held approximately a 50% interest in the apparel fabric and garment
joint ventures at the time they were formed. In February 2001, we and Zaga
negotiated an amicable termination of both joint ventures, pursuant to which we
purchased Zaga's interest in the garment joint venture for $3.2 million in cash
and the transfer of our interest in the apparel fabrics joint venture, whose
primary asset was land valued at approximately $1.5 million. The acquisition was
accounted for as a purchase, and the results of operations of the acquired
23
business have been included in our consolidated financial statements since March
2001. The purchase price was allocated to the assets acquired, primarily plant
and equipment, based on their estimated fair value at the date of acquisition.
The allocation resulted in goodwill of $1.7 being recorded which, prior to the
adoption of SFAS No. 142 at the beginning of fiscal 2002, had been amortized on
the straight-line method over a five year life.
On April 3, 2000, we acquired substantially all of the assets of ISI for
$15.4 million in cash, and the assumption of certain operating liabilities. The
assets acquired consisted principally of receivables and inventory. The
acquisition was funded with borrowings under our working capital line of credit.
ISI, an importer of home fashions products complementary to our customer base,
including doormats, throws, and rugs manufactured primarily in China and India,
became a part of our home fashions business. The acquisition was accounted for
as a purchase and the results of operations of the acquired business have been
included in the consolidated financial statements since the date of acquisition.
The allocation of the purchase price of ISI to the assets acquired resulted in
goodwill of $7.8 million being recorded which, prior to the adoption of SFAS No.
142 at the beginning of fiscal 2002, had been amortized on the straight-line
method over a 20 year life.
Capital Improvements. We made capital expenditures aggregating $12.4
million, $18.2 million, and $33.7 million in fiscal 2002, 2001, and 2000,
respectively. During fiscal 2002 capital improvements were funded primarily
through our reduction in working capital. We anticipate capital expenditures in
the range of $20.0 million to $23.0 million in fiscal 2003, which will be used
primarily for information systems, sewing automation and other various facility
modernizations and maintenance.
Stock Repurchase Program. In August 1999, our board of directors
authorized the repurchase from time to time of up to $10.0 million aggregate
market value of our Class A Common Stock in open market transactions on the
NYSE. Shares repurchased pursuant to this program are retired and constitute
authorized but unissued shares. There were no shares repurchased in fiscal 2002
or 2001. During fiscal 2000, we repurchased 877,225 shares for $4.6 million and
in fiscal 1999, we repurchased 753,919 shares for $5.0 million. No further
repurchases are permitted under our credit facility.
Risk Management
Interest Rate Risk. We have exposure to floating interest rates through
our borrowings under our credit facility. Therefore, interest expense will
fluctuate with changes in LIBOR and the prime rate. At January 1, 2000, we had
interest rate swap agreements that terminated during the first quarter of fiscal
2000 which effectively converted variable rate interest payable on $65.0 million
of existing debt to a fixed rate. No interest rate swap agreements have been
implemented since fiscal 1999. As of December 28, 2002, a 10% increase in
interest rates in effect on our variable rate borrowings would increase interest
expense by $0.5 million on an annual basis.
Commodity Price Risk. We use many types of fiber, both natural and
man-made, in the manufacture of our textile products. We believe that future
price levels of all fibers will depend primarily upon supply and demand
conditions, weather conditions, general inflation and domestic and foreign
governmental regulations and agricultural programs. We manage our exposure to
changes in commodity prices primarily through our procurement practices.
We enter into contracts to purchase cotton under the Southern Mill Rules
ratified and adopted by the American Textile Manufacturers Institute, Inc. and
American Cotton Shippers Association. Under these contracts and rules,
nonperformance by either the buyer or seller may result in a net cash settlement
of the difference between the current market price of cotton and the contract
price. If we had a net cash settlement of our open firm commitment cotton
contracts at December 28, 2002, and market prices of contracted cotton decreased
by 10%, we would be required to pay a net settlement provision of approximately
$1.3 million.
24
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 provides a
uniform accounting model for long-lived assets to be disposed of and changes the
criteria for classifying assets as held-for-sale. Our adoption of this standard
in the first quarter of fiscal 2002 did not have a significant impact.
In April 2002, the FASB issued SFAS No. 145, "Rescission of Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 will generally require gains and losses on extinguishment of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items. We are required to adopt SFAS No. 145 in fiscal 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard requires that costs
associated with exit or disposal activities be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 will apply to exit or disposal activities initiated after fiscal 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. As amended by SFAS
No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based
compensation in annual and condensed interim financial statements. The new
disclosure requirements are effective immediately and are reflected in Notes 1
and 7 to the Consolidated Financial Statements.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the use of
estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of commitments and
contingencies. Management bases its estimates on various assumptions and
historical experience which are believed to be reasonable. However, due to the
inherent nature of estimates, actual results may differ significantly. We
believe that the following critical accounting policies and practices
incorporate estimates and judgements having the most significant impact on our
financial statements.
Accounts Receivable. We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments to us. The amount of the allowance is based on the creditworthiness of
customers, the age of unpaid amounts, and other relevant information. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
We also maintain allowances against accounts receivable for future product
returns, and for various customer programs and incentive offerings, including
special pricing agreements and volume-based incentives. By nature, these
allowances involve considerable estimation. If actual product returns or
customer use of various incentives differ from our estimates, adjustments to
these allowances, and corresponding adjustments to revenues, would be required.
Excess and Obsolete Inventory. Inventories are valued at the lower of cost
or market value. We write down excess and obsolete inventory for the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Property, Plant and Equipment. Property, plant and equipment are recorded
at cost and depreciated on a straight-line basis over the estimated useful lives
of the assets. In addition, assets are reviewed for impairment when events or
changes in business conditions indicate that their carrying value may not be
recoverable. The estimates, assumptions and judgements used by management in
applying our property, plant and equipment and impairment policies reflect both
historical experience and expectations regarding future industry conditions and
25
operations. The use of different estimates, assumptions and judgements could
result in materially different carrying values of assets and results of
operations.
Goodwill. As discussed in Note 2 to the Consolidated Financial Statements,
we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," as of the
beginning of fiscal 2002. Under this standard, goodwill must be tested at least
annually for impairment. In addition, a transitional impairment test is
required, to determine whether goodwill was impaired as of the beginning of the
fiscal year of adoption. Goodwill impairment testing involves the assignment of
goodwill to business units, and the determination of the fair values and book
values of those business units. These determinations involve considerable
estimation and judgement. In particular, determining the fair value of a
business unit involves, among other things, developing forecasts of future cash
flows and appropriate discount rates. Although we believe we have based our
impairment testing on reasonable estimates and assumptions, the use of different
estimates and assumptions could result in materially different results.
Based on the results of the transitional test, we recorded a non-cash
charge of $20.7 million, representing goodwill impairment of $23.4 million, less
the deferred tax effect of $2.7 million. The charge has been reported as a
cumulative effect of a change in accounting principle retroactive to the first
day of fiscal 2002. We also performed the annual impairment review of goodwill
as of the first day of our fiscal 2002 fourth quarter, and determined that no
further impairment existed as of that date. If, in the future, goodwill is
determined to be impaired, the resulting impairment writedown would be charged
to operations.
Accruals for Employee Benefits. We are self-insured for a substantial
portion of the cost of employee medical insurance and workers compensation
benefits. For health and medical costs, we establish reserves as of each balance
sheet date based on current and historical experience in claims costs, known
trends in health care costs and other information available from the third party
company that administers our claims. For workers compensation costs we monitor
the number and severity of accidents to develop appropriate reserves for the
estimated cost to provide both medical care and benefits during the period an
employee is unable to work. We believe that the assumptions and information used
to develop these reserves are reasonable. However, changes in expected medical
and health care costs, changes in the severity of previously reported claims or
legislative changes affecting the administration of these plans could
significantly impact the determination of appropriate reserves in future
periods.
Pension Plans. The valuation of our pension plans requires the use of
assumptions and estimates that are used to develop actuarial valuation of
expenses, assets and liabilities. These assumptions include discount rates,
investment returns, projected salary increases, and mortality rates. The
actuarial assumptions used in our pension reporting are reviewed annually and
compared with external benchmarks to ensure that they accurately account for our
future pension obligations. Changes in assumptions and future investment returns
could potentially have a material impact on pension expense and related funding
requirements.
Income Taxes. As part of the process of preparing our financial statements
we are required to estimate our actual current tax exposure and to assess
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in our consolidated balance sheet. Considerable
judgement is involved in this process. In particular, we must assess the
likelihood that deferred tax assets will be realized, which is ultimately
dependent on the generation of future taxable income. Furthermore, due to the
complexity of the tax laws and other factors, we must constantly assess whether
we have adequate reserves to cover both known tax liabilities and potential
future assessments that might result from audits by various taxing
jurisdictions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part III, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Management."
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE FOLLOWING PAGES
26
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 December 28, 2002 and December 29, 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 28, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 December 28, 2002 and December 29, 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 28, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, in 2002.
/s/ Ernst & Young LLP
Greensboro, North Carolina
February 3, 2003
27
CONSOLIDATED BALANCE SHEETS
December 28, 2002 and December 29, 2001
2002 2001
-------- ---------
(in thousands, except
share data)
Assets
Current assets:
Cash and cash equivalents.......................................................... $ 2,832 $ 8,316
Accounts receivable (less allowance of $13,747 and $15,883)........................ 71,292 75,029
Inventories........................................................................ 151,586 156,508
Prepaid expenses and other current assets.......................................... 4,175 7,577
Deferred income taxes.............................................................. 15,492 17,530
-------- ---------
Total current assets.......................................................... 245,377 264,960
Property, plant and equipment:
Land............................................................................... 11,720 11,697
Building and improvements.......................................................... 105,587 103,332
Machinery and equipment............................................................ 385,397 404,414
Construction in progress........................................................... 5,933 5,516
-------- ---------
508,637 524,959
Less accumulated depreciation and amortization..................................... 260,462 251,224
-------- ---------
Net property, plant and equipment............................................. 248,175 273,735
Goodwill................................................................................ 91,701 115,134
Other assets............................................................................ 10,269 12,540
-------- ---------
$595,522 $ 666,369
======== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current maturities of long-term debt............................................... $241,231 $26,375
Accounts payable................................................................... 25,802 22,911
Accrued compensation and related benefits.......................................... 23,693 21,064
Other accrued expenses............................................................. 8,944 10,247
-------- ---------
Total current liabilities..................................................... 299,670 80,597
Long-term debt.......................................................................... 10,792 299,024
Deferred income taxes................................................................... 15,257 9,709
Other liabilities....................................................................... 40,766 26,701
Shareholders' equity:
Preferred stock, $.01 par value; authorized 50,000,000 shares; no shares issued.... -- --
Common stock, Class A, $.01 par value; authorized 175,000,000 shares; issued and
outstanding 20,362,773 shares (19,926,189 shares at December 29, 2001).......... 204 199
Common stock, Class B, $.01 par value; authorized 35,000,000 shares; issued and
outstanding 2,062,070 shares.................................................... 21 21
Common stock, Class C, $.01 par value; authorized 5,000,000 shares; no shares
outstanding..................................................................... -- --
Additional paid-in capital......................................................... 209,952 209,778
Retained earnings.................................................................. 33,688 47,009
Accumulated other comprehensive loss............................................... (14,387) (6,121)
Unearned compensation--restricted stock............................................ (441) (548)
-------- ---------
Total shareholders' equity.................................................... 229,037 250,338
-------- ---------
$595,522 $666,369
======== =========
See accompanying notes.
28
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 28, 2002, December 29, 2001 and December 30, 2000
2002 2001 2000
----------- ----------- ----------
(in thousands, except per share data)
Net sales.................................................................. $ 612,949 $ 631,072 $ 663,467
Costs and expenses:
Cost of sales......................................................... 500,351 562,606 541,063
Selling, general and administrative expenses.......................... 68,805 67,910 67,335
Amortization of goodwill.............................................. -- 3,617 3,137
Other operating costs, net............................................ (550) 4,282 --
-------- -------- -------
Operating income (loss).................................................... 44,343 (7,343) 51,932
Other income, net.......................................................... 455 694 226
Equity in loss of joint venture............................................ -- (244) (226)
Interest expense........................................................... (26,884) (32,063) (32,931)
-------- -------- -------
Income (loss) before income taxes and cumulative effect
of accounting change.................................................. 17,914 (38,956) 19,001
Provision (benefit) for income taxes....................................... 10,534 (18,087) 8,228
-------- -------- -------
Income (loss) before cumulative effect of accounting change................ 7,380 (20,869) 10,773
Cumulative effect of accounting change, net of taxes of $2,732............. (20,701) -- --
-------- -------- -------
Net income (loss).......................................................... $(13,321) $(20,869) $10,773
======== ======== =======
Earnings (loss) per share--basic:
Income (loss) before cumulative effect of accounting change........ $ 0.34 $ (0.96) $ 0.49
Cumulative effect of accounting change, net of tax................. (0.95) -- --
-------- -------- -------
Net income (loss) per share--basic................................. $ (0.61) $ (0.96) $ 0.49
======= ======= =======
Earnings (loss) per share--diluted:
Income (loss) before cumulative effect of accounting change........ $ 0.33 $ (0.96) $ 0.49
Cumulative effect of accounting change, net of tax................. (0.93) -- --
-------- -------- -------
Net Income (loss) per share--diluted............................... $ (0.60) $ (0.96) $ 0.49
======= ======= =======
See accompanying notes.
29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Unearned
Class A Class B Additional Other Compensation-
Common Common Paid-in Retained Comprehensive Restricted
Stock Stock Capital Earnings Loss Stock Total
----- ----- ------- -------- ------------- ------------- -----
(in thousands)
Balance at January 1,
2000...................... $ 206 $ 21 $ 213,620 $ 57,105 $ -- $ -- $ 270,952
Net income and
comprehensive income...... -- -- -- 10,773 -- -- 10,773
Exercise of stock options.... -- -- 66 -- -- -- 66
Repurchase of common
stock..................... (9) -- (4,590) -- -- -- (4,599)
----- ----- --------- -------- --------- ------- ---------
Balance at December 30,
2000...................... 197 21 209,096 67,878 -- -- 277,192
Comprehensive loss:
Net loss.................. -- -- -- (20,869) -- -- (20,869)
Minimum pension liability
adjustment (net of
taxes of $3,861)..... -- -- -- -- (6,121) -- (6,121)
---------
Comprehensive loss........ (26,990)
---------
Restricted stock awards...... 2 -- 682 -- -- (684) --
Amortization of unearned
compensation............ -- -- -- -- -- 136 136
----- ----- --------- -------- --------- ------- ---------
Balance at December 29,
2001...................... 199 21 209,778 47,009 (6,121) (548) 250,338
Comprehensive loss:
Net loss................ -- -- -- (13,321) -- -- (13,321)
Minimum pension liability
adjustment (net of
taxes of $5,088).. -- -- -- -- (8,112) -- (8,112)
Unrealized loss on
securities (net of
taxes of $97)...... -- -- -- -- ( 154) -- (154)
---------
Comprehensive loss....... (21,587)
---------
Restricted stock awards...... 5 -- 174 -- -- (179) --
Amortization of unearned
compensation.............. -- -- -- -- -- 286 286
----- ----- --------- -------- --------- ------- ---------
Balance at December 28,
2002...................... $ 204 $ 21 $ 209,952 $ 33,688 $ (14,387) $ (441) $ 229,037
===== ===== ========= ======== ========= ======= =========
See accompanying notes.
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 28, 2002, December 29, 2001 and December 30, 2000
2002 2001 2000
--------- ----------- ----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $(13,321) $(20,869) $10,773
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Noncash interest expense................................................. 2,752 1,297 808
Depreciation and amortization of property, plant and equipment........... 37,860 39,451 37,210
Amortization of goodwill................................................. -- 3,617 3,137
Amortization of restricted stock compensation............................ 286 136 --
Deferred income taxes.................................................... 15,496 (17,973) 7,752
Disposal of assets....................................................... 120 108 (206)
Equity in loss of joint venture ......................................... -- 244 226
Other operating costs, net............................................... (550) 4,282 --
Cumulative effect of accounting change, net of tax....................... 20,701 -- --
Changes in operating assets and liabilities, excluding effects of business
acquired:
Accounts receivable................................................. 3,737 9,819 (11,351)
Inventories......................................................... 4,921 50,021 (31,927)
Prepaid expenses and other assets................................... 2,616 924 (2,712)
Accounts payable and accrued expenses............................... 3,906 (3,060) (8,974)
Other liabilities................................................... 960 739 (255)
------- ------- -------
Net cash provided by operating activities...................... 79,484 68,736 4,481
------- ------- -------
Cash flows from investing activities:
Capital expenditures..................................................... (12,384) (18,246) (33,743)
Proceeds from sale of assets............................................. 930 93 481
Acquisitions............................................................. -- (3,809) (15,424)
Investment in joint ventures............................................. -- -- (3,762)
------- ------- -------
Net cash used by investing activities.......................... (11,454) (21,962) (52,448)
------- ------- -------
Cash flows from financing activities:
Payments of long-term debt............................................... (29,375) (35,872) (22,424)
Net proceeds from issuance of long-term debt............................. -- -- 16,410
Borrowings against cash surrender value of life insurance................ -- 5,427 --
Finance costs............................................................ (139) (3,688) (365)
Net borrowings (payments)--working capital facility....................... (44,000) (8,000) 60,500
Proceeds from exercise of stock options.................................. -- -- 36
Repurchase of common stock............................................... -- -- (4,599)
------- ------- -------
Net cash provided (used) by financing activities............... (73,514) (42,133) 49,558
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......................... (5,484) 4,641 1,591
Cash and cash equivalents at beginning of year................................ 8,316 3,675 2,084
------- ------- -------
Cash and cash equivalents at end of year...................................... $2,832 $8,316 $3,675
====== ====== ======
See accompanying notes.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 2002, December 29, 2001 and December 30, 2000
NOTE 1. Significant Accounting Policies and Other Matters
Basis of presentation
The consolidated financial statements include the accounts of Dan River
Inc. and its wholly owned subsidiaries (collectively, the "Company"). All
significant intercompany items have been eliminated in consolidation.
Fiscal year
The Company's fiscal year ends on the Saturday nearest to December 31. All
references to fiscal 2002, 2001 and 2000 mean the 52 weeks ended December 28,
2002, December 29, 2001 and December 30, 2000, respectively. The financial
statements of subsidiaries located in Mexico are consolidated based on a fiscal
year ending November 30 to facilitate timely reporting of the Company's
financial results.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Inventories
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method. Inventories at December 28, 2002 and
December 29, 2001, respectively, by component are as follows:
2002 2001
---- ----
(in thousands)
Finished goods................................. $ 52,088 $ 56,194
Work in process................................ 85,827 85,936
Raw materials.................................. 3,348 2,987
Supplies....................................... 10,323 11,391
---------- ----------
Total inventories.............................. $ 151,586 $ 156,508
========== ==========
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 ten to 35 years for buildings and improvements, and three 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. The Company reviews long-lived assets for impairment when events or
changes in business conditions indicate that their full carrying value may not
be recoverable.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
As discussed in Note 2, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," as of the beginning of fiscal 2002. Under SFAS No. 142
goodwill is no longer amortized but is subject to impairment testing. Prior to
fiscal 2002 goodwill was amortized on the straight-line method based on lives
ranging from five to 40 years.
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, at which time sales are final. Appropriate provisions are made for
uncollectible accounts, product returns, and for various customer programs and
incentive offerings, including special pricing agreements and volume-based
incentives.
Stock-based compensation
The Company's stock-based compensation plans, which are further discussed
in Note 7, are accounted for based on the intrinsic value method set forth in
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation for restricted stock awards is recognized ratably
over the vesting period, based on the fair value of the stock on the date of
grant. No compensation expense has been recognized relative to stock option
awards, as all options granted under the Company's stock option plans have an
exercise price equal to the market value of the underlying stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock options granted:
2002 2001 2000
---------- --------- ----------
(in thousands, except
per share data)
Net income (loss):
As reported................................................ $ (13,321) $ (20,869) $ 10,773
Less: pro forma expense related to stock options.......... (743) (1,298) (1,142)
---------- --------- ----------
Pro forma.................................................. $ (14,064) $ (22,167) $ 9,631
========== ========= ==========
Per share:
As reported--
Basic................................................. $ (0.61) $ (0.96) $ 0.49
Diluted............................................... (0.60) (0.96) 0.49
Pro forma--
Basic................................................. (0.64) (1.02) 0.44
Diluted............................................... (0.63) (1.02) 0.44
The pro forma results reflect amortization of the fair value of stock
options over the vesting period. The weighted average fair value of options
granted in fiscal 2002, 2001 and 2000, was estimated to be $0.33, $1.86 and
$2.81, respectively. The fair value of each option grant was estimated on the
date of grant using a Black-Scholes option pricing model, assuming no expected
dividends.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following weighted average assumptions were used in the valuation of
options:
2002 2001 2000
------ ------ ------
Expected option life in years................ 6.0 6.0 6.0
Risk-free interest rate...................... 4.83% 5.27% 6.51%
Expected stock price volatility.............. 90.00% 60.00% 50.00%
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.
Recent accounting pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 provides a
uniform accounting model for long-lived assets to be disposed of and changes the
criteria for classifying assets as held-for-sale. The Company's adoption of this
standard in the first quarter of fiscal 2002 did not have a significant impact.
In April 2002, the FASB issued SFAS No. 145, "Rescission of Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 will generally require gains and losses on extinguishment of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items. The Company is required to adopt SFAS No. 145 in fiscal
2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard requires that costs
associated with exit or disposal activities be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.
146 will apply to exit or disposal activities initiated by the Company after
fiscal 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. As amended by SFAS
No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based
compensation in annual and condensed interim financial statements. The new
disclosure requirements are effective immediately and are reflected in Notes 1
and 7.
NOTE 2. Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
Effective as of the beginning of fiscal 2002, the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets." Under this standard, goodwill is no
longer amortized, but instead is subject to an impairment test at least
annually. The Company has selected the first day of the fourth fiscal quarter as
its annual testing date. In the year of adoption, SFAS No. 142 also requires the
Company to perform a transitional test to determine whether goodwill was
impaired as of the beginning of the fiscal year.
Under SFAS No. 142, the initial step in testing for goodwill impairment is
to compare the fair value of each reporting unit, as determined in accordance
with the new standard, to its book value. To the extent the fair value of any
reporting unit is less than its book value, which would indicate that potential
impairment of goodwill exists, a second test is required to determine the amount
of impairment. Any impairment charge resulting from the transitional test is
recorded as a cumulative effect of a change in accounting principle, retroactive
to the first day of the year of adoption.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of goodwill impairment testing, SFAS No. 142 requires that
goodwill be assigned to one or more reporting units. The Company has assigned
goodwill to the following reporting units:
bedding products;
import specialty business;
apparel fabrics; and
engineered products.
The bedding products and import specialty business units are components of
the home fashions reporting segment, for which separate financial information is
reported pursuant to SFAS No. 131. The apparel fabrics and engineered products
business units correspond directly to reporting segments under SFAS No.131.
The Company, with the assistance of an outside consultant, completed the
transitional impairment review of goodwill during the third quarter of fiscal
2002, and recorded a non-cash charge of $20,701,000, representing goodwill
impairment of $23,433,000, less the deferred tax effect of $2,732,000. The
charge has been reported as a cumulative effect of a change in accounting
principle retroactive to the first day of fiscal 2002, and therefore increased
the previously reported net loss per share for the first quarter of fiscal 2002
from $0.24 to $1.19. The Company has also completed the annual impairment test
as of the first day of the fourth quarter of fiscal 2002, and has determined
that no additional impairment existed as of that date.
The following table summarizes the transitional goodwill impairment charge
by reporting segment as well as the changes in the carrying amount of goodwill
for the year ended December 28, 2002:
Goodwill at Goodwill at
Reporting Segment December 29, Impairment December 28,
2001 Charge 2002
--------- --------- -------
(in thousands)
Home Fashions:
Bedding products......................... $ 91,701 $ -- $91,701
Import specialty business................ 7,087 (7,087) --
--------- --------- -------
98,788 (7,087) 91,701
Apparel fabrics............................. 1,418 (1,418) --
Engineered products......................... 14,928 (14,928) --
--------- --------- -------
$ 115,134 $ (23,433) $91,701
========= ========= =======
In determining the fair value of each reporting unit for the transitional
impairment test, a combined discounted cash flow and market approach was used.
The resulting impairment is primarily attributable to differences between the
fair value approach required under SFAS No. 142 and the undiscounted cash flow
approach that was used to evaluate goodwill under previous accounting guidance.
In accordance with SFAS No. 142, prior period amounts have not been
restated. The following table summarizes the reported results for fiscal 2001
and 2000, and the results that would have been reported had the non-amortization
provisions of SFAS No. 142 been in effect for those years:
2001 2000
---- ----
(in thousands, except
per share data)
Reported net income (loss).................................... $(20,869) $ 10,773
Amortization of goodwill (net of tax effect).................. 3,468 3,025
-------- --------
Adjusted net income (loss).................................... $(17,401) $ 13,798
======== ========
Reported earnings (loss) per share--basic and diluted......... $ (0.96) $ 0.49
Amortization of goodwill (net of tax effect).................. 0.16 0.14
-------- --------
Adjusted earnings (loss) per share--basic and diluted......... $ (0.80) $ 0.63
======== ========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3. Acquisitions
In January 2000, the Company entered into joint venture agreements with
Grupo Industrial Zaga, S.A. de C.V. ("Zaga") for the purpose of building and
operating plants in Mexico to manufacture apparel fabrics and garments. A new
garment manufacturing facility has been constructed at Jilotepec in the State of
Mexico and is presently manufacturing shirts for sale primarily to career
apparel manufacturers and to retailers. However, based on the generally weak
apparel fabrics market conditions, and higher than expected construction and
other costs, the joint venture partners decided not to proceed with construction
of the apparel fabrics manufacturing plant.
The Company held approximately a 50% interest in the apparel fabric and
garment joint ventures at the time they were formed. In February 2001, the
Company and Zaga negotiated an amicable termination of both joint ventures,
pursuant to which the Company purchased Zaga's interest in the garment joint
venture for $3,160,000 million in cash and the transfer of the Company's
interest in the apparel fabrics joint venture, whose primary asset was land
valued at approximately $1,500,000. The acquisition was accounted for as a
purchase, and the results of operations of the acquired business have been
included in the consolidated financial statements since March 2001. The purchase
price was allocated to the assets acquired, primarily plant and equipment, based
on their estimated fair value at the date of acquisition. The allocation
resulted in goodwill of $1,668,000 being recorded which, prior to the adoption
of SFAS No. 142 at the beginning of fiscal 2002, had been amortized on the
straight-line method over a five year life.
On April 3, 2000, the Company acquired substantially all of the assets of
Import Specialists, Inc. ("ISI") for $15,424,000 in cash, and the assumption of
certain operating liabilities. The assets acquired consisted principally of
receivables and inventory. The acquisition was funded with borrowings under our
working capital line of credit. ISI, an importer of home fashions products
complementary to the Company's customer base, including doormats, throws, and
rugs manufactured primarily in China and India, became a part of the Company's
home fashions business. The acquisition was accounted for as a purchase and the
results of operations of the acquired business have been included in the
consolidated financial statements since the date of acquisition. The allocation
of the purchase price of ISI to the assets acquired resulted in goodwill of
$7,764,000 being recorded which, prior to the adoption of SFAS No. 142 at the
beginning of fiscal 2002, had been amortized on the straight-line method over a
20 year life.
NOTE 4. Shareholders' Equity
Certain shareholders have the right to require the Company to register, at
its expense, their shares under the Securities Act of 1933.
All Class B common stock outstanding as of December 28, 2002 is held by
certain members of the Company's senior management (and certain of their family
members). With limited exceptions, owners of Class B common stock are entitled
to 4.39 votes per share on matters brought before the Company's shareholders,
whereas owners of Class A common stock are entitled to one vote per share.
In August 1999, the Board of Directors approved a share repurchase program
authorizing the Company to utilize up to $10,000,000 to repurchase shares of
Class A common stock. Shares repurchased pursuant to this program are retired
and constitute authorized but unissued shares. During fiscal 2000, the Company
repurchased 877,225 shares for $4,599,000 and in fiscal 1999 the Company
repurchased 753,919 shares for $5,000,000. No shares were repurchased in fiscal
2002 or 2001. Subject to the terms of our credit facility, no further repurchase
of Company stock is permitted.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated other comprehensive loss at December 28, 2002 and December 29,
2001 is comprised of the following:
2002 2001
---- ----
(in thousands)
Minimum pension liability adjustment.................. $ 23,182 $ 9,982
Deferred tax effect.............................. (8,949) (3,861)
-------- -------
14,233 6,121
Unrealized losses on securities....................... 248 --
Deferred tax effect.............................. (94) --
-------- -------
154 --
-------- -------
$ 14,387 $ 6,121
======== =======
NOTE 5. Long-Term Debt
Long-term debt at December 28, 2002 and December 29, 2001 consists of the
following:
2002 2001
---- ----
(in thousands)
Senior subordinated notes................................. $120,000 $120,000
Borrowing base facility................................... 63,000 107,000
Term loan................................................. 56,910 84,910
Capital leases............................................ 5,380 6,363
Other borrowings with various rates and maturities........ 6,733 7,126
-------- --------
252,023 325,399
Less current maturities................................... 241,231 26,375
-------- --------
Total long-term debt...................................... $ 10,792 $299,024
======== ========
The senior subordinated notes (the "Notes") consist of $120,000,000 in
non-amortizing ten-year notes issued pursuant to an indenture dated December 15,
1993, bearing interest at 10 1/8% payable semi-annually.
On October 14, 1998, in order to finance the Bibb acquisition, the Company
replaced its $90 million revolving credit facility with a new $275 million
credit facility. Under the original terms, this credit facility consisted of a
$125 million amortizing term loan, and a $150 million non-amortizing revolving
working capital credit line.
The credit facility was amended during fiscal 2000 to permit the Company's
planned joint ventures in Mexico and to add $12,910,000 of new debt to the term
loan. In February 2001, a subsequent amendment modified the interest coverage
and leverage covenants for the fourth quarter of fiscal 2000 and subsequent
fiscal quarters and increased the interest rate on all loans by 100 basis
points. The amendment also placed restrictions on the permitted investment in
non-guarantor subsidiaries, capital expenditures, repurchase of capital stock,
and payment of dividends. In addition to the existing security provided by our
inventories and accounts receivable, the Company has secured the credit facility
with substantially all of its real and personal property.
In December 2001, a further amendment to the credit agreement waived any
financial covenant defaults on or prior to the effective date of this amendment,
modified the covenant measures as of the third fiscal quarter of 2001 and
subsequent fiscal quarters, and replaced the working capital credit line of $150
million with a working capital borrowing base. The borrowing base is determined
weekly by evaluation of the eligible inventories and accounts receivable or a
maximum amount of $150 million as of June of 2002. Modifications to the
amortization schedule of the term loan were made to defer $15 million of the $20
million of payments scheduled for the first and second quarters of fiscal 2002
until September 2003, and to make the June and December scheduled payments due
on the 15th instead of at the end of those respective months. A new pricing tier
was added which increased the Company's interest margin by 100 basis points at
that time. The agreement was modified to require that interest payments be made
on at least a monthly basis for all outstanding loans. The Company is required
to meet a minimum cumulative EBITDA covenant (as defined) on a monthly basis and
an interest coverage ratio covenant (as defined) on a monthly basis. The
covenant on leverage was eliminated. The Company has remained in compliance with
the credit
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement, as amended. Any further modification or waiver to the agreement
concerning financial covenants will require a larger supporting vote of the
lenders, up from the previous 51% supporting vote. The amendment also prohibited
any payment of dividends or additional repurchases of capital stock and
implemented additional reporting of financial projections and results,
restrictions on capital expenditures, continued limitations on dispositions of
assets, a requirement to use excess liquidity to prepay the term loan under
certain conditions, and requires most cash management services to be moved to
the agent bank. Fees and expenses of $3,688,000 were paid in 2001 in connection
with the February and December 2001 amendments.
At December 28, 2002, the weighted average interest rate of the
$63,000,000 outstanding borrowings under the borrowing base facility was 4.04%.
The Company pays a commitment fee on the unused portion of the borrowing base.
The facility also provides for the issuance of letters of credit up to
$10,000,0000 of which $5,011,000 was outstanding at December 28, 2002. Under the
borrowing base, $55,544,000 was unused and available for borrowing at December
28, 2002.
The weighted average interest rate of the $56,910,000 outstanding
borrowings under the term loan facility at December 28, 2002 was 4.22%. The
entire balance is due during fiscal 2003 and appears in current maturities of
long-term debt as of December 28, 2002. The final payment is due September 30,
2003.
During fiscal 2002, the margin on borrowings under the credit agreement
was lowered by 175 basis points due to the improvement in leverage. In February
2003, the margin was reduced an additional 25 basis points.
The Notes contain certain restrictive covenants which, among other things,
impose limitations on debt incurrence and restrict certain payments, including
payment of dividends and the repurchase of capital stock.
Payments of outstanding indebtedness under the Company's credit facility
and the Notes are due at maturity on September 30, 2003, and December 15, 2003,
respectively. This indebtedness must be refinanced on or before the respective
maturity dates. Although the Company believes it will be successful in
refinancing these obligations prior to maturity, there can be no assurance that
conditions will permit the required refinancing, or that refinancing will be
available on terms that are considered to be in the best interests of the
shareholders. If the indebtedness is not refinanced, the Company will be in
default, and the holders of such indebtedness will be entitled to the remedies
provided in the respective debt instruments. Such an event would have a material
adverse effect on the Company's financial condition and results of operations.
Success in refinancing this indebtedness will be dependent upon a number of
factors, including, for example, the Company's operating performance, operating
performance of peers in the textile and apparel industries, perception of the
industry in the capital markets, general economic and political conditions, and
the general condition of the capital markets, including specifically the high
yield debt markets.
The Company entered into interest rate swap agreements in fiscal 1999 to
manage its exposure to interest rate changes. The swaps involved the exchange of
fixed and variable interest rate payments without exchanging the notional
principal amount. At January 1, 2000, the Company had outstanding interest rate
swap agreements maturing in the first quarter of 2000 against existing
outstanding debt of $65,000,000. No interest rate swaps have been implemented
since fiscal 1999.
The aggregate annual scheduled principal repayments of long-term debt for
fiscal 2003, 2004, 2005, 2006 and 2007 are $241,231,000, $2,243,000, $3,073,000,
$1,689,000 and $394,000, respectively. The principal repayments in fiscal 2003
include $63,000,000 under the borrowing base, $56,910,000 under the term loan,
and $120,000,000 under the Notes.
Cash payments of interest on debt were $24,656,000, $31,159,000, and
$30,912,000 in fiscal 2002, 2001 and 2000, respectively.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6. Income Taxes
The provision (benefit) for income taxes is comprised of the following:
2002 2001 2000
--------- ---------- --------
(in thousands)
Current:
Federal............................................................ $ (5,025) $ (114) $ 426
State.............................................................. 63 -- 50
------- --------- -------
(4,962) (114) 476
------- --------- -------
Deferred:
Federal............................................................ 14,704 (16,080) 6,787
State.............................................................. 792 (1,893) 965
------- --------- -------
15,496 (17,973) 7,752
------- --------- -------
Provision (benefit) for income taxes.................................... $10,534 $ (18,087) $ 8,228
======= ========= =======
A reconciliation of the differences between the provision (benefit) for
income taxes and income taxes computed using the statutory federal income tax
rate of 35% follows:
2002 2001 2000
-------- --------- -------
(in thousands)
Amount computed using the statutory rate................................ $6,270 $ (13,635) $6,650
Increase (decrease) in taxes resulting from:
State taxes........................................................ 556 (1,230) 660
Amortization of goodwill........................................... -- 1,131 996
Credits lost due to loss carryback................................. 2,800 -- --
Reversal of income tax liabilities................................. -- (4,987) --
Change in valuation allowance...................................... 715 510 --
Other, net......................................................... 193 124 (78)
-------- --------- -------
Provision (benefit) for income taxes.................................... $ 10,534 $ (18,087) $ 8,228
======== ========= =======
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 December 28, 2002 and
December 29, 2001 are as follows:
2002 2001
------ ------
(in thousands)
Deferred tax assets:
Net operating loss and credit carryforwards................................... $12,798 $26,923
Compensation and employee benefit plan liabilities........................... 18,326 13,121
Inventory valuation and reserves.............................................. 4,929 6,061
Accounts receivable allowances................................................ 4,213 4,674
Other nondeductible reserves and accruals..................................... 906 1,036
Goodwill...................................................................... 2,276 --
Other......................................................................... 2,371 1,853
Valuation allowance........................................................... (1,535) (820)
------ ------
Total deferred tax assets................................................ 44,284 52,848
------ ------
Deferred tax liabilities:
Book carrying value in excess of tax basis of property, plant and
equipment.................................................................. 43,722 44,197
Other......................................................................... 327 830
------ ------
Total deferred tax liabilities........................................... 44,049 45,027
------ ------
Net deferred tax asset................................................... $ 235 $7,821
======= ======
The federal income tax provision for fiscal 2002 includes a one-time
increase to income tax expense of $2,800,000 attributable to the Job Creation
and Worker Assistance Act of 2002. The Act changed the period for carrying back
taxable losses generated in fiscal 2001 from two to five years, which resulted
in our receiving a
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$5,500,000 refund of taxes in July 2002. However, the carryback also freed up
investment credits that had previously offset tax in the carryback years. A
$2,800,000 tax provision was recorded in the first quarter of fiscal 2002,
representing the amount of these freed up credits that could not be utilized to
offset tax before their expiration.
The income tax benefit for fiscal 2001 includes a $4,987,000 one-time
benefit for the reversal of income tax liabilities recorded in prior years. The
reversal resulted from a review of the Company's tax position after the Internal
Revenue Service completed its examination of our income tax returns through tax
year 1999. Also as a result of this review, the Company recorded a $2,100,000
decrease in certain deferred tax assets associated with the fiscal 1998
acquisition of The Bibb Company and a corresponding increase in goodwill. The
Internal Revenue Service examination was completed in the third quarter of
fiscal 2001 and resulted in the assessment of $900,000 in taxes and interest,
all of which was offset against overpaid taxes for tax year 2000.
At December 28, 2002 the Company had available minimum tax credit
carryforwards of $9,700,000 which may be used to offset future regular federal
tax. In addition the Company had the following carryforwards available to reduce
future federal income tax liabilities: charitable contributions - $3,200,000,
expiring in 2004; net operating losses - $1,800,000, expiring in 2017; and,
general business credits - $700,000, expiring beginning in 2003. Loss
carryforwards were also available in various states in which the Company is
currently subject to income taxes. The total net future tax benefit of the state
carryforwards, most of which expire beginning in 2017, was approximately
$900,000 at December 28, 2002. The Company believes that it is more likely than
not that substantially all of the federal and state carryforwards will be
utilized before they expire.
Foreign net operating loss carryforwards attributable to the Company's
operations in Mexico totaled $4,400,000 at December 28, 2002. Due to the
uncertainty surrounding the future profitability of the Mexican operations, a
$1,535,000 valuation allowance has been established to offset the entire
deferred tax asset associated with these carryforwards.
Income tax refunds received by the Company, net of payments made, were
$4,884,000, $108,000 and $429,000 during fiscal 2002, 2001 and 2000,
respectively.
NOTE 7. Benefit Plans
Retirement plans
The Company sponsors qualified noncontributory defined benefit pension
plans that cover the majority of its full-time employees. In fiscal 2001 the
Company adopted nonqualified supplemental retirement plans covering certain key
management employees. These plans are unfunded and provide participants with
retirement benefits in excess of qualified plan limitations. The following
tables set forth the changes in benefit obligations and plan assets of the
qualified and supplemental plans for fiscal 2002 and 2001, and the funded status
of the plans as of December 28, 2002 and December 29, 2001.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Qualified
Pension Plans Supplemental Plans
------------------ ------------------
2002 2001 2002 2001
------- ------- ------ ------
(in thousands)
Change in benefit obligations:
Benefit obligations at beginning of year............. $ 50,757 $ 38,418 $ 4,080 $ --
Service cost......................................... 3,190 2,747 270 230
Interest cost........................................ 3,897 3,510 300 278
Actuarial loss ...................................... 6,629 8,063 161 181
Plan amendments...................................... -- 97 -- --
Prior service costs--adoption of new plans........... -- -- -- 3,404
Benefits paid........................................ (2,648) (2,078) (16) (13)
------- ------- ------ ------
Benefit obligations at end of year................... 61,825 50,757 4,795 4,080
------- ------- ------ ------
Change in plan assets:
Fair value of plan assets at beginning of year....... 38,871 39,280 -- --
Actual return on plan assets......................... (4,423) (2,182) -- --
Company contributions................................ 3,799 3,851 16 13
Benefits paid........................................ (2,648) (2,078) (16) (13)
------- ------- ------ ------
Plan assets at end of year........................... 35,599 38,871 -- --
------- ------- ------ ------
Funded status............................................... (26,226) (11,886) (4,795) (4,080)
Unrecognized actuarial loss ................................ 25,916 12,141 341 181
Unrecognized prior service cost............................. 83 91 2,944 3,171
------- ------- ------ ------
Net amount recognized at end of year........................ $ (227) $ 346 $ (1,510) $ (728)
======== ======= ======== =======
Amounts recognized in the consolidated statement of
financial position consist of:
Prepaid pension cost................................. $ 286 $ 2,313 $ -- $ --
Accrued pension cost................................. (513) (1,967) (1,510) (728)
Additional minimum liability......................... (22,987) (10,033) (3,222) (3,210)
Intangible asset..................................... 83 91 2,944 3,170
Accumulated other comprehensive loss................. 22,904 9,942 278 40
------- ------- ------ -------
Net amount recognized at end of year................. $ (227) $ 346 $ (1,510) $ (728)
======= ====== ======== =======
At December 28, 2002 and December 29, 2001 the benefit obligation for each
of the qualified plans exceeded the fair value of plan assets. The aggregate
accumulated benefit obligation for these plans was $58,813,000 at December 28,
2002 and $48,558,000 at December 29, 2001. The accumulated benefit obligation
for the nonqualified supplemental plans was $4,732,000 at December 28, 2002 and
$3,938,000 at December 29, 2001.
Weighted average assumptions used in measuring benefit obligations as of
year-end are as follows:
2002 2001
---- ----
Discount rate........................................ 6.5% 7.3%
Expected return on plan assets....................... 9.0% 9.0%
Rate of compensation increase........................ 4.0% 4.0%
Net periodic benefit cost included the following components:
Qualified
Pension Plans Supplemental Plans
--------------------------- ------------------
2002 2001 2000 2002 2001
-------- -------- -------- -------- --------
(in thousands)
Service cost.......................................... $ 3,190 $ 2,747 $ 2,148 $ 270 $ 230
Interest cost......................................... 3,897 3,510 2,827 300 278
Expected return on assets............................. (3,513) (3,564) (3,569) -- --
Amortization of prior service cost.................... 7 -- -- 226 233
Actuarial loss (gain)................................. 791 61 (181) -- --
------- ------- -------- ----- -----
Net periodic benefit cost............................. $ 4,372 $ 2,754 $ 1,225 $ 796 $ 741
======= ======= ======== ===== =====
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also sponsors 401(k) plans for salary paid employees and
certain hourly paid employees. Company matching contributions amounted to
$1,163,000, $1,202,000 and $694,000, respectively, for fiscal 2002, 2001 and
2000. In addition, the Company maintains an unfunded nonqualified 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 benefit obligations of $2,871,000 and $2,458,000 at December 28, 2002
and December 29, 2001, 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-based compensation
The Company maintains stock incentive plans adopted in fiscal 1997 and
fiscal 2000 that allow for the grant of stock options, restricted stock, stock
appreciation rights and other stock-based awards to key employees and
non-employee directors. Through fiscal 2002 all option grants pursuant to these
plans were for nonqualified options to purchase Class A common stock at a price
equal to the fair market value of the stock on the date of grant. The options
generally vest ratably over periods ranging from two and one half to four years,
and expire at the end of ten years.
Until December 31, 2001, the Company also maintained a nonqualified stock
option plan pursuant to which options to purchase Class A common stock were
granted prior to fiscal 1997. All options to purchase unissued shares granted
under this plan had an exercise price of $6.85 per share, generally vested on
December 31, 1999, and expired on December 31, 2001.
In connection with the acquisition of The Bibb Company in 1998, outstanding
incentive stock options ("ISO's") held by Bibb employees were converted into
fully vested and exercisable options to purchase Class A common stock of the
Company. The ISO's expire in 2007.
The following is a summary of stock option activity for the three fiscal
years ended December 28, 2002:
Weighted--
Average
Number of Exercise
Shares Price
--------- ------
Outstanding at January 1, 2000................. 2,186,742 $ 9.00
Granted........................................ 525,600 5.02
Exercised...................................... (6,644) 5.46
Cancelled...................................... (64,261) 7.48
--------- ------
Outstanding at December 30, 2000............... 2,641,437 8.26
Granted........................................ 311,750 3.07
Exercised...................................... -- --
Cancelled...................................... (47,738) 6.67
--------- ------
Outstanding at December 29, 2001............... 2,905,449 7.73
Granted........................................ 307,250 0.44
Exercised...................................... -- --
Cancelled...................................... (629,906) 6.90
--------- ------
Outstanding at December 28, 2002............... 2,582,793 $ 7.08
========= ======
Options exercisable at December 30, 2000....... 919,843 $ 8.70
========= ======
Options exercisable at December 29, 2001....... 1,329,980 $ 9.30
========= ======
Options exercisable at December 28, 2002....... 1,454,882 $ 9.56
========= ======
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of stock options outstanding against unissued shares at December
28, 2002 follows:
Options outstanding Options exercisable
------------------- -------------------
Weighted Weighted Weighted
Average average Average
Range of Number Remaining exercise Number Exercise
Exercise prices Outstanding life (years) price Exercisable Price
- --------------- ----------- ------------ ----- ----------- -----
$0.42-- $3.07............................. 591,749 8.8 $ 1.75 102,246 $ 3.04
$5.00-- $5.46............................... 978,919 6.9 $ 5.17 450,386 $ 5.23
$6.25-- $9.81............................... 457,625 6.0 $ 8.24 347,750 $ 8.28
$15.00-- $20.13........................... 554,500 4.9 $ 15.09 554,500 $ 15.09
Pursuant to the 2000 plan, the Company awarded 449,500 and 225,250 shares
of restricted Class A common stock during fiscal 2002 and 2001, respectively,
with weighted average grant date fair values of $0.42 and $3.07 per share. No
restricted shares were granted in fiscal 2000. Restricted shares carry voting
and dividend rights, however transfer of the shares is restricted prior to
vesting, which generally occurs ratably over three years. The fair value of
restricted shares granted is being amortized to expense over the vesting period.
The Company recorded compensation expense related to restricted stock of
$286,000, $136,000 and $0, in fiscal 2002, 2001 and 2000, respectively. As of
December 28, 2002, 582,780 nonvested shares were outstanding.
As discussed in Note 1, the Company accounts for stock options based on the
intrinsic value method set forth in APB Opinion No. 25, and has not recognized
compensation expense relative to stock options grants. A table illustrating the
effect on net income and earnings per share of applying the fair value
recognition provisions of SFAS No. 123 to the Company's stock option grants is
contained in Note 1.
As of December 28, 2002, 275,318 shares of Class A common stock were
available for future grants under the fiscal 2000 stock incentive plan. No
further grants are permitted under the fiscal 1997 plans.
NOTE 8. Other Operating Costs, Net
Other operating costs, net for fiscal 2001 totaled $4,282,000, consisting
of a $4,722,000 pre-tax charge relating to a plant consolidation program, offset
by a $440,000 pre-tax gain from reversal of the unused portion of a reserve
established in 1995 for environmental and equipment removal costs associated
with an idle research facility.
The plant consolidation program, announced in December 2001, is intended to
reduce overhead, to improve the flow of product within the Company's home
fashions manufacturing operations and to bring apparel weaving capacity in line
with recent demand levels. In connection with the consolidation, a home fashions
cut and sew facility in Newnan, Georgia, and a portion of a home fashions
weaving facility in Greenville, South Carolina, were closed. In addition,
certain apparel fabrics looms located in Danville, Virginia were idled and other
apparel fabrics looms were transferred from Danville to Sevierville, Tennessee,
resulting in a net reduction in apparel fabric weaving capacity of approximately
20%. The vacant space in the Danville plant created by these moves is being
utilized by the installation of modern home fashions sheeting looms which, with
the capacity reductions noted above, resulted in a slight reduction in home
fashions weaving capacity. In connection with the consolidation, a pre-tax
charge of $4,722,000 was recorded in fiscal 2001, comprised of a $3,292,000
non-cash writedown of fixed assets, $1,324,000 for severance and benefits
associated with the termination of approximately 380 employees, and other exit
costs of $107,000.
Substantially all aspects of the consolidation were completed in fiscal
2002, including the payment of all but an estimated $114,000 in remaining
severance and benefits. Due primarily to better than anticipated proceeds from
the sale of the Newnan plant and lower than expected healthcare continuation
costs for employees severed in connection with the consolidation, a $550,000
pre-tax gain was recorded in fiscal 2002. Of this amount, $300,000 is a partial
reversal of the non-cash writedown of fixed assets and $250,000 represents a
change in the reserve for estimated exit costs.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of the reserve account activity during the three
fiscal years ended December 28, 2002 related to Other Operating Costs, Net:
2002 2001 2000
------- ------- -------
Balance at beginning of year.............. $ 1,431 $ 570 $ 570
Expenses accrued.......................... -- 1,431 --
Expenditures.............................. (1,067) (130) --
Change in estimate........................ (250) (440) --
------- ------- -----
Balance at end of year.................... $ 114 $ 1,431 $ 570
======== ======= =====
NOTE 9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
2002 2001 2000
---------- --------- ---------
(in thousands except per share data)
Numerator for basic and diluted earnings per share:
Income (loss) before cumulative effect of accounting change. $ 7,380 $ (20,869) $ 10,773
Cumulative effect of accounting change...................... (20,701) -- --
---------- --------- ---------
Net income (loss)........................................... $ (13,321) $ (20,869) $ 10,773
========== ========= =========
Denominator:
Denominator for basic earnings per share--weighted-average
Shares....................................................... 21,827 21,766 22,024
Effect of dilutive securities:
Employee stock options and restricted stock awards.............. 336 -- --
---------- --------- ---------
Denominator for diluted earnings per share--weighted average
shares adjusted for dilutive securities...................... 22,163 21,766 22,024
========== ========= =========
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of accounting change $ 0.34 $ (0.96) $ 0.49
Cumulative effect of accounting change................... (0.95) -- --
---------- --------- ---------
Net income (loss)........................................ $ (0.61) $ (0.96) $ 0.49
========== ========= =========
Diluted:
Income (loss) before cumulative effect of accounting change $ 0.33 $ (0.96) $ 0.49
Cumulative effect of accounting change................... (0.93) -- --
---------- --------- ---------
Net Income (loss)........................................ $ (0.60) $ (0.96) $ 0.49
========== ========= =========
The effect of potentially dilutive securities is computed using the
treasury stock method. Options to purchase 1,991,000 shares of the Company's
common stock that were outstanding at December 28, 2002 were not included in the
computation of diluted earnings per share for fiscal 2002 because their exercise
prices were greater than the average market price of the common stock during the
year. Because the Company reported a loss before the cumulative effect of an
accounting change in fiscal 2001, all outstanding restricted stock and stock
options were excluded from the computation of diluted loss per share for the
year, as their effect would have been antidilutive. For fiscal 2000, all
outstanding options had exercise prices that exceeded the average market price
of the Company's common stock, and were therefore excluded from the calculation
of diluted earnings per share.
NOTE 10. Leases
The Company leases certain manufacturing equipment, warehouses and office
facilities under operating leases that expire at various dates through 2014.
Rental expense for fiscal 2002, 2001 and 2000 amounted to approximately
$7,674,000, $8,261,000 and $7,806,000, respectively, net of rental income on
noncancelable leases and subleases of $0, $0 and $992,000, respectively.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also leases certain manufacturing equipment and a manufacturing
facility under arrangements treated as capital leases. The manufacturing
equipment leases expire at various dates through 2005, and the manufacturing
facility lease expires in 2018.
Assets under capital leases included in property, plant and equipment at
December 28, 2002 and December 29, 2001 are as follows:
2002 2001
------ ------
(in thousands)
Land.................................................... $ 609 $ 609
Buildings and improvements.............................. 2,281 2,281
Machinery and equipment................................. 10,749 10,749
------ -------
13,639 13,639
Less accumulated depreciation........................... 4,123 3,217
------ -------
Net assets under capital leases......................... $9,516 $10,422
====== =======
The future minimum lease payments due under leases that have initial or
remaining noncancelable lease terms in excess of one year at December 28, 2002,
are as follows:
Capital Operating
Leases Leases
------ ------
(in thousands)
2003................................................. $1,321 $5,606
2004................................................. 2,131 5,228
2005................................................. 2,645 4,213
2006................................................. 15 3,219
2007................................................. 15 2,607
Later................................................ 165 10,644
------ -------
Total minimum lease payments......................... 6,292 $31,517
=======
Less: amount representing interest................... 913
------
Present value of minimum lease payments.............. $5,379
======
NOTE 11. Contingencies
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.
NOTE 12. 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 December 28, 2002 or
December 29, 2001.
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
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
A customer who accounted for 19% of the Company's consolidated net sales in
fiscal 2002 (see Note 13) filed for bankruptcy protection under Chapter 11 of
the U.S. Bankruptcy Code in January 2002. The Company recorded bad debt expense
of $1,600,000 and $3,500,000 in fiscal 2002 and 2001, respectively, related to
this event.
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 $89,400,000 and $48,000,000 at December 28, 2002 and
December 29, 2001, 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 December 28, 2002 and
December 29, 2001.
NOTE 13. Segment Information
The Company operates in three major segments within the textile industry:
home fashions, apparel fabrics, and engineered products. Each segment has a
separate management team, and although certain aspects of the manufacturing
process are similar, each segment can be differentiated by the products it sells
and the nature of its customers. Home fashions products consist mostly of
packaged bedroom furnishings, which are sold to domestic retailers, and bedding
products for the hospitality and healthcare industries. Apparel fabrics products
include a broad range of woven cotton and cotton-blend fabrics, and are
distributed primarily to clothing manufacturers. The engineered products segment
produces specially-treated engineered yarns and fabrics for industrial uses,
including high-pressure hoses and conveyer belts, which are sold primarily to
automobile and tire manufacturers.
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of each segment based on operating
income excluding: amortization of goodwill; plant closure charges and other
one-time items reflected on the Consolidated Statements of Operations as "Other
Operating Costs, Net"; depreciation on the write-up of the Company's fixed
assets from when it was acquired in 1989; and certain other items, such as idle
facility costs. Assets attributable to the Company's operating segments consist
primarily of: accounts receivable; inventories; and property plant and
equipment, including an allocable share of shared facilities and corporate
headquarters assets. Assets not attributable to segments include: cash;
miscellaneous receivables; certain inventories of raw materials; prepaid
expenses and other current assets; deferred income taxes; book value
attributable to the write-up of the Company's fixed assets from when it was
acquired in 1989; goodwill; and other noncurrent assets.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized information by reportable segment is shown in the following
table:
2002 2001 2000
-------- -------- --------
(In thousands)
Net sales
Home fashions........................................................ $441,157 $469,862 $469,758
Apparel fabrics...................................................... 131,482 118,881 143,639
Engineered products.................................................. 40,310 42,329 50,070
-------- -------- --------
Consolidated net sales............................................... $612,949 $631,072 $663,467
======== ======== ========
Operating income (loss)
Home fashions........................................................ $43,634 $10,922 $43,344
Apparel fabrics...................................................... 2,158 (8,579) 10,930
Engineered products.................................................. (1,474) (830) 2,341
Corporate items not allocated to segments:
Amortization of goodwill........................................ -- (3,617) (3,137)
Other operating costs, net...................................... 550 (4,282) --
Depreciation.................................................... (589) (333) 154
Other........................................................... 64 (624) (1,700)
-------- -------- --------
Consolidated operating income (loss)............................ $44,343 $(7,343) $51,932
======== ======== ========
Depreciation and amortization of property, plant and equipment
Home fashions........................................................ $23,855 $24,982 $23,571
Apparel fabrics...................................................... 11,890 12,645 12,594
Engineered products.................................................. 1,526 1,491 1,199
Corporate depreciation not allocated to segments..................... 589 333 (154)
-------- -------- --------
Consolidated depreciation and amortization of property, plant and
equipment......................................................... $37,860 $39,451 $37,210
======== ======== ========
Capital expenditures
Home fashions........................................................ $ 7,477 $10,789 $27,837
Apparel fabrics...................................................... 4,009 3,821 4,584
Engineered products.................................................. 898 3,636 1,322
-------- -------- --------
Consolidated capital expenditures in cash............................ $12,384 $18,246 $33,743
======== ======== ========
Assets at end of year
Home fashions........................................................ $335,012 $362,094 $425,704
Apparel fabrics...................................................... 103,843 108,793 123,605
Engineered products.................................................. 22,459 23,191 21,957
Corporate assets not allocated to segments:.......................... 134,208 172,291 174,207
-------- -------- --------
Consolidated assets.................................................. $595,522 $666,369 $745,473
======== ======== ========
In fiscal years 2002, 2001 and 2000, sales to one home fashions customer
accounted for 19%, 18% and 12%, respectively, of consolidated net sales. In
fiscal years 2002, 2001 and 2000, sales to another customer, principally by the
home fashions segment, accounted for 14%, 13% and 12%, respectively, of
consolidated net sales. Sales to customers outside of the United States amounted
to less than 5% of consolidated net sales in fiscal 2002, 2001 and 2000.
Approximately 2% of the Company's assets were located outside of the United
States at December 28, 2002.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14. Quarterly Financial Data (unaudited)
The Company's unaudited consolidated results of operations are presented
below (in thousands, except per share data):
Year ended December 28, 2002
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales............................................................ $158,418 $153,942 $147,411 $153,178
Gross profit ........................................................ 21,754 30,068 30,941 29,835
Income (loss) before cumulative effect of accounting change.......... (5,135) 3,658 4,699 4,158
Net income (loss) (25,836) 3,658 4,699 4,158
Per share:
Income (loss) before cumulative effect of accounting change--
Basic..................................................... (0.24) 0.17 0.22 0.19
Diluted................................................... (0.24) 0.16 0.21 0.19
Net income (loss)--
Basic..................................................... (1.19) 0.17 0.22 0.19
Diluted................................................... (1.19) 0.16 0.21 0.19
Year ended December 29, 2001
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales............................................................ $164,000 $161,858 $159,390 $145,824
Gross profit......................................................... 16,056 17,343 19,425 15,642
Net income (loss).................................................... (6,519) (6,139) 1,812 (10,023)
Per share:
Basic........................................................... (0.30) (0.28) 0.08 (0.46)
Diluted......................................................... (0.30) (0.28) 0.08 (0.46)
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 (loss) per
share.
Results for the first quarter of fiscal 2002 include a non-cash charge of
$20,701,000 ($0.95 per share), reported as the cumulative effect of an
accounting change, for goodwill impairment related to the Company's adoption of
SFAS No. 142 (Note 2). Results for the first quarter of 2002 also include a
one-time increase to income tax expense of $2,800,000 ($0.13 per share)
attributable to the Job Creation and Worker Assistance Act of 2002 (Note 6).
Results for the third quarter of fiscal 2001 include a one-time income tax
benefit of $4,987,000 ($0.23 per share) from the reversal of income tax
liabilities recorded in prior years (Note 6). Results for the fourth quarter of
fiscal 2001 include net pre-tax charges of $4,282,000 ($2,631,000 after tax, or
$0.12 per share) relating primarily to plant consolidations (Note 8).
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Our Directors
Our board of directors currently has six members. The directors are
divided into three classes with the directors in each class serving a term of
three years. Directors for each class are elected at the annual meeting of
shareholders held in the year in which the term for their class expires.
Additionally, directors newly elected by the Board must stand for re-election by
the shareholders at the next annual meeting following their election by the
Board. At the annual meeting on April 25, 2003, one nominee for director who was
elected by the Board is to be elected to serve until the annual meeting in 2005,
and two nominees for director are to be elected to serve until the annual
meeting in 2006, or, in each case, until their successors are elected and
qualified. Certain information concerning our directors is provided below.
The following table sets forth information concerning our directors:
Name Age Expiration of Term
---- --- ------------------
Edward J. Lill................... 70 2003
John F. Maypole.................. 63 2003
Rainer H. Mimberg................ 60 2003
Donald J. Keller................. 71 2004
Joseph L. Lanier, Jr............. 71 2004
Richard L. Williams.............. 69 2005
-------------
Edward J. Lill has been a director of our company since 1997. Mr. Lill
occasionally provides consulting services to Metropolitan Life Insurance Company
with respect to accounting and other related matters. Mr. Lill was a senior
partner and vice chairman of the accounting firm, Deloitte & Touche, from 1988
until his retirement in 1995.
John F. Maypole has been a director of our company since 1992. Mr. Maypole
has for the past 19 years served as a consultant to and/or director of various
corporations and providers of financial services, prior to which he served in
various financial and general management capacities with two publicly owned
companies. Mr. Maypole also serves as a director of Massachusetts Mutual Life
Insurance Company and Church and Dwight Co., Inc., a household consumer product
and specialty chemical company.
Rainer H. Mimberg was elected a director of our company by the board in
November 2002. Mr. Mimberg spent most of his career at Bestfoods, an
international food company, until his retirement in 2000. He was Vice President
- - Investor Relations of Bestfoods from 1998 until 2000 and Vice President -
Finance from 1997 until 1998. Prior to 1997 he served in a number of management
capacities, primarily involving Bestfoods' international operations.
Donald J. Keller has been a director of our company since 1998. Mr. Keller
was non-executive chairman of Vlasic Foods, International from 1998 until 2001.
From 1993 until 1998 he was chairman of B. Manischewitz Company, a food
manufacturer, and was co-chief executive officer of B. Manischewitz Company from
1992 until 1993. From 1995 until 1997 he was chairman of the board of Prestone
Products Corporation, an automotive chemicals manufacturer.
49
Joseph L. Lanier, Jr. has been chairman of the board of directors and chief
executive officer of our company or our predecessor since 1989. Mr. Lanier is
also a director of Flowers Industries, Inc., a food company, Torchmark
Corporation, an insurance company, and Dimon Incorporated, a tobacco products
company, which he serves as non-executive chairman.
Richard L. Williams has been a director and president and chief operating
officer of our company or our predecessor since 1989.
Information Concerning Our Executive Officers
The following table sets forth information concerning our executive
officers:
Name Age Position Held
---- --- -------------
Joseph L. Lanier, Jr..................................... 71 Chairman, Chief Executive Officer and Director
Richard L. Williams...................................... 69 President, Chief Operating Officer and Director
Barry F. Shea............................................ 54 Executive Vice President--Chief Financial Officer
Gregory R. Boozer........................................ 47 Executive Vice President--Manufacturing
Anthony J. Bender........................................ 45 Vice President--Information Systems
Joseph C. Bouknight...................................... 50 Vice President--Human Resources
Harry L. Goodrich........................................ 52 Vice President, Secretary and General Counsel
Denise Laussade.......................................... 44 Vice President--Finance
Mark K. Tapp............................................. 48 Vice President--Cotton Procurement
Gary D. Waldman.......................................... 46 Vice President--Controller
Joseph L. Lanier, Jr. has been chairman of the board of directors and chief
executive officer of our company or our predecessor since 1989. Mr. Lanier is
also a director of Flowers Industries, Inc. (a food company), Torchmark
Corporation (an insurance company) and Dimon Incorporated (a tobacco products
company).
Richard L. Williams has been a director and president and chief operating
officer of our company or our predecessor since 1989.
Barry F. Shea was vice president--finance, chief financial officer and
assistant secretary of our company or our predecessor from 1989 until 1996 and
was vice president--chief financial officer from 1996 until October 1998, when
he was elected executive vice president--chief financial officer.
Gregory R. Boozer was vice president--manufacturing services of our company
from 1989 until October 1998, when he was elected executive vice
president--manufacturing.
Anthony J. Bender has been vice president--information systems of our
company since 1995. Mr. Bender was director of systems development of Springs
Industries, Inc. (a manufacturer and distributor of textile products) from 1993
until 1995.
Joseph C. Bouknight has been vice president--human resources of our company
since January 1999. Mr. Bouknight was staff vice president--organization
effectiveness with Sonoco Products Company from 1994 until 1999. Prior to that
he served as director of international human resources of Sonoco from 1992 until
1994.
Harry L. Goodrich has been secretary and general counsel of our company or
our predecessor since 1989 and has been vice president since 1995.
Denise Laussade has been vice president--finance of our company since
October 1999 and was assistant treasurer of Darden Restaurants, Inc. from 1995
to 1999. From July to October 1999, Ms. Laussade served as director--marketing
analysis for a subsidiary of Darden Restaurants, Inc.
50
Mark K. Tapp has been vice president--cotton procurement of our company
since April 2002, and was Director of Cotton Procurement from August 2001 until
April 2002. He was Manager of Cotton Quality from 1993 until August 2001.
Gary D. Waldman has been controller of our company since 1996. He was
assistant controller from 1992 until 1996, and director of taxes from 1990 until
1992. He was elected vice president-controller in February 2001.
Other significant employees are:
o Robert E. Major, who has headed our engineered products operations
since 1987 and is 60 years old,
o James E. Martin, who has headed our apparel fabrics operations since
1990 and is 53 years old, and
o Thomas L. Muscalino, who has headed our home fashions operations since
1993 and is 52 years old.
Our executive officers are elected by the board of directors and generally
hold office until the next annual meeting of our shareholders or until their
successors are elected and qualified.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
Summary Compensation Table. The following table shows the compensation
earned during fiscal 2002, 2001 and 2000 by our chief executive officer and our
four other most highly compensated executive officers. These individuals are
called the named executive officers.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation(1) Awards(2)
------------------------------------------------ ------------------------
Other Securities All Other
Fiscal Annual Com- Restricted Underlying Compen-
Name and Principal Position Year Salary Bonus(3) pensation(4) Stock($)(5) Options(#) sation(6)
--------------------------- ------ ------ -------- ------------ ----------- ---------- ---------
Joseph L. Lanier, Jr.................. 2002 $ 566,906 $ 205,763 $ 11,338 $ 27,300 32,500 $ 1,316
Chairman and Chief Executive 2001 551,616 -- 13,120 99,775 32,500 35,998
Officer 2000 533,664 104,385 2,921 -- 65,000 1,700
Richard L. Williams................... 2002 443,991 161,435 8,880 18,900 22,500 (112)
President and Chief Operating 2001 432,640 -- 10,290 69,075 22,500 25,978
Officer 2000 418,560 81,870 2,291 -- 45,000 1,700
Barry F. Shea......................... 2002 266,395 96,861 5,328 7,350 8,750 283
Executive Vice President--Chief 2001 259,584 -- 6,174 26,863 8,750 16,732
Financial Officer 2000 251,136 49,122 1,375 -- 17,500 1,700
Gregory R. Boozer..................... 2002 221,989 80,715 4,828 6,300 7,500 1,438
Executive Vice President-- 2001 216,300 -- 5,319 23,025 7,500 16,868
Manufacturing 2000 209,277 40,935 1,146 -- 15,000 1,700
Harry L. Goodrich..................... 2002 198,368 72,127 3,968 4,200 5,000 1,868
Vice President, Secretary and 2001 193,939 -- 4,608 15,530 5,000 15,763
General Counsel 2000 186,480 36,475 1,019 -- 10,000 1,700
- --------------
51
(1) The aggregate amount of perquisites and other personal benefits, if
any, did not exceed the lesser of $50,000 or 10% of the total annual salary
and bonus reported for each named executive officer and has therefore been
omitted.
(2) No SARs have been granted.
(3) Bonuses are based on operating income targets approved by the board of
directors at the beginning of each fiscal year. Based upon operating income
targets established at the beginning of the 2002 fiscal year, each of the
named executive officers was paid a bonus equal to approximately 36% of his
base salary for the 2002 fiscal year.
(4) Represents the company match in respect of the named executive officer's
deferrals of salary pursuant to the Dan River Inc. 401(k) Plan, a defined
contribution plan available to all of our salaried employees, and of salary
and bonus pursuant to the Dan River Inc. Non-Qualified 401(k) and Deferred
Compensation Plan, (the "NQ 401(k)") a non-qualified defined contribution
plan available to senior managers of the Company. Also includes interest
paid to the named executive officer pursuant to the NQ 401(k), to the
extent such interest exceeded 120% of the applicable federal rate.
(5) Based upon the number of shares of restricted stock awarded multiplied by
the closing market price of Class A Common Stock on the date of grant.
Restricted stock issued during the 2001 fiscal year vests in one third
increments on March 1, 2002, 2003 and 2004 and becomes fully vested in the
event of a Change in Control as defined in the 2000 Long-Term Incentive
Plan. Restricted Stock issued during the 2002 fiscal year vests in one
third increments on March 1, 2003, 2004 and 2005 and becomes fully vested
in the event of a Change in Control. There were a total of 454,500 shares
of restricted stock awarded to a total of 57 key employees during fiscal
2002. The aggregate value of the restricted stock was $1,022,625 at
December 27, 2002, based on the closing price of our Class A Common Stock
of $2.25 per share on December 27, 2002. No dividends are payable on the
restricted stock.
(6) Represents amounts accrued during applicable fiscal years to each named
executive officer pursuant to the Dan River Inc. Salary Retirement Plan
and, for fiscal 2002 and fiscal 2001, the SERP and the restricted SERP (as
described hereafter).
Option Grants Table. The following table shows certain information relating to
the options granted to each of the named executive officers during fiscal 2002.
Option/SAR Grants In Last Fiscal Year
Individual Grants Option Term Potential Realizable
---------------------------------- ----------------------- Value at Assumed
% of Total Exercise Annual Rates of Stock
Number of Securities Options or Base Price Appreciation for
Underlying, Granted to Price Per Option Term
Options/SARs Employees Share Expiration ---------------------
Granted (#)(1)(2) in Fiscal Year ($/Sh) Date 5% 10%
----------------- -------------- -------- ---------- ------- --------
Name
Joseph L. Lanier, Jr............ 32,500 11% $ .42 1/29/12 $62,748 $159,016
Richard L. Williams............. 22,500 7% $ .42 1/29/12 43,441 110,088
Barry F. Shea................... 8,750 3% $ .42 1/29/12 16,894 42,812
Gregory R. Boozer............... 7,500 2% $ .42 1/29/12 14,480 36,696
Harry L. Goodrich............... 5,000 2% $ .42 1/29/12 9,654 24,464
- --------------
(1) We have not granted any SARs.
(2) All options granted are options to purchase Class A Common Stock. The
options vest and become exercisable in three equal increments on December
31, 2002, 2003 and 2004. However, the options vest and become exercisable
immediately in the event of a Change in Control as defined in the 2000
Long-Term Incentive Plan. The optionee or his estate will be entitled to
exercise such options, to the extent vested, within six months after the
date of the event resulting in termination of employment.
Aggregated Options Table. The following table shows certain information with
respect to options exercised during fiscal 2002 and options held at the end of
fiscal 2002 by each named executive officer. There were no stock appreciation
rights outstanding at the end of fiscal 2002.
52
Aggregated Option/SAR Exercises In Last Fiscal Year And
Fiscal Year End Option/SAR Values Table
Number of Securities Value of
Underlying Unexercised Unexercised
Shares Options at Fiscal In-the-money Options
Acquired Year-End (#) at Year-End($)(1)
on Value ---------------------- --------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ----------- -------------
Joseph L. Lanier, Jr.................... -- -- 289,583 70,417 0 $59,475
Richard L. Williams..................... -- -- 201,250 48,750 0 41,175
Barry F. Shea........................... -- -- 81,042 18,958 0 16,013
Gregory R. Boozer....................... -- -- 66,250 16,250 0 13,725
Harry L. Goodrich....................... -- -- 39,167 10,833 0 9,150
- --------------
(1) Represents the difference between the closing price on the New York
Stock Exchange of our Class A Common Stock on December 27, 2002 of $2.25
per share and the respective option exercise prices.
Retirement Plans. The table below shows the annual retirement benefits payable
to named executive officers as a life-only annuity starting at the greater of
age 65 or their current age, based on their remuneration and years of service
under our restricted supplemental executive retirement plan, which we refer to
as our restricted SERP, our supplemental executive retirement plan, which we
refer to as our SERP, and our salary retirement plan, which we refer to as our
retirement plan. The material terms of these three plans are discussed briefly
below the table.
Years of Service
-------------------------------------------------
Remuneration 5 10 15 20 or more
------------ - -- -- ----------
$200,000............... $20,000 $ 40,000 $ 60,000 $ 80,000
$350,000............... $35,000 $ 70,000 $105,000 $140,000
$500,000............... $50,000 $100,000 $150,000 $200,000
$650,000............... $65,000 $130,000 $195,000 $260,000
$800,000............... $80,000 $160,000 $240,000 $320,000
$950,000............... $95,000 $190,000 $285,000 $380,000
The restricted SERP is designed to provide each participant with an
aggregate, noncontributory retirement benefit from us (after taking into account
other deferred compensation benefits from us) at age 65 equal to 40% of such
participant's final average monthly compensation if such participant completes
at least 20 years of service with us. The compensation committee of our board of
directors designates who is eligible to participate in the restricted SERP. A
participant's final average monthly compensation for this purpose consists of
such participant's average monthly base salary, bonus and commissions payable
before any deductions whatsoever, the greater of either
o in the five calendar year period ending immediately before the
participant's retirement date, or
o in the five calendar year period which includes the participant's
retirement date.
A participant's years of service are the same as such participant's years
of vesting service under our retirement plan. If a participant fails to complete
at least 5 years of service, no benefit will be payable to the participant under
the restricted SERP. A participant who completes less than 20 years of service
will receive a fraction of such participant's 40% of final average monthly
compensation benefit. The numerator of this fraction will be such participant's
actual years of service and the denominator of this fraction will be 20. A
participant's restricted SERP benefit is reduced by:
o the retirement benefits payable to the participant under the
retirement plan and the SERP,
o the benefits payable under our 401(k) plan to the extent attributable
to matching contributions made by us,
o such participant's social security benefits, and
o any other benefit which the compensation committee of our board of
directors decides duplicates the benefit payable under the restricted
SERP.
A participant's restricted SERP benefit is further reduced to the extent
provided under the retirement plan in the event of retirement prior to age 65.
Finally, a participant's benefit under the restricted SERP cannot be assigned or
53
otherwise transferred to any other person by a participant, such benefit is
payable to a participant only from our general assets, and a participant is only
a general and unsecured creditor of ours with respect to the payment of such
benefit.
Messrs. Lanier, Williams, Shea, Boozer and Goodrich are participants in the
restricted SERP. For the five calendar year period which ended December 31,
2002, the average monthly compensation for purposes of the restricted SERP for
Messrs. Lanier, Williams, Shea, Boozer and Goodrich was $61,761, $49,276,
$29,403, $23,915 and $20,873, respectively. As of January 1, 2003 each of
Messrs. Lanier, Williams, Shea, Boozer and Goodrich had 13 years of service
under the restricted SERP. As of January 1, 2003 there were 22 other executives
designated as participants in the restricted SERP.
The retirement plan and the SERP work together. The retirement plan
provides a noncontributory benefit to participants based on both years of
service and a participant's career average monthly earnings, which we refer to
as average compensation. Average compensation consists of a participant's base
salary and commissions. No bonuses are taken into account in a participant's
average compensation. Messrs. Lanier, Williams, Shea, Boozer and Goodrich
participate in the retirement plan on the same basis as other salaried
employees, and any benefit which the retirement plan pays to these five named
executive officers reduces the benefit which we will pay to the five named
executive officers under the restricted SERP. Estimated annual benefits payable
under the retirement plan upon retirement at the greater of age 65 or current
age for Messrs. Lanier, Williams, Shea, Boozer and Goodrich based on a single
life annuity were $25,068, $24,996, $44,800, $54,036 and $43,136, respectively.
The SERP will provide a noncontributory benefit to each of our highly
compensated employees who is designated by the compensation committee of our
board of directors as eligible to participate in the SERP and who actually
accrues a benefit under our retirement plan on and after January 1, 2001. The
SERP is designed to work together with the retirement plan to make up for the
fact that the retirement plan does not give a participant credit for bonuses and
cannot give credit for base salary and commissions in excess of the IRS limits.
The SERP will provide a retroactive benefit for a participant for each year
after 1987 and before 2001 if such participant accrued a benefit under the
retirement plan in any such year and was a participant in the SERP on January 1,
2001. The SERP will provide a benefit for each year after 2000 if a participant
accrues a benefit under the retirement plan in any such year. A participant's
benefit under the SERP is paid at the same time and in the same form as provided
under the retirement plan except that a participant's benefit under the SERP is
payable only from our general assets and a participant is only a general and
unsecured creditor of ours with respect to the payment of such benefits. As of
January 1, 2003, there were 108 employees designated as eligible to participate
in the SERP, including Messrs. Lanier, Williams, Shea, Boozer and Goodrich.
Estimated annual benefits payable under the SERP upon retirement at the greater
of age 65 or current age for Messrs. Lanier, Williams, Shea, Boozer and Goodrich
based on a single life annuity were $53,147, $37,432, $36,072, $32,890 and
$21,944, respectively. Any benefit which we pay to the named executive officers
under the SERP reduces the benefit which we will pay to these five executives
under the restricted SERP.
Employment Agreements. We have employment agreements with the five named
executive officers, as well as certain other executive officers and key
employees. The named executive officers' agreements each became effective in
late 2002, and each has a rolling three year term, renewing for an additional
year on the first and each subsequent anniversary unless notice of non-renewal
is given by us or by the executive officer. In the event of a change in control
as defined in the agreement, the term automatically extends for three years from
the date of the change in control and then continues to renew annually as
described above. Each employment agreement provides for the executive officer to
be retained in certain specified capacities, and to devote his full business
time and attention to our business. The employment agreements provide that we
shall pay the executive officer a bonus under the Dan River Inc. Management
Incentive Plan, which we refer to as the bonus plan, and reimburse certain
business related expenses. The bonus plan provides for the payment of an annual
cash bonus to our executive officers and key employees based upon our
achievement of operating income and working capital management goals established
at the beginning of each fiscal year and approved by the board of directors.
Participation in the bonus plan, as well as award levels and performance
criteria, are recommended by the chief executive officer and approved by the
compensation committee of the board of directors. Each of the agreements also
contains restrictions on disclosure or use of confidential information and
solicitation of employees and customers after termination of employment.
Mr. Lanier's employment agreement provides that he will serve as the chief
executive officer and chairman of the board of directors at a base salary of
$575,000 per year, which may be increased at the discretion of the compensation
committee of the board of directors, subject to certain cost of living
adjustments.
54
The employment agreements with the other four named executives provide that
they shall receive a base salary equal to the rate being paid immediately prior
to the execution of the agreement, that they will be considered for salary
increases at least as often as salaried employees generally are considered for
increases, and their salary will not be reduced except in connection with a
reduction which applies generally to all salaried employees.
The employment agreements are terminable upon the death or disability of
the executive, by us for "good cause," as defined in the employment agreements,
by us without cause, by the executive for "good reason," as defined in the
employment agreements, by the executive without good reason or, in the case of
Mr. Shea's contract only, upon the occurrence of a change in control. Each
employment agreement provides that, in the event the executive's employment is
terminated for no cause, for good reason or, in Mr. Shea's case, a change in
control, such executive will be paid an amount equal to two times his annual
base salary and target bonus in effect at the time of termination, plus any
incentive bonus prorated to the date on which employment is terminated. The
executive would also be entitled to participate for a period of up to
twenty-four months after termination of his employment in various welfare,
pension and savings plans and programs offered by us. Additionally, Messrs.
Shea, Boozer and Goodrich would receive the equivalent of an additional two
years of vesting credit under the restricted SERP.
Compensation of Directors
Cash Compensation. Directors who are not employees of our company receive
an annual retainer of $25,000 and $1,500 per board and committee meeting
attended. Directors who are also employees of our company are not separately
compensated for their service as directors. Additionally, the chairmen of the
audit and compensation committees receive annual retainers of $5,000 and $4,000,
respectively.
Options and Restricted Stock. In fiscal 2002, the board of directors
granted to each of Messrs. Keller, Lill, Maypole and Mimberg 5,000 shares of
restricted Class A Common Stock and non-qualified options to purchase an
additional 2,500 shares of Class A Common Stock pursuant to the Dan River Inc.
2000 Long-Term Incentive Plan, which we refer to as the Long-Term Incentive
Plan. The restricted stock vests in three equal increments on March 1, 2003,
2004 and 2005 (or 100% upon a change in control). The options vest and become
exercisable in three equal increments on December 31, 2002, 2003 and 2004 (or
100% upon a change in control). The options granted Messrs. Keller, Lill and
Maypole have an exercise price of $.42 per share and expire on January 29, 2012.
Mr. Mimberg's options have an exercise price of $2.35 per share and expire on
November 1, 2012.
Compensation Committee Interlocks and Insider Participation
Messrs. Maypole, Keller and Lill served on the compensation committee of
the board during fiscal 2002. None of them are current or former officers or
employees of our company or any subsidiary or have any other direct or indirect
relationship with our company or any other entity that could reasonably be
expected to influence their actions as members of the compensation committee.
Compensation Committee Report on Executive Compensation
Our compensation package for all of our executive officers in fiscal 2002
consisted of:
o base salary,
o cash bonus,
o restricted stock, and
o stock options.
The compensation committee expects that compensation for executive officers in
fiscal 2003 will include these same elements.
Base Salary. Mr. Lanier's base salary is determined in accordance with his
employment agreement, with increases in excess of cost of living increases to be
55
recommended by the compensation committee and subject to the approval of the
full board of directors. In fiscal 2002 Mr. Lanier's salary was increased
approximately 4% from fiscal 2001.
Mr. Lanier's, as well as other executive officers' salaries, are
established in line with merit budget guidelines applicable to all salaried
employees and approved by the board of directors. The merit budget is
established annually by the board of directors and is generally intended to
adjust for inflation and competitive factors relating to pay levels in the
textile industry. Adjustments may be approved by the compensation committee to
take account of changes in the executive officer's responsibilities and his or
her overall performance.
Cash Bonuses. Each executive officer, including Mr. Lanier, is eligible to
receive an annual cash bonus pursuant to the terms of our management incentive
plan. The established objectives of the management incentive plan are:
o to maximize operating income while encouraging prudent management of
working capital, and
o to enhance our ability to attract and retain talented management.
Operating income targets are recommended at the beginning of each fiscal year by
the compensation committee and approved by the board of directors. The
compensation committee determines the target award level category to which each
executive officer is assigned. In establishing operating income targets and
other financial criteria for awards under the management incentive plan, the
compensation committee has focused specifically on our performance in comparison
to certain other textile companies. For example, achieving a target award under
the management incentive plan generally requires performance above the level of
such other textile companies at the time the bonus targets were established. Mr.
Lanier and the other named executive officers were each paid a cash bonus equal
to approximately 36% of base salary with respect to fiscal 2002.
Restricted Stock and Stock Options. Our restricted stock and long-term
stock option plans are intended to align the interests between our shareholders
and our directors, officers and key employees through the grant of restricted
stock and/or stock options which vest over a period of time. Options granted in
fiscal 2002 had an exercise price equal to the closing price of our Class A
Common Stock on the New York Stock Exchange on January 29, 2002 and, together
with the restricted stock that was granted in fiscal 2002, provide a strong
incentive to management to build shareholder value over time.
Long-Term Equity-Based Awards and Performance-Based Awards. Our
equity-based and performance-based awards are intended to attract and retain key
employees and directors by providing such persons with incentives and rewards
for superior performance and increased shareholder value. Stock options, stock
appreciation rights, restricted stock, deferred shares, performance awards and
other stock-based awards may be awarded based on certain performance criteria.
The awards and terms of the awards are determined by the compensation committee
in their sole discretion.
John F. Maypole, Chairman
Donald J. Keller
Edward J. Lill
The foregoing report shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, which we refer to together as the Acts, except to the
extent we specifically incorporate this information by reference.
Stock Price Performance Graph
The graph below reflects cumulative shareholder return (based on market
capitalization and assuming the reinvestment of dividends) on our Class A Common
Stock compared to the return on the S&P 500 Index and a peer group of textile
companies which, in our opinion, are engaged in lines of business similar to
those in which we are engaged. Trading in our Class A Common Stock commenced on
November 21, 1997 in connection with our initial public offering. The graph
reflects the investment of $100.00 on December 31, 1997 in our Class A Common
Stock, the S&P 500 Index and in the peer group and the reinvestment of
dividends.
56
[PERFORMANCE GRAPH]
Dan River Inc. S&P 500 Peer Group(1)
12/31/97............... 100.00 100.00 100.00
12/31/98............... 71.49 128.58 125.89
12/31/99............... 31.18 155.64 70.05
12/31/00............... 13.51 141.47 36.73
12/31/01............... 3.35 124.66 15.01
12/31/02............... 16.73 97.11 8.15
------------
(1) Peer group consists of Cone Mills Corporation, Delta Woodside
Industries Inc., and WestPoint Stevens Inc.
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Annual Report
on Form 10-K into any filing under the Acts, except to the extent we
specifically incorporate this information by reference.
57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Beneficial Ownership Table
The table below shows, as of January 24, 2003, how many shares of each
class of our Common Stock were beneficially owned by our directors, named
executive officers, owners of 5% or more of our Common Stock and our directors
and executive officers as a group. Under the rules of the SEC, a person
"beneficially owns" securities if that person has or shares the power to vote or
dispose of the securities. The person also "beneficially owns" securities which
that person has the right to purchase within 60 days. Under these rules, more
than one person may be deemed to beneficially own the same securities, and a
person may be deemed to beneficially own securities in which he or she has no
financial interest. Except as shown in the table, the shareholders named below
have the sole power to vote or dispose of the shares shown as beneficially owned
by them.
Beneficial Ownership of Beneficial Ownership of Percentage
Class A Common Stock(1) Class B Common Stock Of
----------------------------- -------------------------- Combined
Name Number of Percent of Number of Percent of Voting
Shares Class(2) Shares Class Power(2)
--------- ---------- --------- ---------- --------
Donald J. Keller....................... 58,333(11) * -- -- *
Joseph L. Lanier, Jr.(3)(4)............ 2,480,253(7)(8)(11) 10.2 2,062,070(8)(9) 100.0% 30.2
Edward J. Lill......................... 30,333(11) * -- -- *
John F. Maypole........................ 93,333(11) * -- -- *
Rainier H. Mimberg..................... 5,000(11) * -- -- *
Richard L. Williams(3)(5).............. 792,731(11) 3.3 465,981(9) 22.6 7.6
Barry F. Shea(3)(6).................... 292,204(11) 1.2 174,912(9) 8.5 2.8
Gregory R. Boozer(3) .................. 115,000(11) * -- -- *
Harry L. Goodrich(3) .................. 89,417(11) * -- -- *
Mezzanine Investment Limited
Partnership-BDR(10)................. 6,708,723 27.5 -- -- 21.4
Dimensional Fund Advisors,
Inc.(12)............................ 1,650,300 6.8 -- -- 5.3
T. Rowe Price Associates,
Inc.(13)............................ 1,509,400 6.2 -- -- 4.8
Trafelet & Co., LLC(14) .............. 1,395,500 5.7 -- -- 4.5
Delta Partners LLC(15) ................ 1,204,000 4.9 -- -- 3.8
All executive officers and directors
as a group (12 Persons)............. 3,449,304(7)(11) 14.1 2,062,070(8)(9) 100.0 33.3
- --------------
* Less than 1%.
(1) Under our articles of incorporation, shares of Class B Common Stock are
convertible into shares of Class A Common Stock on a share-for-share
basis at any time subject to compliance with certain first offer rights.
As a result, shares of Class A Common Stock shown in the table as
beneficially owned by any individual include shares of Class A Common
Stock issuable upon conversion of Class B Common Stock beneficially owned
by such individual.
(2) Based on an aggregate of 20,362,773 shares of Class A Common Stock issued
and outstanding as of January 24, 2003, including restricted stock, plus,
for each individual,
o the number of shares of Class A Common Stock issuable upon conversion
of shares of Class B Common Stock beneficially owned by such
individual; and
o the number of shares of Class A Common Stock issuable upon exercise of
outstanding stock options which are or will become exercisable prior
to April 25, 2003.
(3) The business address of Messrs. Lanier, Williams, Shea, Boozer and
Goodrich is 2291 Memorial Drive, Danville, Virginia 24541.
(4) Mr. Lanier disclaims beneficial ownership of 96,553 shares that are held
by his wife, Mrs. Ann M. Lanier.
58
(5) Mr. Williams disclaims beneficial ownership of 96,250 shares that are
held by his wife, Mrs. Suzanne S. Williams.
(6) Mr. Shea disclaims beneficial ownership of 60,000 shares that are held by
his wife, Mrs. Nellie C. Shea.
(7) Includes:
o 252,180 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mr. Joseph L.
Lanier, Jr.,
o 65,553 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mrs. Ann M.
Lanier,
o 551,722 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mr. Joseph
Lanier, III,
o 551,722 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mrs. Ann L.
Jackson,
o 96,250 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mrs. Suzanne S.
Williams,
o 369,731 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mr. Richard L.
Williams,
o 124,912 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mr. Barry F.
Shea, and
o 50,000 shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock beneficially owned by Mrs. Nellie C.
Shea.
We refer to the beneficial owners listed in the preceding bullets as the
Senior Management Group. With respect to the shares described above Mr.
Lanier has sole voting power pursuant to the terms of a Voting Agreement
dated November 20, 1997 between the Company and the members of the Senior
Management Group, as amended, which we refer to as the Voting Agreement.
(8) Includes shares of Class B Common Stock beneficially owned by the members
of the Senior Management Group with respect to which Mr. Joseph L.
Lanier, Jr. has sole voting power pursuant to the Voting Agreement. See
Footnote 7 above.
(9) Mr. Lanier has sole voting power with respect to these shares pursuant to
the terms of the Voting Agreement.
(10) Reflects shares of Class A Common Stock beneficially owned by Mezzanine
Investment Limited Partnership--BDR, which we refer to as MILP, whose
address is One Madison Avenue, New York, New York 10010. According to
Schedule 13D/A filed on behalf of MetLife Inc., which we refer to as
MLINC, Metropolitan Life Insurance Company, which we refer to as MetLife,
MILP and 23rd Street Investments, Inc., which we refer to as 23rd Street,
the general partner of MILP is 23rd Street, which is a wholly-owned
subsidiary of MetLife. MetLife is a wholly-owned subsidiary of MLINC, a
publicly traded company. MILP is a limited partnership in which MetLife
is a limited partner with a 99% partnership interest and 23rd Street is
the general partner with a 1% partnership interest.
(11) Includes options exercisable within 60 days and outstanding restricted
stock.
(12) Based solely on Schedule 13G/A filed with the SEC on February 12, 2003.
The address of Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(13) According to Schedule 13G/A filed with the SEC on January 28, 2003, these
securities are owned by various individual and institutional investors
which T. Rowe Price Associates, Inc., which we refer to as TRP, serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, TRP is deemed to be a beneficial owner
of such securities; however, TRP expressly disclaims that it is, in fact,
the beneficial owner of such securities. According to the 13G/A, TRP
possesses sole voting power over 396,200 shares of Class A Common Stock
and sole deposition power over 1,509,400 shares of Class A Common Stock.
The address of TRP is 100 E. Pratt Street, Baltimore, Maryland 21202.
59
(14) According to Schedule 13G/A filed with the SEC on February 4, 2003,
Trafelet & Company, LLC and Remy W. Trafelet, whose business address is
c/o 153 E. 53rd Street, 51st Floor, New York, New York 10022, share
voting and dispositive power with respect to these shares of Class A
Common Stock.
(15) According to Schedule 13G filed with the SEC on January 29, 2003, Delta
Partners LLC, Charles Jobson and Christopher Argyrople, whose business
address is One Financial Center, Suite 1600, Boston, Massachusetts 02111,
share voting and dispositive power with respect to these shares of Class
A Common Stock. Included among the reported shares are shares
beneficially owned by Prism Partners L.P. and Prism Offshore Fund
Limited.
Equity Compensation Plans
The following table shows certain information concerning Class A Common
Stock to be issued in connection with our equity compensation plans:
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity compensation
issued upon exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan Category (a) (b) (c)
--------------------------------- --------------------- -------------------- --------------------
Equity compensation plans approved by 2,582,793 $7.08 275,318
security holders
Equity compensation plans not approved by 0 0 0
security holders
Total 2,582,793 $7.08 275,318
For a discussion of our equity compensation plans, see "Note 7 Benefit Plans" in
the Notes to Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report on Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Registration Rights Agreement
General. We, certain members of senior management, which we refer to as the
Management Shareholders, MILP, and all other holders of our common stock prior
to the initial public offering of our common stock in November 1997, are parties
to a registration rights agreement, dated September 3, 1991, as amended. All
provisions of the registration rights agreement described below terminate on the
earlier of:
o September 3, 2006, or
o the date when shares of Class A Common Stock which are held by the
above-described holders other than Management Shareholders constitute
less than 10% of the outstanding Common Stock, subject to limited
exceptions.
The registration rights agreement is applicable only with respect to shares of
Common Stock held prior to the initial public offering. It contains, among
others, the following provisions:
Demand and Piggyback Registration Rights. The holders (not including the
Management Shareholders) of at least 20% of the Class A Common Stock held by
such holders immediately prior to the initial public offering may, on seven
occasions, demand that we prepare and file a registration statement under the
Securities Act of 1933, as amended. These demand registration rights are
applicable to such number of shares of Class A Common Stock held by such holders
60
prior to the initial public offering as are designated by the holders of a
majority of such shares of Class A Common Stock after consultation with the book
running lead underwriter of any such offering and the demanding holders. Once
every 12 months, we may delay the filing of any such registration statement for
up to 60 days if we would be required in the opinion of counsel to disclose
information in the registration statement that it would not otherwise be
required to publicly disclose and the board of directors determines that such
disclosure is not in our best interests. In addition, such holders of Class A
Common Stock are entitled to offer and sell their Class A Common Stock in any
underwritten public offering involving the offering of any securities by us or
by any of our subsidiaries, subject to certain limitations. We may also offer
and sell our Class A Common Stock in any underwritten public offering effected
at the request of such holders of Class A Common Stock, subject to certain
limitations.
ITEM 14. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report,
management, including our chief executive officer and chief financial officer,
evaluated the effectiveness of the design and operation of the company's
disclosure controls and procedures. Based upon, and as of the date of, that
evaluation, our chief executive officer and chief financial officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported as and when required.
There have been no significant changes in the company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date the company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and, therefore,
no corrective actions were taken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed under Item 8 of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets as of December 28, 2002 and December 29, 2001.
Consolidated Statements of Operations for the fiscal years ended December
28, 2002, December 29, 2001 and December 30, 2000.
Consolidated Statements of Shareholders' Equity for the fiscal years ended
December 28, 2002, December 29, 2001 and December 30, 2000.
Consolidated Statements of Cash Flows for the fiscal years ended December
28, 2002, December 29, 2001 and December 30, 2000.
Notes to Consolidated Financial Statements.
2. The following Financial Statement Schedule is filed as part of this
Report:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required.
61
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Annual Report.
(b) Reports on Form 8-K
None.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Joseph L. Lanier, Jr.
---------------------------------------------
Joseph L. Lanier, Jr.
Chairman and Chief Executive Officer
Date: February 20, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Donald J. Keller Director February 20, 2003
------------------------------------------
Donald J. Keller
/s/Joseph L. Lanier, Jr. Chairman, Chief Executive Officer February 20, 2003
------------------------------------------ and Director (Principal
Joseph L. Lanier, Jr. Executive Officer)
/s/ Edward J. Lill Director February 20, 2003
------------------------------------------
Edward J. Lill
/s/ John F. Maypole Director February 20, 2003
------------------------------------------
John F. Maypole
/s/ Rainer H. Mimberg Director February 20, 2003
------------------------------------------
Rainer H. Mimberg
/s/ Barry F. Shea Executive Vice President--Chief February 20, 2003
------------------------------------------ Financial Officer (Principal
Barry F. Shea Financial and Accounting
Officer)
/s/ Richard L. Williams President and Chief Operating February 20, 2003
------------------------------------------ Officer and Director
Richard L. Williams
63
SCHEDULE II
DAN RIVER INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 28, 2002, December 29, 2001 and December 30, 2000
Additions
----------------------
Balance at Charged to
Beginning Costs Balance at
Description of Year And Expenses Other Deductions(B) End of Year
- ---------------------------------------- ---------- ------------ ----- ------------- -----------
(in thousands)
Allowance for uncollectible accounts,
discounts and claims (deducted from
accounts receivable):
Year ended December 28, 2002............. $ 15,883 $16,150 $ -- $18,286 $ 13,747
========= ======= ====== ======= ========
Year ended December 29, 2001............. $ 14,011 $22,375 $ -- $20,503 $ 15,883
========= ======= ====== ======= ========
Year ended December 30, 2000............. $ 9,693 $21,651 $ 316(A) $17,649 $ 14,011
========= ======= ====== ======= ========
(A) Allowance related to receivables acquired through business combination.
(B) Includes writeoff of receivables (net of recoveries) and claims allowed.
64
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of June 28, 1998, as amended
August 14, 1998, by and between Dan River Inc. and The Bibb Company
(incorporated by reference to Annex A to the Joint Proxy
Statements/Prospectus forming a part of Registration Statement on Form
S-4, Amendment No. 1 (File No. 333-58855))
2.2 Second Amendment to Agreement and Plan of Merger, dated as of September
3, 1998, among Dan River Inc., DR Acquisition Corp. and The Bibb Company
(incorporated by reference to Annex S-A to the Supplement to Joint Proxy
Statement/Prospectus forming a part of Registration Statement on Form
S-4, Post-Effective Amendment No. 1 (File No. 333-58855))
3.1 Amended and Restated Articles of Incorporation of Dan River Inc.
(incorporated by reference to Exhibit 3.1 in Amendment No. 1 to Dan
River's 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 Dan River's Registration Statement on Form S-1 (File
No. 333-36479))
4.1 Form of Indenture between Dan River Inc. and Marine Midland Bank, N.A.,
as Trustee (including Form of Note) (incorporated by reference to
Exhibit 4.1 in Dan River's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000)
10.1 Credit Agreement among Dan River Inc. and certain of its subsidiaries,
the several lenders parties thereto and First Union National Bank as
Agent dated as of October 14, 1998 (incorporated by reference to Exhibit
10.1 in Dan River's Annual Report on Form 10-K for the fiscal year ended
January 2, 1999)
10.2 First Amendment to the Credit Agreement dated as of May 21, 1999 to the
Credit Agreement among Dan River Inc. and certain of its subsidiaries,
the several lenders parties thereto and First Union National Bank as
Agent dated as of October 14, 1998 (incorporated by reference to Exhibit
10 in Dan River's Quarterly Report on Form 10-Q filed August 6, 1999)
10.3 Second Amendment to the Credit Agreement dated as of December 29, 1999
to the Credit Agreement among Dan River Inc. and certain of its
subsidiaries, the several lenders parties thereto and First Union
National Bank as Agent dated as of October 14, 1998 (incorporated by
reference to Exhibit 10.3 in Dan River's Annual Report on Form 10-K for
the fiscal year ended January 1, 2000)
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------
10.4 Third Amendment to the Credit Agreement dated as of June 26, 2000 to the
Credit Agreement among Dan River Inc. and certain of its subsidiaries,
the several lenders parties thereto and First Union National Bank as
Agent dated as of October 14, 1998 (incorporated by reference to Exhibit
10 in Dan River's Quarterly Report on Form 10-Q for the quarterly period
ended July 1, 2000)
10.5 Fourth Amendment to the Credit Agreement dated as of February 14, 2001
to the Credit Agreement among Dan River Inc. and certain of its
subsidiaries, the several lenders parties thereto and First Union
National Bank as Agent dated as of October 14, 1998 (incorporated by
reference to Exhibit 10.5 in Dan River's Annual Report on Form 10-K for
the fiscal year ended December 30, 2000)
10.6 Fifth Amendment to the Credit Agreement dated as of December 10, 2001 to
the Credit Agreement among Dan River Inc. and certain of its
subsidiaries, the several lenders parties thereto and First Union
National Bank as Agent dated as of October 14, 1998 (incorporated by
reference to Exhibit 10 in Dan River Current Report on Form 8-K dated
December 10, 2001)
10.7 Registration Rights Agreement, dated as of September 3, 1991, among Dan
River Inc. and the parties named therein (incorporated by reference to
Exhibit 10.4 in Dan River's Registration Statement on Form S-1 (File No.
33-70442) filed on October 15, 1993)
10.8 Amendment to Registration Rights Agreement dated as of October 27, 1997,
(incorporated by reference to Exhibit 10.4.1 in Dan River's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998)
10.9 Voting Agreement among Joseph L. Lanier, Jr., Richard L. Williams and
Barry F. Shea and certain members of their families (incorporated by
reference to Exhibit 10.5 in Amendment No. 2 to Dan River's Registration
Statement on Form S-1 (File No. 333-36479))
10.10 Amendment to Voting Agreement among Joseph L. Lanier, Jr., Richard L.
Williams and Barry F. Shea and certain members of their families
(incorporated by reference to Exhibit 10.7 in Dan River's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000)
*10.11 Employment Agreement, dated as of November 26, 2002, between Dan River
Inc. and Joseph L. Lanier, Jr. +
*10.12 Employment Agreement, dated as of November 26, 2002, between Dan River
Inc. and Richard L. Williams +
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------
*10.13 Employment Agreement, dated as of November 26, 2002, between Dan River
Inc. and Barry F. Shea +
*10.14 Employment Agreement, dated as of December 2, 2002 between Dan River
Inc. and Gregory R. Boozer +
*10.15 Employment Agreement dated as of November 27, 2002 between Dan River
Inc. and Harry L. Goodrich +
10.16 Form of Dan River Inc. 1997 Stock Incentive Plan (incorporated by
reference to Exhibit No. 10.16 in Dan River's Registration Statement on
Form S-1 (File No. 333-36479)) +
*10.17 Amendment to Form of Dan River Inc. 1997 Stock Incentive Plan
(incorporated by reference to Exhibit No. 10.16 in Dan River's
Registration Statement on Form S-1 (File No. 333-36479)) +
10.18 Form of Dan River Inc. 1997 Stock Plan for Outside Directors
(incorporated by reference to Exhibit No. 10.19 in Dan River's
Registration Statement on Form S-1 (File No. 333-36479)) +
*10.19 Amendment to Form of Dan River Inc. 1997 Stock Plan for Outside
Directors (incorporated by reference to Exhibit No. 10.19 in Dan River's
Registration Statement on Form S-1 (File No. 333-36479)) +
10.20 Dan River Inc. Management Incentive Plan (incorporated by reference to
Exhibit 10.18 in Dan River's Annual Report on Form 10-K for the fiscal
year ended January 1, 2000) +
10.21 Dan River Inc. 2000 Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.19 in Dan River's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000) +
*10.22 Amendment to Dan River Inc. 2000 Long-Term Incentive Plan (incorporated
by reference to Exhibit 10.19 in Dan River's Annual Report on Form 10-K
for the fiscal year ended January 1, 2000) +
10.23 Dan River Inc. Non-qualified 401(k) and Deferred Compensation Plan for
Highly Compensated Employees and Directors (incorporated by reference to
Exhibit 10.20 in Dan River's Annual Report on Form 10-K for the fiscal
year ended December 30, 2000) +
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------
10.24 Dan River Inc. Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.21 in Dan River's Annual Report on Form 10-K for
the fiscal year ended December 30, 2000) +
10.25 Dan River Inc. Restricted Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.22 in Dan River's Annual Report
on Form 10-K for the fiscal year ended December 30, 2000) +
10.26 Members Agreement dated as of January 5, 2000 between Dan River
International Ltd. and Grupo Industrial Zaga, S.A. de C.V. (regarding
Danza Textil, S. de. R.L. de C.V.) (incorporated by reference to Exhibit
10.18 in Dan River's Annual Report on Form 10-K for the fiscal year
ended January 1, 2000)
10.27 Members Agreement dated as of January 5, 2000 between Dan River
International Ltd. and Grupo Industrial Zaga, S.A. de C.V. (regarding
Zadar S. de R.L. de C.V.) (incorporated by reference to Exhibit 10.19 in
Dan River's Annual Report on Form 10-K for the fiscal year ended January
1, 2000)
11 Statement regarding Computation of Earnings per share (incorporated by
reference to Note 9 to Dan River's Consolidated Financial Statements in
this Annual Report on Form 10-K for the fiscal year ended December 28,
2002)
21* List of Subsidiaries
23* Consent of Ernst & Young LLP
99.1* Cautionary Statements relating to Forward Looking Statements
99.2* Certificate of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
* Filed herewith
+ Management contracts and compensatory plans and arrangements required to
be filed as exhibits pursuant to Item 15(c) of this report.
CERTIFICATIONS
I, Joseph L. Lanier, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Dan River Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 20, 2003
/s/ Joseph L. Lanier, Jr.
------------------------------
Joseph L. Lanier, Jr., Chief Executive Officer
CERTIFICATIONS
I, Barry F. Shea, certify that:
1. I have reviewed this annual report on Form 10-K of Dan River Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this annual report
(the "Evaluation Date"); and
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 20, 2003
/s/ Barry F. Shea
------------------------------
Barry F. Shea, Chief Financial Officer