10-Q 1 q3q04.txt 1 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _________________________ Form 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 2004 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission file number 1-13421 DAN RIVER INC. (Exact name of registrant as specified in its charter) GEORGIA 58-1854637 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2291 Memorial Drive 24541 Danville, Virginia (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (434) 799-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /x/ As of October 2, 2004, the registrant had 21,068,060 and 1,431,011 shares of Class A Common Stock and Class B Common Stock outstanding, respectively. ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. See Following Pages. 3 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 3, 2004 2004 ------------ ------------ (in thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 3,223 $ 1,630 Accounts receivable, net 55,239 50,111 Inventories 129,475 148,248 Assets held for sale 6,964 9,796 Prepaid expenses and other current assets 8,045 8,417 Deferred income taxes 5,162 8,993 ------------ ----------- Total current assets 208,108 227,195 Property, plant and equipment 404,957 443,230 Less accumulated depreciation and amortization (251,999) (256,139) ------------ ----------- Net property, plant and equipment 152,958 187,091 Other assets 7,632 18,180 ------------ ----------- $ 368,698 $ 432,466 ============ ===========
4 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, January 3, 2004 2004 ------------ ------------ (in thousands, except share and per share data) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term debt currently due $ 100,358 $ 259,096 Accounts payable 11,177 15,804 Accrued compensation and related benefits 18,400 20,101 Other accrued expenses 11,000 11,381 ------------ ----------- Total current liabilities 140,935 306,382 Other liabilities: Long-term debt -- 5,593 Deferred income taxes 5,162 8,993 Other liabilities 22,383 32,013 ------------ ----------- Total liabilities not subject to compromise 168,480 352,981 Liabilities subject to compromise 193,290 -- 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 21,068,060 shares (20,418,504 shares at January 3, 2004) 211 204 Common stock, Class B, $.01 par value; authorized 35,000,000 shares; issued and outstanding 1,431,011 shares (2,062,070 shares at January 3, 2004) 14 21 Common stock, Class C, $.01 par value; authorized 5,000,000 shares; no shares outstanding -- -- Additional paid-in capital 210,147 210,090 Accumulated deficit (192,009) (119,340) Accumulated other comprehensive loss (11,226) (11,197) Unearned compensation--restricted stock (209) (293) ------------ ----------- Total shareholders' equity 6,928 79,485 ------------ ----------- $ 368,698 $ 432,466 ============ ===========
See accompanying notes. 5 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended ----------------------- -------------------- October 2, Sept. 27, October 2, Sept. 27, 2004 2003 2004 2003 --------- --------- -------- -------- (in thousands, except per share data) Net sales $ 105,202 $ 103,728 $ 336,270 $ 367,448 Cost of sales 102,331 94,936 324,589 316,250 --------- --------- --------- --------- Gross profit 2,871 8,792 11,681 51,198 Selling, general and administra- tive expenses 12,992 13,840 43,014 47,095 Impairment of goodwill -- 91,701 -- 91,701 Other operating costs, net 7,943 800 16,338 12,549 --------- --------- --------- --------- Operating loss (18,064) (97,549) (47,671) (100,147) Other income, net 804 1,144 493 949 Interest expense (contractual interest of $8,319 and $24,268 for the three and nine months ended October 2, 2004, respectively) (2,765) (7,130) (12,843) (20,757) --------- --------- --------- --------- Loss before reorganization items and income taxes (20,025) (103,535) (60,021) (119,955) Reorganization items (3,994) -- (12,648) -- --------- --------- --------- --------- Loss before income taxes (24,019) (103,535) (72,669) (119,955) Income tax provision -- -- -- 235 --------- --------- --------- --------- Net loss $ (24,019) $(103,535) $ (72,669) $(120,190) ========= ========= ========= ========= Loss per share: Basic and diluted $ (1.08) $ (4.70) $ (3.27) $ (5.47) ========= ========= ========= =========
See accompanying notes. 6 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended -------------------------- October 2, Sept. 27, 2004 2003 ------------ ----------- (in thousands) Cash flows from operating activities: Net loss $ (72,669) $ (120,190) Adjustments to reconcile net loss to net cash provided by operating activities: Noncash interest expense 2,530 2,041 Depreciation and amortization of property, plant and equipment 23,005 27,674 Amortization of restricted stock compensation 174 241 Deferred income taxes -- 235 Writedown/disposal of assets 85 102 Other operating costs, net 16,338 12,549 Write-off of unamortized debt costs 2,802 1,299 Goodwill impairment -- 91,701 Changes in operating assets and liabilities: Accounts receivable (5,128) 20,325 Inventories 18,464 (8,338) Prepaid expenses and other assets 822 (2,182) Accounts payable and accrued expenses 21,391 (7,596) Other liabilities (5) 456 ---------- ---------- Net cash provided by operating activities 7,809 18,317 ---------- ---------- Cash flows from investing activities: Capital expenditures (1,887) (9,856) Proceeds from sale of assets 3,490 48 ---------- ---------- Net cash provided (used)by investing activities 1,603 (9,808) ---------- ----------
See accompanying notes. 7 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended -------------------------- October 2, Sept. 27, 2004 2003 ------------ ----------- (in thousands) Cash flows from financing activities: DIP credit facility-borrowings 222,760 -- DIP credit facility-payments (153,282) -- Revolving credit facility-borrowings 112,770 92,000 Revolving credit facility-payments (182,070) (86,372) Payments of long-term debt (8,060) (259,186) Proceeds from issuance of long-term debt -- 254,568 Borrowings against cash surrender value of life insurance 2,263 -- Debt issuance costs-DIP credit facility (2,200) -- Debt issuance costs-revolving credit facility and term loan -- (10,207) Proceeds from exercise of stock options -- 3 ---------- ---------- Net cash used by financing activities (7,819) (9,194) ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,593 (685) Cash and cash equivalents at beginning of period 1,630 2,832 ---------- ---------- Cash and cash equivalents at end of period $ 3,223 $ 2,147 ========== ==========
See accompanying notes. 8 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Chapter 11 Filing On March 31, 2004 (the "Petition Date"), Dan River Inc. and its domestic subsidiaries (the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia. Since that date, the Debtors have been operating their businesses as debtors-in- possession pursuant to the Bankruptcy Code. In conjunction with the commencement of the Chapter 11 cases, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate to the extent possible in the normal course of business during the Chapter 11 process. The most significant of these orders: . permit the Debtors to operate their consolidated cash management system during the Chapter 11 cases in substantially the same manner as it was operated prior to the commencement of the Chapter 11 cases, . authorize payment of certain pre-petition employee salaries, wages, and benefits and reimbursement of pre-petition employee business expenses, . authorize payment of pre-petition sales, payroll, and use taxes owed by the Debtors, . authorize payment of certain pre-petition obligations to customers and certain customs brokers, common carriers and warehousemen, and . authorize payment of certain pre-petition obligations to critical vendors to aid the Debtors in maintaining operation of their business. On May 28, 2004, the Bankruptcy Court granted final approval for the Debtors to enter into a $145.0 million debtor-in-possession financing facility (the "DIP Facility") with Deutsche Bank Trust Company Americas as agent for a syndicate of financial institutions comprised of certain of the Company's pre-petition senior secured lenders. See Note 5 for a further discussion regarding the DIP Facility. Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Under Chapter 11, a debtor is authorized to continue to operate its business in the ordinary course and to reorganize its business for the benefit of its creditors. A debtor-in-possession under Chapter 11 may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court, after notice and an opportunity for a hearing. 9 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors. In addition, any actions to collect pre- petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy Court. While under bankruptcy protection, the Debtors have not paid and do not expect to pay the interest obligations on the 12 3/4% senior notes due 2009 unless ordered to do so by the Bankruptcy Court. As debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and "rejection" means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 process, unless such claims had been secured on a pre-petition basis. The Bankruptcy Court has approved the rejection of certain executory contracts and leases, and the Debtors are in the process of reviewing their remaining executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. Since the petition date, the Debtors have conducted business in the ordinary course to the extent permitted by the Bankruptcy Code. The Debtors filed a Plan of Reorganization with the Bankruptcy Court on July 28, 2004. The plan does not provide for any recovery for holders of Dan River Inc. equity securities, including its Class A and Class B Common Stock. The Debtors are actively engaged in discussions with a number of potential providers of exit financing. The Debtors expect to seek the requisite acceptance of the plan by impaired creditors and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. The accompanying condensed consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles assume, except as disclosed, that assets will be realized and liabilities will be discharged in the ordinary course of business. The Debtors are currently operating as debtors-in-possession 10 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS under Chapter 11 of the Bankruptcy Code, and their continuation as a going concern is contingent upon, among other things, their ability to gain approval of the plan of reorganization by the requisite parties under the Bankruptcy Code and have the plan confirmed by the Bankruptcy Court, comply with the DIP Facility, return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. There can be no assurance that the Debtors will be able to achieve any of these results. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. In addition, the amounts reported on the condensed consolidated balance sheet could materially change because of various factors, including changes in business strategies and the effects of any proposed plan or reorganization. In the Chapter 11 proceedings, substantially all unsecured liabilities as of the Petition Date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities, as well as all pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are not presently determinable. Under SOP 90-7, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings have been segregated and classified as liabilities subject to compromise on the condensed consolidated balance sheet. The principal categories of liabilities subject to compromise as of October 2, 2004 are as follows (in thousands): 12 3/4% senior notes due 2009, net of unamortized discount and deferred financing costs $ 145,198 Other borrowings and capital lease obligations 6,579 Accrued interest 9,643 Accounts payable and other accrued expenses 21,835 Nonqualified deferred compensation 10,035 --------- $ 193,290 =========
11 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 proceedings or that it is probable that it will be an allowed claim. During the first nine months of fiscal 2004, the Company recognized charges of $12,648,000 for reorganization items, including $8,423,000 for professional fees related to the Chapter 11 proceedings, $2,802,000 for the non-cash write-off of a portion of the deferred financing costs associated with the prepetition credit agreement (Note 5), and $1,423,000 related to employee retention incentives for services rendered through October 2, 2004. Assets of Dan River Inc.'s foreign subsidiaries, which are not included in the bankruptcy proceedings, totaled $6,646,000 as of October 2, 2004, or 1.8% of total assets included on the accompanying condensed consoli- dated balance sheet. Net sales of the foreign subsidiaries were $4,452,000, or 1.3% of consolidated net sales for the first nine months of fiscal 2004. 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Dan River Inc. and its wholly-owned subsidiaries, (collectively, the "Company"). In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of results for the interim periods presented have been included. Interim results are not necessarily indicative of results for a full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 3, 2004. 3. Stock-Based Compensation The Company's stock-based compensation plans are accounted for based on the intrinsic value method set forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensa- tion for restricted stock awards is recognized ratably over the vesting period, based on the fair value of the stock on the date of grant. No compensation expense has been recognized relative to stock option awards, as all options granted under the Company's stock option plans have an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock options granted: 12 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Nine Months Ended ----------------------- -------------------- October 2, Sept. 27, October 2, Sept. 27, 2004 2003 2004 2003 --------- --------- -------- --------- (in thousands, except per share data) Net loss: As reported $ (24,019) $(103,535) $(72,669) $(120,190) Pro forma expenses related to stock options (54) (159) (182) (432) --------- --------- --------- --------- Pro forma $ (24,073) $(103,694) $(72,851) $(120,622) ========= ========= ========= ========= Per share: As reported-- Basic and diluted $ (1.08) $ (4.70) $ (3.27) $ (5.47) Pro forma-- Basic and diluted (1.08) (4.71) (3.28) (5.49)
4. Inventories The components of inventory are as follows:
October 2, January 3, 2004 2004 ------------ ------------ (in thousands) Finished goods $ 42,686 $ 48,385 Work in process 77,855 86,932 Raw materials 2,625 5,131 Supplies 6,309 7,800 -------- -------- Total Inventories $129,475 $148,248 ======== ========
13 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Indebtedness Indebtedness is as follows (in thousands): Indebtedness not subject to compromise:
October 2, January 3, 2004 2004 ---------- ------------ Senior notes, net of unamortized discount $ -- $149,847 Borrowing base facility -- 69,300 Term loan 27,875 35,714 DIP facility 69,479 -- Other borrowings and capital lease obligations 3,004 9,828 -------- -------- 100,358 264,689 Less amount reported as long-term debt currently due 100,358 259,096 -------- -------- Total long-term debt $ -- $ 5,593 ======== ========
Indebtedness subject to compromise:
October 2, 2004 --------- Senior notes, net of unamortized discount and deferred finance costs $145,198 Other borrowings and capital lease obligations 6,579 -------- $151,777 ========
14 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS As discussed in Note 1 above, on May 28, 2004, the Bankruptcy Court approved the $145 million DIP Facility. On May 27, 2004, the Debtors entered into an amendment which, among other things, revised the Minimum Operating EBITDA which they were required to maintain during the term of the DIP Facility and revised the cash budget which they were required to meet. On July 20, 2004, the Debtors entered into a second amendment to the DIP Facility which, among other things, required that revolving loans under the DIP Facility could not exceed $73 million during the period from July 20, 2004 through July 31, 2004. On July 31, 2004, the Debtors entered into a third amendment to the DIP Facility which, among other things, provided that during the period from July 31, 2004 through August 21, 2004, revolving loans under the DIP Facility could not exceed $75 million. On August 18, 2004, the Debtors entered into a fourth amendment to the DIP Facility. The fourth amendment waived until November 6, 2004 a default of the financial covenant pertaining to minimum operating EBITDA for the fiscal month ended July 3, 2004, and established new monthly operating EBITDA covenants through the fiscal month ending October 2, 2004. The amendment also provided that commencing on the date of the amendment and ending on November 6, 2004, outstanding Revolving Loans could not exceed $75 million and the aggregate amount of Letter of Credit Obligations and Revolving Loans together could not exceed $82 million. In addition to certain business plans and other information and analyses that the Debtors were required to deliver to the Agent on or before September 15, 2004, the Debtors were required to provide a commitment letter for exit financing which was acceptable to the Agent and the Majority Lenders. As approved by the bankruptcy court, the amendment required that the commitment letter be delivered no later than October 15, 2004. Finally, the amendment increased interest rates by 100 basis points on all loans outstanding under the DIP Facility during the period from the date of the amendment until November 6, 2004. On or before October 15, 2004, the Debtors received financing commitment letters from potential lenders for the funding required to emerge from Chapter 11. On November 1, 2004, the bankruptcy entered an interim order permitting the Debtors to use cash collateral and approved on an interim basis an additional new $10 million senior, secured credit facility which was provided by certain of the Debtor's existing bondholders. The Debtors obtained the additional financing when they could not reach an agreement with the existing DIP lenders regarding certain non-financial covenants, and the Debtors determined that it was in the best interest of creditors to seek alternative financing. The new $10 million facility was senior to the existing DIP Facility. On November 19, 2004, the Debtors entered into a fifth amendment to the DIP Facility. Pursuant to the amendment, the Company's current and ongoing operations will continue to be funded pursuant to the existing DIP Facility. The parties agreed that the interim order entered by the bankruptcy court on November 1, 2004 would be vacated, and the outstanding indebtedness under the interim facility was repaid on the date of the amendment. Pursuant to the fifth amendment, certain 15 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS covenants under the DIP Facility, including those which required maintenance of minimum operating EBITDA and approval of a budget, were eliminated. Certain limitations applicable to the borrowing base were also eliminated, which is expected to provide the Company with approximately $10 million of additional liquidity. Also, certain deadlines for completion of various steps in the bankruptcy emergence process were extended. Finally, all defaults alleged under the financing documents were waived. The Debtors' access to financing necessary for their operations is again limited to borrowings under the DIP Facility. If in the future they were unable to maintain compliance with the covenants contained in the DIP Facility, as amended, there can be no assurance that they would be able to reach agreement with the lenders concerning further amendments or waivers. If the Debtors did not have access to the DIP Facility for working capital there can be no assurance that the Bankruptcy Court would again permit access to cash collateral, or that cash available would be sufficient to continue the Debtor's operations in the ordinary course of business. Additionally, inability to obtain exit financing could delay or prevent the Debtors successful reorganization and emergence from bankruptcy. The DIP financing order authorized the Debtors to grant first priority mortgages, security interests, liens, and superpriority claims on substantially all of the assets of the Debtors to secure the DIP Facility. Pursuant to the Bankruptcy Court's final order on May 28, 2004, the Debtors repaid $34.3 million on the term loan which was outstanding at the Petition Date with proceeds from a $34.3 million term loan included in the DIP Facility. The remaining prepetition revolving credit balance of $4.8 million was also repaid with proceeds of the DIP Facility. Amounts borrowed under the DIP Facility boar interest, at the option of the Debtors, at the rate of the London Interbank Offering Rate ("LIBOR") plus 4.50% (6.53% as of October 2, 2004), or the Alternate Base Rate plus 3.50% (8.25% as of October 2, 2004), for borrowings under the revolving credit, and at the rate LIBOR plus 4.75% (6.78% as of October 2, 2004), or the Alternate Base Rate plus 3.75% (8.50% as of October 2, 2004), for borrowings under the Term Loan. As provided in the fourth amendment to the DIP Facility, applicable rates were reduced by 100 basis points as of November 6, 2004. In addition, there is a fee of 0.50% on the unused commitment and a fee of 4.50% on letters of credit outstanding. The DIP Facility is secured by substantially all of the Debtors' assets. The DIP Facility imposes restrictions relating to, among other things, capital expenditures, asset sales, incurrence or guarantee of debt, acquisitions, sale of receivables, certain payments and investments, affiliate and subsidiary transactions, payment of dividends and repurchases of stock, derivatives, and excess cash. The DIP Facility also requires that proceeds from sales of certain assets be used to repay specified borrowings and permanently reduce the commitment amount under the facility. Availability under the revolving credit of 16 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS the DIP Facility is based upon a borrowing base determined by reference to eligible accounts receivable and inventory, as defined. At October 2, 2004, there was $69.5 million outstanding in borrowings under the revolving credit facility at an average interest rate of 6.40%, and $6.0 million in letters of credit. Also at October 2, 2004, a total of $27.9 million was outstanding under the term loan, at an average interest rate of 6.52%. In connection with the finalization of the DIP Facility, and in accordance with Emerging Issues Task Force Issue No. 98-14, "Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt Arrange- ments," the Company wrote off $2,802,000 of unamortized deferred financing costs related to the prepetition borrowing base facility. The write-off, which represented the portion of unamortized costs associated with the decrease in borrowing capacity resulting from the refinancing of the borrowing base facility into the DIP Facility, was included under "Reorganization items" on the Condensed Consolidated Statement of Operations. 6. Other Operating Costs, Net Other operating costs, net for the nine months ended October 2, 2004 totaled $16,338,000 and consisted of pre-tax charges of: $13,748,000 relating to plant closures and staff reductions, all of which result from actions taken by the Company to reduce manufacturing capacity and fixed costs in light of recent declines in sales volume; and, $2,590,000 resulting from an adjustment to the carrying value of assets held for sale. In the second quarter of fiscal 2004, the Company decided to close its garment manufacturing operations in Mexico, because of the continuing losses generated by these operations. In connection with the closure, a $3,903,000 pre-tax charge was recorded, consisting of a $3,385,000 non- cash writedown of fixed assets, and $518,000 for severance and benefits associated with the termination of approximately 350 employees. The shutdown of the operations and payment of severance and benefits is expected to be completed by the end of fiscal 2004. On June 22, 2004 the Company announced that, in order to reduce overhead, it would be terminating approximately 320 employees through staff reductions and shift eliminations. The estimated cost of severance and benefits associated with these terminations is $1,902,000, most of which is expected to be paid by the end of fiscal 2004. In the third quarter of fiscal 2004 the Company commenced the closure of its finishing and sheet sewing facility in Danville, VA and a warehouse in Portsmouth, VA. In connection with the closures, a $7,943,000 pre- tax charge was recorded, consisting of a $6,764,000 non-cash writedown of fixed assets and $1,179,000 for severance and benefits associated with the termination of approximately 420 employees. The shutdown of operations at the affected plants is expected to be completed in the fourth quarter of fiscal 2004 and substantially all of the severance and benefits will be paid by the end of the second quarter of fiscal 2005. 17 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The $2,590,000 adjustment to the carrying value of assets held for sale, which was recorded in the second quarter of fiscal 2004, represents a reduction in the Company's estimate of proceeds that will be realized from the future sale of the its plants in Greenville, South Carolina, Fort Valley, Georgia, and Juliette, Georgia, which were closed in fiscal 2003. The reduction in estimated proceeds was due to the deterioration in market conditions for textile facilities. Other operating costs, net for the first nine months of fiscal 2003 consisted of: a $440,000 gain from the sale of surplus equipment, recorded in the first quarter; a $12,189,000 pre-tax charge relating to the closure of two manufacturing facilities, recorded in the second quarter; and, $800,000 in severance and benefits expense relating to staff reductions, recorded in the third quarter. On June 11, 2003 the Company announced that it would be closing a home fashions weaving facility located in Greenville, South Carolina and a comforter sewing plant in Fort Valley, Georgia, in order to rationalize capacity in its home fashions business. In connection with the closings, a $12,189,000 pre-tax charge was recorded in the second quarter of fiscal 2003, consisting of a $10,238,000 non-cash writedown of fixed assets, and $1,951,000 of other exit costs, primarily severance and benefits associated with the termination of 630 employees. The shutdown of the plants was substantially completed in the third quarter of fiscal 2003, and substantially all severance and exit costs were paid prior to the end of the first quarter of fiscal 2004. On August 22, 2003 the Company announced that, in order to reduce overhead costs, it had eliminated approximately 80 salaried positions throughout the Company's operations. As a result, a pre-tax charge of $800,000 was recorded, representing the estimated severance and benefit costs associated with the staff reductions. Substantially all of these costs has been paid by the end of the first quarter of fiscal 2004. Following is a summary of the reserve account activity relating to exit costs for the first nine months of fiscal 2004 (in thousands): Balance at January 3, 2004 $2,283 Expenses accrued 3,599 Expenditures (2,339) ------ Balance at October 2, 2004 $3,543 ====== 18 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. Goodwill Impairment Due to the deterioration in the performance of its home fashions bedding business that occurred in fiscal 2003, which is considered an indication of possible impairment under accounting guidelines, the Company evaluated goodwill for impairment as of the third quarter of fiscal 2003, rather than waiting for the annual impairment review that is normally performed in the fourth quarter of the fiscal year. With the assistance of an outside consultant, the Company completed the impairment test, which, based on a comparison of the fair value of the home fashions bedding business unit to its book value, indicated that the goodwill was, in fact, fully impaired. For this purpose, the fair value of the business unit was determined primarily by a discounted cash flow approach. The Company recorded a $91,701,000 charge for impairment of goodwill, which represented the write-off of the entire remaining balance of goodwill, all of which related to the home fashions bedding unit. 8. Income Taxes No income tax benefits were recorded against the pre-tax losses for the three- and nine- month periods ended October 2, 2004 or September 27, 2003, as potential future tax benefits associated with the losses for these periods were fully offset by increases to the valuation allowance against deferred tax assets. Additions to the allowance were $7,100,000 and $25,600,000 for the three- and nine-month periods ended October 2, 2004, respectively, and $3,784,000 and $10,552,000 for the three- and nine-month periods ended September 27, 2003, respectively. As of the end of each fiscal period presented, the Company's net deferred tax assets were fully offset by the valuation allowance. The valuation allowance is necessary because, in light of the Company's recent history of operating losses and other available evidence, management does not believe that it is more likely than not that the tax benefits associated with the deferred tax assets, to the extent they exceed the deferred tax liabilities, will be realized. 9. Pension Plans The Company sponsors qualified noncontributory defined benefit pension plans that cover the majority of its full-time employees. In fiscal 2001 the Company adopted nonqualified supplemental retirement plans covering certain key management employees. These supplemental plans are unfunded and provide participants with retirement benefits in excess of qualified plan limitations. On July 21, 2004 the Company adopted amendments to freeze benefit accruals under its qualified defined benefit plans effective September 20, 2004. The Company has suspended benefit accruals under the supplemental plans pending the results of the bankruptcy proceedings. 19 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Net periodic benefit cost included the following components:
Three Months Ended Nine Months Ended -------------------- ------------------- October 2, Sept. 27, October 2, Sept. 27, 2004 2003 2004 2003 --------- --------- -------- -------- (in thousands) Qualified pension plans: Service cost $ 757 $ 637 $ 2,480 $ 2,566 Interest cost 1,113 954 3,292 3,012 Expected return on assets (972) (828) (2,854) (2,264) Prior service cost amortization 1 1 5 4 Actuarial loss 414 384 1,223 1,400 Curtailment loss 72 -- 72 -- --------- -------- --------- -------- Net periodic benefit cost $ 1,385 $ 1,148 $ 4,218 $ 4,718 ========= ========= ========= ======== Supplemental pension plans: Service cost $ -- $ (12) $ 52 $ 149 Interest cost -- 62 81 221 Prior service cost amortization -- 57 57 168 Actuarial gain -- (1) -- -- --------- -------- --------- -------- Net periodic benefit cost $ -- $ 106 $ 190 $ 538 ========= ========= ========= ========
20 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company contributed $5,580,000 to its pension plans in the first nine months of fiscal 2004 and estimates that it will contribute an additional $1,633,000 to the plans in the remainder of fiscal 2004. 10. Shareholders' Equity Activity in Shareholders' Equity is as follows:
Accumu- lated Unearned Addi- Other Compen- Total tional Accumu- Compre- sation- Share- Common Stock Paid-in lated hensive Restricted holders' Class A Class B Capital Deficit Loss Stock Equity ------- ------- -------- -------- ------- -------- -------- (in thousands) Balance at January 3, 2004 $ 204 $ 21 $ 210,090 $(119,340)$(11,197)$ (293) $ 79,485 Comprehensive loss: Net loss -- -- -- (72,669) -- -- (72,669) Unrealized loss on securities -- -- -- -- (29) -- (29) --------- Comprehensive loss (72,698) --------- Retirement of common stock -- -- (33) -- -- -- (33) Restricted stock awards -- -- 90 -- -- (90) -- Amortization of unearned compensation -- -- -- -- -- 174 174 Conversion of shares 7 (7) -- -- -- -- -- ------- ------ --------- --------- -------- ------- -------- Balance at Oct. 2, 2004$ 211 $ 14 $ 210,147 $(192,009) $(11,226)$ (209) $ 6,928 ======= ====== ========= ========= ======== ======== =========
21 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended ----------------------- ------------------ October 2, Sept. 27, October 2, Sept. 27, 2004 2003 2004 2003 --------- --------- --------- -------- (in thousands, except per share data) Numerator for basic and diluted loss per share-net loss $ (24,019) $(103,535) $(72,669) $(120,190) ========= ========= ======== ========= Denominator for basic and diluted loss per share-weighted average shares 22,228 22,016 22,196 21,985 ========= ========= ======== ======== Loss per share: Basic and diluted $ (1.08) $ (4.70) $ (3.27) $ (5.47) ========= ========= ======== ========
The effect of potentially dilutive securities is computed using the treasury stock method. Because the Company reported a loss in each of the periods presented, all outstanding restricted stock and stock options were excluded from the computations of diluted loss per share, as their inclusion would have been antidilutive. 22 DAN RIVER INC. (DEBTORS-IN-POSSESSION AS OF MARCH 31, 2004) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Segment Information Beginning in the third quarter of fiscal 2004, the Company's segment reporting has been changed to reflect changes in the Company's organizational and internal financial reporting structures. The Company's apparel fabrics business, which previously had been reported as a separate segment, has been combined with the former home fashions segment. Together, these businesses are now reported as the Dan River segment. The Company will continue to report the engineered products business as a separate segment. Summarized information by reportable segment is shown below. Prior period information has been restated to reflect the reporting change discussed above.
Three Months Ended Nine Months Ended ------------------------- ------------------- October 2, Sept. 27, October 2, Sept. 27, 2004 2003 2004 2003 ----------- ----------- --------- -------- (in thousands) Net sales: Dan River segment $ 96,790 $ 96,938 $ 310,321 $ 341,872 Engineered products segment 8,412 6,790 25,949 25,576 --------- ---------- --------- --------- Consolidated net sales $ 105,202 $ 103,728 $ 336,270 $ 367,448 ========= ========== ========= ========= Operating income (loss): Dan River segment $ (9,386) $ (3,384) $ (27,235) $ 7,778 Engineered products segment 108 (1,029) (437) (2,497) Corporate items not allocated to segments: Impairment of Goodwill -- (91,701) -- (91,701) Other operating costs, net (7,943) (800) (16,338) (12,549) Other (843) (635) (3,661) (1,178) --------- ---------- --------- --------- Consolidated operating loss $ (18,064) $ (97,549) $ (47,671) $(100,147) ========= ========== ========= =========
23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CHAPTER 11 FILINGS As more fully described in Note 1 to the condensed consolidated financial statements, on March 31, 2004, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia. The Debtors are currently operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code. The Debtors filed a plan of reorganization in the Bankruptcy Court on July 28, 2004. The plan does not provide for any recovery for holders of Dan River Inc. equity securities, including the Class A and Class B Common Stock. The Debtors are actively engaged in discussions with a number of potential providers of exit financing. The Debtors expect to seek the requisite acceptance of the plan by creditors and third parties and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code. As a result of the bankruptcy filing, our creditors were automatically stayed from taking certain enforcement actions under their respective agreements with us unless the stay is lifted by the Bankruptcy Court. In addition, the Debtors have entered into the DIP facility, which is more fully described below under "Liquidity and Capital Resources." During the Chapter 11 process, we may with Bankruptcy Court approval sell assets and settle liabilities, including for amounts other than those reflected in our financial statements. As permitted under the Bankruptcy Code, we have rejected certain executory contracts and leases that are not necessary for the business going forward, and are in the process of reviewing our remaining executory contracts and unexpired leases to determine which, if any, we will reject. We cannot presently estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The administrative and reorganization expenses resulting from the Chapter 11 process will unfavorably affect our results of operations. Future results of operations may also be affected by other factors related to the Chapter 11 process. Our condensed consolidated financial statements are presented in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles assume, except as disclosed, that assets will be realized and liabilities will be discharged in the ordinary course of business. The Debtors are currently operating as debtors-in-possession under Chapter 11 of the Bankruptcy Code, and their continuation as a going concern is contingent upon, among other things, their ability to gain approval of the plan of reorganization by the requisite parties under the Bankruptcy Code and have the plan confirmed by the Bankruptcy Court, comply with the DIP 24 facility, return to profitability, generate sufficient cash flows from operations and obtain financing sources to meet future obligations. There can be no assurance that the Debtors will be able to achieve any of these results. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets, and liquidate or settle liabilities, for amounts other than those reflected in the financial statements. In addition, the amounts reported could materially change because of various factors, including changes in business strategies and the effects of any proposed plan or reorganization. In the Chapter 11 proceedings, substantially all unsecured liabilities as of the petition date are subject to compromise or other treatment under a plan of reorganization which must be confirmed by the Bankruptcy Court after submission to any required vote by affected parties. Generally, all actions to enforce or otherwise effect repayment of prepetition liabilities, as well as all pending litigation against the Debtors, are stayed while the Debtors continue their business operations as debtors-in-possession. The ultimate amount of and settlement terms for such liabilities are not presently determinable. Under SOP 90-7, those liabilities and obligations whose treatment and satisfaction is dependent on the outcome of the Chapter 11 proceedings have been segregated and classified as liabilities subject to compromise on the condensed consolidated balance sheet. Pursuant to SOP 90-7, professional fees associated with the Chapter 11 proceedings are expensed as incurred and reported as reorganization items. Interest expense is reported only to the extent that it will be paid during the Chapter 11 proceedings or that it is probable that it will be an allowed claim. RESULTS OF OPERATIONS CHANGE IN SEGMENT REPORTING Beginning in the third quarter of fiscal 2004, our segment reporting has been changed to reflect changes in Dan River's organizational and internal financial reporting structures. Our apparel fabrics business, which previously had been reported as a separate segment, has been combined with the former home fashions segment. Together, these businesses are now reported as the Dan River segment. We will continue to report the engineered products business as a separate segment. In the discussion below, prior period information has been restated to reflect the reporting change. Comparison of Three Months Ended October 2, 2004 and September 27, 2003: NET SALES Net sales for the third quarter of fiscal 2004 were $105.2 million, an increase of $1.5 million or 1.4% over the third quarter of fiscal 2003. Net sales for the Dan River segment were $96.8 million for the third quarter of fiscal 2004, approximately the same level as for the third quarter of fiscal 2003. However, net sales of home fashions products declined by $6.1 million or 8% from $76.4 million to $70.3 million over the comparable 25 period. Offsetting this decline was an increase of $6.0 million in net sales of apparel fabrics products, a 29% increase from $20.5 million to $26.5 million in the third quarter of fiscal 2004 compared to the same period in fiscal 2003. Net sales of home fashions products decreased in all major retail distribution channels, reflecting slow retail business conditions, expiring juvenile bedding licenses, and concerns from certain customers over our Chapter 11 status. Net sales to Kmart, our largest home fashions customer, were $1.1 million lower in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003. The increase in apparel fabrics net sales is due to higher sales of sportswear fabric to a major customer for a pant fabric program and increased sales of career apparel fabrics. Net sales of engineered products for the third quarter of fiscal 2004 were $8.4 million, an increase of $1.6 million or 23.9% over the third quarter of fiscal 2003. The increase in net sales this year reflects shipments to several additional customers whereas during the same quarter last year net sales were lower due to slow business conditions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $13.0 million for the third quarter of fiscal 2004 (12.3% of net sales), a decrease of $0.8 million or 6.1% from $13.8 million (13.3% of net sales) for the third quarter of fiscal 2003. The decrease was generally caused by lower salary and benefit costs, which was attributable to staff reductions made in the third quarter of fiscal 2003 and the second quarter of fiscal 2004. OPERATING INCOME (LOSS) We had a consolidated operating loss of $18.1 million in the third quarter of fiscal 2004, compared to a $97.5 million operating loss in the third quarter of fiscal 2003. Segment Operating Income (Loss): The Dan River segment had a $9.4 million operating loss in the third quarter of fiscal 2004, compared to a $3.4 million operating loss for the third quarter of fiscal 2003. The larger operating loss in the third quarter of fiscal 2004 reflects a $6.9 million reduction in gross profit, offset by a $0.9 million decrease in selling, general and administrative expenses. Gross margins decreased to 3.1% of net sales in the third quarter of fiscal 2004 from 10.2% in the third quarter of fiscal 2003. Contributing to the decrease in gross margins were promotional pricing of home fashions products, lower first quality manufacturing yields in apparel fabrics sportswear products, and higher per unit manufacturing costs due to lower production capacity utilization. The engineered products segment generated $0.1 million in operating income for the third quarter of fiscal 2004 compared to a $1.0 million operating loss in the third quarter of fiscal 2003. The $0.9 million improvement in operating income primarily reflects higher net sales during the quarter and lower manufacturing costs due to lower overhead and improvements in manufacturing processes. 26 Corporate Items: Impairment of Goodwill Due to the deterioration in the performance of our home fashions bedding business that occurred in fiscal 2003, which is considered an indication of possible impairment under accounting guidelines, we evaluated goodwill for impairment as of the third quarter of fiscal 2003, rather than waiting for the annual impairment review that is normally performed in the fourth quarter of the fiscal year. With the assistance of an outside consultant, we completed the impairment test, which, based on a comparison of the fair value of the home fashions bedding business to its book value, indicated that the goodwill was, in fact, fully impaired. Accordingly, we recorded a $91.7 million charge for impairment of goodwill, which represented the write-off of the entire remaining balance of goodwill, all of which relates to our home fashions bedding unit. Other Operating Costs, Net Other operating costs, net for the third quarter of fiscal 2004 consisted of a $7.9 million pre-tax charge relating to the closure of our finishing and sheet sewing facility in Danville, VA and our warehouse in Portsmouth, VA. The charge included a $6.7 million non-cash writedown of fixed assets and $1.2 million of severance and benefits associated with the termination of approximately 420 employees. We expect that the shutdown of the affected facilities will be completed in the fourth quarter of fiscal 2004 and that substantially all of the severance and benefits will be paid by the end of the second quarter of fiscal 2005. Other operating costs, net for the third quarter of fiscal 2003 consisted of a $0.8 million pre-tax charge for estimated severance and employee benefit costs associated with the elimination of approximately 80 salaried positions. Substantially all of these costs were been paid by the end of the first quarter of fiscal 2004. Other Corporate Items Other corporate items not allocated to segments, which consisted of idle facility costs and other expenses totaled $0.8 million for the third quarter of fiscal 2004, compared to $0.6 million (expense) for the third quarter of fiscal 2003. OTHER INCOME, NET Other income, net was $0.8 million for the third quarter of fiscal 2004, compared to $1.1 million for the third quarter of fiscal 2003. The amounts for both periods were attributable to gains related to life insurance policies. INTEREST EXPENSE For periods subsequent to our Chapter 11 filing, interest expense is reported only to the extent that it will be paid during the bankruptcy proceedings or that it is probable that it will be an allowed claim. Interest expense reported for the third quarter of fiscal 2004 was $2.8 million. Total contractual interest for the period, including interest that was not reported 27 because it did not meet the criteria described above, was $8.3 million, an increase of $1.2 million over interest expense reported for the third quarter of fiscal 2003. The majority of the increase was attributable to higher average debt levels. REORGANIZATION ITEMS During the third quarter of fiscal 2004, we recognized charges of $4.0 million for reorganization items, including $3.2 million for professional fees related to the Chapter 11 proceedings and $0.8 million for employee retention incentives for services rendered through October 2, 2004. INCOME TAXES No income tax benefits were recorded against the pre-tax losses for the third quarter of fiscal 2004 or fiscal 2003, as potential future tax benefits associated with the losses for these periods were fully offset by increases to the valuation allowance against deferred tax assets. Additions to the allowance were $7.1 million and $3.8 million for the third quarter of fiscal 2004 and fiscal 2003, respectively. As of October 2, 2004 and September 27, 2003, our net deferred tax assets were fully offset by the valuation allowance. The valuation allowance is necessary because, in light of our recent history of operating losses and other available evidence, management does not believe that it is more likely than not that the tax benefits associated with the deferred tax assets, to the extent they exceed the deferred tax liabilities, will be realized. Comparison of Nine Months Ended October 2, 2004 and September 27, 2003: NET SALES Net sales for the first nine months of fiscal 2004 were $336.3 million, a decrease of $31.2 million or 8.5% from the first nine months of fiscal 2003. Net sales for the Dan River segment were $310.3 million for the first nine months of fiscal 2004, a decrease of $31.6 million or 9.2% from the first nine months of fiscal 2003. The decrease is primarily due to a $32.3 million reduction in net sales of home fashions products, where sales were lower in all channels of distribution except in the hospitality and sheeting area, in which net sales increased by $10.5 million. The lower sales reflect slow retail business conditions, expiring juvenile bedding licenses, and concerns from certain customers over our Chapter 11 status. Net sales to Kmart, our largest home fashions customer, were $18.4 million lower in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003. Net sales of engineered products for the first nine months of fiscal 2004 were $25.9 million, an increase of $0.4 million or 1.5% over the first nine months of fiscal 2003. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $43.0 million for the first nine months of fiscal 2004 (12.8% of net sales), a decrease of $4.1 million or 8.7% from $47.1 million (12.8% of net sales) for the first nine months of fiscal 2003. The decrease amount was generally caused by lower salary and benefit costs, which was attributable to staff reductions made in the third quarter of fiscal 2003 and the second quarter of fiscal 2004. 28 OPERATING INCOME (LOSS) We had a consolidated operating loss of $47.7 million in the first nine months of fiscal 2004, compared to a $100.1 million operating loss in the first nine months of fiscal 2003. Segment Operating Income (Loss): The Dan River segment had a $27.2 million operating loss in the first nine months of fiscal 2004, compared to $7.8 million in operating income for the first nine months of fiscal 2003. The lower profitability in the first nine months of fiscal 2003 reflects a $39.5 million reduction in gross profit, offset by a $4.9 million decrease in selling, general and administrative expenses. The lower gross profit reflects the $31.6 million decrease in sales, discussed above, and lower gross margins, which decreased to 4.2% of net sales in the first nine months of fiscal 2004 from 15.5% in the first nine months of fiscal 2003. Contributing to the decrease in gross margins were promotional pricing of home fashions products, lower first quality manufacturing yields in apparel fabrics sportswear products, and higher per unit manufacturing costs due to lower production capacity utilization. The engineered products segment had a $0.4 million operating loss in the first nine months of fiscal 2004 compared to a $2.5 million operating loss in the first nine months quarter of fiscal 2003. This improvement reflects overhead reductions, inventory reductions, improved manufacturing processes and lower selling, general and administrative expenses. Corporate Items: Impairment of Goodwill As discussed above, we recorded a $91.7 million charge for impairment of goodwill in the third quarter of fiscal 2003, which represents the write-off of the entire remaining balance of goodwill, all of which relates to our home fashions bedding business unit. Other Operating Costs, Net Other operating costs, net for the first nine months of fiscal 2004 totaled $16.3 million and consisted of pre-tax charges of: $13.7 million relating to plant closures and staff reductions, all of which result from actions we have taken to reduce manufacturing capacity and fixed costs in light of recent declines in sales volume; and $2.6 million resulting from an adjustment to the carrying value of assets held for sale. In the second quarter of fiscal 2004, we decided to close our garment manufacturing operations in Mexico, because of the continuing losses generated by these operations. In connection with the closure, a $3.9 million pre-tax charge was recorded, consisting of a $3.4 million non-cash writedown of fixed assets, and $0.5 million for severance and benefits associated with the termination of approximately 350 employees. The shutdown of the operations and payment of severance and benefits is expected to be completed by the end of fiscal 2004. On June 22, 2004 we announced that, in order to reduce overhead we would be terminating approximately 320 employees through staff reductions and shift 29 eliminations. The estimated cost of severance and benefits associated with these terminations is $1.9 million, most of which is expected to be paid by the end of fiscal 2004. As discussed above, in the third quarter of fiscal 2004 we recorded a pre-tax charge of $7.9 million relating to the closure of our finishing and sheet sewing facility in Danville, VA and our warehouse in Portsmouth, VA. The $2.6 million adjustment to the carrying value of assets held for sale, which was recorded in the second quarter of fiscal 2004, represents a reduction in our estimate of proceeds that will be realized from the future sale of our plants in Greenville, South Carolina, Fort Valley, Georgia, and Juliette, Georgia, which were closed in fiscal 2003. The reduction in estimated proceeds was due to the deterioration in market conditions for textile facilities. Other operating costs, net for the first nine months of fiscal 2003 consisted of: a $0.4 million gain from the sale of surplus equipment, recorded in the first quarter; a $12.2 million pre-tax charge relating to the closure of two manufacturing facilities, recorded in the second quarter; and $0.8 million in severance and benefits expense relating to staff reductions, recorded in the third quarter (discussed above). On June 11, 2003 we announced that we would be closing a home fashions weaving facility located in Greenville, South Carolina and a comforter sewing plant in Fort Valley, Georgia, in order to rationalize capacity in our home fashions business. In connection with the closings, a $12.2 million pre-tax charge was recorded in the second quarter of fiscal 2003, consisting of a $10.2 million non-cash writedown of fixed assets, and $2.0 million of other exit costs, primarily severance and benefits associated with the termination of 630 employees. The shutdown of the plants was substantially completed in the third quarter of fiscal 2003, and substantially all severance and exit costs were paid prior to the end of the first quarter of fiscal 2004. Other Corporate Items Other corporate items not allocated to segments totaled $3.7 million for the first nine months of fiscal 2004 and is comprised of: $1.4 million of idle facility costs; a $0.7 million writedown of inventories in connection with the closure of our Mexican operations (discussed above); $0.8 million for professional fees incurred prior to our bankruptcy filing for debt-related matters; and $0.8 million of other expenses not directly related to segment business. Other corporate items not allocated to segments totaled $1.2 million for the first nine months of fiscal 2003 and consisted of idle facility costs and other expenses. OTHER INCOME, NET Other income, net was $0.5 million for the first nine months of fiscal 2004, and consisted of $0.6 million in gains related to life insurance policies and $0.1 million in interest income, offset by various expenses of $0.2 million. For the first nine months of fiscal 2003, other income, net was $0.9 million, and consisted of $1.6 million in gains related to life insurance policies, 30 interest income of $0.3 million and various other income items of $0.3 million, offset in part by a $1.3 million expense for the write-off of unamortized costs associated with debt retired in connection with our refinancing completed in April 2003. INTEREST EXPENSE For periods subsequent to our Chapter 11 filing, interest expense is reported only to the extent that it will be paid during the bankruptcy proceedings or that it is probable that it will be an allowed claim. Interest expense reported for the first nine months of fiscal 2004 was $12.8 million. Total contractual interest for the period, including interest that was not reported because it did not meet the criteria described above, was $24.3 million, an increase of $3.5 million over interest expense reported for the first nine months of fiscal 2003. The majority of the increase was attributable to higher average debt levels. REORGANIZATION ITEMS During the first nine months of fiscal 2004, we recognized charges of $12.6 million for reorganization items, including $8.4 million for professional fees related to the Chapter 11 proceedings, $2.8 million for the non-cash write-off of a portion of the deferred financing fees associated with our prepetition credit agreement which was refinanced under the DIP facility, and $1.4 million for employee retention incentives for services rendered through October 2, 2004. INCOME TAXES No income tax benefits were recorded against the pre-tax losses for the first nine months of fiscal 2004 or fiscal 2003, as potential future tax benefits associated with the losses for these periods were fully offset by increases to the valuation allowance against deferred tax assets. Additions to the allowance were $25.6 million and $10.6 million for the first nine months of fiscal 2004 and 2003, respectively. As of October 2, 2004 and September 27, 2003, our net deferred tax assets were fully offset by the valuation allowance. The valuation allowance is necessary because, in light of our recent history of operating losses and other available evidence, management does not believe that it is more likely than not that the tax benefits associated with the deferred tax assets, to the extent they exceed the deferred tax liabilities, will be realized. LIQUIDITY AND CAPITAL RESOURCES General With the filing of our petition for reorganization on March 31, 2004, our administrative expenses of the proceedings, working capital needs, and capital improvements are provided for by cash from operations and the DIP Facility, discussed below. Working Capital Our operations are working capital intensive. Our operating working capital (accounts receivable and inventories less accounts payable and accrued expenses) typically increases and decreases in relation to sales and operating activity levels. 31 Net cash generated by operating activities in the nine months ended October 2, 2004 was $7.8 million. The net loss, adjusted for noncash expense items, net, used $27.7 million of cash. This was offset by a $35.5 million source of cash from changes in operating assets and liabilities, comprised of a $34.7 million source from operating working capital (accounts receivable - $5.1 million use, inventories - $18.5 million source, and accounts payable and accrued expenses - $21.4 million source) and a $0.8 million source of cash for prepaid expenses and other assets and other liabilities. In the first nine months of fiscal 2003, net cash generated from operating activities was $18.3 million. The net loss for that period, adjusted for noncash expense items, net, generated $15.7 million of cash. Additionally, changes in operating assets and liabilities generated $2.7 million of cash, comprised of a $4.4 million source of cash from operating working capital (accounts receivable - $20.3 million source, inventories - $8.3 million use, and accounts payable and accrued expenses - $7.6 million use) and a $1.7 million use of cash for prepaid expenses and other assets and other liabilities. DIP Financing Facility On April 1, 2004, the Bankruptcy Court approved a $145 million DIP Facility on an interim basis. The DIP Facility authorized us to grant first priority mortgages, security interests, liens, and superpriority claims on substantially all of the assets of the Debtors to secure the DIP Facility. On May 27, 2004, we entered into an amendment which, among other things, revised the Minimum Operating EBITDA which we were required to maintain during the term of the DIP Facility and revised the cash budget which we were required to meet. A final order with respect to the DIP Facility was entered on May 28, 2004. On July 20, 2004, we entered into a second amendment to the DIP Facility, which among other things, required that revolving loans under the DIP Facility could not exceed $73 million during the period from July 20, 2004 through July 31, 2004. On July 31, 2004, we entered into a third amendment to the DIP Facility which, among other things, provided that during the period from July 31, 2004 through August 21, 2004, revolving loans under the DIP Facility could not exceed $75 million. On August 18, 2004, we entered into a fourth amendment to the DIP Facility. The fourth amendment waived until November 6, 2004 a default of the financial covenant pertaining to minimum operating EBITDA for the fiscal month ended July 3, 2004, and established new monthly operating EBITDA covenants through the fiscal month ending October 2, 2004. The amendment also provided that commencing on the date of the amendment and ending on November 6, 2004, outstanding Revolving Loans could not exceed $75 million, and the aggregate amount of Letter of Credit Obligations and Revolving Loans together could not exceed $82 million. In addition to certain business plans and other information and analyses that we were required to deliver to the Agent on or before September 15, 2004, we were required to provide a commitment letter for exit financing which was acceptable to the Agent and the Majority Lenders. As approved by the bankruptcy court, the amendment required that the commitment letter be delivered no later than October 15, 2004. Finally, the amendment increased interest rates by 100 basis points on all loans outstanding under the DIP Facility during the period from the date of the amendment until November 6, 2004. 32 On or before October 15, 2004, we received financing commitment letters from potential lenders for the funding required to emerge from Chapter 11. On November 1, 2004, the bankruptcy court entered an interim order permitting us to use cash collateral and approved on an interim basis an additional new $10 million senior, secured credit facility which was provided by certain of our existing bondholders. We obtained the additional financing when we could not reach an agreement with the existing DIP lenders regarding certain non- financial covenants, and we determined that it was in the best interest of creditors to seek alternative financing. The new $10 million facility was senior to the existing DIP Facility. On November 19, 2004, we entered into a fifth amendment to the DIP Facility. Pursuant to the amendment, our current and ongoing operations will continue to be funded pursuant to the existing DIP Facility. The parties agreed that the interim order entered by the bankruptcy court on November 1, 2004 would be vacated, and the outstanding indebtedness under the interim facility was repaid on the date of the amendment. Pursuant to the fifth amendment, certain covenants under the DIP Facility, including those which required maintenance of minimum operating EBITDA and approval of a budget, were eliminated. Certain limitations applicable to the borrowing base were also eliminated, which is expected to provide us with approximately $10 million of additional liquidity. Also, certain deadlines for completion of various steps in the bankruptcy emergence process were extended. Finally, all defaults alleged under the financing documents were waived. Our access to financing necessary for our operations is presently limited to borrowings under the DIP Facility. If in the future we were unable to maintain compliance with the covenants contained in the DIP Facility, as amended, there can be no assurance that we would be able to reach agreement with the lenders concerning further amendments or waivers. If we did not have access to the DIP Facility for our working capital, there can be no assurance that the Bankruptcy Court would again permit access to our cash collateral, or that cash available would be sufficient to continue our operations in the ordinary course of business. Additionally, our inability to obtain exit financing could delay or prevent our successful reorganization and emergence from bankruptcy. Pursuant to the final order of May 28, 2004 we repaid $34.3 million on the term loan which was outstanding at the Petition Date with proceeds from a $34.3 million term loan included in the DIP Facility. At November 19, 2004, there was $23.5 million outstanding under the term loan at an average interest rate of 7.75%. Also at November 19, 2004, there was $73.2 million outstanding in borrowings under the revolving credit facility at an average interest rate of 7.08%, and $4.6 million in letters of credit. Amounts borrowed under the DIP Facility will bear interest at our option at the rate of the London Interbank Offering Rate ("LIBOR") plus 3.50% (5.89% as of November 19, 2004), or the Alternate Base Rate plus 2.50% (7.50% as of November 19, 2004), for borrowings under the revolving credit, and at LIBOR plus 3.75% (6.14% as of November 19, 2004), or the Alternate Base Rate plus 2.75% (7.75% as of November 19, 2004), for borrowings under the Term Loan. In addition, there is a fee of 0.50% on the unused commitment and a fee of 3.50% on letters of credit outstanding. 33 The DIP Facility, as amended, imposes restrictions relating to, among other things, capital expenditures, asset sales, incurrence or guarantee of debt, acquisitions, sale or of receivables, certain payments and investments, affiliate and subsidiary transactions, payment of dividends and repurchases of stock, derivatives, and excess cash. The DIP Facility also requires that proceeds from sales of certain assets be used to repay specified borrowings and permanently reduce the commitment amount under the facility. Availability under the revolving credit of the DIP Facility is based upon a borrowing base determined by reference to eligible accounts receivable and inventory, as defined. Investing Activities During the first nine months of fiscal 2004, we purchased $1.9 million in equipment and manufacturing improvements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to the disclosure contained in our Annual Report on Form 10-K for the fiscal year ended January 3, 2004. Item 4. Controls and Procedures. As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the company's disclosure controls and procedures. Based upon, and as of the date of, that evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as and when required. There have been no significant changes in the company's internal control over financial reporting that occurred during our last fiscal quarter that has materially effected, or is reasonably likely to materially effect, our internal control over financed reporting. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken. 34 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements generally preceded by, followed by or that include the words "believe," "expect," "anticipate," "plan," "estimate" or similar expressions. These statements include, among others, statements regarding our expected business outlook, the Chapter 11 process, anticipated financial and operating results, strategies, contingencies, financing plans, working capital needs, sources of liquidity, estimated amounts and timing of capital expenditures, environmental compliance costs and other expenditures, and expected outcomes of litigation. Forward-looking statements reflect our current expectations and are not guarantees of performance. These statements are based on our management's beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to these forward-looking statements include, among others, assumptions regarding demand for our products, continued availability of the DIP Facility, expected pricing levels, raw material costs, the timing and cost of planned capital expenditures, the estimated cost of environmental compliance, expected outcomes of pending litigation, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the factors set forth in Exhibit 99.1, "Cautionary Statements relating to Forward Looking Statements," filed with our Annual Report on Form 10-K for the fiscal year ended January 3, 2004, and the following: . general economic and political conditions and the cyclicality of the textile industry; . developing, securing approval of, and implementing a successful plan of reorganization in the Chapter 11 process; . obtaining financing for our exit from bankruptcy; . competitive conditions in the textile industry; . our ability to operate our business under the restrictions imposed by the Chapter 11 process and in compliance with the limitations in the DIP Facility; . our ability to implement manufacturing cost reductions, efficiencies and other improvements; . fluctuations in the supply of raw materials or shortages of the supply of raw materials; . our ability to maintain or acquire licenses; 35 . our ability to fund our capital expenditure requirements needed to maintain our competitive position; . the effect of U.S. governmental policies regarding imports on our competitiveness; . our compliance with environmental, health and safety laws and regulations; . changes in our relationship with our large customers, including the ability to maintain relationships with these customers, licensors and other constituencies, in light of the Chapter 11 process; . business-related difficulties of our customers; . our dependence on outside production sources; . our ability to compete with foreign imports; . the significant time that will be required by management to structure and implement a plan of reorganization; . our reliance on key management personnel, including the effects of the Chapter 11 process on our ability to attract and retain key management personnel; and . our relationship with the union representing some of our employees. You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. 36 PART II - OTHER INFORMATION Item 1. Legal Proceedings. On March 31, 2004, we and our domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia (Case Nos. 04-10990 though 04-10993). We are currently operating our businesses as debtors-in-possession pursuant to the Bankruptcy Code. As a result of the filing, pre- petition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect pre-petition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. For more information about the filing, see Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." From time to time, we are a party to litigation arising in the ordinary course of our business. We are not currently a party to any litigation that we believe could reasonably be expected to have a material adverse effect on our results of operations or financial condition. Item 5. (a) In lieu of filing a Current Report on Form 8-K, we are disclosing the following information in this Quarterly Report on Form 10-Q: Entry into a Material Definitive Agreement (1.01) and Termination of a Material Definitive Agreement (1.02). On November 19, 2004 we entered into an amendment to our existing $110 million Debtor-in-Possession (DIP) revolving credit facility and $35 million DIP term loan with Deutsche Bank Trust Company Americas, as Agent, and the lenders party thereto. (See Exhibit 10.1 to this Quarterly Report on Form 10-Q.) Pursuant to the amendment, the lenders will continue to fund our current and ongoing operations. Additionally, the parties agreed that an interim order entered by the bankruptcy court on November 1, 2004 would be vacated. The interim order provided that we could use cash collateral and approved, on an interim basis, an additional new $10 million senior, secured credit facility to be provided by certain of our existing bondholders. The outstanding indebtedness under the interim facility was repaid on November 19, 2004. Pursuant to the amendment, certain covenants under the existing DIP agreement, including those which required maintenance of minimum operating EBITDA and approval of a budget were eliminated. Certain limitations applicable to the borrowing base were also eliminated, which is expected to provide us with approximately $10 million of additional liquidity. Also, certain deadlines for completion of various steps in the bankruptcy emergence process were extended. Finally, the existing DIP lenders waived all defaults alleged under the financing documents. 37 Item 6. Exhibits. (a) Exhibits. The Exhibits listed as applicable on the accompanying Exhibit Index are filed as part of this Quarterly Report. 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. DAN RIVER INC. Date: November 22, 2004 /s/ Barry F. Shea ----------------------------------- Barry F. Shea Executive Vice President-Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)
39 EXHIBIT INDEX -------------
Exhibit No. Description of Exhibit ----------- ---------------------- 2.1 Joint Plan of Reorganization of Dan River Inc., The Bibb Company LLC, Dan River International Ltd. and Dan River Factory Stores, Inc. (incorporated by reference to Exhibit 99.1 in Current Report on Form 8-K filed August 2, 2004 (File No. 1-13421)) 2.2 Disclosure Statement for Joint Plan of Reorganization Filed by Dan River Inc., The Bibb Company LLC, Dan River International Ltd. and Dan River Factory Stores, Inc. (incorporated by Reference to Exhibit 99.2 in Current Report on Form 8-K filed August 2, 2004 (File No. 1-13421)) 3.1 Amended and Restated Articles of Incorporation of Dan River Inc.(incorporated by reference to Exhibit 3.1 in Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-36479)) 3.2 Bylaws of Dan River Inc.(incorporated by reference to Exhibit 3.2 in Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-36479)) 10.1* Fifth Amendment dated as of November 19, 2004 to Post-Petition Credit Agreement dated April 1, 2004 between Dan River Inc. and Deutsche Bank Trust Company Americas 11 Statement regarding Computation of Earnings per share (incorporated by reference to Note 11 to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q) 31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 40 Exhibit No. Description of Exhibit ----------- ---------------------- 32.2* Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ----------------- *Filed herewith.