<PAGE>
As filed with the Securities and Exchange Commission on September 26, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DAN RIVER INC.
(Exact name of registrant as specified in charter)
GEORGIA 2211 58-185637
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
---------------
2291 MEMORIAL DRIVE
DANVILLE, VIRGINIA 24541
(804) 799-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
HARRY L. GOODRICH, ESQ.
DAN RIVER INC.
2291 MEMORIAL DRIVE
DANVILLE, VIRGINIA 24541
(804) 799-7000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
---------------
COPIES TO:
MARY A. BERNARD WILLIAM P. ROGERS, JR.
KING & SPALDING CRAVATH, SWAINE & MOORE
1185 AVENUE OF THE AMERICAS WORLDWIDE PLAZA
NEW YORK, NEW YORK 10036 825 EIGHTH AVENUE
(212) 556-2100 NEW YORK, NEW YORK 10019-7475
(212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following effectiveness of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
============================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(1) OFFERING REGISTRATION FEE(1)
PRICE(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 ______ _______ $115,000,000 $34,849
par value per share
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</TABLE>
(1) Computed in accordance with Rule 457(o) under the Securities Act of 1933,
as amended.
(2) Estimated solely for the purpose of calculating the registration fee.
-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED SEPTEMBER 26, 1997
______ SHARES
DAN RIVER INC.
CLASS A COMMON STOCK
_________________
OF THE SHARES OF CLASS A COMMON STOCK BEING OFFERED, SHARES ARE
BEING SOLD BY THE COMPANY AND SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS (THE "OFFERING"). SEE "PRINCIPAL AND SELLING
SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF THE SHARES OF CLASS A COMMON STOCK BY THE
SELLING SHAREHOLDERS. PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE WILL BE BETWEEN $
AND $ . SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
_________________
Application has been made to list the Class A Common Stock on the New York Stock
Exchange under the symbol " ."
_________________
THE COMPANY'S AUTHORIZED CAPITAL STOCK INCLUDES CLASS A COMMON STOCK, CLASS B
COMMON STOCK AND PREFERRED STOCK. THE CLASS A COMMON STOCK IS SUBSTANTIALLY
IDENTICAL TO THE CLASS B COMMON STOCK EXCEPT WITH RESPECT TO VOTING
POWER AND, EXCEPT AS OTHERWISE REQUIRED BY THE COMPANY'S AMENDED AND
RESTATED ARTICLES OF INCORPORATION AND GEORGIA LAW, WILL VOTE
TOGETHER WITH THE CLASS B COMMON STOCK AS ONE CLASS ON ALL
MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS, INCLUDING THE
ELECTION OF DIRECTORS. THE CLASS A COMMON STOCK IS
ENTITLED TO ONE VOTE PER SHARE AND THE CLASS B COMMON
STOCK IS ENTITLED TO VOTES PER SHARE.
_________________
SEE "RISK FACTORS" BEGINNING ON PAGE FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
PRICE $ A SHARE
---------------------
UNDERWRITING PROCEEDS PROCEEDS TO
PRICE TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
-------- ----------------- ---------- ---------------
Per Class A Share $ $ $ $
Total(3) $ $ $ $
<PAGE>
_______________
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
(2) Before deducting expenses estimated at $ , which will be paid by
the Company.
(3) The Selling Shareholders have granted the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of additional Shares of Class A Common
Stock at the price to public less underwriting discounts and commissions for
the purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions and proceeds to the Selling Shareholders will be
$ , $ and $ , respectively. See "Underwriters."
_________________
The Shares are offered, subject to prior sale, when, as and if accepted by the
Underwriters named herein and subject to approval of certain legal matters by
Cravath, Swaine & Moore, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about , 1997,
at the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.
_________________
MORGAN STANLEY DEAN WITTER
J.P. MORGAN & CO.
SBC WARBURG DILLON READ INC.
, 1997
-2-
<PAGE>
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this Prospectus,
and if given or made, such information or representation must not be relied upon
as having been authorized by the Company, by any Selling Shareholder or by any
Underwriter. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the Class A Common Stock
offered hereby to any person in any jurisdiction in which it is unlawful to make
any such offer or solicitation to such person. Neither the delivery of this
Prospectus nor any sale made hereby shall under any circumstance imply that the
information contained herein is correct as of any date subsequent to the date
hereof.
TABLE OF CONTENTS
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Page Page
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Prospectus Summary................... Management...........................
Risk Factors......................... Certain Transactions.................
Use of Proceeds...................... Principal and Selling Shareholders...
Dividend Policy...................... Description of Capital Stock.........
Capitalization....................... Shares Eligible for Future Sale......
Selected Historical and Pro Forma Underwriters.........................
Consolidated Financial Data......... Legal Matters........................
Management's Discussion and Analysis Experts..............................
of Financial Condition and Results Available Information................
of Operations....................... Index to Consolidated
Business............................. Financial Statements................ F-1
</TABLE>
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, SHARES OF THE CLASS A COMMON STOCK IN THE OPEN
MARKET. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE IN ACCORDANCE WITH RULE 103 UNDER
REGULATION M. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
------------------
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" including, without limitation, those
concerning the Company's strategy, contain certain forward-looking statements
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause such differences include, but are
not limited to, those discussed under "Risk Factors."
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, references in this Prospectus to "Dan River" or the
"Company" include Dan River Inc. and its predecessors and subsidiaries. In
addition, all information in this Prospectus gives retroactive effect to the
completion of the Recapitalization (as hereinafter defined), as well as to
certain other changes with respect to the Company's charter, bylaws and
management that will be completed prior to completion of the Offering. See
"Certain Transactions." References to a fiscal year refer to the fiscal year of
the Company, which is the 52- or 53-week period ending on the Saturday nearest
to December 31. All fiscal years presented consisted of 52 weeks other than
fiscal 1992, which ended on January 2, 1993 and consisted of 53 weeks. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the exercise of the Underwriters' over-allotment option. See "Underwriters."
THE COMPANY
Founded in 1882, Dan River Inc. (the "Company" or "Dan River") is a leading
manufacturer and marketer of textile products for the home fashions and apparel
fabrics markets. The Company designs, manufactures and markets a coordinated
line of value-added home fashions products consisting of packaged bedroom
furnishings such as comforters, sheets, pillowcases, shams, bed skirts,
decorative pillows and draperies. Dan River also manufactures and markets a
broad range of high quality woven cotton and cotton-blend fabrics and believes
that it is the leading supplier of men's dress shirting fabrics in North America
(based on net sales). On a pro forma basis, after giving effect to the Cherokee
Acquisition (described below), the Company's home fashions products and apparel
fabrics accounted for 50.6% and 49.4%, respectively, of the Company's net sales
of $480.6 million in fiscal 1996.
HOME FASHIONS PRODUCTS. Dan River's home fashions products are marketed to
key retailers under the "Dan River" brand name, as well as under licenses from,
among others, "Colours by Alexander Julian," "D. Porthault," "John Wilman,"
"Liberty" and "Nautica." The Company's top five retail home fashions customers
in fiscal 1996 were Wal-Mart Stores, Inc., Kmart Corporation, Federated
Department Stores, Inc., J.C. Penney Company, Inc. and The May Department Stores
Company. The Company focuses on value-added, higher thread count and yarn-dyed
products and accessory items, as opposed to solid-colored commodity products.
Management believes these products yield higher margins and differentiate the
Company's product line from those of its competitors. Additionally, the Company
is a leader in offering complete bed ensembles which it markets under the "Bed-
in-a-Bag" name and which package a comforter together with matching sheets,
pillowcases, shams and a dust ruffle. These packaged sets provide attractive
profit margins for both the Company and its retail customers, while offering
consumers value and convenience.
The Company works directly with its customers from the earliest stage of the
design process to develop styles that satisfy their specific needs. The
Company's technologically advanced manufacturing operations also provide the
flexibility to produce a wide variety of styles and to respond quickly to
changes in market conditions. As a result of its innovative merchandising and
styling techniques, its superior customer service, its license of certain well-
known brand names and its flexible manufacturing operations, Dan River has
increased its net sales of home fashions products 34.8% from $180.4 million in
fiscal 1992 to $243.2 million in fiscal 1996.
-4-
<PAGE>
APPAREL FABRICS. The Company's apparel fabrics are marketed to a diverse
customer base including manufacturers of men's, women's and children's clothing,
uniforms and home furnishings, and retailers of sewing and craft fabrics. The
Company's apparel fabrics are used in garments marketed under such well-known
brand names as Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz Claiborne,
L.L. Bean, Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as numerous
private labels marketed through retailers such as J.C. Penney Company, Inc. and
Sears, Roebuck & Co. The Company believes that it is the leading manufacturer
of men's dress shirting fabrics in North America (based on net sales).
Management believes that the Company enjoys a reputation as a leader in
developing innovative fabric styles and designs and that its customers look to
the Company's design and styling professionals to anticipate fashion trends and
develop new products.
On February 3, 1997, the Company acquired substantially all of the assets and
certain of the liabilities of The New Cherokee Corporation ("Cherokee"), a major
competitor of the Company (the "Cherokee Acquisition"). The Cherokee
Acquisition almost doubled the size of the Company's apparel fabrics business,
added complementary product lines and introduced new distribution channels.
Since completing the Cherokee Acquisition, the Company has achieved significant
cost savings by eliminating redundant manufacturing capacity and overhead and
increasing the production volume at the former Cherokee facilities. On a pro
forma basis, after giving effect to the Cherokee Acquisition, the Company had
net sales of apparel fabrics of $237.4 million in 1996.
BUSINESS STRATEGY
The Company's principal business objective is to continue to expand the sales
of its home fashions products and apparel fabrics, while improving the overall
profitability of its operations. The primary components of the Company's
business strategy include the following:
. CAPITALIZE ON PROFIT OPPORTUNITIES IN HOME FASHIONS MARKET. The Company
focuses on the sale of higher thread count percale products (180 threads
per square inch and above), printed products and accessory items (products
other than individually packaged sheets and pillowcases) which enhance the
Company's competitiveness, sales growth and profitability. The Company's
customer-specific marketing strategy is designed to (i) create specialized
products that provide differentiation from competitors and enable both the
Company and its customers to increase sales and margins, and (ii) attract
value conscious consumers by offering high quality products at reasonable
prices. Accordingly, the Company works directly with retailers to develop
value-added, fashion-oriented products (as opposed to solid color commodity
products) that are continuously updated to respond to changing consumer
preferences, thereby improving retailers' inventory turn rates and
associated profitability.
. EXPAND DISTRIBUTION OF HOME FASHIONS PRODUCTS THROUGH STRATEGIC
RELATIONSHIPS WITH MAJOR RETAILERS. The Company aggressively markets its
home fashions products to, and has developed significant business
relationships with, key retailers in all retail trade classes, including
department stores, mass merchandisers, discount stores, national chain
stores, specialty stores and warehouse clubs. Establishing and expanding
these key distribution channels has strengthened consumer recognition of
the "Dan River" brand name and increased sales. The Company has
established strategic relationships with such large, high volume retailers
as Wal-Mart Stores, Inc., Kmart Corporation, Federated Department Stores,
Inc., J.C. Penney Company, Inc. and The May
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<PAGE>
Department Stores Company, by providing high quality products together with
superior customer service.
. ENHANCE STRONG APPAREL FABRICS MARKET POSITION. Dan River seeks to enhance
its position as a leading producer of apparel fabrics by focusing on
customer relationships, anticipating fashion trends, developing new
innovative products and reducing manufacturing lead times. Management
believes that (i) the significant reduction in manufacturing costs achieved
through its aggressive facility modernization program, (ii) the increase in
the size of its apparel fabrics operations and attendant reduction in fixed
costs on a per unit basis as a result of the Cherokee Acquisition and (iii)
its diverse customer base will make Dan River's apparel fabrics business
less sensitive to the cyclicality experienced by the textile industry in
general and will further increase the Company's profitability. Management
also believes that demand for apparel fabrics manufactured in North America
and the Caribbean will continue to increase as a result of the North
American Free Trade Agreement ("NAFTA"), the Caribbean Basin Recovery
Act and the increasing importance of geographic proximity in enabling
shortened delivery times.
. REDUCE PRODUCTION COSTS AND IMPROVE PRODUCTIVITY. The Company is a low cost
producer. During the past five fiscal years, the Company has invested
approximately $150 million in an extensive facility modernization program
focused on installing the most advanced manufacturing technologies making
the Company more competitive and cost-efficient. As a result of this
program, as well as other improvements made by the current management team
since the Company was acquired in 1989, the Company has significantly
increased productivity, reduced costs and improved product quality. The
Company intends to continue to modernize its operations and improve its low
cost position.
. ATTAIN TEXTILE INDUSTRY LEADERSHIP IN INFORMATION TECHNOLOGY. The Company
has invested significantly in information technology to provide improved
and differentiated services. The Company has implemented an advanced supply
chain management system which reduces manufacturing lead-time and enhances
the Company's ability to respond to customer requirements. The Company's
electronic data interchange ("EDI") systems, quick response customer
delivery programs and point-of-sale decision support systems enable
customers to maintain lower inventory levels and react faster to changes in
product demand, thereby improving their operating results. In addition, the
Company employs continuous inventory replenishment and dedicated
manufacturing programs with certain customers to enhance service. Planned
investments in information technology include the implementation of a new
enterprise resource planning ("ERP") system along with additional
continuous inventory replenishment programs.
. ENHANCE FINANCIAL FLEXIBILITY. The Company seeks to maintain a capital
structure that will position it for growth through expansion of existing
operations and potential acquisitions as well as provide stability during
cyclical downturns. The textile industry generally, and in particular
marketers of home fashions products, have undergone significant
consolidation in recent years and the Company anticipates that this trend
will continue. The Company believes that, following completion of the
Offering, its strong balance sheet will enable it to capitalize on
attractive acquisition opportunities.
Dan River is a Georgia corporation whose principal executive offices are
located at 2291 Memorial Drive, Danville, Virginia 24541, and its telephone
number is (804) 799-7000.
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<PAGE>
THE OFFERING
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Class A Common Stock offered:
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Class A Common Stock offered by the Company.............. shares(1)
Class A Common Stock offered by the Selling Shareholders. ____________ shares
Total Class A Common Stock offered................ shares
============
Class A Common Stock to be outstanding after the Offering.. shares(2)
Class B Common Stock to be outstanding after the Offering.. ____________ shares(1)(3)
Total Common Stock to be outstanding after the Offering.... shares(1)(2)(3)
============
Use of proceeds by the Company............................. To repay outstanding
indebtedness and for general
corporate purposes. The
Company will not receive
any proceeds from the sale of
the Shares by the Selling
Shareholders.
Proposed NYSE symbol..................................... "______"
</TABLE>
________________
(1) Except with respect to voting power and, except as otherwise required by the
Company's Amended and Restated Articles of Incorporation (the "Restated
Charter") and Georgia law, the Class A Common Stock and Class B Common Stock
will vote as one class on all matters submitted to a vote of shareholders,
including the election of directors. The Class A Common Stock is entitled
to one vote per share and the Class B Common Stock is entitled to votes
per share. Immediately after the Offering, the Class B Common Stock will
represent % of the equity and 35% of the voting power of both classes of
Common Stock. Upon consummation of the Exchange Offer (as defined herein),
all of the Class B Common Stock will be held by Joseph L. Lanier, Jr., the
Company's Chairman and Chief Executive Officer, Richard L. Williams, the
Company's President and Chief Operating Officer, and Barry F. Shea, the
Company's Vice President-Chief Financial Officer (and, as applicable,
certain members of their immediate families). Pursuant to a voting
agreement, Mr. Lanier will control the voting of all the Shares of Class B
Common Stock. Each share of Class B Common Stock will be convertible at any
time at the option of its holder into one share of Class A Common Stock, and
will automatically convert into Class A Common Stock upon the transfer of
Class B Common Stock to any person who is not a Permitted Transferee (as
defined herein) or if the aggregate outstanding shares of Class B Common
Stock represents less than 7% of the aggregate outstanding Common Stock.
See "Description of Capital Stock."
(2) Does not include (i) shares of Class A Common Stock issuable upon
exercise of options outstanding as of the date of the Offering or (ii)
shares of Class A Common Stock available for the future grant of stock
options under the Company's stock option plans.
(3) Upon completion of the Offering, under its Restated Charter, the Company
will only be authorized to issue additional shares of Class B Common Stock
in connection with a dividend or other distribution with respect to, or a
subdivision of, all outstanding shares of Class A Common Stock and Class B
Common Stock (together, the "Common Stock"). See "Description of Capital
Stock--Common Stock."
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<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The information set forth below should be read in conjunction with the
"Selected Historical and Pro Forma Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and Notes thereto of the Company, the
Financial Statements and Notes thereto of Cherokee, the Unaudited Condensed
Consolidated Financial Statements of the Company, and the Unaudited Pro Forma
Condensed Consolidated Statements of Income of the Company included elsewhere in
this Prospectus.
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Pro Forma
Six
Pro Forma Six Months Ended Months
Fiscal Year Fiscal -------------------- Ended
------------------------------------------------ Year June 29, June 28, June 28,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------- -------- -------- -------- -------- ---------- --------- -------- ---------
(in thousands, except share and per share data)
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STATEMENT OF INCOME DATA:
Net sales................. $333,033 $317,566 $371,534 $384,801 $379,567 $480,639 $176,941 $227,935 $237,145
Cost of sales............. 268,605 259,148 297,460 306,879 307,383 399,602 145,074 180,720 187,876
Selling, general and
administrative
expenses.............. 39,083 38,550 43,908 44,860 45,673 51,863 22,956 25,098 25,847
Other operating costs,
net(2)................ -- 3,039 1,534 8,972 (428) (428) -- 7,875 7,914
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income......... $ 25,345 $ 16,829 $ 28,632 $ 24,090 $ 26,939 $ 29,602 $ 8,911 $ 14,242 $ 15,547
======== ======== ======== ======== ======== ======== ======== ======== ========
Income (loss) before
income taxes and
extraordinary item... $ 13,103 $ 4,643 $ 8,357 $ 2,390 $ 9,256 $ 10,818 $ (154) $ 3,766 $ 7,350
Extraordinary item(3) -- 348 -- -- -- -- -- -- --
Net income (loss)........ 8,166 2,519 3,525 258 5,686 6,642 (92) 2,314 4,513
Redeemable preferred
stock dividends....... 2,782 2,091 -- -- -- -- -- -- --
Net income (loss)
applicable to
common stock.......... $ 5,384 $ 428 $ 3,525 $ 258 $ 5,686 $ 6,642 $ (92) $ 2,314 $ 4,513
Earnings per share:
Primary............... $ $ $ $ $ $ $ $ $
Fully diluted......... $ $ $ $ $ $ $ $ $
Weighted average
number of shares
outstanding:
Primary...............
Fully diluted.........
OTHER FINANCIAL DATA:
EBITDA(4) $ 40,413 $ 36,314 $ 48,353 $ 52,599 $ 47,306 $ 56,569 $ 19,324 $ 36,159 $ 37,981
Cash flow from
operating activities.. 25,360 21,518 11,887 22,538 45,078 14,435 17,735
Depreciation and
amortization(5)....... 15,068 16,446 18,187 19,537 20,795 10,413 14,042
Capital expenditures,
gross................. 9,914 27,690 44,112 28,004 34,515 16,207 7,285
Capital expenditures,
net(6)................ 9,821 12,839 26,885 20,801 28,564 12,983 7,273
</TABLE>
AS OF JUNE 28, 1997
----------------------
AS
ACTUAL ADJUSTED (7)
----------------------
(in thousands)
BALANCE SHEET DATA:
Working capital......................................... $115,782
Total assets............................................ 390,387
Total debt.............................................. 223,500
Common stock subject to put rights(8)................... 10,884
Shareholders' equity(8)................................. 79,054
-8-
<PAGE>
______________________
(1) The pro forma statement of income data and pro forma other financial data
give effect to the Cherokee Acquisition and the Offering and the application
of the estimated net proceeds therefrom to the Company as if they had been
consummated at the beginning of the periods presented. See "Use of
Proceeds" and Unaudited Pro Forma Condensed Consolidated Financial
Statements included herein.
(2) Other operating costs, net includes various non-recurring charges and
credits from year to year, the most significant of which relate to
writedowns of fixed assets rendered obsolete by the Company's ongoing
facility modernization program, plant closure costs and the decision to
discontinue manufacturing and marketing a line of apparel fabrics. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note 7 to the Consolidated Financial Statements of the Company,
and Note 5 to the Unaudited Condensed Consolidated Financial Statements of
the Company.
(3) The extraordinary item for 1993 represents the gain, net of related income
taxes, from the early retirement of certain of the Company's credit
facilities and term loans out of the proceeds from the issuance of the
Company's 10% Senior Subordinated Notes due 2003 (the "Senior Subordinated
Notes").
(4) EBITDA represents operating income before depreciation and amortization.
For purposes of computing EBITDA, operating income has been adjusted to
exclude other operating costs, net. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and Note 7 to the Consolidated Financial Statements. EBITDA is
presented not as an alternative measure of operating results or cash flow
(as determined in accordance with generally accepted accounting principles),
but rather to provide additional information related to the Company's cash
flow and its ability to service debt.
(5) Includes depreciation and amortization of tangible assets, but excludes
amortization of debt issuance costs, which amortization is included in
interest expense.
(6) Represents capital improvements, net of amounts acquired in exchange for
debt.
(7) As adjusted to give pro forma effect to the Offering and the application of
the net proceeds to the Company therefrom as if such transactions had
occurred as of June 28, 1997. See "Use of Proceeds" and "Capitalization."
(8) As adjusted shareholders' equity reflects the reclassification of the Common
Stock subject to put rights as part of shareholders' equity. See Note 8 to
the Unaudited Condensed Consolidated Financial Statements of the Company.
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<PAGE>
RISK FACTORS
An investment in the Shares of Class A Common Stock offered hereby involves a
high degree of risk. Prospective purchasers of the Class A Common Stock should
consider carefully the following information contained in this Prospectus in
evaluating an investment in the shares of Class A Common Stock offered hereby.
CYCLICAL NATURE OF TEXTILE INDUSTRY; SEASONALITY
Domestic demand for textile products tends to vary with the business cycle of
the U.S. economy. In addition, the popularity, supply and demand for particular
textile products may change significantly from year to year based upon
prevailing fashion trends and other factors. These factors historically have
contributed to fluctuations in the sales and profitability of certain textile
products and in Dan River's results of operations. A decline in the demand for
textile products, an increase in the supply of textile products due to expansion
of capacity within the textile industry, changes in fashion trends or
deteriorating economic conditions could have a material adverse effect on the
Company's results of operations and financial condition.
Demand for the Company's products and the level of the Company's sales
fluctuate moderately during the year, based upon historical buying trends.
Generally, there is increased retail demand for home fashions products during
the fall (back to school) and Christmas holiday seasons and for apparel fabrics
during the same seasons as well as for Father's Day. As a result, the Company
sells more of its home fashions products during its third and fourth fiscal
quarters when demand for home fashions products is generally higher, and sells
more apparel fabrics during the first and second quarters when demand for
apparel fabrics is greatest.
COMPETITION
The textile industry is highly competitive. Dan River sells its products
primarily to domestic customers and competes with large, vertically integrated
textile manufacturers as well as numerous smaller companies specializing in
limited segments of the market. Competitors are both domestic and foreign, and
include a number of companies that are larger in size and have greater financial
resources than the Company. Increases in domestic capacity and imports of
foreign-made textile and apparel products are a significant source of
competition for many domestic textile manufacturers, including Dan River.
Competition in the form of imported textile and apparel products, pricing
strategies of domestic competitors and the proliferation of newly styled fabrics
competing for fashion acceptance have been factors affecting the Company's
business environment. The primary competitive factors in the textile industry
are price, product styling and differentiation, quality, manufacturing
flexibility, delivery time and customer service. The importance of these
factors is determined by the needs of particular customers and the
characteristics of particular products. To the extent that one or more of the
Company's competitors gains an advantage with respect to any key competitive
factor, Dan River's business could be materially adversely affected. See
"Business--Competition." In addition, import protections afforded to foreign
textile manufacturers could make the Company's products less competitive and
have a material adverse effect on the Company's results of operations and
financial condition. See "--Government Policy; Import Regulations."
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<PAGE>
PRICE AND AVAILABILITY OF COTTON
The primary raw material used by the Company is cotton. Prior to 1991, from
time to time, domestic cotton prices exceeded world prices, which created a
competitive disadvantage for the Company and other domestic textile
manufacturers, which are required by law to purchase substantially all of their
cotton from domestic sources. The U.S. government has taken legislative action
to improve the price imbalance, but there can be no assurance that this will
continue to be the case. To the extent that U.S. cotton prices exceed world
cotton prices, the Company's competitiveness may be materially adversely
affected. U.S. Cotton prices are also affected by general economic conditions
as well as the demand for U.S. cotton in world markets and may increase or
decrease depending on other market variables at the time. Prevailing cotton
prices significantly impact the Company's results of operations, and price
increases could have a material adverse effect on the Company's results of
operations and financial condition. In connection with its purchase of cotton,
Dan River generally covers open order requirements, which average approximately
three months of production, through direct purchases and hedging transactions,
and the Company may shorten or lengthen that period in accordance with its
perception of the direction of cotton prices. Although the Company believes it
acts prudently in hedging its cotton requirements, there can be no assurance
that such transactions will not result in higher costs to the Company or will
protect the Company from fluctuations in cotton prices. Further, since cotton
is an agricultural product, its supply and quality are subject to forces of
nature. Although the Company has always obtained sufficient supplies of cotton,
any material shortage or interruption in the supply, variations in the quality
of cotton by reason of weather, infestations or any other factor that would
result in an increase in the cost of cotton could have a material adverse effect
on the Company's results of operations and financial condition. See "Business--
Raw Materials."
SUBSTANTIAL CAPITAL REQUIREMENTS
The textile manufacturing industry is capital intensive. In order to
maintain their competitive position, textile manufacturers, including Dan River,
must continually modernize their manufacturing processes, plants and equipment,
which can involve substantial capital investments. Over the last five fiscal
years, the Company has made capital improvements of approximately $150 million.
The Company expects to invest approximately $26 million during fiscal
1997 and from $25 million to $30 million during fiscal 1998 in capital
improvements designed to reduce manufacturing costs, enhance manufacturing
flexibility and improve product quality and responsiveness to customers. Dan
River generally finances its capital improvements with cash from operations,
vendor financing and borrowings under its credit facilities. To the extent
these sources of funds are insufficient to meet the Company's ongoing capital
improvements requirements, the Company may be required to seek alternative
sources of financing or curtail or delay capital spending plans. There can be
no assurance that such financing will be available when needed or, if available,
that it will be on terms acceptable to the Company. Failure to make capital
improvements necessary to continue modernizing the Company's manufacturing
operations and reduce costs could adversely affect the Company's competitive
position and have a material adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Business Strategy."
GOVERNMENT POLICY; IMPORT REGULATIONS
The domestic textile market is subject to various U.S. governmental policies
affecting raw material costs and product supply. In addition, the policies of
foreign governments may, directly or indirectly, affect the domestic market.
Because U.S. textile companies are generally prohibited from importing cotton,
Dan River
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<PAGE>
must purchase substantially all of its cotton in the domestic market. Prior to
1991, from time to time, price imbalances between world and domestic cotton
prices existed. A series of U.S. legislative initiatives has resulted in the
reduction of the Company's effective cotton costs to near world levels. Because
the availability and cost of cotton are affected by U.S. agricultural policies,
Dan River may experience increased cotton costs that cannot be entirely passed
on to its customers.
The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation. In view of the labor cost advantages and the
number of foreign producers of textile products that compete with certain of the
Company's products, substantial elimination of import protection for domestic
textile manufacturers could have a material adverse effect on the Company's
business. In January 1995, a multilateral trade organization, the World Trade
Organization ("WTO"), was established to replace the General Agreement on
Tariffs and Trade ("GATT"). This new body has set forth the mechanisms by which
world trade in textiles and clothing will be progressively liberalized with the
elimination of quotas and the reduction of duties. The implementation began in
January 1995 with the phasing-out of quotas and the reduction of duties to take
place over a 10-year period. 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. The
elimination of quotas and the reduction of tariffs under the WTO may result in
increased imports of certain textile products and apparel into North America.
These factors could make the Company's products less competitive against low
cost imports from developing countries. See "Business--Competition."
NAFTA, which was entered into by Canada, Mexico and the United States and
became effective on January 1, 1994, has created the world's largest free-trade
zone. The agreement contains safeguards that were 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 will phase out
all trade restrictions and tariffs on textiles and apparel among the three
countries. Although management believes that the Company has benefited from
NAFTA, there can be no assurance that the removal of these barriers to trade
will not have a material adverse effect on the Company's results of operations
and financial condition. See "Business--Competition."
ACQUISITION RISKS
The Company completed the Cherokee Acquisition in February 1997, and it may
seek additional acquisition opportunities that enhance its business. There can
be no assurance that the Company will be able successfully to identify suitable
acquisition candidates, complete acquisitions, integrate acquired operations
into its existing operations or expand into new markets. There can also be no
assurance that future acquisitions will not have an adverse effect upon the
Company's operating results, particularly in the fiscal quarters immediately
following the completion of such acquisitions while the operations of the
acquired business are being integrated into the Company's operations. Once
integrated, acquired operations may not achieve levels of revenues,
profitability or productivity comparable with those achieved by the Company's
existing operations, or otherwise perform as expected. In addition, the Company
competes for acquisition and expansion opportunities with companies that have
substantially greater resources. Although the Company has preliminary
discussions from time to time regarding possible acquisition opportunities, the
Company does not presently have any agreements, arrangements or understandings
regarding any particular acquisition.
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AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
On September 3, 1991, the Company completed a financial restructuring (the
"1991 Restructuring") which involved issuing common and preferred stock to
various parties. Management believes that the 1991 Restructuring did not result
in a "change in ownership" as such term is used in Section 382 of the Internal
Revenue Code. However, Section 382 and related regulations promulgated by the
Internal Revenue Service ("IRS") are extremely complex, and management's
assessment of whether or not a "change in ownership" occurred involves judgments
as to certain factual issues and interpretations as to certain legal issues for
which there is little guidance. There can be no assurance that the IRS will not
challenge the Company's conclusion that no "change in ownership" has occurred
under Section 382. The utilization of the Company's pre-1991 Restructuring net
operating loss and credit carryforwards could be significantly restricted or
eliminated if the 1991 Restructuring is deemed to constitute a "change in
ownership." From the date of the 1991 Restructuring through December 28, 1996,
the Company utilized an aggregate of $16.9 million in net operating loss
carryforwards and $1.7 million in general business credit carryforwards for
federal income tax purposes that are subject to review by the IRS. At December
28, 1996, the Company had unused net operating loss carryforwards of $0.9
million (expiring in 2005), a minimum tax credit carryforward of $8.1 million,
and investment credit and other general business credit carryforwards of $5.3
million (the majority of which expire in 1997 through 2000).
RESTRICTIVE COVENANTS
The Company's Credit Facilities (as defined herein) and the indenture
governing the Company's Senior Subordinated Notes contain restrictions on the
ability of the Company to, among other things (i) incur additional indebtedness,
(ii) place liens on assets, (iii) sell assets, (iv) engage in mergers or
consolidations, (v) pay dividends, (vi) engage in certain transactions with
affiliates and (vii) enter into sale and leaseback transactions. The Credit
Facilities also require the Company to maintain compliance with certain
financial ratios. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." These
limitations and requirements may restrict the ability of Dan River to obtain
additional financing for working capital, capital improvements, acquisitions or
general corporate purposes.
ENVIRONMENTAL REGULATION
Dan River is subject to 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, including some substances which contain
constituents considered hazardous under environmental laws. The Company's
dyeing and finishing operations result in the discharge of substantial
quantities of wastewater and emissions to the atmosphere. The Company's
operations also are governed by laws and regulations relating to workplace
safety and worker health which, among other things, establish cotton dust,
formaldehyde, asbestos and noise standards, and regulate the use of hazardous
chemicals in the workplace. Treatment costs of air emissions and wastewater
discharges, as well as other costs of environmental compliance, have increased
moderately over the past serveral years and have not had a material adverse
impact on the Company's business; however, there can be no assurance that
compliance with environmental or health and safety laws and regulations will not
materially adversely affect the Company's operations in the future. Dan River
cannot predict what environmental or health and safety legislation or
regulations will be enacted in the future or how existing or future laws or
regulations will be enforced, administered or interpreted, nor can it predict
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the amount of future expenditures which may be required in order to comply with
any such environmental or health and safety laws or regulations. See "Business-
- -Governmental Regulation."
CUSTOMER CONCENTRATION
The Company markets its home fashions products and apparel fabrics to over
3,000 customers. In fiscal 1996, the top five home fashions products customers
and apparel fabrics customers accounted for 44.5% and 24.4%, respectively, of
the Company's net sales attributable to home fashions products and apparel
fabrics. During the six months ended June 28, 1997, the top five home fashions
products customers and apparel fabrics customers accounted for 45.0% and 34.9%,
respectively, of net sales attributable to home fashions products and apparel
fabrics. The Company's largest home fashions products customer and apparel
fabrics customer accounted for 8.7%, and 3.9%, respectively, of the Company's
net sales in fiscal 1996, and 7.3% and 4.6%, respectively, of the Company's net
sales in the six months ended June 28, 1997. The loss of any of the top five
home fashions products customers or apparel fabrics customers could have a
material adverse effect on the Company's net sales attributable to such product
lines.
RELIANCE ON KEY MANAGEMENT
The success of the Company is dependent upon the talents and efforts of a
small number of key management personnel, including Joseph L. Lanier, Jr., the
Company's Chairman and Chief Executive Officer, Richard L. Williams, the
Company's President and Chief Operating Officer, and Barry F. Shea, the
Company's Vice President-Chief Financial Officer. The loss of such management
personnel could have an adverse effect on the business of the Company. See
"Management."
SUBSTANTIAL INFLUENCE OF PRINCIPAL SHAREHOLDERS
Upon the completion of the Offering, Joseph L. Lanier, Jr., Richard L.
Williams and Barry F. Shea (together with certain of their family members) will
control all of the outstanding Class B Common Stock, which will represent 35% of
the combined outstanding voting power of all classes of the Company's Common
Stock. As a result, such persons will be able to exert substantial influence
with respect to all matters submitted to a vote of holders of Common Stock
(except matters where the Class A Common Stock is entitled to vote as a separate
voting group under the Restated Charter or Georgia law), including election of
the Company's directors. Moreover, as a result of the Voting Agreement (as
defined herein), Mr. Lanier, who will own Class B Common Stock representing
approximately % of the equity represented by both classes of Common Stock,
will individually control the voting of all of the Class B Common Stock. The
Class B Common Stock may only be transferred to certain Permitted Transferees
(as defined below) and automatically converts into shares of Class A Common
Stock when the aggregate outstanding shares of Class B Common Stock constitutes
less than 7% of the aggregate outstanding shares of Common Stock. See
"Description of Capital Stock--Common Stock."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Class A Common
Stock of the Company. The initial public offering price for the Class A Common
Stock will be determined by negotiations among the Company, the Selling
Shareholders and the representatives of the Underwriters. There can be no
assurance that an active trading market for the Class A Common Stock will
develop or continue after the
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completion of the Offering or that the market price of the Class A Common Stock
will not decline below the initial public offering price. See "Underwriters."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
shares of Class A Common Stock, of which the shares
sold pursuant to the Offering will be fully tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except for any of such shares held by "affiliates" (as
defined under Rule 405 of the Securities Act) of the Company. The holders of
the remaining shares of Class A Common Stock (the
"Restricted Shares") will be entitled to sell their shares in the public
securities market without registration under the Securities Act only to the
extent permitted by Rule 144 promulgated thereunder. A total of of the
Restricted Shares have been owned by the holders thereof for more than one year
and as a result will be fully tradeable upon completion of the Offering without
compliance with the restrictions under Rule 144 and , which are
owned by affiliates of the Company, will be eligible for sale pursuant to Rule
144, subject to certain restrictions, upon completion of the Offering. As
described below, certain holders of Common Stock have agreed to certain
restrictions on their ability to sell Common Stock for 180 days following the
Offering. See "Underwriters."
After the Offering, certain shares of Common Stock will be covered by the
Registration Rights Agreement (as defined herein). The Registration Rights
Agreement provides for, among other things: (i) a call right, exercisable by
Joseph L. Lanier, Jr., for the purchase of shares of Common Stock held by
certain lenders related to the 1991 Restructuring; (ii) a call right,
exercisable by the Company, for the shares of Common Stock set forth in clause
(i) above; (iii) certain demand and piggyback registration rights; (iv) certain
drag-along rights; and (v) certain preemptive rights which are not applicable in
connection with the Offering. See "Description of Capital Stock--Registration
Rights Agreement."
Immediately following the Offering, there will be shares
of Class B Common Stock outstanding, which will be convertible (subject to
certain restrictions on transfer and first offer rights described under
"Description of Capital Stock--Common Stock") into shares of Class A Common
Stock (on a share-for-share basis). Shares of Class B Common Stock may not be
transferred other than to certain Permitted Transferees (as defined herein).
Sales of substantial amounts of Class A Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the prevailing
market price of the Class A Common Stock or the ability of the Company to raise
capital through a public offering of its equity securities. See "Shares
Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS
The Company's Restated Charter and Bylaws contain several provisions
which may discourage or make more difficult any attempt by a person or group to
obtain control of the Company, including provisions authorizing the issuance of
preferred stock without shareholder approval, requiring a supermajority vote of
shareholders under certain circumstances, restricting the persons who may call a
special meeting of shareholders, establishing a classified board of directors,
providing that directors may be removed only for cause and requiring notice of
shareholder nominations and proposals. The Company has also elected to be
covered by the Georgia business combination and fair price statutes, which
restrict certain business
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<PAGE>
combinations with "interested shareholders" and prohibit such combinations with
"interested shareholders" unless certain fair price criteria and other
requirements are satisfied. See "Description of Capital Stock--Charter and Bylaw
Provisions" and "Georgia Anti-Takeover Statutes." Further, upon completion of
the Offering, Joseph L. Lanier, Jr., Richard L. Williams and Barry F. Shea
(together with certain of their family members) will control approximately 37%
of the combined outstanding voting power of all classes of the Company's Common
Stock and are parties to a voting agreement that entitles Mr. Lanier to direct
the voting of all such shares. As a result, Mr. Lanier will be able to exert
substantial influence with respect to all matters submitted to a vote of
shareholders (except with respect to matters as to which the record holders of
the Class A Common Stock are entitled to vote as a separate voting group under
the Restated Charter or applicable law), making any attempt by a person or group
to obtain control of the Company more difficult.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (after deducting estimated underwriting
discounts and commissions and estimated offering expenses) from the sale of
shares of Class A Common Stock offered hereby by the Company (at an assumed
initial public offering price of $ per share) are estimated to be $
million. The Company will not receive any of the proceeds from the sale of
shares of Class A Common Stock offered hereby by the Selling Shareholders or
from the sale of shares of Class A Common Stock by the Selling
Shareholders if the Underwriters' over-allotment option is exercised.
The Company intends to use the net proceeds to repay indebtedness outstanding
under the Company's term loan facility (the "Term Loan Facility") pursuant to
the Loan and Security Agreement dated as of February 3, 1997 (the "Credit
Agreement"), certain notes payable to equipment vendors ("Vendor Financing"),
certain other notes ("Other Notes"), and a partial repayment of indebtedness
pursuant to a secured term note due 2001 (the "Term Loan due 2001"). As of
September 16, 1997, the Company had approximately $34.1 million outstanding
under the Term Loan Facility, $7.6 million outstanding under the Vendor
Financing, $12.7 million outstanding under the Other Notes, and $10.5 million to
be repaid under the Term Loan due 2001. Such borrowings bore interest as of
such date at a weighted average interest rate of 8.22%, 8.00%, 8.46% and 7.47%,
respectively. All such borrowings were incurred to finance the Cherokee
Acquisition or the modernization of the Company's manufacturing and distribution
capabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources." The Company will
not incur any penalty or be required to pay a premium in connection with its
prepayment of the Term Loan Facility, Vendor Financing, Other Notes or the Term
Loan due 2001. The Company will use the balance, if any, of the net proceeds of
the Offering for general corporate purposes, including capital improvements and
possible future acquisitions. See "Risk Factors--Substantial Capital
Requirements" and "--Acquisition Risks."
Pending application of the net proceeds as described above, the Company
intends to invest its net proceeds in short-term interest-bearing, investment-
grade debt securities, certificates of deposit or direct or guaranteed
obligations of the U.S. government.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. Pursuant to the Company's Restated Charter, no dividend may be declared
or paid in cash or property on any share of either class of Common Stock unless
simultaneously the same dividend is declared or paid on each share of the other
class of Common Stock. The Company currently intends to retain its future
earnings for general corporate purposes including working capital, capital
improvements and possible acquisitions. Any payment of cash dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend upon the Company's results of operations, earnings, capital requirements,
contractual restrictions and other factors deemed relevant by the Company's
Board. The Credit Agreement and the Indenture relating to the Senior
Subordinated Notes limit the Company's ability to pay dividends on the Common
Stock, based primarily upon the Company's compliance with certain financial
ratios and other financial requirements.
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CAPITALIZATION
The following table sets forth as of June 28, 1997, the short-term debt and
total capitalization of Dan River at June 28, 1997 and as adjusted to give
effect to (i) the Offering (at an assumed initial public offering price of $
per share) and (ii) the application of the net proceeds therefrom to the Company
to repay outstanding indebtedness as described under "Use of Proceeds." In
addition, as a result of the Offering, certain put rights will terminate and the
Common Stock subject to such put rights will be classified as part of
shareholders' equity. All information reflects the Recapitalization. This
table should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 28, 1997
ACTUAL AS ADJUSTED(1)
--------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(2)................ $ 10,774 $ 4,568
======== ========
Long-term debt(2):
10.125% Senior Subordinated Notes due 2003........ $120,000 $120,000
Working Capital Facility(3)....................... 18,000 18,000
Term Loan Facility(3)............................. 31,500 -
Term Loan due 2001................................ 18,318 8,898
Notes payable to equipment vendors................ 7,142 1,425
Other borrowings with various rates and maturities 17,766 5,609
-------- --------
Total long-term debt............................ 212,726 153,932
Common stock subject to put rights..................... 10,884 (4)
Shareholders' equity:
Class A Common Stock, $.01 par value;
__________ shares authorized;
__________ shares outstanding;
__________ shares outstanding as adjusted(5).... 7
Class B Common Stock, $.01 par value;
_________ shares authorized;
_________ shares outstanding;
_________ shares outstanding as adjusted........ 1
Preferred Stock, $.01 par value;
_________ shares authorized;
no shares outstanding;
no shares outstanding as adjusted............... -
Additional paid-in capital........................ 63,643 (4)
Retained earnings................................. 16,012
Pension liability adjustment...................... (609)
--------
Total shareholders' equity...................... 79,054
--------
Total capitalization............................ $302,664 $
======== ===========
</TABLE>
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_____________
(1) As adjusted to give effect to (i) the Offering (at an assumed initial public
offering price of $ per share) and (ii) the application of a
portion of the net proceeds therefrom to the Company to repay outstanding
indebtedness as described under "Use of Proceeds."
(2) For information concerning the Company's outstanding debt, see Note 3 to the
Consolidated Financial Statements of the Company.
(3) As of June 28, 1997, the Company had $65.5 million of borrowing availability
under the working capital facility established pursuant to the Credit
Agreement (the "Working Capital Facility"). After giving effect to the
Offering and the application of the net proceeds therefrom to the Company,
the Company would have had $65.5 million of borrowing availability under the
Working Capital Facility. For a discussion of the Company's Working Capital
Facility and Term Loan Facility, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(4) Reflects the reclassification of the Common Stock subject to put rights as
part of shareholders' equity. See Note 8 to the Unaudited Condensed
Consolidated Financial Statements of the Company.
(5) Does not include (i) shares of Class A Common Stock issuable upon
exercise of stock options outstanding as of June 28, 1997 or (ii)
shares of Class A Common Stock available for the future grant of stock
options under the Company's stock option plans. See "Management--New
Benefit Plans" and Note 6 to the Consolidated Financial Statements of the
Company.
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SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The selected historical statement of income data and historical balance sheet
data for each of the five fiscal years in the period ended December 28, 1996 are
derived from the consolidated financial statements of the Company, which have
been audited by Ernst & Young LLP, independent auditors. The selected historical
consolidated financial data set forth below should be read in conjunction with
the Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Prospectus, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial data included herein.
The selected historical statement of income data and historical balance sheet
data for the six months ended June 29, 1996 and June 28, 1997 are derived from
the Unaudited Condensed Consolidated Financial Statements of the Company. In the
opinion of the Company, such unaudited condensed consolidated financial
statements include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the six months ended June 28, 1997 are
not necessarily indicative of results that may be expected for the full year.
The pro forma consolidated financial data are derived from the Unaudited Pro
Forma Condensed Consolidated Income Statements of the Company included elsewhere
in this Prospectus. The selected pro forma statement of income data give effect
to the Cherokee Acquisition and the Offering and the application of the net
proceeds therefrom to the Company as if they had been consummated at the
beginning of the respective periods presented. The selected pro forma
consolidated financial data may not be indicative of results that would have
actually occurred if the Cherokee Acquisition, the Offering and the application
of the net proceeds therefrom to the Company had been effected on the dates
indicated or the results that may be obtained in the future. The selected pro
forma consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company, the
Financial Statements and Notes thereto of Cherokee, and the Unaudited Pro Forma
Condensed Consolidated Statements of Income of of the Company included elsewhere
in this Prospectus. The consolidated financial data set forth below reflect the
Recapitalization. See "Certain Transactions--Recapitalization" and Note to the
Consolidated Financial Statements of the Company.
Dan River and its previous parent and sole shareholder, Braelan Corp.
("Braelan"), were organized in 1989 to acquire and operate Dan River Holding
Company and subsidiaries. On December 29, 1995, Braelan was merged with and
into Dan River. Selected historical financial data for periods prior to the
merger have been restated to reflect the combination. See Notes 1 and 2 to the
Consolidated Financial Statements of the Company.
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<TABLE>
<CAPTION>
Pro Forma
Six
Pro Forma Six Months Ended Months
Fiscal Year Fiscal -------------------- Ended
------------------------------------------------ Year June 29, June 28, June 28,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- ---------- --------- -------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.............. $333,033 $317,566 $371,534 $384,801 $379,567 $480,639 $176,941 $227,935 $237,145
Cost of sales........... 268,605 259,148 297,460 306,879 307,383 399,602 145,074 180,720 187,876
Selling, general and
administrative
expenses............ 39,083 38,550 43,908 44,860 45,673 51,863 22,956 25,098 25,847
Other operating costs,
net(2).............. -- 3,039 1,534 8,972 (428) (428) -- 7,875 7,875
-------- -------- -------- -------- -------- ---------- --------- -------- ---------
Operating income....... $ 25,345 $ 16,829 $ 28,632 $ 24,090 $ 26,939 $ 29,602 $ 8,911 $ 14,242 $ 15,547
======== ======== ======== ======== ======== ========= ========= ======== ========
Income (loss) before
income taxes and
extraordinary
item................ $ 13,103 $ 4,643 $ 8,357 $ 2,390 $ 9,256 $ 10,818 $ (154) $ 3,766 $ 7,350
Extraordinary item(3).. -- 348 -- -- -- -- -- --
Net income (loss)...... 8,166 2,519 3,525 258 5,686 6,642 (92) 2,314 4,513
Redeemable preferred
stock dividends..... 2,782 2,091 -- -- -- -- -- -- --
Net income (loss)
applicable to
common stock........ $ 5,384 $ 428 $ 3,525 $ 258 $ 5,686 $ 6,642 $ (92) $ 2,314 $ 4,513
Earnings per share:
Primary............. $ $ $ $ $ $ $ $ $
Fully diluted....... $ $ $ $ $ $ $ $ $
Weighted average
number of shares
outstanding:
Primary.............
Fully diluted.......
OTHER FINANCIAL DATA:
EBITDA(4).............. $ 40,413 $ 36,314 $ 48,353 $ 52,599 $ 47,306 $ 56,569 $ 19,324 $ 36,159 $ 37,981
Cash flow from
operating activities. 25,360 21,518 11,887 22,538 45,078 14,435 17,735
Depreciation and
amortization(5)...... 15,068 16,446 18,187 19,537 20,795 10,413 14,042
Capital expenditures, gross 9,914 27,690 44,112 28,004 34,515 16,207 7,285
Capital expenditures,
net(6)............... 9,821 12,839 26,885 20,801 28,564 12,983 7,273
BALANCE SHEET DATA
(END OF PERIOD):
Working capital........ $ 98,954 $ 94,040 $103,973 $109,763 $ 93,291 $104,731 $115,782
Total assets........... 282,668 289,384 329,902 330,944 321,050 329,413 390,387
Total debt............. 145,182 170,066 196,436 179,703 169,468 179,514 223,500
Redeemable preferred
stock................ 18,577 -- -- -- -- -- --
Common stock subject to
put rights........... 7,000 7,000 7,000 7,000 9,726 7,000 10,884
Shareholders' equity... 42,065 42,493 46,810 73,702 77,898 73,610 79,054
</TABLE>
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<PAGE>
_______________________
(1) The pro forma statement of income data and pro forma other financial data
give effect to the Cherokee Acquisition and the Offering and the application
of a portion of the net proceeds therefrom to the Company as if they had
been consummated at the beginning of the periods presented, and the pro
forma balance sheet data give effect to the Cherokee Acquisition as if it
had been consummated on December 28, 1996. See "Use of Proceeds" and
Unaudited Pro Forma Condensed Consolidated Financial Statements included
herein.
(2) Other operating costs, net includes various non-recurring charges and
credits from year to year, the most significant of which relate to
writedowns of fixed assets rendered obsolete by the Company's ongoing
facility modernization program, plant closure costs and the decision to
discontinue manufacturing and marketing a line of apparel fabrics. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note 7 to the Consolidated Financial Statements of the Company,
and Note 5 to the Unaudited Condensed Consolidated Financial Statements of
the Company.
(3) The extraordinary item for 1993 represents the gain, net of related income
taxes, from the early retirement of certain of the Company's credit
facilities and term loans out of the proceeds from the issuance of the
Senior Subordinated Notes.
(4) EBITDA represents operating income before depreciation and amortization.
For purposes of computing EBITDA, operating income has been adjusted to
exclude other operating costs, net. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 7 of the
Consolidated Financial Statements of the Company. EBITDA is presented not
as an alternative measure of operating results or cash flow (as determined
in accordance with generally accepted accounting principles), but rather to
provide additional information related to the Company's cash flow and its
ability to service debt.
(5) Includes depreciation and amortization of tangible assets, but excludes
amortization of debt issuance costs, which amortization is included in
interest expense.
(6) Represents capital improvements, net of amounts acquired in exchange for
debt.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading designer, manufacturer and marketer of textile
products for the home fashions products and apparel fabrics markets. The
Company's net sales are derived principally from sales of home fashions
products, consisting of packaged bedroom furnishings such as comforters, sheets,
pillowcases, shams, bed skirts, decorative pillows and draperies, and apparel
fabrics, including a broad range of cotton and cotton-blend fabrics. Sales of
home fashions products are mainly to major retailers, including Wal-Mart Stores,
Inc., Kmart Corporation, Federated Department Stores, Inc., J.C. Penney Company,
Inc. and The May Department Stores Company. Sales of apparel fabrics are mainly
to domestic manufacturers of men's, women's and children's clothing, which in
turn market clothing under a variety of widely recognized brand names such as
Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz Claiborne, L.L. Bean,
Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as numerous private labels
through retailers such as J.C. Penney Company, Inc. and Sears, Roebuck & Co.
The Company's sales are affected by the general business cycles of the textile
industry and the U.S. economy which, in turn, affect the retail environment for
the Company's products. The Company has taken steps to reduce the sensitivity
of its business to industry downturns. Within its home fashions operations, the
Company focuses on value-added, fashion-directed products that have higher
margins than solid color commodity products. The Cherokee Acquisition has
substantially increased the size of the Company's apparel fabrics operations and
reduced its fixed costs on a per unit basis, which management believes will make
such operations less sensitive to cyclical downturns.
The Company's cost of sales include raw materials costs, primarily cotton and
polyester, as well as manufacturing costs. Fluctuations in the price of cotton
can have a significant effect on the Company's cost of sales. Generally, the
Company seeks to purchase sufficient amounts of cotton to cover existing order
commitments. However, the Company may also purchase cotton in advance of orders
on terms that it deems advantageous, and while the Company does not speculate on
the price of cotton, it may hedge prices from time to time through forward
contracts and the futures and options markets. To reduce manufacturing costs
and improve productivity, the Company has invested approximately $150 million
since 1992 in an extensive ongoing facility modernization program which began in
1989.
On February 3, 1997, the Company consummated the acquisition of substantially
all of the assets and certain of the liabilities of Cherokee for an aggregate
purchase price of $65 million, subject to a working capital adjustment. The
Company also assumed approximately $6.7 million in liabilities. The Company
funded the purchase price (and approximately $2.0 million in fees and expenses
relating to the Cherokee Acquisition) with $12.1 million of cash, $19.9 million
of borrowings under the Working Capital Facility and $35.0 million of borrowings
under the Term Loan Facility. In July 1997, as a result of the finalization of
the working capital adjustment, the Company received a $1.7 million payment from
Cherokee. The Cherokee Acquisition was accounted for using the purchase method
of accounting. In connection with the Cherokee Acquisition, the Company
acquired two greige fabrics manufacturing facilities, one located in
Sevierville, Tennessee and one located in Spindale, North Carolina, and a
finishing plant located in Harris, North Carolina.
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<PAGE>
The following table sets forth selected results of operations, expressed in
millions of dollars and as a percentage of net sales, for each of fiscal 1994,
1995 and 1996 and for the six months ended June 29, 1996 and June 28, 1997:
<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
------------------------------------------------- -------------------------------------
1994 1995 1996 June 29, 1996 June 28, 1997
--------------- --------------- --------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Home fashions
products........... $213.3 57.4% $231.8 60.2% $243.2 64.1% $112.8 63.8% $116.5 51.1%
Apparel fabrics....... 158.2 42.6 153.0 39.8 136.4 35.9 64.1 36.2 111.4 48.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total net sales.. 371.5 100.0 384.8 100.0 379.6 100.0 176.9 100.0 227.9 100.0
Cost of sales 297.5 80.1 306.9 79.8 307.4 81.0 145.1 82.0 180.7 79.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross profit............. 74.1 19.9 77.9 20.2 72.2 19.0 31.9 18.0 47.2 20.7
Selling, general and
administrative expenses 43.9 11.8 44.9 11.7 45.7 12.0 23.0 13.0 25.1 11.0
Other operating costs, net 1.5 0.4 9.0 2.3 (0.4) (0.1) - - 7.9 3.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Operating income......... 28.6 7.7 24.1 6.3 26.9 7.1 8.9 5.0 14.2 6.2
Other income............. 0.1 - 0.2 0.1 0.5 0.1 0.4 0.2 0.1 -
Interest expense......... (20.4) (5.5) (21.9) (5.7) (18.2) (4.8) (9.4) (5.3) (10.6) (4.6)
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) before
income taxes............ 8.4 2.3 2.4 0.6 9.3 2.4 (0.2) (0.1) 3.8 1.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Provision for income taxes 4.8 1.3 2.1 0.5 3.6 0.9 (0.1) (0.1) 1.5 0.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Net income (loss)........ $ 3.5 0.9% $ 0.3 0.1% $ 5.7 1.5% $ (0.1) (0.1)% $2.3 1.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED JUNE 29, 1996
Net sales for the first six months of 1997 were $227.9 million, an increase
of $51.0 million or 28.8% compared to $176.9 million for the first six months of
fiscal 1996. Net sales of home fashions products during the first six months of
fiscal 1997 were $116.5 million, an increase of $3.6 million or 3.2% compared to
$112.8 million for the first six months of fiscal 1996. Net sales of apparel
fabrics during the first six months of fiscal 1997 were $111.4 million, an
increase of $47.4 million or 73.9% compared to $64.1 million for the first six
months of fiscal 1996. The increase in net sales of home fashions products was
due to higher unit volume offset somewhat by lower average pricing. The
increase in net sales of apparel fabrics resulted primarily from the Cherokee
Acquisition, which was consummated on February 3, 1997. Apparel fabrics unit
volumes more than doubled for the first six months of fiscal 1997. This was
offset somewhat by lower price greige fabrics that were sold to the converter
trade (purchasers of unfinished fabric who contract out the finishing to third
parties).
Gross profit for the first six months of fiscal 1997 was $47.2 million (20.7%
of net sales), an increase of $15.3 million or 48.2% from gross profit of $31.9
million (18.0% of net sales) for the first six months of fiscal 1996. The
increase in gross profit was due to higher unit volumes, better manufacturing
performance (particularly in apparel fabrics where there were increased activity
levels) and lower raw material prices.
Selling, general and administrative expenses for the first six months of
fiscal 1997 were $25.1 million (11.0% of net sales), an increase of $2.1 million
or 9.3% from $23.0 million (13.0% of net sales) for the first six months of
fiscal 1996. The increase was caused by higher incentive compensation expense,
increased product design and roll-out costs associated with the introduction of
the "Nautica" brand of home fashions products, and increased selling and
administrative expense as a result of the Cherokee Acquisition.
-24-
<PAGE>
The Company incurred a one-time charge in the second quarter of fiscal 1997
as a result of the decision to close its Riverside apparel fabrics weaving
operation in Danville, Virginia. The production from this facility will be
moved to other Company facilities. Accordingly, its closure will reduce fixed
costs without any decrease in production. The $7.9 million pre-tax charge,
reflected under "Other operating costs, net", includes $0.4 million for
severance and other employee benefit costs. The remainder of the charge relates
principally to writedowns and other costs associated with the divestiture of
real estate and equipment.
For the reasons described above, operating income during the first six months
of fiscal 1997 was $14.2 million (6.2% of net sales), an increase of $5.3
million or 59.8% from $8.9 million (5.0% of net sales) for the first six months
of fiscal 1996.
Interest expense was $10.6 million for the first six months of fiscal 1997,
an increase of $1.2 million or 12.3% from $9.4 million for the first six months
of fiscal 1996. The increase in interest expense was due to higher debt levels
arising from the Cherokee Acquisition offset somewhat by lower average interest
rates. The lower average interest rates reflect the debt incurred to finance the
Cherokee Acquisition, most of which was financed at floating rates which are
lower than the Company's fixed rate public debt, thereby reducing the average
interest rate.
The income tax provision was $1.5 million (38.6% of pre-tax income) for the
first six months of fiscal 1997, an increase of $1.6 million compared to an
income tax benefit of $0.1 million (40.3% of the pre-tax loss) recorded for the
first six months of fiscal 1996. Accordingly, the Company recorded net income
of $2.3 million (1.0% of net sales) for the first six months of fiscal 1997
compared to a net loss of $0.1 million for the first six months of fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in fiscal 1996 were $379.6 million, a decrease of $5.2 million or
1.4% compared to $384.8 million in fiscal 1995. Net sales of home fashions
products were $243.2 million in fiscal 1996, an increase of $11.3 million or
4.9% compared to $231.8 million in fiscal 1995. Net sales of apparel fabrics
were $136.4 million, a decrease of $16.6 million or 10.8% compared to $153.0
million in fiscal 1995. The increase in net sales of home fashions products in
fiscal 1996 was due to higher unit volume, which was partially offset by lower
average pricing reflecting a competitive pricing environment. The decrease in
net sales of apparel fabrics in fiscal 1996 was due to lower unit volume of
shirting fabrics, particularly commodity white and blue oxfords, due to a
sluggish retail environment for these products during the first half of 1996.
Gross profit in fiscal 1996 was $72.2 million (19.0% of net sales), a
decrease of $5.7 million or 7.4% compared to gross profit of $77.9 million
(20.2% of net sales) in fiscal 1995. The decrease in gross profit was due to
lower sales of apparel fabrics, higher cotton costs and poor manufacturing
performance associated with abbreviated running schedules during the first half
of 1996 because of the weak order position for apparel fabrics during that
period.
Selling, general and administrative expenses in fiscal 1996 were $45.7
million (12.0% of net sales), an increase of $0.8 million or 1.8% from $44.9
million (11.7% of net sales) in fiscal 1995. The increase in these expenses
relates primarily to higher rent expense for the Company's New York City office
and showrooms and higher incentive compensation, offset by lower costs from the
operation of fewer factory stores and lower general and administrative expenses
for the year.
-25-
<PAGE>
The Company incurred one-time charges in both fiscal 1996 and fiscal 1995.
Other operating costs, net reflect a net credit of $0.4 million in fiscal 1996
compared to $9.0 million of net charges in fiscal 1995. Fiscal 1996 reflected
the reversal of a portion of the fiscal 1995 charges principally relating to the
discontinued line of apparel fabrics ($0.9 million), which was partially offset
by $0.5 million of net charges for equipment writedowns associated with the
Company's modernization program. Fiscal 1995 charges included $4.4 million in
writedowns of fixed assets relating to the Company's ongoing modernization
program, $3.0 million of costs associated with the Company's decision to
discontinue manufacturing and marketing a line of apparel fabrics, and $1.6
million of costs associated with relocation of the Company's design,
merchandising and marketing staff from office space at 111 West 40th Street to
new offices at 1325 Avenue of the Americas in New York City.
Operating income for fiscal 1996 was $26.9 million (7.1% of net sales), an
increase of $2.8 million or 11.8% from $24.1 million (6.3% of net sales) in
fiscal 1995. The increase resulted from the one-time charges that were taken in
fiscal 1995 and which are described above. Excluding these charges, operating
income for fiscal 1996 would have decreased $6.6 million or 19.8% from fiscal
1995 due to the lower sales of apparel fabrics, higher cotton costs, and poor
manufacturing performance associated with abbreviated running schedules during
the first half of fiscal 1996 because of the weak order position for apparel
fabrics during that period.
Interest expense was $18.2 million in fiscal 1996, a decrease of $3.8 million
or 17.2% from $21.9 million in fiscal 1995. The reduction in interest expense
was due primarily to the conversion of the Company's 16.35% Convertible
Subordinated Junior Notes (the "Junior Notes") into 158,867 shares of the
Company's Class A Common Stock as of September 3, 1995 and to a lesser extent
because of lower average interest rates and outstanding indebtedness during
fiscal 1996. The decrease in debt levels was due to lower levels of working
capital during fiscal 1996.
The income tax provision was $3.6 million (38.6% of pre-tax income) for
fiscal 1996, an increase of $1.4 million or 67.4% from the $2.1 million (89.2%
of pre-tax income) income tax provision recorded for fiscal 1995. The high
effective tax rate for fiscal 1995 reflected the nondeductibility of interest on
the Junior Notes that were outstanding during the first eight months of fiscal
1995.
For the reasons described above, net income in fiscal 1996 was $5.7 million
(1.5% of net sales), an increase of $5.4 million from $0.3 million (0.1% of net
sales) in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in fiscal 1995 were $384.8 million, an increase of $13.3 million or
3.6% compared to $371.5 million in fiscal 1994. Net sales of home fashions
products were $231.8 million in fiscal 1995, an increase of $18.5 million or
8.7% compared to $213.3 million in fiscal 1994. Net sales of apparel fabrics
were $153.0 million in fiscal 1995, a decrease of $5.3 million or 3.3% compared
to $158.2 million in fiscal 1994. The increase in net sales of home fashions
products was due to higher unit volume, the sale of a better mix of products and
higher average selling prices. The improved product mix consisted of more
accessory items, ensembles and high thread count sheeting in fiscal 1995 as
compared to fiscal 1994. The decrease in sales of apparel fabrics in fiscal
1995 was entirely due to lower unit volume, primarily in shirting fabrics.
Gross profit in fiscal 1995 was $77.9 million (20.2% of net sales), an
increase of $3.8 million or 5.2% compared to gross profit of $74.1 million
(19.9% of net sales) in fiscal 1994. The increase in gross profit
-26-
<PAGE>
in fiscal 1995 reflected lower costs resulting from the Company's capital
improvement program, which were offset somewhat by higher costs for raw
materials and manufacturing materials.
Selling, general and administrative expenses in fiscal 1995 were $44.9
million (11.7% of net sales), an increase of $1.0 million or 2.2% from $43.9
million (11.8% of net sales) in fiscal 1994. The increase in selling, general
and administrative expenses in fiscal 1995 related primarily to higher expenses
associated with operating the Company's factory stores and an increase in bad
debt expense.
The Company incurred one-time charges in both fiscal 1995 and fiscal 1994.
Other operating costs, net reflect $9.0 million of charges in fiscal 1995
compared to $1.5 million of net charges in fiscal 1994. The charges in fiscal
1995 related to $4.4 million in writedowns of certain fixed assets that had
become obsolete as a result of the Company's ongoing modernization program, $3.0
million of costs associated with the Company's decision to discontinue
manufacturing and marketing a line of apparel fabrics, and $1.6 million of costs
associated with relocation of the Company's design, merchandising and marketing
staff from office space at 111 West 40th Street to new offices at 1325 Avenue of
the Americas in New York City. The one-time charges in fiscal 1994 included
$0.7 million for writedowns of equipment that became obsolete as a result of the
Company's modernization program and $0.8 million related to the noncash portion
of certain compensation expense associated with the transfer of stock and the
granting of stock options by a principal shareholder to certain management
employees.
Operating income for fiscal 1995 was $24.1 million (6.3% of net sales), a
decrease of $4.5 million or 15.9% from $28.6 million (7.7% of net sales) in
fiscal 1994. All of the decrease was caused by the one-time charges described
above. Absent those charges, operating income would have been $33.1 million
(8.6% of net sales) in fiscal 1995, an increase of $2.9 million or 9.6% from
$30.2 million (8.1% of net sales) in fiscal 1994. The better operating
performance in fiscal 1995 was due to lower manufacturing costs associated with
the Company's modernization program, which were offset somewhat by cost
increases for raw materials and manufacturing materials.
Interest expense was $21.9 million in fiscal 1995, an increase of $1.5
million or 7.5% from $20.4 million in fiscal 1994. Included in interest expense
during fiscal 1995 and fiscal 1994 was $2.9 million and $3.8 million,
respectively, of noncash interest associated with the Junior Notes which were
converted into 158,867 shares of the Company's Class A Common Stock as of
September 3, 1995. Excluding the interest on the Junior Notes, interest expense
would have been $19.0 million and $16.6 million in fiscal 1995 and 1994,
respectively. The increase was due to higher debt levels during fiscal 1995,
which was offset to a certain extent by slightly lower average interest rates.
The increase in debt levels was caused by the Company's capital spending with
respect to its ongoing modernization program and increased levels of working
capital during the year.
The income tax provision for fiscal 1995 was $2.1 million (89.2% of pre-tax
income), a decrease of $2.7 million or 55.9% compared to $4.8 million (57.8% of
pre-tax income) in fiscal 1994. The high effective tax rates in both fiscal
years reflected the nondeductibility of interest on the Junior Notes.
For the reasons described above, net income in fiscal 1995 was $0.3 million
(0.1% of net sales), a decrease of $3.3 million or 92.7% from $3.5 million (0.9%
of net sales) in fiscal 1994.
-27-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company relies on internally generated cash flow, supplemented by
borrowings under its Credit Facilities and Vendor Financing, to meet its working
capital needs, capital improvements and debt service requirements. In the past,
the Company has maintained substantial levels of leverage. However, the
Offering will result in a substantial reduction in that leverage. On a pro
forma basis, after giving effect to the Offering and the application of the net
proceeds to reduce indebtedness, the Company's debt to total capital ratio at
June 28, 1997 would be reduced from 71.3% to 50.1% and its ratio of EBITDA to
interest expense would be increased from 3.4 times to 4.6 times. There can be
no assurance that the Company will not incur substantial leverage in the future
in connection with its capital improvements program or in connection with
possible future acquisitions.
WORKING CAPITAL
The Company's operations are working capital intensive. The Company's
operating working capital (accounts receivable and inventories less accounts
payable and accrued expenses) typically increases or decreases in relation to
sales and operating activity levels.
Net cash generated from operating activities was $17.7 million in the six
months ended June 28, 1997. Included in that amount was a use of cash for
operating assets and liabilities of $4.9 million, primarily comprised of a $5.0
million use for operating working capital (accounts receivable -- $2.3 million
source, inventories -- $11.1 million use, and accounts payable and accrued
expenses -- $3.8 million source).
During the comparable six month period ended June 29, 1996, net cash
generated from operating activities was $14.4 million. Included in that amount
was a source of cash from operating assets and liabilities of $3.5 million,
primarily comprised of a $3.8 million source from operating working capital
(accounts receivable -- $4.1 source, inventories -- $1.9 million source, and
accounts payable and accrued expenses -- $2.2 million use).
Operating working capital decreased $17.3 million (16.7%) during fiscal 1996
reflecting improved inventory management and to a lesser extent the 1.4%
decrease in net sales from fiscal 1995. Net income plus noncash expense items
(net) provided $28.4 million in cash during the year. Additionally, cash was
provided by a $16.7 million reduction in operating assets and liabilities. This
reduction was made up of a $24.6 million reduction in inventories offset by
items totaling $7.8 million, principally a reduction in accounts payable and
accrued expenses of $6.6 million. Accordingly, net cash of $45.1 million was
generated from operating activities.
Operating working capital increased $5.7 million (5.8%) in fiscal 1995
reflecting the 3.6% increase in net sales. Net income plus noncash expense
items (net) provided $29.6 million in cash during the year, which provided
funding for $7.0 million used by changes in operating assets and liabilities.
Those changes were a $1.8 million reduction in other liabilities, a $0.5 million
reduction in prepaid expenses and other assets, as well as the $5.7 million
increase in operating working capital mentioned above. As a result, $22.5
million in net cash was provided by operating activities in fiscal 1995.
-28-
<PAGE>
During fiscal 1994, operating working capital increased $17.1 million (20.3%)
reflecting the 17.0% increase in net sales from fiscal 1993. Net income plus
noncash expense items provided $30.0 million in cash during the year. This was
used to fund the $18.1 million change in operating assets and liabilities. That
change was made up of $17.1 million of cash used for operating working capital
described above and a $1.0 million use of cash resulting from a decrease in
other liabilities, offset by a decrease in prepaid expenses and other assets.
Accordingly, operating activities generated $11.9 million of net cash in fiscal
1994.
In connection with the purchasing of cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option contracts in
order to reduce the risk associated with future price fluctuations. The Company
generally covers open order requirements, which average approximately three
months of production, through direct purchase and hedging transactions, and it
may shorten or lengthen that period in accordance with its perception of the
direction of cotton prices. Futures and option contracts are accounted for as
hedges and, accordingly, gains or losses are deferred and reflected in cost of
sales as an element of the cost of the finished product.
CREDIT FACILITIES AND VENDOR FINANCING
On February 3, 1997, in order to finance the Cherokee Acquisition, the
Company replaced its $60.0 million revolving credit facility with the Working
Capital Facility, under which the Company has $90.0 million aggregate borrowing
availability, subject to a borrowing base limitation, and the Term Loan
Facility, under which the Company has $35.0 million of aggregate borrowing
availability. The Working Capital Facility and Term Loan Facility (together,
the "Credit Facilities") are secured by the Company's accounts receivable and
inventories, the personal property located at the three former Cherokee
manufacturing facilities, and the real property of the Cherokee North Carolina
manufacturing facilities.
The Working Capital Facility bears interest at the Base Rate, as defined
(8.50% as of September 16, 1997) or LIBOR plus 2% (7.72% as of September 16,
1997) for periods of one, three or six months, at the Company's option. The
Working Capital Facility is non-amortizing and any amounts outstanding are due
at the final maturity of February 3, 2001. At September 16, 1997, the Company
had an aggregate of $15.7 million of borrowings and $0.2 million in letters of
credit outstanding under the Working Capital Facility and had $63.9 million in
unused and available borrowings under the Working Capital Facility.
The Term Loan Facility bears interest at the Base Rate or LIBOR plus 2.50%
(8.22% as of September 16, 1997) for periods of one, three or six months, at the
Company's option. Principal payments are required in the following amounts for
each fiscal year: 1997, $1.75 million; 1998, $4.25 million; 1999, $5.0 million,
and 2000, $24.0 million, of which $20.25 million is due November 2000. At
September 16, 1997, the Company had an aggregate of $34.1 million of borrowings
outstanding under the Term Loan Facility.
The Credit Agreement relating to the Credit Facilities contains certain
covenants including requirements for the maintenance of a certain cash interest
coverage ratio and a minimum net worth and limitations on mergers and
consolidations, affiliated transactions, incurring liens, making restricted
payments, entering into sale and leaseback transactions, disposing of assets and
owning, purchasing or acquiring margin securities. An event of default under the
Credit Agreement includes a Change in Control (as defined) as well as the
Company's default on certain of its other indebtedness. Borrowings under the
Working Capital Facility are tied to a borrowing base formula which is dependent
on the level of eligible accounts receivable and inventories, less $10 million.
-29-
<PAGE>
In addition, the Company finances certain capital improvements through
vendors of the capital assets, and will continue to utilize this method of
financing where it deems appropriate.
SENIOR SUBORDINATED NOTES
The Company currently has outstanding an aggregate principal amount of $120.0
million of Senior Subordinated Notes. The Senior Subordinated Notes were issued
pursuant to the Indenture, dated December 15, 1993 (the "Indenture"), between
the Company and Marine Midland Bank, N.A. The Senior Subordinated Notes are
non-amortizing and mature on December 15, 2003. Interest on the Senior
Subordinated Notes accrues at the rate of 10.125% per annum. The Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, on or after December 15, 1998, at a redemption price beginning at 105.1%
of the principal amount thereof (plus accrued interest). The Indenture contains
certain covenants which restrict the Company's ability to, among other things,
incur additional indebtedness and enter into a sale and leaseback transaction
unless a specified fixed charge coverage ratio is satisfied, make certain
dividend payments and other restricted payments, create liens or make asset
sales. The Indenture also requires the Company to make an offer to purchase the
Senior Subordinated Notes upon a Change of Control (as defined) and contains,
among other things, a cross acceleration to certain other outstanding
indebtedness.
CAPITAL IMPROVEMENTS
Between fiscal 1992 and fiscal 1996, the Company purchased or leased
approximately $150 million of equipment and other manufacturing improvements to
modernize its manufacturing processes and enhance its information systems.
These capital improvements have been financed through a variety of sources,
including (i) internally generated funds and borrowings under existing credit
facilities, (ii) vendor financing and (iii) operating leases.
The table below sets forth the amount of capital improvements made through
specified financing sources during the past three fiscal years and for the first
six months of fiscal 1997:
FISCAL YEAR
------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 28, 1997
----- ----- ----- ----------------
SOURCE OF FINANCING (IN MILLIONS)
- ------------------------------
Internally generated funds and
borrowings................. $26.9 $20.8 $28.5 $7.3
Vendor financing(1)........... 17.2 7.2 6.0 --
Operating leases(2)........... 1.4 1.3 0.9 --
----- ----- ----- ----
Total capital improvements $45.5 $29.3 $35.4 $7.3
===== ===== ===== ====
____________________________________
(1) The financings provided by vendors for machinery and equipment typically
have maturities ranging from three to seven years and carry floating rates
of interest similar to the Company's Credit Facilities. The 1994, 1995 and
1996 amounts also include $2.8 million, $1.0 million and $3.6 million,
respectively, of financing from an Industrial Development Authority for a
home fashions accessory sewing plant and a warehouse and distribution
center.
(2) Amounts reflect the fair market value of machinery and equipment which was
leased during the applicable period.
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<PAGE>
During the first six months of fiscal 1997, the Company made capital
improvements aggregating $7.3 million for equipment and manufacturing
improvements. The Company anticipates capital improvements aggregating
approximately $19.0 million during the balance of fiscal 1997. Such capital
improvements will be primarily for new home fashions and apparel looms and
spinning equipment. The Company anticipates capital improvements in the range
of $25 million to $30 million in fiscal 1998, which will be used primarily for
new looms, air conditioning and other facility modernizations. Capital
improvements in fiscal 1994, 1995 and 1996 aggregated $45.5 million, $29.3
million and $35.4 million, respectively. Capital improvements in fiscal 1994,
1995 and 1996 were for (i) the installation of open-end spinning and associated
opening and carding equipment, (ii) the purchase of various manufacturing
equipment subject to certain leases, (iii) the installation of dyeing, printing
and finishing equipment, (iv) the construction of a home fashions bedding
accessory sewing plant, (v) the construction of a home fashions warehouse and
distribution center, and (vi) the normal upgrading, replacement and maintenance
of the Company's equipment and facilities.
Rental expense for fiscal 1994, 1995 and 1996 was approximately $14.2
million, $13.0 million and $10.3 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $1.7 million, $1.5 million
and $0.1 million, respectively. At December 28, 1996, the Company's future
minimum lease payments due under operating leases with noncancellable terms in
excess of one year were as follows: 1997, $5.3 million; 1998, $4.2 million;
1999, $2.8 million; 2000, $2.0 million; and 2001 and later, $18.3 million.
Approximately 9% of future rental payments relate to operating leases for
machinery and equipment used to produce the Company's products.
NET OPERATING LOSS AND CREDIT CARRYFORWARDS
On September 3, 1991, the Company completed the 1991 Restructuring which
involved issuing common and preferred stock to various parties. Management
believes that the 1991 Restructuring did not result in a "change in ownership"
as such term is used in Section 382 of the Internal Revenue Code. However,
Section 382 and related regulations promulgated by the IRS are extremely
complex, and management's assessment of whether or not a "change in ownership"
occurred involves judgments as to certain factual issues and interpretations as
to certain legal issues for which there is little guidance. There can be no
assurance that the IRS will not challenge the Company's conclusion that no
"change in ownership" has occurred under Section 382. The utilization of the
Company's pre-1991 Restructuring net operating loss and credit carryforwards
could be significantly restricted or eliminated if the 1991 Restructuring is
deemed to constitute a "change in ownership." From the date of the 1991
Restructuring through December 28, 1996, the Company utilized an aggregate of
$16.9 million in net operating loss carryforwards and $1.7 million in general
business credit carryforwards for federal income tax purposes that are subject
to review by the IRS. At December 28, 1996, the Company has unused net operating
loss carryforwards of $0.9 million (expiring in 2005), a minimum tax credit
carryforward of $8.1 million, and investment credit and other general business
credit carryforwards of $5.3 million (the majority of which expire in 1997
through 2000).
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<PAGE>
BUSINESS
GENERAL
Founded in 1882, the Company is a leading manufacturer and marketer of
textile products for the home fashions and apparel fabrics markets. The Company
designs, manufactures and markets a coordinated line of value-added home
fashions products consisting of packaged bedroom furnishings such as comforters,
sheets, pillowcases, shams, bed skirts, decorative pillows and draperies. These
products are marketed under the "Dan River" brand name as well under licenses
from, among others "Colours by Alexander Julian," "D. Porthault," "John Wilman,"
"Liberty" and "Nautica." Dan River also manufactures and markets a broad range
of high quality woven cotton and cotton-blend apparel fabrics and believes that
it is the leading supplier of men's dress shirting fabrics in North America and
the leading supplier of yarn-dyed men's dress shirting fabrics in the Western
Hemisphere (based on net sales).
On February 3, 1997, the Company acquired substantially all of the assets and
certain liabilities of Cherokee, which was a competitor of the Company and a
supplier of yarn-dyed fabrics to men's and women's shirting manufacturers and of
sportswear fabrics to the converting trade. The assets purchased consisted
primarily of two woven fabrics manufacturing facilities located in Spindale,
North Carolina and Sevierville, Tennessee and a finishing facility located in
Harris, North Carolina, together with associated real property, machinery and
equipment, inventories and receivables. The Company presently intends to
continue the current operations of all three facilities.
The following table sets forth for the periods indicated the dollar amount
and percentage of total net sales of the Company attributable to home fashions
products and apparel fabrics:
<TABLE>
<CAPTION>
Pro Forma
Six
Pro Forma Six Months Ended Months
Fiscal Year Fiscal -------------------- Ended
------------------------------------------------ Year June 29, June 28, June 28,
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- ---------- --------- -------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar amount:
Home fashions products $180.4 $179.4 $213.3 $231.8 $243.2 $243.2 $112.8 $116.5 $116.5
Apparel fabrics....... 152.6 138.2 158.2 153.0 136.4 237.4 64.1 111.4 120.6
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. $333.0 $317.6 $371.5 $384.8 $379.6 $480.6 $176.9 $227.9 $237.1
====== ====== ====== ====== ====== ====== ====== ====== ======
Percentage:
Home fashions products 54.2% 56.5% 57.4% 60.2% 64.1% 50.6% 63.8% 51.1% 49.1%
Apparel fabrics....... 45.8 43.5 42.6 39.8 35.9 49.4 36.2 48.9 50.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Total............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) The pro forma data gives effect to the Cherokee Acquisition as if it had
been consummated at the beginning of each of the periods presented.
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<PAGE>
BUSINESS STRATEGY
The Company's principal business objective is to continue to expand the sales
of its home fashions products and apparel fabrics, while improving the overall
profitability of its operations. The primary components of the Company's
business strategy include the following:
. CAPITALIZE ON PROFIT OPPORTUNITIES IN HOME FASHIONS MARKET. The Company
focuses on the sale of higher thread count percale products (180 threads
per square inch and above), printed products and accessory items (products
other than individually packaged sheets and pillowcases) which enhance the
Company's competitiveness, sales growth and profitability. The Company's
net sales attributable to home fashions products have been driven by
improved product and customer mix and product innovation. The Company's
customer-specific marketing strategy is designed to (i) create specialized
products that provide differentiation from competitors and enable both the
Company and its customers to increase sales and margins, and (ii) attract
value conscious consumers by offering high quality products at reasonable
prices. Accordingly, the Company works directly with retailers to develop
value-added, fashion-oriented products (as opposed to solid color commodity
products) that are continuously updated to respond to changing consumer
preferences, thereby improving retailers' inventory turn rates and
associated profitability.
. EXPAND DISTRIBUTION OF HOME FASHIONS PRODUCTS THROUGH STRATEGIC
RELATIONSHIPS WITH MAJOR RETAILERS. The Company aggressively markets its
home fashions products to, and has developed significant business
relationships with, key retailers in all retail trade classes, including
department stores, mass merchandisers, discount stores, national chain
stores, specialty stores and warehouse clubs. Establishing and expanding
these key distribution channels has strengthened consumer recognition of
the "Dan River" brand name and increased sales. The Company has established
strategic relationships with such large, high volume retailers as Wal-Mart
Stores, Inc., Kmart Corporation, Federated Department Stores, Inc., J.C.
Penney Company, Inc. and The May Department Stores Company, by providing
high quality products together with superior customer service.
. ENHANCE STRONG APPAREL FABRICS MARKET POSITION. Dan River seeks to enhance
its position as a leading producer of apparel fabrics by focusing on
customer relationships, anticipating fashion trends, developing new
innovative products and reducing manufacturing lead times. Management
believes that (i) the significant reduction in manufacturing costs achieved
through its aggressive facility modernization program, (ii) the increase in
the size of its apparel fabrics operations and attendant reduction in fixed
costs on a per unit basis as a result of the Cherokee Acquisition and (iii)
its diverse customer base will make Dan River's apparel fabrics business
less sensitive to the cyclicality experienced by the textile industry in
general and will further increase the Company's profitability. Management
also believes that demand for apparel fabrics manufactured in North America
and the Caribbean will continue to increase as a result of NAFTA, the
Caribbean Basin Recovery Act and the increasing importance of geographic
proximity in enabling shortened delivery times. The Company believes the
Cherokee Acquisition will enhance its ability to benefit from this
opportunity.
. REDUCE PRODUCTION COSTS AND IMPROVE PRODUCTIVITY. The Company is a low cost
producer. During the past five fiscal years, the Company has invested
approximately $150 million in an extensive facility modernization program
focused on installing the most advanced manufacturing technologies
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<PAGE>
making the Company more competitive and cost-efficient. As a result of this
program as well as other improvements made by the current management team
since the Company was acquired in 1989, the Company has significantly
increased productivity, reduced costs and improved product quality. From
fiscal 1990 through June 1997, the Company substantially improved
productivity by (i) increasing weaving efficiencies within its home
fashions and apparel fabrics operations by 12% and 9%, respectively, (ii)
increasing square yards of greige (unfinished) fabrics produced per man
hour within its home fashions and apparel fabrics operations by 166% and
34%, respectively, and (iii) increasing square yards of finished fabrics
produced per man hour by 13%. During the same period, the Company achieved
significant cost reductions by (i) reducing off-quality production of home
fashions products and apparel fabrics by 45% and 38%, respectively, (ii)
reducing pounds of waste generated by its manufacturing operations and
(iii) reducing its manufacturing work force by 28% excluding the effect of
the Cherokee Acquisition. The Company intends to continue to modernize its
operations and improve its low cost position.
. ATTAIN TEXTILE INDUSTRY LEADERSHIP IN INFORMATION TECHNOLOGY. The Company
has invested significantly in information technology to provide improved
and differentiated services. The Company has implemented an advanced supply
chain management system which reduces manufacturing lead-time and enhances
the Company's ability to respond to customers' requirements. The Company's
electronic data interchange (EDI) systems, quick response customer delivery
programs and point-of-sale decision support systems enable customers to
maintain lower inventory levels and react faster to changes in product
demand, thereby improving their operating results. In addition, the Company
employs continuous inventory replenishment and dedicated manufacturing
programs with certain customers to enhance service. Planned investments in
information technology include the implementation of a new enterprise
resource planning (ERP) system along with additional continuous inventory
replenishment programs.
. ENHANCE FINANCIAL FLEXIBILITY. The Company seeks to maintain a capital
structure that will position it for growth through expansion of existing
operations and potential acquisitions as well as provide stability during
cyclical downturns. The textile industry generally, and in particular
marketers of home fashions products, have undergone significant
consolidation in recent years and the Company anticipates that this trend
will continue. The Company believes that, following completion of the
Offering, its strong balance sheet will enable it to capitalize on
attractive acquisition opportunities.
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<PAGE>
HOME FASHIONS OPERATIONS
PRODUCTS
The Company designs, manufactures and markets a coordinated line of value-
added home fashions products, consisting of packaged bedroom furnishings such as
comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and
draperies which are marketed under the "Dan River" brand name, as well as under
various other trademarks and licenses from, among others, "Colours by Alexander
Julian," "D. Porthault," "John Wilman," "Liberty" and "Nautica." Home fashions
products are offered 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 250-
thread count percale 100% cotton sheet. The Company focuses on value-added,
higher margin products, such as percales and printed products and accessory
items (products other than sheets and pillowcases), which the Company believes
enhance its competitiveness and will enable it to increase sales. The Company
believes that its percentage of net sales of home fashions products attributable
to these higher margin products is among the highest in the industry.
Dan River has established itself as an innovator in merchandising home
fashions products. The Company was a leader in introducing the complete bed
ensemble, which it markets 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. This merchandising concept capitalizes on the
Company's design capabilities and manufacturing flexibility, enabling the
Company to develop and manufacture customer-specific "Bed-in-a-Bag" products.
These packaged sets, which accounted for 42.9% of the Company's net sales of
home fashions products for the first six months of fiscal 1997, provide
attractive profit margins for the Company and its customers, while offering
consumers value and convenience. In addition, "Bed-in-a-Bag" complete bed
ensembles increase retailers' inventory turns and help them avoid markdowns on
unsold products. Dan River also manufactures and sells home fashions products
manufactured from yarn-dyed fabrics (as opposed to printed or solid-colored
fabrics), which have expanded the styling available in this product line.
Management believes that the Company's 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 the Company from its
competitors.
CUSTOMERS
The Company distributes home fashions products through key retailers in all
retail trade classes including department stores, specialty home fashions
stores, direct marketers, national chains, mass merchants and regional
discounters. The Company markets its home fashions products to over 600
customers, none of which accounted for more than 10% of the Company's total net
sales in fiscal 1996. The Company has pursued and established strong
relationships with large, high volume retailers including Wal-Mart Stores, Inc.,
Kmart Corporation, Federated Department Stores, Inc., J.C. Penney Company, Inc.
and The May Department Stores Company. As a supplement to its primary
distribution channels, a Dan River subsidiary operates factory outlet stores
which sell home fashions products directly to consumers. The factory outlet
stores sell first-quality and close-out merchandise, as well as seconds, and are
located off highway exits and in tourist areas, avoiding the creation of a
perceived threat to the traditional Dan River home fashions retailer. Sales
through the Company's factory outlet stores accounted for approximately 2% of
total home fashions products sales in fiscal 1996 and are not expected to grow
significantly as a percentage of total home fashions products sales.
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<PAGE>
SALES AND MARKETING
The home fashions products sales and marketing staff consists of 62 persons
and is headquartered in New York City, with satellite offices in Atlanta,
Boston, Chicago, Dallas, Los Angeles, Minneapolis, Philadelphia and San
Francisco. 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. The Company's
stylists monitor trends by periodically traveling throughout the world to attend
trade shows, meet with home fashions retailers and conduct market research.
Together with the marketing group, stylists often work directly with the
Company's customers to create fabrics 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 six to 12
weeks of order placement.
APPAREL FABRICS OPERATIONS
PRODUCTS
The Company manufactures and markets a broad range of high quality woven
cotton and cotton-blend fabrics, which are marketed primarily to manufacturers
of men's, women's and children's clothing. The Company's yarn-dyed and piece-
dyed woven apparel fabrics include oxford cloth, pinpoint oxford cloth, fancy
broad cloth, seer-suckers, mid and light weight denim, twills and chambrays.
As a result of the Cherokee Acquisition, the Company believes that it is the
leading manufacturer of men's dress shirting fabrics in North America (based on
net sales). In fiscal 1996, the Company manufactured and sold approximately 27
million yards of shirting fabric, approximately 71% of which was oxford cloth.
The Company also manufactures and distributes apparel fabrics to uniform
manufacturers and for use in decorating and crafts, 100% cotton fabrics to the
furniture market and greige (unfinished) fabrics to converters.
Management believes that the Company enjoys a reputation as a leader in
creating new fabric styles and designs within the apparel fabrics market.
Management also believes that the Company's customers look to its design and
styling professionals to help identify new product ideas and anticipate fashion
trends in the domestic apparel market. The Company has a library with over one
million yarn-dyed fabric samples to help develop new product ideas. The
Company's product development professionals work independently as well as
directly with customers to develop new fabric styles and constructions. In
addition, the Company's product development personnel increasingly work directly
with retailers to develop fabrics. These retailers often specify that the
Company's fabrics be used by their suppliers in the manufacture of garments to
be sold by them. The Company believes that it is a leader in wrinkle resistant
technology for shirting fabrics and markets Dri-Don(R) blended easy care fabrics
and 100% cotton Wrinkl-Shed(R) fabrics. As a result of the Cherokee
Acquisition, the Company now manufactures and markets fabrics utilizing Tencel
lyocell, an innovative new fiber. These versatile, innovative fabrics are used
primarily in manufacturing women's sportswear.
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<PAGE>
CUSTOMERS
The Company distributes its 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 and the Caribbean. The Company's
customers market clothing manufactured from its apparel fabrics under such brand
names as Arrow, Brooks Brothers, Hathaway, Levi Strauss, Liz Claiborne, L.L.
Bean, Manhattan, Osh Kosh B'Gosh and Van Heusen, as well as under private labels
through retailers such as J.C. Penney Company, Inc. and Sears, Roebuck & Co. The
Company markets uniform fabrics to customers such as Cintas Corporation and Red
Kap, and distributes apparel fabrics to home sewing retailers such as Wal-Mart
Stores, Inc., Fabric-Centers of America, and through various wholesale
distributors, for use in decorating and crafts, as well as garment sewing.
SALES AND MARKETING
The Company's apparel fabrics, sales and marketing staff consists of 55
persons and is headquartered in New York City, with satellite offices in
Chicago, Dallas, Danville, High Point (North Carolina), Los Angeles and San
Francisco. Apparel fabrics are generally "made to order" products. Fabrics are
manufactured and generally shipped within nine to 12 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.
Fabric stylists and computerized fabric design capability aid in the process of
fabric development and samples are created for customer approval. Once customer
approval and delivery requirements are received, orders are committed to
production.
MANUFACTURING PROCESS
PRODUCTION
Dan River is a vertically integrated manufacturer involved in all aspects of
the woven textile manufacturing process, from spinning and weaving to dyeing,
finishing, and sewing. Substantially all of the Company's facilities for the
manufacture of home fashions products are located in Danville, Virginia. As a
result of the acquisition of Cherokee, with spinning and weaving facilities
located in Spindale, North Carolina and Sevierville, Tennessee and finishing
facilities located Harris, North Carolina, the Company added almost a million
square feet of manufacturing and warehousing floor space dedicated to the
manufacture of apparel fabrics in addition to its existing apparel fabrics
manufacturing facilities in Danville.
During the past five fiscal years, the Company has invested approximately
$150 million in an extensive facility modernization program focused on
installing the most advanced manufacturing technologies in an effort to be the
low cost manufacturer in the industry. Within its home fashions operations, the
Company has installed modern, high-speed air-jet looms; automatic sheet cutting,
hemming and folding equipment; lower cost open-end spinning equipment; and
computerized comforter equipment. Within its apparel fabrics operations, the
Company has modernized its yarn preparation processes through the installation
of more efficient, lower cost, open-end spinning, carding, drawing and combing
equipment. The Company's ongoing capital improvement programs have modernized
and streamlined substantially all significant components of the manufacturing
process for both home fashions products and apparel fabrics, helping the Company
reduce lead times, minimize inventory levels and maximize flexibility to respond
to changing market conditions, while at the same time increasing the quality of
its products.
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<PAGE>
At Dan River's manufacturing facilities, raw cotton and synthetic fibers are
spun into cotton and polyester-blend yarns. Much of the yarn used in the
manufacture of apparel fabrics is dyed before being woven or knitted into
fabric, as opposed to yarn used in the manufacture of home fashions products,
which typically is not dyed. Yarn is then woven into fabric on looms to produce
unfinished fabric. After weaving, fabric may be marketed as greige (unfinished)
goods that are finished in accordance with customer specifications. Fabric
utilized in the manufacture of home fashions products is finished by bleaching,
dyeing and/or printing. The Company also supplements its printing through the
use of third party manufacturers in order to meet customer demand for its
products. The Company cuts and sews fabric in home fashions products, such as
prepackaged sheets, pillowcases and accessory products at its sewing and cutting
facilities and supplements production from these facilities through the use of
third party contractors. Once packaged, final products are sold to the
Company's customers. Apparel fabrics are finished through combinations of
bleaching, dyeing, napping and applying various finishes.
The Company's finishing facilities are capable of finishing over 190 million
yards of fabric per year. Dan River believes its finishing capabilities enable
it to originate new fabrics rapidly and vary production to meet market trends
and demands. The Company's finishing facilities also finish fabric on a
commission basis for outside customers. During fiscal 1997, the Company
completed construction of a new 258,000 square foot home fashions finished goods
warehouse and distribution center which is located adjacent to its new home
fashions accessory sewing plant in Danville, Virginia. The Company believes the
new warehouse will enable it to better and more efficiently service its home
fashions customers and accommodate further growth of its home fashions business.
Dan River has engineered its manufacturing processes to meet the quick
response delivery requirements of its customers. Quick response techniques
reduce turnaround time (the time required to process a particular order) which
improves customer service and production efficiency. Furthermore, Dan River has
the capability to offer electronic data interchange programs to all of its
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. The Company has electronic data interchange programs in place with
most of its major home fashions products customers.
QUALITY IMPROVEMENT PROGRAM
Dan River has a program of quality improvement designed to establish common
standards of quality and performance at each stage of the manufacturing process.
These standards are used to set goals and measure performance. Statistical
process control techniques have been introduced throughout the Company's
manufacturing facilities. Modern systems have been installed to assist in
controlling the dyeing and finishing of yarn and fabric. Computerized
monitoring of key manufacturing processes is being installed and real-time
information is being integrated into the overall quality system. Dan River's
capital improvement program and the related modernization of manufacturing
processes and information systems are also important components in its quality
improvement program.
Product testing is done in the Company's laboratories in its facilities,
which are certified by both federal government agencies, private sector
customers and certification bodies. All products are subjected to statistical
sampling plans designed to assure compliance to specifications.
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<PAGE>
PRODUCT DEVELOPMENT
As part of its customer-specific marketing strategy, the Company works
directly with its customers to develop new fabric constructions, patterns,
textures and colors. The Company has equipment in its facilities dedicated to
sample manufacturing where it tests new fabric concepts in actual end-use
products. Extensive evaluation of a product is conducted prior to committing
fabrics to mill production. Fabrics are sometimes introduced in cooperation
with a retailer, in which case a test run of the fabric is produced,
manufactured (by a third party garment manufacturer) and delivered to a retailer
for test sales. Based upon the results of internal evaluations and these retail
tests, new fabrics are introduced into the marketplace.
RAW MATERIALS
Dan River uses substantial quantities of cotton in its manufacturing
operations. By law, U.S. textile companies are generally prohibited from
importing cotton, subject to certain exceptions which take effect primarily when
the U.S. price of cotton exceeds the world price. 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.
Dan River purchases cotton primarily in the domestic market directly from
merchants or through brokers. Generally, the Company seeks to purchase
sufficient amounts of cotton to cover existing order commitments (approximately
three months); however, the Company may purchase cotton in advance of orders on
terms that it deems advantageous, and while the Company does not speculate on
the price of cotton, it may hedge prices from time to time through forward
contracts and the futures and options markets. The Company also uses
significant quantities of polyester, which is available from several sources.
Although the Company has 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 the
Company's business. Additionally, fluctuations in cotton and polyester prices
can significantly affect the Company's profitability, particularly on a short
term basis, since Dan River and other textile manufacturers cannot always mirror
such fluctuations in the pricing of their products. See "Risk Factors--Cyclical
Nature of Textile Industry."
The Company also uses various other raw materials, such as dyes and
chemicals, in its manufacturing operations. The Company believes these
materials are readily available from a number of sources. Dan River also
supplements its 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.
TRADEMARKS AND LICENSES
The Company holds licenses to produce and sell home fashions products under
"Colours by Alexander Julian," "D. Porthault," "John Wilman," "Liberty" and
"Nautica" and certain other names or marks, and to use certain designs on its
home fashions textile products. Such licenses generally provide that the
Company has the exclusive right for a limited period, generally three years
subject to renewal for additional periods, to use the respective brand name in
the sale of certain types of products in certain geographic regions. Dan River
also holds non-exclusive licenses with respect to the use and advertising of
certain processes or synthetic fibers or fabrics. Management believes that the
failure of the Company to continue
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<PAGE>
to hold any one of its licenses or trademarks (other than "Dan River") would not
have a material adverse effect on the Company's business.
Dan River has registered the "Bed-in-a-Bag" name as a trademark. In February
1997, a competitor filed a Petition for Cancellation of the trademark in the
United States Patent and Trademark Office (the "U.S. Patent Office"). Dan River
filed its answer to the Petition for Cancellation and intends to vigorously
defend the action. The Petition challenges only the exclusivity of the
trademark and not the Company's right to continue to use the phrase in
connection with its products. Therefore, while the Company cannot predict the
outcome of this matter, the Company believes that the loss of such exclusivity
would not have a material adverse effect on the Company's business or prospects.
COMPETITION
The Company's competitive position varies by product line. Competitive
factors include price, product styling and differentiation, quality, flexibility
of production and finishing, delivery time and customer service. The Company
sells its products primarily to domestic customers and competes with both large,
integrated textile companies and numerous smaller companies specializing in
limited segments of the market. Some competitors have significantly greater
financial resources than Dan River.
The Company is one of several domestic manufacturers of home fashions
products. Certain of the Company's competitors have a significantly greater
share of the domestic market than the Company, including WestPoint Stevens Inc.,
Springs Industries, Inc. and Fieldcrest Cannon, Inc., which management believes
hold collectively over 50% of the home fashions bedding products market.
With the acquisition of Cherokee, the Company believes that it is a leading
producer of lightweight yarn-dyed woven cotton and cotton-blend apparel fabrics
in North America. With respect to men's shirtings, management believes the
Company is the largest producer of oxford cloth and pima cotton pinpoint oxford
cloth and the leading producer of lightweight yarn-dyed dress shirting fabrics
in North America (based on net sales). In the sportswear fabrics market, the
Company is one of a number of domestic producers.
The Company is subject to foreign competition. The Company believes that
over half of the apparel fabrics (much in the form of imported garments) and
approximately 15% of the home fashions products sold in the U.S. are
manufactured overseas. One of the Company's business strategies is to seek
niche apparel fabrics markets that are less susceptible to foreign competition.
The Company believes that its domestic manufacturing base and emphasis on
shortening production and delivery times allow the Company to respond more
quickly than foreign producers to changing fashion trends and to its domestic
customers' delivery schedules.
The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation and foreign considerations. The Company benefits
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. 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. Item 9802.00.80 is beneficial for Dan River and
other domestic producers of apparel fabrics, because it creates an attractive
manufacturing base for apparel in close proximity to the U.S.
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<PAGE>
In January 1995, a multilateral trade organization, the WTO, was established
to replace the GATT. This new body has set forth the mechanisms by which world
trade in textiles and clothing will be progressively liberalized with the
elimination of quotas and the reduction of duties. The implementation began in
January 1995 with the phasing-out of quotas and the reduction of duties to take
place over a 10-year period. 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. The
elimination of quotas and the reduction of tariffs under the WTO may result in
increased imports of certain textile products and apparel into North America.
These factors could make the Company's products less competitive against low
cost imports from developing countries. See "Risk Factors--Government Policy;
Import Regulations."
NAFTA, which was entered into by the United States, Canada and Mexico and
became effective on January 1, 1994, 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 will phase 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 management believes that the
Company may benefit from NAFTA, there can be no assurance that the removal of
these barriers to trade will not have a material adverse effect on the Company's
business. See "Risk Factors--Government Policy; Import Regulations."
ORDER BACKLOG
The Company's order backlog was approximately $120.4 million at June 28,
1997, as compared to approximately $83.6 million at June 29, 1996, which was
prior to the Cherokee Acquisition. Substantially all of the orders on hand at
June 28, 1997 are expected to be filled within four months of that date.
PROPERTIES
On February 3, 1997, the Company acquired substantially all of the assets of
Cherokee, including greige manufacturing facilities in Spindale, North Carolina
and Sevierville, Tennessee, and a finishing plant in Harris, North Carolina.
The Company owns the North Carolina facilities, totaling approximately 588,000
square feet of manufacturing space. The Company leases the Sevierville,
Tennessee facility (consisting of approximately 384,000 feet of manufacturing
space) with an option to purchase the facility for nominal consideration in
2018. The North Carolina real estate and the machinery and equipment at all of
these facilities are subject to liens securing borrowings by the Company under
the Credit Facilities funded in connection with the acquisition of Cherokee.
Substantially all of Dan River's other apparel fabrics facilities, and
substantially all of its home fashions and corporate facilities, are located in
Danville, Virginia. Most of the Danville facilities are owned by the Company.
The owned facilities occupy a total of approximately 5,848,000 square feet, with
approximately 3,252,000 square feet of manufacturing space. The Company's
116,000 square foot accessory sewing plant and new 258,000 square foot
distribution center are leased, with an option to purchase for nominal
consideration upon repayment of debt incurred in the construction of these
facilities. The Company leases approximately 873,000 square feet of additional
warehouse and manufacturing space in Danville.
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Dan River also owns a yarn mill in Alabama. The Company leases each of its
marketing and sales offices and, through its subsidiary, Dan River Factory
Stores, Inc., the Company leases seven factory outlet stores in Georgia,
Illinois, Maryland, Ohio, South Carolina and Tennessee, each of which averages
approximately 6,000 square feet of total space. The Company owns its factory
outlet store in Danville, Virginia.
GOVERNMENTAL REGULATION
Dan River is subject to 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, the Company's dyeing
and finishing operations result in the discharge of substantial quantities of
wastewater and in emissions to the atmosphere.
The Company is subject to the federal Clean Water and Clean Air Acts, and
related state and local laws and regulations. The Company's 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 and
noise standards, and regulate the use of hazardous chemicals in the workplace.
The Company believes that it is currently in compliance in all material respects
with the environmental or health and safety laws and regulations and does not
believe that the cost of, or any operational constraints or modifications
required to assure, future compliance with such laws or regulations will have a
material adverse effect on its results of operations or financial condition.
However, there can be no assurance that environmental requirements will not
become more stringent in the future or that the Company will not incur
significant costs to comply with such requirements.
At the property formerly owned by Cherokee at Spindale, North Carolina, there
is groundwater contamination consisting of diesel fuel, for which the owner of
an adjoining property has acknowledged responsibility. The neighboring
landowner is engaged in cleanup operations under the direction of the North
Carolina Department of Health, Environment and Natural Resources. Prior to
purchasing the Spindale property, the Company identified additional
contamination, consisting primarily of benzene in excess of applicable action
levels, that the Company believes, based on reports from its environmental
consultant, also originates on the adjoining property. The Company also
believes cleanup of the benzene contamination may not be required under current
North Carolina policy, and that in the event the Company is required to clean up
the contamination, it may be eligible to apply for funding from the North
Carolina underground storage tank trust fund. In addition, liabilities arising
from environmental contamination associated with pre-closing operation of
Cherokee's facilities were excluded in connection with the Company's purchase of
Cherokee's assets and therefore not assumed by the Company. Furthermore, the
Company believes that any contamination on the Spindale property prior to the
closing is subject to an indemnity from Cherokee, for which an amount adequate
to cover the likely cost of cleanup has been placed in an escrow fund until May
1998. In any event, the Company believes that if it were required to clean up
the currently known contamination because it is the owner of the affected
property, the cost of such cleanup would not have a material adverse effect on
its results of operations or financial condition.
The Company was recently issued a Notice of Violation ("NOV") and is
negotiating with the Tennesee Department of Environment and Conservation
("TDEC") to resolve the matter. The NOV pertains to alleged unpermitted
emissions of methanol from the slasher units at the Sevierville, Tennessee
facility and arises from installation of equipment which took place before the
Company's acquisition of Cherokee. The Company believes that any violation is
of a record-keeping nature and can be resolved by amendment of the facility's
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existing permit. Nevertheless, it is possible that the TDEC may seek to impose
a substantial penalty because of the duration of the alleged violations. In
such event, the Company believes that the majority of any such penalty would be
subject to the indemnity from Cherokee.
EMPLOYEES
At September 1, 1997, the Company had approximately 5,500 employees, of which
approximately 4,700 were hourly employees. Of these hourly employees,
approximately 3,600 are located primarily in the Company's Danville, Virginia
operations and represented by a collective bargaining agreement which expires on
January 1, 2002. The Company believes that its relations with its employees are
good.
LEGAL PROCEEDINGS
From time to time, the Company is a party to litigation arising in the
ordinary course of its business. The Company is not currently a party to any
litigation that management believes, if determined adversely to the Company,
would have a material adverse effect on the Company. A competitor has filed a
Petition for Cancellation with the U.S. Patent Office challenging the Company's
"Bed-in-a-Bag" trademark. See "--Trademarks and Licenses."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Years in
Textile
Name Age Industry Positions Held
- ------------------------ --- -------- -------------------------------------
<S> <C> <C> <C>
Joseph L. Lanier, Jr.... 65 39 Chairman, Chief Executive Officer and
Director
Richard L. Williams..... 63 29 President, Chief Operating Officer and
Director
Paul R. Crotty.......... 48 - Director
John F. Maypole......... 58 - Director
Barry F. Shea........... 48 21 Vice President-Chief Financial Officer
Scott D. Batson......... 41 15 Vice President-Finance
Anthony J. Bender....... 39 4 Vice President-Information Systems
Gregory R. Boozer....... 42 20 Vice President-Manufacturing Services
Edward E. Carroll....... 58 30 Vice President-Industrial Relations
Harry L. Goodrich....... 46 17 Vice President, Secretary and General
Counsel
George R. Herron........ 57 26 Vice President-Cotton Procurement
Larry W. Van de Visser.. 61 36 Vice President-Administration
Gary D. Waldman......... 41 7 Controller
</TABLE>
Joseph L. Lanier, Jr. has been Chairman of the Board of Directors and Chief
Executive Officer of Dan River or its predecessor since 1989. Mr. Lanier is
also a director of SunTrust Bank, Inc. (a bank holding company), Flowers
Industries, Inc. (a food company), Torchmark Corporation (an insurance company)
and Dimon Incorporated (a tobacco products company and distributor of cut
flowers).
Richard L. Williams has been a director and President and Chief Operating
Officer of Dan River or its predecessor since 1989.
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<PAGE>
Paul R. Crotty has served as a director of the Company or its predecessor
since 1991. Since July 1997, he has been managing director of Portfolio
Advisors, LLC, an investment advising firm, since July 1997. Previously, he
served as a consultant to Metropolitan Life Insurance Company ("MetLife") and
was Senior Vice President of MetLife from 1991 until 1996 and Vice President of
MetLife from 1982 to 1991.
John F. Maypole has served as a director of the Company or its
predecessor since 1992. Mr. Maypole is presently a consultant to MetLife and has
over the past five years served as a consultant to and/or director of various
other corporations and providers of financial services. Mr. Maypole also serves
as a director of Bell Atlantic Corporation (a telecommunications company) and
Massachusetts Mutual Life Insurance Company.
Barry F. Shea was a director of the Company's predecessor from 1989 to 1991.
He was Vice President-Finance, Chief Financial Officer and Assistant Secretary
of Dan River or its predecessor from 1989 until 1996 and has been Vice
President-Chief Financial Officer from 1996 to the present.
Scott D. Batson has been Vice President-Finance of Dan River since 1995 and
was Director of Finance from 1990 to 1995. Mr. Batson was also Treasurer of the
Company's predecessor from 1990 to 1995.
Anthony J. Bender has been Vice President-Information Systems of Dan River
since 1995. Mr. Bender was Director of Systems Development of Springs
Industries, Inc. (a manufacturer and distributor of textile products) from 1993
until 1995, and held a number of management consulting positions with Price
Waterhouse, LLP from 1985 to 1993.
Gregory R. Boozer has been Vice President-Manufacturing Services of Dan River
since 1989.
Edward E. Carroll has been Vice President-Industrial Relations of Dan River
since 1995. He was Director of Employee Relations of Dan River from 1984 until
1995.
Harry L. Goodrich has been Secretary and General Counsel of Dan River or its
predecessor since 1989 and has been Vice President of Dan River since 1995.
George R. Herron has been Vice President-Cotton Procurement of Dan River
since 1987.
Larry W. Van de Visser was Controller of Dan River from 1990 until 1995 and
Vice President-Controller of Dan River from 1995 to 1996. He has been Vice
President-Administration of Dan River since 1996.
Gary D. Waldman has been Controller of Dan River since 1996. He was
Assistant Controller of Dan River from 1992 until 1996, and Director of Taxes
from 1990 until 1992.
Other significant employees of the Company are James E. Martin and Thomas L.
Muscalino.
Mr. Martin has headed Dan River's apparel fabrics operations since 1990. He
is 47 years old and has 25 years of experience in the textile industry.
Mr. Muscalino has headed Dan River's home fashions operations since 1993.
From 1975 until 1992, he held a number of marketing positions with WestPoint
Stevens Inc. (a textile company), including President
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of its Consumer Products Division in 1992. He is 46 years old and has 25 years
of experience in the textile industry.
Directors are elected by the Company's shareholders and serve until their
successors are elected and qualified. Directors are divided into three classes
and serve staggered terms that expire at the 1998, 1999 or 2000 annual meeting
of shareholders. The terms of the directors expire as follows: Mr. Lanier in
1998, Mr. Williams in 1999 and Messrs. Crotty and Maypole in 2000. Directors
for each class will be elected at the annual meeting of shareholders held in the
year in which the term for such class expires and will serve thereafter for
three years, or until their earlier resignation or removal, or until their
successors are elected and qualified.
The Company intends to add two additional non-employee directors within 60
days following completion of the Offering. The term of one such director will
expire at the 1998 annual meeting of shareholders and the term of the other
director will expire at the 1999 annual meeting of shareholders.
The Board of Directors has established a Compensation Committee and an Audit
Committee. The Compensation Committee is composed of Messrs. Crotty and Maypole
and is responsible for establishing salaries, bonuses and other compensation for
the Company's executive officers and for administering the Company's option
plans. The Audit Committee is also composed of Messrs. Crotty and Maypole and
is responsible for recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
the Company's financial policies and control procedures, and reviewing and
monitoring the provision of non-audit services by the Company's auditors.
All executive officers of the Company are elected annually by and serve at
the discretion of the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The table below sets forth the annual
compensation paid by Dan River to or for the account of the chief executive
officer of Dan River and each of the other four most highly compensated
executive officers of Dan River in the fiscal years indicated (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
-------------
Securities
Annual Compensation(1) Underlying
------------------------- Other Annual Options/ All Other
Name and Principal Position Year Salary Bonus(2) Compensation(3) SAR's(#) Compensation(4)
- ------------------------------ ---- ------- -------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Joseph L. Lanier, Jr. 1996 $422,424 $169,650 -- -- $1,500
Chairman and Chief Executive 1995 404,193 128,050 -- -- 1,500
Officer 1994 388,435 213,330 -- 5,000 1,500
Richard L. Williams 1996 352,118 141,410 -- -- 1,500
President and Chief Operating 1995 338,558 107,260 -- -- 1,500
Officer 1994 325,500 178,760 $543,000 4,000 1,500
Barry F. Shea 1996 201,815 81,050 -- -- 1,500
Vice President-Chief Financial 1995 193,389 61,270 -- -- 1,500
Officer 1994 185,866 102,080 259,000 1,500 1,500
Gregory R. Boozer 1996 145,385 58,390 -- -- 1,454
Vice President-Manufacturing 1995 133,077 42,160 -- -- 1,331
Services 1994 113,462 62,310 -- 1,250 1,135
Harry L. Goodrich 1996 120,723 48,480 -- -- 1,207
Vice President-Secretary and 1995 116,037 36,760 -- -- 1,160
General Counsel 1994 111,516 61,240 -- 750 1,115
</TABLE>
________________
(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) For information relating to the determination of bonus amounts, see
"Compensation Committee Interlocks and Insider Participation."
(3) During 1994, Mr. Lanier transferred 6,940 and 3,370 shares of his Old Class
A Common Stock (as defined herein) of the Company to Messrs. Williams and
Shea, respectively, for no consideration. Under applicable IRS regulations,
the transfer is deemed to be compensation paid by the Company to Messrs.
Williams and Shea equal to the fair market value of the securities
transferred, which amount is deductible by the Company and taxable to the
recipients. The amounts set forth in the table above reflect the noncash
compensation deemed to have been paid to Messrs. Williams and Shea, plus
$196,000 and $90,500 in cash paid by the Company to each of them,
respectively, in partial reimbursement to Messrs. Williams and Shea of taxes
payable by them as a result of the stock transfer. The Old Class A Common
Stock transferred was valued at that time at $50 per share.
(4) Represents amounts accrued during applicable fiscal years to each Named
Executive Officer pursuant to the Dan River Salary Retirement Plan.
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<PAGE>
Aggregated Options Table. The table below sets forth certain information
with respect to stock options exercised (or repurchased by the Company) during
and held at the end of fiscal 1996 by each Named Executive Officer.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
SHARES VALUE FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME(1) EXERCISE(#) ($) UNEXERCISABLE(#) UNEXERCISABLE($)
- ----------------------- ------------ --------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Joseph L. Lanier, Jr... -- -- 0/5,000 $ 0/$ 90,000
Richard L. Williams.... -- -- 0/4,000 0/72,000
Barry F. Shea.......... -- -- 0/1,500 0/27,000
Gregory R. Boozer...... -- -- 1,500/1,250 192,000/22,500
Harry L. Goodrich...... -- -- 1,500/750 192,000/13,500
</TABLE>
____________________
(1) Each of the Named Executive Officers holds options granted in 1994 which
vest in increments of 20% of the grant on December 31 of each year from 1995
through 1999; provided, however, if cumulative Consolidated EBITDA (as
defined in the Indenture and based on internal growth of the Company)
commencing January 1, 1995 and continuing through the end of fiscal 1997
equals or exceeds $188 million, or $274 million through the end of fiscal
1998, the options will become fully vested as of December 31, 1997 or 1998,
as the case may be. The options also vest early in the event there is a
Change of Control as defined in the Indenture. The options are exercisable,
at an exercise price of $120 per share, only at the time at which such
options are 100% vested, as provided above, and are automatically revoked if
the optionee voluntarily leaves the Company or is terminated for cause prior
to exercise of the options. To the extent vested at the time of an
optionee's death, disability, retirement or involuntary termination without
cause, the optionee or his estate will be entitled to exercise the options
within six months after the later of the date of the event resulting in
termination of employment or the earliest permissible exercise date as
described above. Messrs. Boozer and Goodrich hold options, granted
September 3, 1991, to purchase 1,500 shares each of the Company's Class A
Common Stock at an exercise price of $10 per share. These options are fully
vested and exercisable. For purposes of determining the value of
unexercised options at the end of fiscal 1996 (and solely for such purpose),
the Class A Common Stock had been valued at $138 per share, based upon last
12 months EBITDA times a market multiple based upon market multiples of
comparable publicly traded companies, less debt net of cash equivalents and
a discount relating to the fact that the Class A Common Stock was not
publicly traded at that time.
NEW BENEFIT PLANS
1997 STOCK INCENTIVE PLAN
In , 1997, the Company adopted a new stock incentive plan
(the "1997 Plan") that allows for the grant of non-qualified and incentive stock
options, restricted stock and stock appreciation rights
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("SARs"). There are shares of Class A Common Stock reserved for use under the
1997 Plan. The 1997 Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"), which selects the individuals to receive
options, restricted stock and SARs. Awards under the 1997 Plan may be granted
only to key employees of the Company or an affiliate of the Company. The
Committee acting in its absolute discretion determines the terms and conditions
of the options to be granted. However, options granted to key employees under
the 1997 Plan will all expire no later than 10 years after the date of grant and
the option price always will be no less than 100% of the fair market value of
the Class A Common Stock on the date of grant.
The Committee acting in its absolute discretion determines the terms and
conditions for the restricted stock grants under the 1997 Plan, including the
conditions, if any, under which the restricted stock will be granted and the
conditions, if any, under which a key employee's interest in his or her
restricted stock will become nonforfeitable. The Committee also determines, as
it deems appropriate, the rights, if any, a key employee has with respect to his
or her restricted stock to vote and to receive dividends (or a dividend
equivalent right), pending the forfeiture of the restricted stock or the
transfer of the stock to the key employee.
The Committee may grant SARs in tandem with the grant of options or as an
independent grant and the Committee determines the terms and conditions for the
exercise of the SARs as it deems appropriate. Upon exercise of a SAR, the key
employee receives payment in cash or stock (as determined by the Committee)
based on no more than the excess of the fair market value of the Class A Common
Stock on the date of exercise over the fair market value of the Class A Common
Stock on the date of grant. However, SARs may be exercised only when the fair
market value of the Class A Common Stock exceeds the fair market value of the
Class A Common Stock on the date the SAR was granted.
Options, restricted stock and SARs are not transferable by the key employee
other than by will or applicable laws of descent or distribution. As of the
date of this prospectus, no options, restricted stock or SARs have been granted
under the 1997 Plan.
1997 STOCK PLAN FOR OUTSIDE DIRECTORS
In , 1997, the Company adopted a new outside directors' stock
plan (the "Directors' Plan") that allows for the grant of stock options,
restricted stock and stock in lieu of cash as part of the director's
compensation package. There are shares of Class A Common Stock
reserved for use under the Directors' Plan. The Directors' Plan is administered
by the Board of Directors (the "Board"), which selects the individuals to
receive stock options and restricted stock. The Board determines the terms and
conditions of the options to be granted, including the vesting schedule and the
exercise price. However, all options granted to an outside director under the
Directors' Plan will expire no later than 10 years after the date of grant and
the option price will be no less than 100% of the fair market value of the Class
A Common Stock on the date of grant.
The Board determines the terms and conditions of the restricted stock to be
granted under the Directors' Plan, including the conditions, if any, under which
the restricted stock will be granted and the conditions, if any, under which an
outside director's interest in his or her restricted stock will become
nonforfeitable. In addition, the restricted stock may be subject to any
restrictions the Company deems necessary or appropriate to make sure the outside
director satisfies the applicable holding period requirement, if any, set forth
in Rule 16b-3 under the Securities Exchange Act of 1934, as amended. The Board
determines the
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<PAGE>
rights, if any, an outside director has with respect to voting and dividend
rights relative to restricted stock grants, pending the forfeiture of the
restricted stock or the transfer of the stock to the key employee. No option or
restricted stock grant may be transferred by an outside director other than by
will or by the laws of descent or distribution.
Each outside director generally has the right to receive shares of Class A
Common Stock in lieu of cash as part of his or her compensation package with
respect to all or a portion of (i) his or her annual cash retainer fee as an
outside director, (ii) any fee payable in cash to him or to her for attending a
meeting of the Board or a committee of the Board and (iii) any fee payable in
cash to him or to her for serving as the chairperson of a committee of the
Board. The fair market value of the shares which an outside director elects to
receive in lieu of cash is intended to equal the cash compensation which the
outside director gives up to receive the shares. The stock issued under the
Directors' Plan may be subject to any restrictions the Company deems necessary
or appropriate to make sure the outside director satisfies the applicable
holding period requirement, if any, set forth in Rule 16b-3. As of the date of
this prospectus, no option or restricted stock grants have been made under the
Directors' Plan, and no outside directors have elected to receive stock in lieu
of cash compensation.
DIRECTOR COMPENSATION
Each of Messrs. Maypole and Crotty, the non-employee directors of the
Company, receives a retainer of $20,000 per year for their services as
directors. In 1994, Mr. Maypole was granted an option to purchase 650 shares of
Class A Common Stock pursuant to the Company's Option Plan. The terms of Mr.
Maypole's option are identical to the terms of other options granted in 1994 to
executive officers and key employees of the Company. See Note 1 to "Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values."
Directors who are officers of Dan River are not compensated for their services
as directors. It is expected that the two additional directors appointed after
completion of the Offering will receive compensation similar to that described
above.
EMPLOYMENT AGREEMENTS
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with Joseph L. Lanier, Jr.,
Richard L. Williams and Barry F. Shea, each dated September 3, 1996 and
terminating September 3, 1999, unless earlier terminated as described below (the
"Employment Agreements"). Each Employment Agreement provides for the employee
to be retained in certain specified capacities by the Company and to devote his
full business time and attention to the business of the Company. Each of the
employment agreements provides that the Company shall pay the employee a bonus
under the Dan River Management Incentive Plan and reimburse certain business
related expenses. The Dan River Inc. Management Incentive Plan provides for the
payment of an annual cash bonus to executive officers and key employees of the
Company based upon achievement of operating income and cash flow goals
established at the beginning of each fiscal year. Participation in the 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.
Mr. Lanier's employment agreement (the "Lanier Agreement") provides that he
will serve as the Chief Executive Officer and Chairman of the Board of Directors
of the Company. The Lanier Agreement provides
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for a base salary of $420,116.32 per year which may be increased at the
discretion of the Compensation Committee, subject to certain cost of living
adjustments.
The Employment Agreements with Messrs. Williams and Shea provide for their
employment as President and Chief Operating Officer and Chief Financial Officer
of the Company, respectively. Each agreement provides that the employee shall
receive a base salary determined by the Chief Executive Officer of the Company
in consultation with the Compensation Committee.
The Employment Agreements are terminable upon the death or disability of the
employee, by the Company for good cause (as defined in the Employment
Agreements), by the Company without cause, by the employee for good reason (as
defined in the Employment Agreements), by the employee without good reason or on
the occurrence of a change in control (as defined in the Employment Agreements).
Each Employment Agreement provides that, in the event the employee's employment
is terminated for no cause, a change in control or for good reason (all as
defined in the Employment Agreements), such employee is to be paid an amount
equal to two times his annual base salary in effect at the time of termination,
plus any incentive bonus prorated to the date on which employment is terminated.
The employee 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 the Company.
POST EMPLOYMENT AGREEMENTS
The Company has entered into agreements with Messrs. Batson, Bender, Boozer,
Carroll, Goodrich, Herron, Martin, Muscalino and Van de Visser, as well as other
key employees. These agreements currently provide certain assurances to the
employee in the event Mr. Lanier ceases for any reason to be Chief Executive
Officer of the Company (an "Employment Event"), including an agreement not to
arbitrarily reduce the salary of or relocate the employee and to allow the
employee to participate in certain incentive and other benefit plans at a level
commensurate with his level of participation at the time the Employment Event
occurred. In the event employment of the employee is terminated by the Company
without good cause (as defined) or by the employee upon breach of the agreement
by the Company, the employee is entitled to a severance payment of up to two
years salary, plus any bonus otherwise earned for the year in which the
termination occurs, and to continue to participate for a period of up to two
years in certain welfare, retirement and savings plans and policies afforded by
the Company.
RETIREMENT PLAN
The Dan River Salary Retirement Plan (the "Retirement Plan") provides
noncontributory defined benefits based on both years of service and the
employee's career average monthly earnings ("Average Compensation"). Average
Compensation includes salary and commissions but excludes bonuses. Estimated
annual benefits payable upon retirement at age 65 for each of the Named
Executive Officers are as follows, based upon a single life annuity: Joseph L.
Lanier, Jr. -- $11,835; Richard L. Williams -- $14,824; Barry F. Shea --
$36,712; Gregory R. Boozer -- $40,429; and Harry L. Goodrich -- $28,286.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Crotty and Maypole currently serve on a Senior Management Committee
of the Company's Board of Directors which is responsible for determining Mr.
Lanier's base salary and whether to terminate Mr. Lanier's employment. Mr.
Lanier consults with the Senior Management Committee in determining the
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compensation of Mr. Williams and Mr. Shea. Within merit budget guidelines
approved by the Board of Directors for each fiscal year, and in consultation
with a Management Compensation Committee consisting of Messrs. Williams, Shea
and Carroll, Mr. Lanier determines the compensation of all other executive
officers. Targets and participation levels in Dan River's bonus programs are
based on certain financial objectives and are recommended by the Management
Compensation Committee and approved by Mr. Lanier, in consultation with the
Senior Management Committee. Following consummation of the Offering, the
Compensation Committee of the Board of Directors will be responsible for
establishing the compensation of the Company's executive officers.
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CERTAIN TRANSACTIONS
RECAPITALIZATION
The Company completed a recapitalization (the "Recapitalization") in
1997. Prior to the Recapitalization, the Company's outstanding capital stock
included shares of Class A Common Stock, par value $.01 per share ("Old Class A
Stock"), and Class B Common Stock, par value $.01 per share ("Old Class B
Stock"). The Old Class A Common Stock was voting stock while the Old Class B
Stock had no voting rights. The Recapitalization involved three steps. First,
the Company amended and restated its Articles of Incorporation to effect the
reclassification of each outstanding share of Old Class B Stock and Old Class A
Stock into shares of Class A Common Stock and to create a new class of Class B
Common Stock (the "Reclassification"). Following the Reclassification, the
Company effected a for one split of the Class A Common Stock. The
Company then consummated an exchange offer pursuant to which Messrs. Joseph L.
Lanier, Jr., Richard L. Williams and Barry F. Shea (and, as applicable, members
of their immediate families) were entitled to exchange each share of Class A
Common Stock beneficially owned by them for one share of Class B Common Stock
(the "Exchange Offer"). In connection with the Exchange Offer, the Company
issued an aggregate of shares of Class B Common Stock in exchange
for an aggregate of shares of Class A Common Stock. The table
below sets forth for each of Mr. Lanier, Mr. Williams and Mr. Shea, and the
members of the immediate families of such persons who participated in the
Exchange Offer, the number of shares of Class A Common Stock surrendered for
exchange and the number of shares of Class B Common Stock issued to such person.
Pursuant to the terms of a Voting Agreement, Mr. Lanier individually controls
the voting of all of the Class B Common Stock. See "Principal and Selling
Stockholders" and "Description of Capital Stock."
<TABLE>
<CAPTION>
Number of Shares Number of Shares
of Class A Common of Class B Common
Name Stock Exchanged Stock Received
- ----------------------- ----------------- -----------------
<S> <C> <C>
Joseph L. Lanier, Jr.
Richard L. Williams
Barry F. Shea
Total................
=========== ==========
</TABLE>
OTHER CHANGES PRIOR TO THE OFFERING
Prior to completion of the Offering, the Company will effect a number of
changes to its charter, bylaws and management that are described elsewhere
herein and which are assumed to have been completed in this Prospectus. These
changes include the establishment of a Board of Directors with three classes of
directors who serve staggered terms and with a new Compensation Committee and
Audit Committee, as well as the adoption of
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the 1997 Plan and the Directors' Plan and revisions to the employment agreements
between the Company and certain of its executive officers. In addition, the
Company's charter and bylaws will be amended to (i) allow for the issuance of
Preferred Stock by the Board of Directors, (ii) restrict the ability of
shareholders to call special meetings or to make proposals or nominations and
(iii) establish certain supermajority voting requirements. Furthermore, the
Company will elect to be covered by the Georgia business combination and fair
price statutes. Additionally, certain revisions will also be made to the
Registration Rights Agreement and the Voting Agreement. See "Management" and
"Description of Capital Stock."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Company's classes of Common Stock, as of the date hereof, by
(i) each person who is known to Dan River to be the beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each of the directors of Dan
River, (iii) each of the Named Executive Officers, and (iv) all directors and
executive officers of Dan River as a group. Except as set forth below, the
shareholders named below have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP OF CLASS B
OF CLASS A OF CLASS A COMMON STOCK PERCENTAGE OF
COMMON STOCK COMMON STOCK PRIOR TO AND COMBINED
PRIOR TO OFFERING AFTER OFFERING AFTER OFFERING VOTING POWER
NAMED EXECUTIVE -------------------- CLASS A ------------------- ------------------- ------------------
OFFICERS, DIRECTORS, EXECUTIVE NUMBER PERCENT COMMON NUMBER PERCENT NUMBER PERCENT
OFFICERS AND DIRECTORS AS A OF OF STOCK OF OF OF OF BEFORE AFTER
GROUP AND 5% SHAREHOLDERS SHARES CLASS OFFERED SHARES CLASS SHARES CLASS OFFERING OFFERING
- ------------------------------ ------- ------- ------- ------ ------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph L. Lanier,
Jr.(1)(2)(3).................
Richard L.
Williams(1)(3)(4)............
Barry F. Shea(1)(4)...........
Mezzanine Investment..........
Limited Partnership-BDR(5)....
Bank of America National
Trust and Savings Association
Investment Administration
#15027(6)..................
All executive officers and
directors as a group
(12 persons)...............
------- ------- ------- ------ ------- ------ ------- -------- --------
Other Selling Shareholders
------- ------- ------- ------ ------- ------ ------- -------- --------
Total
======= ======= ======= ====== ======= ====== ======= ======== ========
</TABLE>
____________________________
(1) The business address of Messrs. Lanier, Williams and Shea is 2291 Memorial
Drive, Danville, Virginia, 24541.
(2) Includes 25,800 shares of Class A Common Stock which Mr. Lanier is
contractually obligated to surrender to the Company from time to time upon
exercise of any stock options issued pursuant to the Option Plan. Upon
surrender of shares of stock, the Company is required to pay to Mr. Lanier
an amount equal to the exercise price of the option in respect of which the
shares were surrendered. Also includes 3,746; 14,493; 14,493; 5,500; 21,128;
and 9,995 shares of Class B Common Stock beneficially owned by Mrs. Ann M.
Lanier, Mr. Joseph Lanier, III, Mrs. Ann M. Jackson, Mrs. Suzanne S.
Williams, Mr. Richard L. Williams and Mr. Barry F. Shea, respectively. With
respect to all of the above-described shares, Mr. Joseph L. Lanier, Jr. has
sole voting power on the election of directors pursuant to the terms of a
Voting Agreement among the Company, Mr. Lanier, and certain other parties,
dated , 1997, whereby Mr. Lanier has been granted a proxy to vote
any and all shares of Class B Common Stock beneficially owned by the above-
described shareholders. See "Description of Capital Stock--Voting
Agreement."
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<PAGE>
(3) Messrs. Lanier and Williams disclaim beneficial ownership of the Common
Stock held by their wives, Mrs. Ann M. Lanier and Mrs. Suzanne S. Williams,
respectively.
(4) Joseph L. Lanier, Jr. has sole voting power over these shares pursuant to
the terms of the Voting Agreement.
(5) Mezzanine Investment Limited Partnership-BDR's ("MILP") address is One
Madison Avenue, New York, New York 10010. MILP is an affiliate of MetLife.
(6) Bank of America's address is 315 Montgomery, 13/F, San Francisco, California
94104.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue shares of Class A Common
Stock, par value $.01 per share, shares of Class B Common Stock,
par value $.01 per share, and shares of Preferred Stock, par value
$.01 per share. As of September , 1997, the Company had issued and
outstanding shares of Class A Common Stock and shares of
Class B Common Stock and no shares of Preferred Stock. As of , 1997 the
Company had 23 holders of record of Class A Common Stock and 8 holders of record
of Class B Common Stock.
COMMON STOCK
The rights of holders of Class A Common Stock and Class B Common Stock are
identical except for voting, conversion and transfer rights.
Dividends. Holders of shares of Common Stock are entitled to receive such
dividends as may be declared by the Company's Board of Directors out of funds
legally available for such purpose. No dividend may be declared or paid in cash
or property on any share of either class of Common Stock unless simultaneously
the same dividend is declared or paid on each share of the other class of Common
Stock. Dividends payable in Common Stock of the Company shall be payable in
shares of Class A Common Stock to the holders thereof and in shares of Class B
Common Stock to the holders thereof. See "Dividend Policy."
Voting Rights. Except as otherwise provided by the Restated Charter or
Georgia law, holders of shares of Common Stock will vote as a single voting
group with respect to all matters submitted to a vote of the shareholders. Each
share of Class A Common Stock will be entitled to one vote and each share of
Class B Common Stock will be entitled to votes with respect to all such
matters. Under the Restated Charter, holders of shares of Class A Common Stock
will be entitled to vote as a single voting group with respect to certain
proposed amendments to the powers, preferences, rights or limitations of the
Class B Common Stock and other limited matters; provided that with respect to
any such vote, each holder of Class B Common Stock shall be entitled to vote
with the holders of Class A Common Stock and shall be entitled to one vote for
each share of Class A Common Stock that would be issuable to such holder upon
conversion of such share of Class B Common Stock. Holders of Common Stock are
not entitled to cumulate votes in the election of directors.
Conversion Rights. Subject to compliance with the First Offer Rights (as
hereinafter defined), each share of Class B Common Stock will be convertible at
any time, at the option of its holder, into one share of Class A Common Stock.
The Class B Common Stock will convert automatically into Class A Common Stock,
and thereby lose its special voting rights, generally (i) as to any outstanding
share of Class B Common Stock if such share is sold or otherwise transferred to,
or otherwise held by, any person or entity other than a Permitted Transferee or
an Offeree (both as defined under "Restrictions on Transfer; First Offer Rights"
below) or (ii) on the last day of any fiscal quarter of the Company if the
aggregate outstanding shares of Class B Common Stock constitute less than 7% of
the aggregate outstanding shares of Common Stock (treating for the purposes of
such calculation each outstanding share of Class B Common Stock as one
outstanding share of Class A Common Stock). The shares of Class A Common Stock
do not have any conversion rights.
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Restrictions on Transfer; First Offer Rights. No shares of Class B Common
Stock may be sold, assigned, pledged, transferred, given or otherwise disposed
of (a "Transfer"), or converted into shares of Class A Common Stock, except (i)
for any Transfer by a holder of Class B Common Stock to a Permitted Transferee
of such holder, or (ii) otherwise as expressly permitted by the Company's
Restated Charter after complying with the First Offer Rights (as described
below). For purposes of the Restated Charter, Permitted Transferees of a holder
of Class B Common Stock include (i) another holder of Class B Common Stock, (ii)
the spouse or surviving spouse and natural and adopted children of such holder
provided that such holder was a beneficial owner of Class B Common Stock
immediately prior to the effectiveness of the Restated Charter, (iii) any trust
existing solely for the benefit of any person who would be a Permitted
Transferee of such holder under clause (ii), (iv) upon the death of such holder
that was a beneficial owner of Class B Common Stock immediately prior to the
effectiveness of the Restated Charter, such holder's estate or any executor,
administrator, conservator or other legal representative of such holder, (v) any
corporation, partnership, business trust or similar entity all of the
outstanding equity interests of which are owned and all of the outstanding
voting power of which is controlled, directly or indirectly by such holder that
was a beneficial owner of Class B Common Stock immediately prior to the
effectiveness of the Restated Charter or certain Permitted Transferees of such
holder. Upon a transfer of any shares of Class B Common Stock to any person or
entity that is not a Permitted Transferee or an Offeree pursuant to the First
Offer Rights (as described below), such shares automatically convert
into shares of Class A Common Stock. The Restated Charter does not contain any
restrictions on the transfer of shares of Class A Common Stock.
Except for a proposed Transfer or other disposition to a Permitted
Transferee, prior to any proposed Transfer or conversion of Class B Common
Stock, the holder thereof is required to give notice to the Company, which
constitutes an offer to sell to the management group (as designated from time to
time by the Board of Directors from the full-time officers of the Company in
accordance with the Company's Bylaws) (the "Offerees"), or to the extent that
the Offerees do not elect to purchase all such shares, to sell to the Company,
up to all of the shares proposed to be transferred or as to which conversion has
been requested at a purchase price per share equal to the Current Market Price
(the "First Offer Rights"). As defined in the Restated Charter, the Current
Market Price will be an amount equal to (i) if the Class A Common Stock is not
publicly traded, the fair market value per share of the Class B Common Stock as
determined in good faith by the Board of Directors from time to time, or (ii) if
the Class A Common Stock is publicly traded, the average of the "average sales
prices." The "average sales prices" will mean generally the weighted average of
the sales prices of a share of Class A Common Stock (or if no such sales occur,
the weighted average of the last bid and asked prices) as reported by the New
York Stock Exchange or, if the Class A Common Stock is not listed on the New
York Stock Exchange, by any other national securities exchange or quotation
system on which the shares of Class A Common Stock are listed or admitted to
trading on each of the four consecutive business days commencing on the day
after the Company receives a notice of a proposed Transfer or conversion
request. Under the Restated Charter, shares of Class A Common Stock are not
subject to the First Offer Rights.
Liquidation Rights. Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, after payment in full of creditors
and any liquidation preference payable to the holders of any Preferred Stock,
the remaining assets of the Company will be distributed ratably to the holders
of Class A Common Stock and Class B Common Stock, as a single class, in
proportion to the number of shares held by them.
Reorganization, Consolidation, Share Exchange or Merger. In the event of a
reorganization, consolidation, share exchange or merger of the Company, each
holder of a share of Common Stock shall be
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entitled to receive the same kind and amount of consideration (whether
consisting of cash, property or securities), if any, to be received by each
other holder of a share of Common Stock, regardless of whether such share of
Common Stock is a share of Class A Common Stock or Class B Common Stock.
Other. Except as otherwise described in "Registration Rights Agreement"
below, the holders of Common Stock are not entitled to preemptive or similar
rights. The shares of Common Stock are not subject to redemption or a sinking
fund. No class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless concurrently the other class of Common Stock is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. Under the Restated Charter, upon completion
of the Offering, the Company is only authorized to issue shares of Class B
Common Stock in connection with a dividend or other distribution with respect
to, or a subdivision of, all outstanding shares of Common Stock.
The transfer agent for the Company's Common Stock is .
PREFERRED STOCK
The Board of Directors, by approval of three-quarters of the Directors
constituting the Board, is empowered by the Company's Restated Charter to
designate and issue from time to time one or more series of Preferred Stock
without shareholder approval. The Board of Directors may fix and determine the
preferences, limitations and relative rights of each series of Preferred Stock
so issued. Because the Board of Directors has the power to establish the
preferences and rights of each series of Preferred Stock, it may afford the
holders of any series of Preferred Stock preferences and rights, voting or
otherwise, senior to the rights of holders of Common stock. The issuance of
Preferred Stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors has no present plans to issue
any shares of Preferred Stock.
CHARTER AND BYLAW PROVISIONS
Shareholders' rights and related matters are governed by the Georgia Business
Corporation Code ("GBCC"), the Company's Restated Charter and its Bylaws.
Certain provisions of the Restated Charter and Bylaws of the Company, which are
summarized below, may discourage or make more difficult any attempt by a person
or group to obtain control of the Company. See "Risk Factors--Anti-Takeover
Provisions."
Special Meetings. Under the Company's Bylaws, special meetings of the
shareholders may be called only by the Chief Executive Officer of the Company,
the Chairman of the Board or a majority of the Board of Directors. This
provision eliminates the right of shareholders to call a special meeting of
shareholders to consider any proposed corporate action, including any sale of
the Company, which may be favored by the shareholders.
Shareholder Proposals and Nominations. The Company's Bylaws require notice
to the Secretary of the Company, in advance of any shareholders' meeting, of any
shareholder proposals or nominations by any shareholders of candidates for
election as directors. In addition, shareholders that wish to make shareholder
proposals or director nominations must provide the Company with certain
specified information. These requirements may have the effect of precluding
shareholder proposals and director nominations if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to consider matters, including issues relating to the
control of the Company.
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Supermajority Voting Requirements. Under the Company's Restated Charter, a
merger, consolidation, sale of all or substantially all of the assets or
dissolution of the Company must be approved by the affirmative vote of at least
66 2/3% of the outstanding voting power of the Company. This requirement,
combined with the 35% vote of the Management Group conferred by its ownership of
all the outstanding shares of Class B Common Stock could inhibit or prevent an
acquisition of the Company that is not supported by such group. See "Risk
Factors--Substantial Influence of Principal Shareholders" and "-- Anti-Takeover
Provisions."
In addition, under the Restated Charter, certain provisions of the Company's
Restated Charter and Bylaws, including all of the provisions discussed above,
may not be amended and no contrary provision may be adopted by the shareholders
without the affirmative vote of at least 66 2/3% of the outstanding voting power
of the Common Stock. This restriction renders it more difficult for the
shareholders of the Company to amend these provisions and thus enhances the
power of the Board of Directors with regard to matters of corporate governance
governed by these provisions.
LIMITATION OF DIRECTORS' LIABILITY
The Company's Restated Charter eliminates, to the fullest extent permitted by
applicable law, the personal liability of directors to the Company or its
shareholders for monetary damages for breaches of such directors' duty of care
or other duties as a director. This provision of the Restated Charter will
limit the remedies available to a shareholder in the event of breaches of any
director's duties to such shareholder or the Company. Under current Georgia
law, the Restated Charter does not provide for the elimination of or any
limitation on the personal liability of a director for (i) any appropriation, in
violation of the director's duties, of any business opportunity of the Company,
(ii) acts or omissions which involve intentional misconduct or a knowing
violation of law, (iii) unlawful corporate distributions or (iv) any
transactions from which the director received an improper personal benefit.
GEORGIA ANTI-TAKEOVER STATUTES
The Company has elected to be covered by the Georgia business combination and
fair price statutes.
The Georgia business combination statute regulates business combinations,
such as mergers, consolidations, share exchanges and asset purchases, where the
acquired business has at least 100 shareholders residing in Georgia and, among
other things, (i) at least 10% of its outstanding voting shares are beneficially
owned by Georgia residents or (ii) at least 10% of the holders of its
outstanding shares are Georgia residents, and where the acquiror became an
"interested shareholder" of the corporation, unless either (x) the transaction
resulting in such acquiror becoming an "interested shareholder" or the business
combination received the approval of the corporation's board of directors prior
to the date on which the acquiror became an interested shareholder, (y) the
acquiror became the owner of at least 90% of the outstanding voting stock of the
corporation (excluding shares held by directors, officers and affiliates of the
corporation and shares held by certain other persons) in the same transaction in
which the acquiror became an interested shareholder or (z) subsequent to
becoming an interested shareholder, the acquiror became the owner of additional
shares of at least 90% of the outstanding voting stock of the corporation. For
purposes of this statute, an "interested shareholder" generally is any person
who directly or indirectly, alone or in concert with others, beneficially owns
or controls 10% or more of the voting power of the outstanding voting shares of
the corporation. The law prohibits business combinations with an approved
interested shareholder for a period of five years after the date on which such
person became an interested shareholder. The law restricting business
combinations is broad in its scope and is designed to inhibit unfriendly
acquisitions.
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The Georgia fair price statute prohibits certain business combinations
between a Georgia business corporation and an interested shareholder unless (i)
certain "fair price" criteria are satisfied, (ii) the business combination is
unanimously approved by the continuing directors, (iii) the business combination
is recommended by at least two-thirds of the continuing directors and approved
by a majority of the votes entitled to be cast by holders of voting shares,
other than voting shares beneficially owned by such interested shareholder, or
(iv) the interested shareholder has continuously been such for at least three
years and has not increased his ownership position in such three-year period by
more than one percent in any twelve month period. The fair price statute is
designed to inhibit unfriendly acquisitions that do not satisfy the specified
"fair price" requirements.
VOTING AGREEMENT
The Company, Joseph L. Lanier, Jr. and the other holders of Class B Common
Stock have entered into a Voting Agreement (the "Voting Agreement") whereby Mr.
Lanier is granted a proxy to vote any and all shares of Class B Common Stock
beneficially owned by such holders. As a result of the Voting Agreement, Mr.
Lanier controls the vote of all of the shares of Class B Common Stock.
REGISTRATION RIGHTS AGREEMENT
The Company, certain members of senior management (the "Management
Shareholders"), Management Investment Limited Partnership - BDR ("MILP") and all
other holders of the Company's Common Stock prior to the Offering are parties to
a Registration Rights Agreement, dated September 3, 1991 (the "Registration
Rights Agreement"). All provisions of the Registration Rights Agreement
described below terminate on the earlier of (i) September 3, 2006 or (ii) the
date when shares of Class A Common Stock which are held by 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
Offering. It contains, among others, the following provisions:
The Company's and Mr. Lanier's Call Rights. Joseph L. Lanier, Jr. has the
right to purchase the Class A Common Stock beneficially owned by certain
specified shareholders (the "Lanier Call"). The Company has a similar call
right (the "Company Call"). The Company Call applies to Class A Common Stock
held by the lenders under a credit agreement to which the Company and Bank of
America and certain other lenders were party immediately following the 1991
Restructuring. The Lanier Call is limited to such institutions' Class A Common
Stock originally issued in the 1991 Restructuring. In the case of a Company
Call, the call price is the fair market value (as defined) of the Common Stock.
In the case of a Lanier Call, the call price is 105% of the fair market value of
the Common Stock. The Company may not exercise the Company Call during any
period in which Mr. Lanier has previously delivered a call notice. In addition,
Mr. Lanier may request that the Company exercise the Company Call, and if the
Company does not do so within 90 days of such request, the Company Call must be
assigned to Mr. Lanier. Mr. Lanier may also preempt any Company Call by
delivering a Lanier Call notice within 30 days after delivery of a Company Call
notice. In addition, Mr. Lanier has a first offer right to purchase any Class A
Common Stock offered for sale by certain of the Company's shareholders. The
rights of each of the Company and Mr. Lanier under the call provisions of the
Registration Rights Agreement terminate on September 3, 2001 or, in the case of
a Lanier Call, if earlier, Mr. Lanier's death or total disability or termination
of employment for good cause (as defined in the Lanier Agreement).
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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 Offering may, on seven occasions, demand
that the Company prepare and file a registration statement under the Securities
Act with respect to such number of shares of Class A Common Stock held by them
prior to the Offering as are designated by the holders of a majority of such
shares of Class A Common Stock of the Company after consultation with the book
running lead underwriter of any such offering and the demanding holders. Once
every 12 months, the Company may delay the filing of any such registration
statement for up to 60 days if the Company 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 determines that such
disclosure is not in the Company's 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 security by
the Company or any subsidiary of the Company, subject to certain limitations.
The Company may also offer and sell its 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.
Purchase and Sale Rights. If (i) the holders which are parties to the
Registration Rights Agreement (not including the Management Shareholders) of 66
2/3% of the Common Stock held by such holders (provided such holders also hold a
majority of Company's voting securities (the "Requisite Holders")) propose any
sale (as defined in the Registration Rights Agreement and including certain
qualified sales to Mr. Lanier and other than to any such holder, or an affiliate
of any such holder or the Company) of all of their Common Stock and (ii) each
such holder and Management Shareholder has received a fairness opinion relating
to such sale in accordance with the Registration Rights Agreement, then each
such party shall be obligated to participate in, to vote in favor of and take
all reasonable actions to effect such sale. Until September 3, 2001, Mr. Lanier
has the right to preempt any such sale proposed by the Requisite Holders by
making a Qualifying Offer (as defined in the Registration Rights Agreement) and
delivering a letter of intent to such Requisite Holders within 30 days of
receiving notice of their intention to pursue a sale and satisfying certain
other conditions.
Preemptive Rights. Subject to certain exceptions, the Company has granted
each holder of its Common Stock which is a party to the Registration Rights
Agreement the right to subscribe for certain equity securities issued by the
Company. These rights are not applicable in connection with the Offering.
OTHER MATTERS
This Company has applied to have its Class A Common Stock approved for
listing on the New York Stock Exchange under the symbol " ."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
shares of Class A Common Stock, of which the shares
sold pursuant to the Offering will be fully tradeable without restriction or
further registration under the Securities Act, except for any of such shares
held by "affiliates" (as defined under Rule 405 of the Securities Act) of the
Company. The holders of the remaining shares will be
entitled to sell their shares in the public securities market without
registration under the Securities Act only to the extent permitted by Rule 144
promulgated thereunder. Generally, Rule 144 provides that a person who has owned
Restricted Shares for at least one year, or who may be deemed an "affiliate" of
the Company, is entitled to sell, within any three-month period, up to the
number of Restricted Shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Class A Common Stock, or (ii) the average
weekly trading volume during the four calendar weeks preceding the date on which
notice of sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are subject to certain restrictions
relating to manner of sale, volume of sales and the availability of current
public information about the Company. A total of of the Restricted
Shares have been owned by the holders thereof for more than one year and a
result will be fully tradeable upon completion of the Offering without
compliance regard to the restrictions under Rule 144 and , which
are owned by affiliates of the Company, will be eligible for sale pursuant to
Rule 144, subject to certain restrictions, upon completion of the Offering. As
described below, certain holders of Common Stock have agreed to certain
restrictions on their ability to sell Common Stock for 180 days following the
Offering. See "Underwriters."
After the Offering, certain shares of Common Stock will be covered by,
subject to the Registration Rights Agreement which provides for, among other
things: (i) a call right, exercisable by Joseph L. Lanier, Jr., for the purchase
of shares of Common Stock held by certain lenders related to the 1991
Restructuring; (ii) a call right, exercisable by the Company, for the shares of
Common Stock set forth in clause (i) above; (iii) certain demand and piggyback
registration rights; (iv) certain tag-along and drag-along rights; and (v)
certain preemptive rights which are not applicable in connection with the
Offering. See "Description of Capital Stock--Registration Rights Agreement."
Immediately following the Offering, there will be shares of
Class B Common Stock outstanding, which will be convertible (subject to certain
restrictions on transfer and first offer rights) into shares of Class A Common
Stock (on a share-for-share basis). See "Description of Capital Stock--Common
Stock."
The Selling Shareholders, certain other shareholders of the Company, the
Company and its executive officers and directors holding an aggregate of
shares of Class A Common Stock have agreed that they will not offer, sell,
contract to sell or otherwise dispose of any Restricted Shares for a period
of days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated, subject to limited exceptions. See
"Underwriters" and "Risk Factors--Shares Eligible for Future Sale."
Prior to the Offering, there has been no market for the Class A Common Stock,
and no predictions can be made with respect to the effect, if any, that public
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Sales of substantial amounts of Class A
Common Stock in the public market following the Offering, or the perception that
such sales may occur, could
-63-
<PAGE>
adversely affect the prevailing market price of the Class A Common Stock. See
"Risk Factors--Absence of Prior Public Market."
-64-
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions set forth in an Underwriting
Agreement, dated , 1997 (the "Underwriting Agreement"), the
Underwriters named below, for whom Morgan Stanley & Co. Incorporated, J.P.
Morgan Securities Inc. and SBC Warburg Dillon Read Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase, and
the Company and the Selling Shareholders have severally agreed to sell to them,
the respective numbers of shares of Class A Common Stock set forth opposite the
names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
--------
Total
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
such shares are taken.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering
price. Any Underwriter may allow, and such dealers may reallow, a concession
not in excess of $ per share to other Underwriters or to certain other
dealers. After the initial offering of the shares of Class A Common Stock, the
offering price and other selling terms may from time to time be varied by the
Representatives.
Pursuant to the Underwriting Agreement, the Selling Shareholders have granted
to the Underwriters an option, exercisable for thirty days from the date of this
Prospectus, to purchase up to an aggregate of additional shares
of Class A Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase solely for the purpose of covering over-
allotments, if any, made in connection with the Offering. To the extent such
option is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Class A Common Stock as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Class A Common Stock set forth next to the names of all Underwriters in the
preceding table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
the Class A Common Stock offered by them.
Application has been made to list the Class A Common Stock on the New York
Stock Exchange under the symbol " ." In order to meet the requirements
for listing the Class A Common Stock on the New York Stock Exchange, the
Underwriters have undertaken to meet the New York Stock Exchange's minimum
distribution, issuance and aggregate market value requirements.
-65-
<PAGE>
Each of the Company and the directors, executive officers and certain other
shareholders of the Company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Class A Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Class A Common Stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to (x) the sale of Shares
to the Underwriters, (y) the issuance by the Company of shares of Class A Common
Stock upon the exercise of an option or a warrant or the conversion of a
security outstanding on the date of this Prospectus of which the Underwriters
have been advised in writing or (z) transactions by any person other than the
Company relating to shares of Class A Common Stock or other securities acquired
in open market transactions after the completion of the Offering.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A Common Stock. Specifically, the Underwriters may over-allot in connection
with the Offering, creating a short position in the Class A Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Class A Common Stock, the Underwriters may bid for, and purchase,
shares of Class A Common Stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an Underwriter or a dealer
for distributing the Class A Common Stock in the Offering, if the syndicate
repurchases previously distributed Class A Common Stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end any of these activities at any time.
The Underwriters and dealers may engage in passive market making transactions
in the Class A Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the Class A Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume in
the Class A Common Stock during a specified two month prior period, or 200
shares, whichever is greater. Passive market making transactions must be
displayed on the Nasdaq electronic inter-dealer reporting system. Passive
market making may stabilize or maintain the market price of the Class A Common
Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
From time to time, the Representatives have provided, and
continue to provide, investment banking services to the Company.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
-66-
<PAGE>
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Class A Common
Stock. Consequently, the initial public offering price was determined by
negotiations among the Company, the Selling Shareholders and the
Representatives. Among the factors considered in determining the initial public
offering price were the Company's record of operations, the Company's current
financial condition and future prospects, the experience of its management, the
economics of the industry in general, the general condition of the equity
securities markets, and the market prices of similar securities of companies
considered comparable to the Company. There can be no assurance that a regular
trading market for the shares of Class A Common Stock will develop after the
Offering or, if developed, that a public trading market can be sustained. There
can be no assurance that the prices at which the Class A Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is offered by the Underwriters in the Offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Class A
Common Stock offered hereby will be passed upon for the Company by King &
Spalding, New York, New York. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Cravath, Swaine & Moore,
New York, New York.
EXPERTS
The Consolidated Financial Statements and related financial statement
schedules of the Company at December 30, 1995 and December 28, 1996 and for each
of the three fiscal years in the period ended December 28, 1996 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, and the historical Statement of Income Data and
historical Balance Sheet Data under the caption "Selected Historical and Pro
Forma Consolidated Financial Data" for each of the five fiscal years in the
period ended December 28, 1996, appearing in this Prospectus and Registration
Statement have been derived from the Consolidated Financial Statements audited
by Ernst & Young LLP as set forth in their reports thereon appearing elsewhere
herein. Such Consolidated Financial Statements, financial statement schedules
and historical Statement of Income Data and historical Balance Sheet Data are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The Financial Statements of Cherokee at September 30, 1995 and September 28,
1996 and for each of the three fiscal years in the period ended September 28,
1996 appearing in this Prospectus and Registration Statement have been audited
by Pugh & Company, P.C., independent auditors, as set forth in their report
thereon appearing elsewhere herein. Such financial statements are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
-67-
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed with the
Commission, as well as the Registration Statement (as defined below), may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60601-2511. Copies of such material also can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site on the Internet at http://www.sec.gov that
contains reports, proxy statements and other information regarding registrants
that file electronically with the Commission.
The Company has filed a Registration Statement on Form S-1 (together with all
amendments thereto, the "Registration Statement") under the Securities Act with
the Commission, Washington, D.C. 20549, with respect to the shares of Class A
Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission. For further information with respect to the Company and the Class A
Common Stock, reference is hereby made to the Registration Statement, and
exhibits and schedules contained therein, which may be inspected without charge
at the principal office of the Commission in Washington, D.C., and copies of all
or any part of which may be obtained from the Commission upon payment of the
prescribed fees. The summaries contained in this Prospectus concerning
information included in the Registration Statement, or in any exhibit or
schedule thereto, are qualified in their entirety by reference to such
information, exhibit or schedule.
The Company intends to furnish its shareholders with an annual report
containing consolidated financial statements certified by its independent
auditors and with quarterly reports for each of the first three quarters of each
fiscal year containing unaudited consolidated financial information.
-68-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
DAN RIVER INC.
<S> <C>
Report of Independent Auditors....................................................... F-3
Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996............ F-4
Consolidated Statements of Income for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996................... F-6
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996................... F-8
Notes to Consolidated Financial Statements........................................... F-9
Unaudited Condensed Consolidated Balance Sheets as of June 28, 1997.................. F-27
Unaudited Condensed Consolidated Statements of Operations for the six months ended
June 29, 1996 and June 28, 1997.............................................. F-28
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended
June 29, 1996 and June 28, 1997.............................................. F-29
Notes to Unaudited Condensed Consolidated Financial Statements
for the six months ended June 29, 1996 and June 28, 1997..................... F-30
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Statements of Income for the
year ended December 28, 1996 and the six months ended June 28, 1997.......... F-34
THE NEW CHEROKEE CORPORATION
Report of Independent Auditors....................................................... F-39
Balance Sheets as of September 28, 1996 and September 30, 1995....................... F-40
Statements of Operations for the fiscal years ended
September 28, 1996, September 30, 1995 and October 1, 1994................... F-41
Statements of Changes in Shareholders' Equity for the fiscal years ended
September 28, 1996, September 30, 1995 and October 1, 1994................... F-42
Statements of Cash Flows for the fiscal years ended
September 28, 1996, September 30, 1995 and October 1, 1994................... F-44
Notes to Financial Statements........................................................ F-46
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Unaudited Condensed Balance Sheets as of December 28, 1996........................... F-61
Unaudited Condensed Statements of Operations for the three months
ended December 28, 1996 and December 30, 1995.............................. F-62
Unaudited Condensed Statements of Cash Flows for the three months
ended December 28, 1996 and September 30, 1995............................. F-63
Notes to Unaudited Condensed Financial Statements.................................... F-64
</TABLE>
F-2
<PAGE>
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 30, 1995 and December 28, 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the each of the
three fiscal years in the period ended December 28, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dan River Inc. at
December 30, 1995 and December 28, 1996, and the consolidated results of its
operations and its cash flows for each of the three fiscal years in the period
ended December 28, 1996 in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets as of January 2, 1993, January 1,
1994 and December 31, 1994 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two fiscal years in the
period ended January 1, 1994 (none of which are presented separately herein);
and we expressed unqualified opinions on those consolidated financial
statements. The information set forth as historical Statement of Income Data
and historical Balance Sheet Data in the Selected Historical and Pro Forma
Consolidated Financial Data for each of the five years in the period ended
December 28, 1996, appearing on page 21, was derived from the consolidated
financial statements which we audited. In our opinion, the aforementioned
information derived from the consolidated financial statements is fairly stated
in all material respects in relation to those consolidated financial statements.
Ernst & Young LLP
Charlotte, North Carolina
February 7, 1997,
except as to Note 12, as to which the date is
September 25, 1997
F-3
<PAGE>
DAN RIVER INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
- ------------------------------------------------- -------- --------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 9) $ 1,540 $ 5,042
Accounts receivable - trade (less allowance of
$5,140,000 at December 30, 1995 and $4,631,000
at December 28, 1996) (Notes 3 and 9) 54,848 55,782
Inventories (Notes 2 and 3) 96,204 72,493
Prepaid expenses and other current assets 2,481 1,275
Deferred income taxes (Note 5) 7,231 5,643
-------- --------
Total current assets 162,304 140,235
Property, plant and equipment (Note 3):
Land 6,529 6,526
Buildings and improvements 41,288 43,363
Machinery and equipment 186,019 209,568
Construction in progress 7,455 15,241
-------- --------
241,291 274,698
Less accumulated depreciation and amortization 79,311 99,348
-------- --------
Net property, plant and equipment 161,980 175,350
Other assets 6,660 5,465
-------- --------
$330,944 $321,050
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DAN RIVER INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
SHAREHOLDERS'
EQUITY
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996 (NOTE 13)
- --------------------------------------------------- -------- -------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 3) $ 5,138 $ 6,990
Accounts payable 23,776 21,531
Accrued compensation and related benefits 14,857 13,652
Other accrued expenses 8,770 4,771
-------- --------
Total current liabilities 52,541 46,944
Long-term debt (Note 3) 174,565 162,478
Deferred income taxes (Note 5) 16,795 17,857
Other liabilities 6,341 6,147
Commitments and contingencies (Notes 4, 5 and 8)
Common stock subject to put rights (Note 4) 7,000 9,726 $ -
Shareholders' equity (Notes 3, 4 and 6):
Common stock, Class A, $.01 par value;
authorized 1,500,000 shares; issued and
outstanding 726,454 shares 7 7 7
Common stock, Class B, $.01 par value;
authorized 1,500,000 shares; issued and
outstanding 82,413 shares 1 1 1
Additional paid-in capital 67,527 64,801 74,527
Retained earnings 8,012 13,698 13,698
Pension liability adjustment (1,845) (609) (609)
-------- -------- --------
Total shareholders' equity 73,702 77,898 87,624
-------- -------- --------
$330,944 $321,050 $321,050
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DAN RIVER INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net sales $371,534 $384,801 $379,567
Costs and expenses:
Cost of sales 297,460 306,879 307,383
Selling, general and administrative expenses 43,908 44,860 45,673
Other operating costs, net (Note 7) 1,534 8,972 (428)
-------- -------- --------
Operating income 28,632 24,090 26,939
Other income 144 241 485
Interest expense (20,419) (21,941) (18,168)
-------- -------- --------
Income before income taxes 8,357 2,390 9,256
Provision for income taxes (Note 5) 4,832 2,132 3,570
-------- -------- --------
Net income $ 3,525 $ 258 $ 5,686
======== ======== ========
Earnings per share:
Primary $5.42 $0.37 $7.03
======== ======== ========
Fully diluted $5.42 $3.97 $7.03
======== ======== ========
Weighted average shares outstanding:
Primary 650,000 701,501 808,867
======== ======== ========
Fully diluted 650,000 796,579 808,867
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DAN RIVER INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL PENSION
COMMON COMMON PAID-IN RETAINED LIABILITY
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------- -------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994 $6 $1 $38,257 $ 4,229 $ - $42,493
Net income - - - 3,525 - 3,525
Capital contribution - - 792 - - 792
---- ---- ------- ------- ------- -------
Balance at December 31,
1994 6 1 39,049 7,754 - 46,810
Net income - - - 258 - 258
Pension liability
adjustment - - - - (1,845) (1,845)
Conversion of junior
subordinated notes 1 - 28,478 - - 28,479
---- ---- ------- ------- ------- -------
Balance at December 30,
1995 7 1 67,527 8,012 (1,845) 73,702
Net income - - - 5,686 - 5,686
Change in common
stock subject to put
rights - - (2,726) - - (2,726)
Pension liability
adjustment - - - - 1,236 1,236
---- ---- ------- ------- ------- -------
Balance at December 28,
1996 $ 7 $ 1 $64,801 $13,698 $ (609) $77,898
==== ==== ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
DAN RIVER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,525 $ 258 $ 5,686
Adjustments to reconcile net income to net cash
provided by operating activities:
Noncash interest expense 4,857 4,110 1,166
Noncash compensation expense 792 - -
Depreciation and amortization 18,187 19,537 20,795
Deferred income taxes 1,847 (1,379) 1,842
Writedown/disposal of equipment 742 4,040 (280)
Writedown - discontinued product line - 3,005 (849)
Changes in operating assets and liabilities:
Accounts receivable (16,209) 6,578 (691)
Inventories (6,690) (8,423) 24,554
Prepaid expenses and other assets 942 512 (396)
Accounts payable and accrued expenses 5,791 (3,904) (6,555)
Other liabilities (1,897) (1,796) (194)
-------- -------- --------
Net cash provided by operating activities 11,887 22,538 45,078
Cash flows from investing activities:
Total capital expenditures (44,112) (28,004) (34,515)
Plant and equipment acquired in exchange for debt 17,227 7,203 5,951
Accrued equipment purchases 2,092 (3,515) 982
-------- -------- --------
Capital expenditures in cash (24,793) (24,316) (27,582)
Proceeds from sale of assets 380 322 2,385
Proceeds from insurance claim 540 - -
-------- -------- --------
Net cash used by investing activities (23,873) (23,994) (25,197)
Cash flows from financing activities:
Payments of long-term debt (8,611) (8,453) (18,566)
Net proceeds from issuance of long-term debt - 700 25,313
Net borrowings (payments) - working capital facility 14,000 9,000 (23,000)
Other - - (126)
-------- -------- --------
Net cash provided (used) by financing activities 5,389 1,247 (16,379)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,597) (209) 3,502
Cash and cash equivalents at beginning of year 8,346 1,749 1,540
-------- -------- --------
Cash and cash equivalents at end of year $ 1,749 $ 1,540 $ 5,042
======== ======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
1. Description of business
-----------------------
Dan River Inc. and its former parent and sole shareholder, Braelan Corp.
("Braelan"), were organized in 1989 to acquire and operate Dan River Holding
Company and its subsidiaries (the "Predecessor"). Dan River Inc. is a
manufacturer and marketer of a variety of textile products, primarily home
fashions and apparel fabrics. Home fashions products, which accounted for
approximately 64 percent of sales for the year ended December 28, 1996,
consist mostly of packaged bedroom furnishings which are sold to domestic
retailers. Apparel products, which include a broad range of woven cotton and
cotton-blend fabrics, are distributed primarily to domestic clothing
manufacturers.
2. Significant accounting policies and other matters
-------------------------------------------------
Basis of presentation
---------------------
On December 29, 1995, Braelan was merged with and into Dan River Inc. The
consolidated balance sheets as of December 30, 1995 and December 28, 1996,
and the consolidated statements of income, shareholders' equity and cash
flows for the fiscal year ended December 28, 1996, represent the consolidated
financial position, results of operations and cash flows of Dan River Inc.
and its wholly-owned subsidiary, Dan River Factory Stores, Inc. The
consolidated statements of income, shareholders' equity and cash flows for
each of the two fiscal years in the period ended December 30, 1995, represent
the consolidated results of operations and cash flows of Braelan and its
subsidiaries. All significant intercompany balances have been eliminated.
Braelan and its subsidiaries, and Dan River Inc. and its subsidiary are
collectively referred to as the Company.
Fiscal year
-----------
The Company's fiscal year ends on the Saturday nearest to December 31. All
references to 1994, 1995 and 1996 mean the 52-week fiscal years ended
December 31, 1994, December 30, 1995 and December 28, 1996, respectively.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-9
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
2. Significant accounting policies and other matters (continued)
-------------------------------------------------
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 30, 1995 and
December 28, 1996, respectively, by component are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
(in thousands)
<S> <C> <C>
Finished goods $34,463 $24,558
Work in process 51,452 38,274
Raw materials 3,483 2,679
Supplies 6,806 6,982
------- -------
Total inventories $96,204 $72,493
======= =======
</TABLE>
Property, plant and equipment
-----------------------------
Property, plant and equipment are stated at cost. Depreciation is computed
on a straight-line basis over the estimated useful lives of the related
assets, ranging from 10 to 35 years for buildings and improvements, and 3 to
14 years for machinery and equipment. Leasehold improvements are amortized
on a straight-line basis over the lease term or estimated useful life,
whichever is less.
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The adoption did not have a material
effect on the Company's financial statements because the Company was
generally in conformance with this standard prior to adoption.
F-10
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
2. Significant accounting policies and other matters (continued)
-------------------------------------------------
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.
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.
Cotton futures contracts
------------------------
In connection with the purchasing of cotton for anticipated manufacturing
requirements, the Company may enter into cotton futures and option contracts
in order to reduce the risk associated with future price fluctuations. These
contracts are accounted for as hedges and, accordingly, gains or losses are
deferred and reflected in cost of sales as an element of the cost of the
finished product. Transactions related to cotton futures and option
contracts during the three year period ended December 28, 1996 were not
material.
Earnings per share
------------------
Primary earnings per share are computed on the basis of the weighted average
number of common shares and common equivalent shares (stock options), if
dilutive, outstanding during the period. The Company's convertible junior
subordinated notes, which were converted into shares of Class A common stock
on September 3, 1995 (Note 4), were antidilutive on an if-converted basis for
both 1994 and 1995. For purposes of calculating fully diluted earnings per
share for 1995, the convertible subordinated junior notes were deemed to be
converted on the first day of the period.
F-11
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
3. Long-term debt
--------------
Long-term debt at December 30, 1995 and December 28, 1996, consists of the
following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Senior subordinated notes $120,000 $120,000
Working capital facility 23,000 -
Term loan - 23,545
Notes payable to equipment vendors 27,010 13,081
Other borrowings with various rates
and maturities 9,693 12,842
-------- --------
179,703 169,468
Less current maturities 5,138 6,990
-------- --------
Total long-term debt $174,565 $162,478
======== ========
</TABLE>
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.
The working capital facility at December 28, 1996 consists of a long-term $60
million working capital line of credit, the availability of which is tied to
a defined borrowing base formula. The working capital facility also provides
for the issuance of letters of credit up to $8,500,000 outstanding, of which
$2,563,000 was outstanding at December 28, 1996. This facility was
terminated on February 3, 1997 in connection with the Company's establishment
of a new $90 million working capital facility (see below).
The working capital facility and the Notes contain certain restrictive
covenants which, among other things, require the Company to meet minimum net
worth and earnings ratios, impose limitations on debt incurrence and restrict
certain payments, including dividends and payments for the repurchase of
capital stock (see Note 4).
F-12
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
3. Long-term debt (continued)
--------------
The term loan consists of a $25 million amortizing note due in 2001, bearing
interest at LIBOR plus 1.75% (7.34% at December 28, 1996). The Company has a
fixed rate option until June 30, 1998, whereby the rate may be fixed based on
the yield of the June 1999, 6.75% U.S. Treasury Notes plus 1.85%. Payments
on the term loan are made quarterly with a 30% balloon payment at maturity.
The term loan is secured by various machinery and equipment of the Company.
Notes payable to vendors for machinery and equipment purchases are secured by
the related assets. The notes payable to vendors mature on various dates
between 1997 and 2002 and bear interest at various fixed and variable
interest rates averaging 7.96% at December 28, 1996.
Other borrowings consist primarily of various industrial development, revenue
and pollution control obligations.
On February 3, 1997, in connection with the acquisition of the assets of The
New Cherokee Corporation (the "Acquisition," See Note 11), the Company
established a new $90 million working capital facility and a new $35 million
term loan. Initial borrowings on that date were $19.9 million on the working
capital facility and $35 million on the term loan, which proceeds together
with $12 million cash on hand were used to consummate the Acquisition,
including associated fees and expenses.
The $90 million working capital facility (the "New Working Capital Facility")
consists of a long-term working capital line of credit, the availability of
which is tied to a defined borrowing base formula. As of February 3, 1997,
$54,781,000 was unused and available. Borrowings under the New Working
Capital Facility are non-amortizing and are due February 3, 2001. The
borrowings bear interest at a Base Rate, as defined, or LIBOR plus 2%, as
defined, at the option of the Company. The Company pays a commitment fee of
.25% per annum on the unused portion of the $90 million working capital line
of credit. The New Working Capital Facility also provides for the issuance
of letters of credit up to $7,500,000 outstanding, of which $2,563,000 was
outstanding at February 3, 1997. The obligations of the Company under the
New Working Capital Facility are secured by a lien on substantially all
accounts receivable and inventory.
F-13
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
3. Long-term debt (continued)
--------------
The $35 million term loan facility (the "New Term Loan") bears interest at a
Base Rate, as defined, or LIBOR plus 2.5%, as defined, at the Company's
option. Scheduled principal payments are: 1997, $1,750,000; 1998,
$4,250,000; 1999, $5,000,000 and 2000, $24,000,000. The New Term Loan is
secured by the assets of certain manufacturing facilities purchased by the
Company in connection with the Acquisition.
The New Working Capital Facility and New Term Loan contain certain
restrictive covenants not materially different from the prior working capital
facility and the Notes described above.
The aggregate annual scheduled principal repayments of long-term debt
outstanding as of December 28, 1996 are: 1997, $6,990,000; 1998, $6,838,000;
1999, $6,982,000; 2000, $7,310,000 and 2001, $11,442,000.
Cash payments of interest on debt were $15,319,000, $17,742,000 and
$17,854,000 for 1994, 1995 and 1996, respectively.
4. Capital stock
-------------
Holders of Class A common stock are entitled to vote on all matters to be
voted on by the shareholders of the Company. Class B common stock is non-
voting, except that holders of Class B common stock are entitled to vote on
certain mergers or reorganizations. All holders of common stock will share
equally in dividends and distributions, except that any distributions payable
in shares or other rights to acquire shares will be made in the same class of
common stock as the shareholder then owns. Upon liquidation, all shares of
common stock are entitled to share equally in the assets of the Company
available for distribution to holders of such shares. Shares of Class A
common stock are convertible at any time for a like number of Class B common
shares, and Class B common shares are convertible for a like number of Class
A common shares.
F-14
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
4. Capital stock (continued)
-------------
Until the earlier of September 2001 or a public offering of the Company's
common stock, certain shareholders may require the Company to repurchase
annually a portion of their shares at the then fair market value, as defined.
These put rights, which apply to 454,665 of the common shares outstanding as
of December 28, 1996, may only be exercised once during any 12-month period
and only if the Company is able to obtain financing on commercially
reasonable terms for such repurchase. Furthermore, the Company's obligation
to repurchase shares is limited by certain financial and other covenants
contained in the put agreement and the Company's debt agreements. The Company
will not be required to repurchase shares in 1997 because of an indebtedness
limitation set forth in the put agreement. Such limitation provides that the
Company does not have to accept a put to the extent that the ratio of its
debt as of the prior year-end plus debt incurred to finance the put exceeds
3.0 times the Company's "earnings before interest, taxes, depreciation and
amortization," as defined, for the previous fiscal year. In addition, the
exercise of puts will be further limited by a restricted payment provision
contained in the indenture under the Notes, which prevents certain payments,
including dividends and payments to shareholders for the repurchase of
capital stock, from reducing the Company's shareholders' equity below certain
levels. Under this provision, cumulative restricted payments over the term
of the put rights generally cannot exceed the greater of $7,000,000 or the
sum of $1,000,000 plus 50% of the Company's cumulative post-1993 net income
(or minus 100% of net losses), as defined, as of the year ending prior to the
restricted payment. Cumulative post-1993 net income for this purpose was
$17,453,000 as of December 28, 1996. Based on the minimum levels of
shareholders' equity required by the restricted payment provision, the
accompanying consolidated balance sheets reflect the reclassification of
$7,000,000 and $9,726,000 from shareholders' equity to "common stock subject
to put rights" as of December 30, 1995 and December 28, 1996, respectively.
Through September 2001, the Company has the option to purchase the common
shares held by certain shareholders at a price equal to the then fair market
value, as defined. The Company's call option is generally subject to the
same financial covenants and other restrictions as the put rights described
above. A certain shareholder has a similar call option on certain issued and
outstanding common shares, which has priority to the Company's call option.
In addition, certain shareholders have the right to require the Company to
register, at its expense, their shares under the Securities Act of 1933.
F-15
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
4. Capital stock (continued)
-------------
On September 3, 1995 the Company's convertible junior subordinated notes (the
"Junior Notes") with an outstanding balance of $28,479,000 were converted
into 158,867 shares of Class A common stock. The Junior Notes were non-
amortizing, and bore interest at 16.35%, which accrued quarterly and was
automatically capitalized and added to principal.
5. Income taxes
------------
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------ -------- ------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $2,420 $ 3,123 $1,645
State 565 388 83
------ ------- ------
2,985 3,511 1,728
Deferred:
Federal 1,563 (1,365) 1,278
State 284 (14) 564
------ ------- ------
1,847 (1,379) 1,842
------ ------- ------
Provision for income taxes $4,832 $ 2,132 $3,570
====== ======= ======
</TABLE>
A reconciliation of the differences between the provision for income taxes
and income taxes computed using the statutory federal income tax rate of 35%
follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Amount computed using the statutory rate $2,925 $ 837 $3,240
Increase (decrease) in taxes resulting from:
State taxes 552 243 421
Nondeductible interest 1,321 1,018 80
Other, net 34 34 (171)
------ ------ ------
Provision for income taxes $4,832 $2,132 $3,570
====== ====== ======
</TABLE>
F-16
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
5. Income taxes (continued)
------------
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
30, 1995 and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Book carrying value in excess of tax
basis of property, plant and equipment $27,930 $29,389
Other 1,417 1,376
------- -------
Total deferred tax liabilities 29,347 30,765
Deferred tax assets:
Net operating loss and credit carryforwards 12,507 13,712
Nondeductible reserves and accruals 10,108 8,437
Minimum pension liability adjustment 1,207 399
Other 1,231 770
------- -------
Total deferred tax assets 25,053 23,318
Valuation allowance for deferred tax assets (5,270) (4,767)
------- -------
Net deferred tax assets 19,783 18,551
------- -------
Net deferred tax liabilities $ 9,564 $12,214
======= =======
</TABLE>
At December 28, 1996, the Company had net operating loss carryforwards of
$900,000, which expire in 2005. In addition, the Company had available a
minimum tax credit carryforward of $8,100,000, and investment credit and
other general business credit carryforwards of $5,300,000. If not used,
$4,300,000 of the investment credit and other general business credit
carryforwards will expire in the years 1997 through 2000, and the remainder
will expire in various years through 2010.
Because the acquisition of the Predecessor in 1989 constituted a "change in
ownership" under Section 382 of the Internal Revenue Code, the utilization of
net operating loss and credit carryforwards existing as of the acquisition
date are subject to certain restrictions. These restrictions have not
impacted the utilization of pre-acquisition net operating losses, none of
which remain as of December 28, 1996, and are not expected to materially
impact the future utilization of credit carryforwards.
F-17
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
5. Income taxes (continued)
------------
On September 3, 1991, the Company completed a financial restructuring (the
"Restructuring") which involved issuing common and preferred stock to various
parties. The Company believes that the Restructuring did not result in a
"change in ownership" and thus did not cause further restrictions in the
utilization of carryforwards. However, Section 382 and related regulations
promulgated by the Internal Revenue Service ("IRS") are extremely complex,
and the Company's assessment of whether or not a "change in ownership"
occurred involves judgments as to certain factual issues and interpretations
as to certain legal issues for which there is little guidance. There can be
no assurance that the IRS will not challenge the Company's conclusion that no
"change in ownership" has occurred under Section 382. The utilization of the
Company's pre-Restructuring carryforwards could be significantly restricted
or eliminated if the Restructuring is deemed to constitute a "change in
ownership." From the date of the Restructuring through December 28, 1996,
the Company utilized an aggregate of $16,876,000 in net operating loss
carryforwards and $1,723,000 in general business credit carryforwards for
federal income tax purposes that are subject to review by the IRS.
For financial reporting purposes, valuation allowances of $5,270,000 and
$4,767,000 are reflected at December 30, 1995 and December 28, 1996,
respectively, to offset a portion of the deferred tax assets.
The Company made income tax payments of $1,482,000, $3,625,000, and
$1,180,000 during 1994, 1995 and 1996, respectively.
6. Benefit plans
-------------
Hourly and salary retirement plans
----------------------------------
The Company sponsors the Dan River Inc. Hourly Retirement Plan (the "Hourly
Plan") and the Dan River Inc. Salary Retirement Plan (the "Salary Plan").
These plans are noncontributory and cover substantially all of the Company's
full-time employees. Funding for the Hourly and Salary Plans is through
employer cash contributions.
F-18
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
6. Benefit plans (continued)
-------------
Participants are generally eligible for full benefits at age 65 or upon
completion of five years of vesting service, if later. Vesting service is
defined generally as years of service from hire. Benefits of the Hourly Plan
are determined based upon years of service while benefits of the Salary Plan
are determined based upon years of service and career average earnings.
The following sets forth the funded status of the plans at December 30, 1995
and December 28, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $15,174,000 at December 30, 1995
and $16,079,000 at December 28, 1996 $(16,267) $(17,069)
======== ========
Projected benefit obligation for service rendered
to date $(17,558) $(18,591)
Plan assets at fair value 13,043 16,218
-------- --------
Projected benefit obligation in excess of plan assets (4,515) (2,373)
Unrecognized net loss 4,343 1,896
Minimum liability adjustment (3,052) (1,008)
-------- --------
Accrued pension cost included in the
consolidated balance sheets $ (3,224) $ (1,485)
======== ========
</TABLE>
The Company's practice is to fund amounts which are required by statute and
applicable regulations and which are tax deductible. The minimum liability
adjustment at December 30, 1995 and December 28, 1996, represents the excess
of unfunded accumulated benefit obligations over previously recorded
liabilities. A corresponding reduction is reflected in shareholders' equity,
net of the related income tax effect of $1,207,000 and $399,000 at December
30, 1995 and December 28, 1996, respectively.
F-19
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
6. Benefit plans (continued)
-------------
Net pension cost for the plans included the following components:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Service cost $ 1,639 $ 1,452 $ 1,728
Interest cost 999 1,181 1,401
Actual return on assets 317 (2,193) (1,919)
Other, net (1,159) 1,204 951
------- ------- -------
Net periodic pension cost $ 1,796 $ 1,644 $ 2,161
======= ======= =======
</TABLE>
The projected benefit obligations were determined using an assumed discount
rate of 7.25% at December 30, 1995 and 7.90% at December 28, 1996. An
assumed long-term rate of increase in compensation of 4.25% was used at
December 30, 1995 and 4.90% at December 28, 1996. The assumed long-term rate
of return on plan assets was 9.5% at December 31, 1994, December 30, 1995 and
December 28, 1996. Assets of the plans consist of various institutional
investment funds and money market accounts.
Supplemental retirement plan
----------------------------
The Company sponsors an unfunded supplemental retirement plan for certain
former employees that provides for payments upon retirement, death or
disability over the longer of the employee's life or ten years. The
projected benefit obligations of $3,182,000 and $2,960,000 at December 30,
1995 and December 28, 1996, respectively, are accrued in the accompanying
consolidated balance sheets. The Company is a beneficiary of life insurance
policies on certain participants in this plan.
F-20
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
6. Benefit plans (continued)
-------------
Stock option plan
-----------------
The Company sponsors a nonqualified stock option plan under which directors,
officers and key management employees of the Company may be granted options
to purchase shares of the Company's Class A common stock. The Company has
reserved 37,000 shares of its authorized but unissued common stock for this
plan. All options to purchase unissued shares granted through December 28,
1996 have an exercise price of $120 per share, generally vest on December 31,
1999, and expire on December 31, 2001. None of these options were
exercisable at December 28, 1996.
Prior to December 30, 1994, the plan also provided for the granting of
options to purchase shares of the Company's Class A common stock from a
certain principal shareholder at an exercise price of $10 per share. All of
these options were exercisable at December 28, 1996 and expire on December
31, 1999.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation," but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plan.
No compensation expense was recorded in 1995 or 1996. If the Company had
elected to recognize compensation expense for the stock option plan based on
the fair value at the grant dates for awards under the plan, consistent with
the method prescribed by SFAS No. 123, the pro forma effect on net income
would be immaterial for both years.
The following table summarizes activity under the stock option plan:
<TABLE>
<CAPTION>
Options outstanding against
------------------------------
Authorized Shares held by
but unissued principal
shares shareholder
------------- ---------------
<S> <C> <C>
Outstanding at 12/31/94 34,500 29,960
Granted 1,150 -
Forfeited (1,650) (600)
------ ------
Outstanding at 12/30/95 34,000 29,360
Granted 750 -
Exercised - (2,960)
Forfeited (760) (300)
------ ------
Outstanding at 12/28/96 33,990 26,100
====== ======
</TABLE>
F-21
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
6. Benefit plans (continued)
-------------
The weighted average fair value of options granted during the year ended
December 28, 1996 is $27.93. For this purpose, fair value was determined
under the minimum value method, assuming a dividend yield of 0.0%, a risk
free interest rate of 5.3% and an expected holding period of five years.
7. Other operating costs, net
--------------------------
During 1994 charges totaling $742,000 were recognized for writedowns and
disposals of equipment rendered obsolete by the Company's ongoing
modernization program. The Company also recorded a $792,000 charge in 1994
for stock based compensation associated with shares of the Company's common
stock deemed contributed to capital by a principal shareholder. Charges in
1995 relating to the modernization program totaled $4,391,000. Also in 1995,
the Company recorded a $1,576,000 loss for the writedown of a leasehold and
other costs related to the relocation of the Company's marketing headquarters
in New York, and a $3,005,000 charge for the writedown of assets associated
with the Company's decision to discontinue one of its apparel fabrics product
lines. In 1996 the Company reversed $849,000 of the prior year charge
relating to the discontinued product line and $84,000 of the loss for the
marketing headquarters relocation. This was offset in part by net charges of
$505,000 relating to the modernization program.
8. Commitments and contingencies
-----------------------------
The Company leases certain manufacturing equipment, warehouses and office
facilities under operating leases that expire at various dates through 2011.
Rental expense for 1994, 1995 and 1996 amounted to approximately $14,247,000,
$13,032,000 and $10,296,000, respectively, net of rental income on
noncancelable leases and subleases of approximately $1,697,000, $1,544,000
and $76,000, respectively.
F-22
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
8. Commitments and contingencies (continued)
-----------------------------
The future minimum lease payments at December 28, 1996 due under operating
leases with noncancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $ 5,310
1998 4,243
1999 2,817
2000 2,044
2001 2,001
Later 16,283
-------
$32,698
=======
</TABLE>
Commitments for additions to plant and equipment amounted to approximately
$6,673,000 at December 28, 1996. Certain manufacturing and warehouse leases
contain renewal options at their fair rental values.
The Company is subject to various legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. It is impossible at this time for the Company to predict with
any certainty the outcome of such litigation. However, management is of the
opinion, based upon information presently available, that it is unlikely that
any such liability, to the extent not provided for through insurance or
otherwise, would be material in relation to the Company's consolidated
financial position.
9. 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 30, 1995 or December 28, 1996. See Note 2 for information on the
Company's accounting policy with respect to cotton futures and option
contracts.
F-23
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
9. Financial instruments (continued)
---------------------
Concentrations of credit risk
-----------------------------
Financial instruments that potentially subject the Company to a concentration
of credit risk consist principally of temporary cash investments and trade
accounts receivable. The Company places its temporary cash investments with
high credit quality financial institutions. Concentration of credit risk
with respect to trade accounts receivable is managed by an in-house
professional credit staff. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral.
Fair values
-----------
The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair values due to the short-term nature of
these instruments. The fair value of the Company's senior subordinated
notes, based on quoted market prices, was $109,200,000 and $120,600,000 at
December 30, 1995 and December 28, 1996, respectively, compared to a carrying
value of $120,000,000. Based on rates available for similar types of
borrowings, the carrying values of the Company's other debt approximated fair
value at December 30, 1995 and December 28, 1996.
10.Quarterly financial data (unaudited)
------------------------------------
The Company's unaudited consolidated results of operations are presented
below (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 30, 1995:
Net sales $98,111 $96,972 $88,155 $101,563
Cost of sales 78,877 75,872 70,068 82,062
Net income (loss) 958 2,086 444 (3,230)
Earnings (loss) per share -
Primary 1.47 3.21 0.64 (3.99)
Fully diluted 1.47 3.21 1.52 (3.99)
</TABLE>
F-24
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
10. Quarterly financial data (unaudited) (continued)
------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year ended December 28, 1996:
Net sales $83,738 $93,203 $95,090 $107,536
Cost of sales 70,134 74,940 75,901 86,408
Net income (loss) (1,428) 1,336 2,305 3,473
Earnings (loss) per share -
Primary (1.77) 1.65 2.85 4.29
Fully diluted (1.77) 1.65 2.85 4.29
</TABLE>
The interim earnings (loss) per share amounts were computed as if each
quarter was a discrete period. As a result, the sum of the earnings (loss)
per share by quarter will not necessarily total the annual earnings per
share.
The fourth quarter of 1995 includes certain pre-tax charges amounting to
$8,972,000, relating to the Company's ongoing modernization program and other
items. These charges decreased net income by $5,424,000 ($6.71 per share).
See Note 7.
11. Subsequent event
----------------
On February 3, 1997 the Company acquired substantially all of the assets of
The New Cherokee Corporation, a manufacturer of yarn-dyed shirting and
sportswear fabrics, for approximately $65 million in cash, subject to a
working capital adjustment, and the assumption of certain operating
liabilities. See Note 3 concerning the financing of the acquisition.
12. Public offering
---------------
In September 1997, the Board of Directors authorized the filing of a
Registration Statement with the Securities and Exchange Commission for the
sale of shares of the Company's common stock to the public.
F-25
<PAGE>
DAN RIVER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, DECEMBER 30, 1995
AND DECEMBER 28, 1996
13. Unaudited pro forma shareholders' equity
----------------------------------------
If the offering mentioned in Note 12 is consummated under the terms presently
anticipated, the put rights currently available to certain shareholders (Note
4) will terminate. Unaudited pro forma shareholders' equity reflects the
assumed termination of these put rights.
F-26
<PAGE>
DAN RIVER INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
JUNE 28, EQUITY
ASSETS 1997 (NOTE 8)
- ------------------------------------------------- --------------------- ----------------------
(in thousands except, share and per share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,823
Accounts receivable, net 70,457
Inventories 95,951
Prepaid expenses and other current assets 4,456
Deferred income taxes 5,313
---------
Total current assets 178,000
Property, plant and equipment 307,369
---------
Less accumulated depreciation and amortization (102,008)
---------
Net property, plant and equipment 205,361
---------
Other assets 7,026
---------
$ 390,387
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 10,774
Accounts payable 26,936
Accrued compensation and related benefits 15,994
Other accrued expenses 8,514
---------
Total current liabilities 62,218
Other liabilities:
Long-term debt 212,726
Deferred income taxes 15,279
Other deferred items 10,226
---------
Total other liabilities 238,231
Common stock subject to put rights 10,884 $ -
Shareholders' equity:
Common stock, Class A, $.01 par value; 7 7
authorized 1,500,000 shares; issued and
outstanding 726,454 shares
Common stock, Class B, $.01 par value;
authorized 1,500,000 shares; issued and
outstanding 82,413 shares 1 1
Additional paid-in capital 63,643 74,527
Retained earnings 16,012 16,012
Pension liability adjustment (609) (609)
--------- --------
Total shareholders' equity 79,054 89,938
--------- --------
$ 390,387 $390,387
========= ========
</TABLE>
See accompanying notes.
F-27
<PAGE>
DAN RIVER INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------------------
JUNE 29, JUNE 28,
1996 1997
-------- --------
(in thousands, except share and per share data)
<S> <C> <C>
Net sales $176,941 $227,935
Costs and expenses:
Cost of sales 145,074 180,720
Selling, general and
administrative expenses 22,956 25,098
Other operating costs, net - 7,875
-------- --------
Operating income 8,911 14,242
Other income 377 123
Interest expense (9,442) (10,599)
-------- --------
Income (loss) before income
taxes (154) 3,766
Provision (benefit) for income
taxes (62) 1,452
-------- --------
Net income (loss) $ (92) $ 2,314
======== ========
Earnings (loss) per share $(0.11) $2.86
======== ========
Weighted average shares outstanding 808,867 808,867
======== ========
</TABLE>
See accompanying notes.
F-28
<PAGE>
DAN RIVER INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
JUNE 29, JUNE 28,
1996 1997
--------- --------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (92) $ 2,314
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Noncash interest expense 594 621
Depreciation and amortization 10,413 14,042
Deferred income taxes (118) (2,248)
Loss on writedown/disposal of equipment 97 46
Writedown-plant closure - 7,875
Changes in operating assets and liabilities,
net of business acquired:
Accounts receivable 4,123 2,323
Inventories 1,929 (11,143)
Prepaid expenses and other assets (491) (980)
Accounts payable and accrued expenses (2,236) 3,806
Other liabilities 216 1,079
-------- --------
Net cash provided by operating activities 14,435 17,735
Cash flows from investing activities:
Total capital expenditures (16,207) (7,285)
Plant and equipment acquired in exchange for debt 3,224 12
Accrued equipment purchases (1,357) (1,209)
-------- --------
Capital expenditures in cash (14,340) (8,482)
Acquisition of business (66,330)
Proceeds from sale of discontinued product line 2,455 -
Proceeds from sale of assets 1,675 1,722
-------- --------
Net cash used by investing activities (10,210) (73,090)
Cash flows from financing activities:
Payments of long-term debt (15,200) (5,473)
Net borrowings - working capital facility (13,526) (1,900)
Proceeds from issuance of long-term debt 25,313 60,783
Payments of debt issuance costs - (1,274)
-------- --------
Net cash provided (used) by financing (3,413) 52,136
activities
-------- --------
Net increase (decrease) in cash and cash equivalents 812 (3,219)
Cash and cash equivalents at beginning of period 1,540 5,042
-------- --------
Cash and cash equivalents at end of period $ 2,352 $ 1,823
======== ========
</TABLE>
See accompanying notes.
F-29
<PAGE>
DAN RIVER INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
include the accounts of Dan River Inc. and its wholly-owned subsidiary, Dan
River Factory Stores, Inc. (together, the "Company"). In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results for the interim
periods presented have been included. Interim results are not necessarily
indicative of results for a full year. For further information, refer to the
consolidated financial statements and notes thereto included elsewhere in
this Prospectus.
2. Earnings per share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
which is required to be adopted in the fourth quarter of fiscal 1997. At
that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive
effect of stock options will be excluded. The Company does not expect SFAS
128 to have a significant effect on the calculation of basic and diluted
earnings per share, except the antidilutive effect of the convertible
subordinated junior notes will not be included in the calculation of diluted
earnings per share for the year ended December 30, 1995.
3. Inventories
-----------
The components of inventory at June 28, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Finished goods $28,823
Work in process 54,213
Raw materials 3,592
Supplies 9,323
-------
Total Inventories $95,951
=======
</TABLE>
F-30
<PAGE>
DAN RIVER INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Shareholders' equity
--------------------
Activity in shareholders' equity is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL PENSION
COMMON COMMON PAID-IN RETAINED LIABILITY
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 28,
1996 $ 7 $ 1 $64,801 $13,698 $(609) $77,898
Change in
common
stock subject
to put rights - - (1,158) - - (1,158)
Net Income - - 792 - - 792
----------------------------------------------------------------
Balance at
June 28, 1997 $ 7 $ 1 $63,643 $16,012 $(609) $79,054
==== ==== ======= ======= ===== =======
</TABLE>
5. Other operating costs, net
--------------------------
During the quarter ended June 28, 1997, the Company recorded a pre-tax charge
of $7,875,000 as a result of its decision to close its Riverside apparel
fabrics weaving operation in Danville, Virginia. The charge includes $373,000
for severance and other benefits related to approximately 200 employees. The
remainder of the charge relates principally to writedowns and other costs
associated with the divestitures of real estate and equipment. The Company
anticipates that the facility will be closed during the second half of 1997
and that substantially all of the facility's assets will be relocated or
disposed of within a 2-year period.
6. Income taxes
------------
At December 28, 1996, the Company had net operating loss carryforwards of
$900,000, which expire in 2005. In addition, the Company had available a
minimum tax credit carryforward of $8,100,000, and investment credit and
other general business credit carryforwards of $5,300,000. If not used,
substantially all of the investment credit and other general business credit
carryforwards will expire in the years 1997 through 2000.
F-31
<PAGE>
DAN RIVER INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Income taxes (continued)
------------
On September 3, 1991, the Company completed a financial restructuring (the
"Restructuring") which involved issuing common and preferred stock to various
parties. The Company believes that the Restructuring did not result in a
"change in ownership" under Section 382 of the Internal Revenue Code.
However, Section 382 and related regulations promulgated by the Internal
Revenue Service (IRS) are extremely complex, and the Company's assessment of
whether or not a "change in ownership" occurred involves judgments as to
certain factual issues and interpretations as to certain legal issues for
which there is little guidance.
From the date of the Restructuring through December 28, 1996, the Company
utilized an aggregate of $16,876,000 in net operating loss carryforwards and
$1,723,000 in general business credit carryforwards for federal income tax
purposes that are subject to review by the IRS. The utilization of these
carryforwards and related tax benefits could be significantly restricted or
eliminated if the Restructuring is ultimately deemed to constitute a "change
in ownership."
7. Acquisition
-----------
On February 3, 1997, the Company acquired substantially all the assets of The
New Cherokee Corporation ("Cherokee") for $65 million in cash, subject to a
working capital adjustment, and the assumption of certain operating
liabilities. The purchase price and associated fees and expenses of
approximately $2 million were funded at closing with $12.1 million of cash on
hand, and borrowings under a new working capital line of credit and term loan
of $19.9 million and $35 million, respectively. In July 1997, as a result of
the working capital adjustment, the Company received $1.7 million from an
escrow deposit. The acquisition has been accounted for using the purchase
method of accounting and the preliminary allocation of the purchase price did
not result in the recording of goodwill.
The following summarized, unaudited pro forma results of operations assume
the acquisition of Cherokee had occurred at the beginning of each period
presented. The pro forma information is presented for informational purposes
and is not indicative of results which would have occurred or which may occur
in the future.
Six Months Ended
--------------------------------------
June 29, 1996 June 28, 1997
--------------------------------------
(in thousands, except per share data)
Net sales $226,506 $237,145
Net income (loss) (1,533) 2,785
Earnings (loss) per share (1.90) 3.44
F-32
<PAGE>
DAN RIVER INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Pro forma shareholders' equity
------------------------------
In September 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the
sale of shares of the Company's common stock to the public. If the offering
is consummated under the terms presently anticipated, the put rights
currently available to certain shareholders will terminate. Unaudited pro
forma shareholders' equity reflects the assumed termination of these put
rights.
F-33
<PAGE>
DAN RIVER INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
On February 3, 1997 Dan River Inc. (the "Company") acquired substantially all
of the assets of The New Cherokee Corporation ("Cherokee") for $65 million in
cash, subject to a working capital adjustment, and the assumption of certain
operating liabilities.
The Unaudited Pro Forma Condensed Consolidated Statements of Income for the
fiscal year ended December 28, 1996 and six months ended June 28, 1997 give
effect to the acquisition of Cherokee (the "Acquisition") and the Company's
initial public offering of common stock (the "Offering") as if the Acquisition
and Offering had occurred on the first day of the periods presented. For
purposes of presenting the pro forma financial information of Cherokee for the
year ended December 28, 1996, the results of Cherokee's operations for its
fiscal year ended September 28, 1996 were adjusted by adding the results of
operations for the quarter ended December 28, 1996 and omitting the results for
the comparative quarter ended December 30, 1995. The revenues and net loss of
Cherokee omitted for the quarter ended December 30, 1995 were $27,521,000 and
$1,655,000, respectively.
The pro forma information does not purport to reflect the results of
operations that actually would have resulted had the Acquisition and the
Offering occurred as of the dates indicated or to the project the results of
operations for any future period.
The Unaudited Pro Forma Condensed Consolidated Statements of Income should be
read in conjunction with the accompanying notes and the audited financial
statements, including the notes thereto, of the Company and Cherokee,
respectively, included elsewhere in this Prospectus.
F-34
<PAGE>
DAN RIVER INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------
CHEROKEE
DAN RIVER INC. CHEROKEE ACQUISITION OFFERING PRO FORMA
-------------- --------- ----------- -------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
$379,567 $101,072 $480,639
Net Sales
Cost and expenses:
Cost of sales 307,383 92,847 (1,000) (1) 399,602
372 (2)
Selling, general and
administrative expenses 45,673 10,221 101 (2) 51,863
(4,132) (3)
Other operating costs, net (428) 3,350 (3,350) (4) (428)
-------------- --------- ----------- -------- ---------
Operating income (loss) 26,939 (5,346) 8,009 29,602
Other income (expenses) 485 (867) (382)
Interest expense (18,168) (3,358) (2,310) (5) 5,434 (6) (18,402)
-------------- --------- ----------- -------- ---------
Income (loss) before income taxes 9,256 (9,571) 5,699 5,434 10,818
Provision for income taxes 3,570 9,324 (10,816) (7) 2,098 (7) 4,176
-------------- --------- ----------- -------- ---------
Net income (loss) $ 5,686 $(18,895) $ 16,515 $ 3,336 $ 6,642
============== ========== =========== ========= =========
Earnings per share $ 7.03
==============
Weighted average shares
outstanding 808,867
==============
</TABLE>
______________________________
(1) Decrease in depreciation expense based on adjusted fixed asset values and
related estimated remaining useful lives.
(2) Additional costs associated with providing a pension benefit to Cherokee
employees hired by the Company.
(3) Elimination of certain selling, general and administrative expenses,
including: salaries and benefits of certain officers and other employees of
Cherokee who were not employed by Dan River Inc. after the Acquisition; and
costs associated with Cherokee's marketing offices, which Dan River vacated
shortly after the Acquisition.
(4) Elimination of expenses associated with Cherokee's Employee Stock Ownership
Plan, the obligations which were not assumed in connection with the
Acquisition.
F-35
<PAGE>
DAN RIVER INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 28, 1996
(5) Net increase in interest expense resulting from the Acquisition, as follows:
Interest and amortization of related deferred
finance costs on approximately $67 million in
borrowings incurred to finance the Acquisition,
with assumed average annual interest rates of
approximately 7.8% $ 5,593,000
Interest on debt assumed in the Acquisition 75,000
Elimination of Cherokee historical interest (3,358,000)
expense -----------
Net increase in interest expense $ 2,310,000
===========
(6) Decrease in interest expense attributable to the assumed repayment of $65
million in borrowings related to the Acquisition out of the net proceeds
from the Offering.
(7) Adjustment of income tax expense to reflect an assumed effective tax rate of
38.6% of pre-tax income.
F-36
<PAGE>
DAN RIVER INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 28, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------
CHEROKEE
DAN RIVER INC. CHEROKEE(1) ACQUISITION OFFERING PRO FORMA
------------- ----------- ----------- -------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Net Sales $227,935 $9,210 $237,145
Cost and expenses:
Cost of sales 180,720 7,208 (83) (2) 187,876
31 (3)
Selling, general and
administrative expenses 25,098 1,085 8 (3) 25,847
(344) (4)
Other operating costs, net 7,875 302 (302) (5) 7,875
------------- ----------- ----------- -------- ----------
Operating income 14,242 615 690 15,547
Other income (expenses) 123 7 130
Interest expense (10,599) (318) (224) (6) 2,814 (7) (8,327)
------------- ----------- ----------- --------- ----------
Income before income taxes 3,766 304 466 2,814 7,350
Provision for income taxes 1,452 0 (299) (8) 1,086 (8) 2,837
------------- ----------- ----------- ---------- ----------
Net income $ 2,314 $ 304 $ 167 $ 1,728 $ 4,513
============== ========== =========== ========== ==========
Earnings per share $ 2.86
==============
Weighted average shares
outstanding 808,867
==============
</TABLE>
_____________________________
(1) Reflects the operating results of Cherokee for the portion of 1997 prior to
the Acquisition.
(2) Decrease in depreciation expense based on adjusted fixed asset values and
related estimated remaining useful lives.
(3) Additional costs associated with providing a pension benefit to Cherokee
employees hired by the Company.
(4) Elimination of certain selling, general and administrative expenses,
including: salaries and benefits of certain officers and other employees of
Cherokee who were not employed by Dan River Inc. after the Acquisition, and;
costs associated with Cherokee's marketing offices, which Dan River vacated
shortly after the Acquisition.
(5) Elimination of expenses associated with Cherokee's Employee Stock Ownership
Plan, the obligations which were not assumed in connection with the
Acquisition.
F-37
<PAGE>
DAN RIVER INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 28, 1997
(6) Net increase in interest expense resulting from the Acquisition
(representing the five week period prior to the consummation of the
Acquisition on February 3, 1997) as follows:
Interest and amortization of certain deferred
finance costs on approximately $67 million in
borrowings incurred to finance the
Acquisitions, with assumed average annual
interest rates of approximately 7.8% $ 535,000
Interest on debt assumed in the Acquisition 7,000
Elimination of Cherokee historical interest (318,000)
expense ---------
Net increase in interest expense $ 224,000
=========
(7) Decrease in interest expense attributable to the assumed repayment of $65
million in borrowings related to the Acquisition out of the net proceeds
from the Offering.
(8) Adjustment of income tax expense to reflect an assumed effective tax rate of
38.6% of pre-tax income.
F-38
<PAGE>
Independent Auditor's Report
Board of Directors
The New Cherokee Corporation
Harris, North Carolina
We have audited the accompanying balance sheets of The New Cherokee Corporation
as of September 28, 1996 and September 30, 1995, and the related statements of
operations, changes in shareholders' equity, and cash flows for the years ended
September 28, 1996, September 30, 1995, and October 1, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The New Cherokee Corporation as
of September 28, 1996 and September 30, 1995, and the results of its operations
and its cash flows for the years ended September 28, 1996, September 30, 1995,
and October 1, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 15 to the financial statements, the Company changed its
method of accounting for certain inventories from the last-in, first-out (LIFO)
basis to the first-in, first-out (FIFO) basis in 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, as of September 28, 1996, the Company was in default under
certain covenants of its revolving and term credit agreements which causes the
balances to become due on demand. In addition, as discussed in Note 19,
negotiations are presently under way with a third party to sell substantially
all the assets of the Company. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcomes of these
uncertainties.
Pugh & Company, P.C.
Certified Public Accountants
Knoxville, Tennessee
October 18, 1996
(Except for Notes 8 and 19, as to which
the dates are October 31, 1996 and
November 20, 1996, respectively)
F-39
<PAGE>
THE NEW CHEROKEE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 28, SEPTEMBER 30,
1996 1995
- ------------------------------------------------------- -------------- --------------
<S> <C> <C>
Current Assets
Cash $ 497,726 $ 315,614
Trade Accounts Receivable 22,458,355 24,488,362
Inventories 12,389,823 20,024,645
Prepaid Items and Other 180,619 59,745
------------- -------------
Total Current Assets 35,526,523 44,888,366
------------- -------------
Property, Plant and Equipment, Net 51,961,090 53,867,962
------------- -------------
Other Assets
Cash Value of Life Insurance, Net of Policy Loans of
$137,172 2,047,658 2,451,501
Intangible Assets, Net of Accumulated Amortization of
$335,161 ($303,184 in 1995) 115,900 127,877
Net Deferred Tax Asset -0- 8,466,647
Other 1,255,592 841,290
------------- -------------
Total Other Assets 3,419,150 11,887,315
------------- -------------
Total Assets $ 90,906,763 $110,643,643
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------
Current Liabilities
Checks Written in Excess of Cash on Deposit $ 2,320,832 $ 1,398,694
Trade Accounts Payable 4,228,776 5,504,068
Accrued Expenses
Litigation Settlement -0- 1,715,000
ESOP Benefits 646,630 1,500,000
Other 2,018,585 2,021,401
Notes Payable 7,000,000 4,000,000
Current Maturities of Long-Term Debt 35,896,284 2,576,179
------------- -------------
Total Current Liabilities 52,111,107 18,715,342
------------- -------------
Long-Term Liabilities
Long-Term Debt 261,512 35,897,296
Accrued Rent 346,739 325,000
Deferred Compensation Plans 5,203,294 6,277,955
------------- -------------
Total Long-Term Liabilities 5,811,545 42,500,251
------------- -------------
Shareholders' Equity
Preferred Stock 12,000,000 12,000,000
Common Stock 17,979,310 17,979,310
Capital in Excess of Par Value 20,384,496 20,384,496
Retained Earnings (Deficit) (14,172,239) 4,834,200
Treasury Stock, 4,886 Shares at Par (48,860) (48,860)
Deferred Compensation - Restricted Stock
47,709 Shares at Cost (1,236,721) (1,236,721)
Notes Receivable from ESOP (1,921,875) (4,484,375)
-------------- --------------
Total Shareholders' Equity 32,984,111 49,428,050
-------------- --------------
Total Liabilities and Shareholders' Equity $ 90,906,763 $110,643,643
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
THE NEW CHEROKEE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------
OCTOBER 1,
SEPTEMBER 28, SEPTEMBER 30, 1994
1996 1995 (RESTATED)
------------- ------------- -------------
<S> <C> <C> <C>
Sales $105,783,472 $125,757,564 $110,202,321
Cost of Goods Manufactured and Sold 98,252,472 109,753,125 95,238,678
------------- ------------- -------------
Gross Margin 7,531,000 16,004,439 14,963,643
Selling, General and Administrative
Expenses 10,592,241 14,958,285 15,382,094
------------- ------------- -------------
Operating Income (Loss) Before ESOP
Contributions (3,061,241) 1,046,154 (418,451)
ESOP Contribution 3,697,774 7,085,499 6,995,259
------------- ------------- -------------
Net Operating Loss (6,759,015) (6,039,345) (7,413,710)
------------- ------------- -------------
Other Income (Expense)
Interest Income 8,988 13,088 25,382
Miscellaneous Income 408,008 564,662 22,072
Interest Expense (Net of Capitalized
Interest of $-0-, $-0- and
$489,854, Respectively) (3,186,263) (2,935,312) (603,293)
Miscellaneous Expense (Including
Litigation Settlements of $-0-,
$1,715,000 and $597,000,
Respectively) (1,011,510) (3,055,088) (670,582)
------------- ------------- -------------
Net Other Expense (3,780,777) (5,412,650) (1,226,421)
------------- ------------- -------------
Loss Before Income Taxes (Benefit) (10,539,792) (11,451,995) (8,640,131)
Income Taxes (Benefit) 8,466,647 (3,794,515) (2,784,210)
------------- ------------- -------------
Net Loss $(19,006,439) $ (7,657,480) $ (5,855,921)
============= ============= =============
Loss per Share:
Primary Loss Per Share Amounts $ (10.60) $ (4.27) $ (3.26)
============= ============= =============
Fully Diluted Loss Per Share Amounts $ (7.94) $ (3.20) $ (2.55)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
THE NEW CHEROKEE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
CAPITAL IN RETAINED
PREFERRED COMMON EXCESS OF EARNINGS
STOCK STOCK PAR VALUE (DEFICIT)
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, October 2, 1993, as $12,000,000 $17,979,310 $20,459,421 $ 14,891,613
Originally Stated
Restatement for Change in
Accounting Principle;
Change in Method of
Accounting for Certain
Inventories From LIFO
to FIFO -0- -0- -0- 3,455,988
------------ ----------- ----------- -------------
Balances, October 2, 1993, as
Restated 12,000,000 17,979,310 20,459,421 18,347,601
Repayment of Loans to
ESOP -0- -0- -0- -0-
Net Loss -0- -0- -0- (5,855,921)
------------ ----------- ----------- -------------
Balances, October 1, 1994 12,000,000 17,979,310 20,459,421 12,491,680
Repayment of Loans to
ESOP -0- -0- -0- -0-
Receipt of 4,682 Shares of
Common Stock from
Executive Deferred Stock
Bonus Trust -0- -0- (74,925) -0-
Net Loss -0- -0- -0- (7,657,480)
------------ ----------- ----------- -------------
Balances, September 30, 1995 12,000,000 17,979,310 20,384,496 4,834,200
Repayment of Loans to
ESOP -0- -0- -0- -0-
Net Loss -0- -0- -0- (19,006,439)
------------ ----------- ----------- -------------
Balances, September 28, 1996 $12,000,000 $17,979,310 $20,384,496 $(14,172,239)
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
THE NEW CHEROKEE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
FOR THE THREE YEARS ENDED SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION- NOTES TOTAL
TREASURY RESTRICTED RECEIVABLE SHAREHOLDERS'
STOCK STOCK FROM ESOP EQUITY
--------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, October 2, 1993, as
Originally Stated $ (2,040) $(1,358,466) $(15,491,318) $ 48,478,520
Restatement for Change in
Accounting Principle;
Change in Method of
Accounting for Certain
Inventories From LIFO
to FIFO -0- -0- -0- 3,455,988
--------- -------------- ----------- -------------
Balances, October 2, 1993, as
Restated (2,040) (1,358,466) (15,491,318) 51,934,508
Repayment of Loans to
ESOP -0- -0- 5,923,608 5,923,608
Net Loss -0- -0- -0- (5,855,921)
--------- -------------- ----------- -------------
Balances, October 1, 1994 (2,040) (1,358,466) (9,567,710) 52,002,195
Repayment of Loans to
ESOP -0- -0- 5,083,335 5,083,335
Receipt of 4,682 Shares of
Common Stock From
Executive Deferred
Stock Bonus Trust (46,820) 121,745 -0- -0-
Net Loss -0- -0- -0- (7,657,480)
--------- -------------- ------------ -------------
Balances, September 30, 1995 (48,860) (1,236,721) (4,484,375) 49,428,050
Repayment of Loans to
ESOP -0- -0- 2,562,500 2,562,500
Net Loss -0- -0- -0- (19,006,439)
--------- -------------- ------------ -------------
Balances, September 28, 1996 $(48,860) $(1,236,721) $ (1,921,875) $ 32,984,111
========= ============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
THE NEW CHEROKEE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
OCTOBER 1,
SEPTEMBER 28, SEPTEMBER 30, 1994
1996 1994 (RESTATED)
------------ ------------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Cash Received from Customers $107,813,479 $ 126,116,453 $106,144,681
Cash Paid to Suppliers, Employees and for
Selling, General and Administrative
Expenses (99,478,559) (119,973,720) (97,408,911)
ESOP Contributions (3,697,774) (7,085,499) (6,995,259)
Interest Received 8,988 13,088 25,382
Interest Paid (3,321,526) (2,854,811) (1,093,147)
Miscellaneous Receipts 1,018,014 1,489,626 22,072
------------ ------------- ------------
Net Cash Provided by (Used in)
Operating Activities 2,342,622 (2,294,863) 694,818
------------ ------------- ------------
Cash Flows from Investing Activities:
Proceeds From Sales of Equipment 77,076 2,117,327 -0-
Purchases of Property, Plant and
Equipment (6,347,636) (5,658,132) (30,981,220)
(Increase) in Other Assets 20,000 (20,000) -0-
(Increase) in Cash Value of Life Insurance,
Net (80,363) (459,537) (325,410)
Repayment on Loans to ESOP 2,562,500 5,083,335 5,923,608
Receipt on Note Receivable 1,454 1,613 824
Increase in Note Receivable -0- -0- (125,000)
------------ ------------- ------------
Net Cash Provided by (Used in)
Investing Activities (3,766,969) 1,064,606 (25,507,198)
------------ ------------- ------------
Cash Flows from Financing Activities:
Increase (Decrease) in Checks Written in
Excess of Cash on Deposit 922,138 263,610 (403,103)
Net Proceeds From Notes Payable 3,000,000 4,000,000 -0-
Proceeds from Long-Term Debt Borrowing 800,000 3,700,000 31,200,000
Repayment on Long-Term Debt Borrowing (3,115,679) (6,432,970) (5,979,559)
------------ ------------- ------------
Net Cash Activities by Financing
Activities 1,606,459 1,530,640 24,817,338
------------ ------------- ------------
Net Increase in Cash 182,112 300,383 4,958
Cash at Beginning of Year 315,614 15,231 10,273
------------ ------------- ------------
Cash at End of Year $ 497,726 $ 315,614 $ 15,231
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
THE NEW CHEROKEE CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------------
OCTOBER 1,
SEPTEMBER 28, SEPTEMBER 30, 1994
1996 1995 (RESTATED)
------------- ------------- --------------
<S> <C> <C> <C>
Reconciliation of Net Loss to Net Cash
Provided by (Used in) Operating
Activities:
Net Loss $(19,006,439) $(7,657,480) $(5,855,921)
------------- ------------- --------------
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in)
Operating Activities:
Depreciation 7,567,426 8,688,294 7,540,814
Amortization 31,977 40,923 92,433
Loss on Sales of Equipment 610,006 924,964 -0-
Deferred Compensation Plans, Net (1,026,211) (327,914) 190,215
Deferred Income Taxes (Benefit) 8,466,647 (3,794,515) (2,552,490)
(Increase) Decrease in Assets:
Trade Accounts Receivable 2,030, 007 358,889 (4,057,640)
Inventories 7,634,822 (3,466,709) 2,637,793
Prepaid Items and Other (140,874) 387,071 (47,064)
Increase (Decrease) in Liabilities:
Accounts Payable (1,275,292) (566,489) 2,737,113
Accrued Expenses and Other (2,549,447) 3,118,103 9,565
------------- ------------- --------------
Total Adjustments 21,349,061 5,362,617 6,550,739
------------- ------------- --------------
Net Cash Provided by (Used in)
Operating Activities $ 2,342,622 $(2,294,863) $ 694,818
============= ============== ==============
Supplementary Disclosure of Noncash
Financing Activities:
Transfer of Restricted Stock to
Treasury Stock $ -0- $ 121,745 $ -0-
============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
1. Nature of Business and Summary of Significant Accounting Policies
-----------------------------------------------------------------
The New Cherokee Corporation (the "Company") is a manufacturer of yarn and
woven fabrics for textile industry customers principally located in the
eastern United States. The Company utilizes the fifty-two/fifty-three week
method for its year-end, which is always the Saturday closest to September
30. This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements. The summary of significant accounting policies is:
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
Inventories
-----------
Inventories, consisting of finished goods, stock in process, raw materials in
bales, purchased yarn and other manufacturing supplies are stated at the
lower of cost or market, using the first-in, first-out (FIFO) method (see
Notes 3 and 15).
Futures Contracts
-----------------
The Company enters into futures contracts to hedge certain raw material
purchases, principally cotton, with the objective of minimizing cost risk due
to market fluctuations. Any gains or losses from hedging transactions are
included as part of the inventory cost.
Intangible Assets
-----------------
Intangible assets consist of organization costs, which represent past merger
expenses and are being amortized using the straight-line method over a five
year period; and loan costs, which represent expenses incurred in regards to
long-term debt borrowing or refinancing and are being amortized using the
straight-line method over the lives of the loans, which range from two to
eight years.
F-46
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost. Depreciation is computed
using both straight-line and accelerated methods based on estimated useful
lives of 5 to 50 years. The Company uses accelerated methods for income tax
reporting purposes, except for the asset under capital lease which is treated
as an operating lease for income tax reporting purposes.
Income Taxes
------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain notes
receivable from the Company's employee stock ownership plan, inventories,
accrued expenses, deferred compensation plans liabilities; and calculation of
depreciation expense for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes also are recognized
for operating losses which are available to offset future taxable income and
tax credits which are available to offset future federal income taxes.
2. Trade Accounts Receivable
-------------------------
Factoring Agreement
-------------------
The Company factors principally all of its receivables from yarn and fabric
sales with the factor assuming all credit risk. The Company receives payment
from the factor based on the average due date of the invoices plus seven days
for delays. Receivables consist of the following:
September 28, September 30,
1996 1995
------------- ------------
Factored $21,277,099 $23,409,234
Other 1,181,256 1,079,128
------------- ------------
$22,458,355 $24,488,362
============= =============
Included in accounts receivable - other as of September 28, 1996 and
September 30, 1995 are receivables totalling $140,695 for the sales of cotton
and $802,170 for the sales of cotton and equipment related to the closure of
the Spindale plant's yarn mill (see Note 16), respectively.
F-47
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
3. Inventories
-----------
Inventories, priced on the basis described in Note 1, consist of the
following:
September 28, September
1996 1995
------------- ------------
Finished goods $ 6,177,616 $12,124,461
Stock in process 4,422,010 5,103,017
Cotton in bales 556,818 702,154
Polyester in bales 57,904 81,553
Rayon in bales 429,861 126,603
Purchased yarn 337,627 1,442,934
Dyes and chemicals 348,093 392,736
Supplies 41,603 41,603
Waste 18,928 9,584
------------- ------------
$12,389,823 $20,024,645
============= ============
In 1995, the Company changed its method of accounting for certain inventories
from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
method of inventory valuation (see Note 15).
F-48
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
4. Employee Stock Ownership Plan (ESOP)
-------------------------------------
The Company has a defined contribution employee stock ownership plan (ESOP)
covering substantially all employees. The ESOP was originally funded
primarily by loans from the Company, which obtained the funds through loans
from banks. The Company's bank loans and loans to the ESOP have similar
terms and each is repayable within one year with interest at 4.898% for both
1996 and 1995 (4.386% to 4.898% in 1994). The ESOP obtains the funds to
repay its loans primarily through tax deductible contributions made by the
Company to the ESOP. The maximum contributions to all defined contribution
plans cannot exceed twenty-five percent of the compensation of eligible
employees plus contributions to pay interest on the ESOP loans. A summary of
total ESOP contributions for 1996, 1995, and 1994 is:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Contributions to ESOP for:
Debt Service:
Principal Payments $2,562,500 $5,083,335 $5,923,608
Interest Payments 164,646 338,132 486,374
Administrative Expenses 17,797 54,247 89,594
Benefits Accrued or
Paid to Participants 952,831 1,609,785 495,683
---------- ---------- ----------
$3,697,774 $7,085,499 $6,995,259
========== ========== ==========
</TABLE>
In 1995, benefits accrued to participants include approximately $1,125,000
related to employees terminated due to the closure of the Spindale plant's
yarn mill (see Note 16).
Certain notes, which were expensed as contributions in a prior year for
financial accounting purposes, will be deducted for income tax purposes as
contributions are made to retire the debt. For financial accounting
purposes, the bank loans are reflected as liabilities and the Company loans
to the ESOP are reflected as a reduction of stockholders' equity. The notes
receivable from the ESOP are secured by a stock pledge agreement which
pledges all shares of stock owned by the ESOP, including any stock rights, to
the Company (see Note 8). The bank, and subsequently the Company, release a
calculated number of pledged shares annually as specified by the agreements.
Subsequently, the ESOP allocates to plan participants' accounts the shares
released. Since the Company's common stock is not readily tradeable on an
established market, the ESOP requires that participants' distributions be
made in the form of cash payments in the amount of each participant's account
value, unless the participant specifically requests to receive shares of the
Company's common stock. As of September 28, 1996 and September 30, 1995, the
shares released and allocated and their market value per share, which is
based on the 1995 and 1994 ESOP stock valuations as performed by a third
party appraiser, Management Planning, Inc., were 1,496,660 and 1,374,539 and
$10.60 and $14.74, respectively, which represents a contingent repurchase
obligation of $15,864,596 and $20,260,705, respectively.
F-49
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
5. Profit Sharing Plan
-------------------
The Company has a profit sharing plan to enable employees to share in its
profits. All employees with one year of service are eligible to contribute
two percent of their total compensation, while the Company may contribute a
discretionary amount as determined annually by the board of directors. The
Company's board of directors elected not to make a discretionary contribution
for the years 1996, 1995, and 1994.
6. Deferred Compensation Plans
---------------------------
To provide compensation for the Company's chairman (effective May 1, 1990)
and the president (effective March 1, 1992), the Company contracted to defer
certain payments of bonuses and salaries due them until they retire. The
terms of the contracts permit the Company to invest the funds at the
officers' risk, with the income or loss from such investments, net of
applicable income taxes, being credited or charged to the deferred
compensation plans. The Company deducts this compensation for income tax
purposes in the year it is actually paid. The net deferred compensation
expense under the contracts for the years ended September 28, 1996, September
30, 1995, and October 1, 1994 was ($96,464), $10,488, and ($10,231),
respectively. As of September 28, 1996, the total accumulated deferred
compensation liability under the contracts was $458,654 ($437,244 in 1995).
Effective October 2, 1988, the Company entered into deferred compensation
agreements with certain key employees. At the discretion of the executive
committee of the board of directors, the Company may accrue compensation
based on the key employees' years of service and position with the Company.
The Company did not accrue any compensation in 1996 and 1995. For the year
ended October 1, 1994, the Company accrued $573,641 in deferred compensation
expense. Deferred compensation generally only becomes payable on retirement
of a participant. Participants that are terminated will receive only the
vested portion of their deferred compensation based on the agreement's
vesting schedule, which is pro-rata over a period of ten years. As of
September 28, 1996 and September 30, 1995, the total accumulated deferred
compensation liability under the preceding agreements was $3,150,155.
Effective June 1, 1989, the Company entered into a trust agreement for the
benefit of the Company's chairman. The Company agreed to contribute to the
trust shares of its common stock sufficient to equal the difference between
each actual allocation of stock to the Company's chairman by The New Cherokee
Corporation Employee Stock Ownership Plan (ESOP) and the allocation of stock
he would have received, but for the Internal Revenue Code Section 1042
election by the chairman's family. As of September 28, 1996 and September 30,
1995, 1,800 shares with a fair value of $19,080 and $26,532, respectively,
were either held in trust or accrued for the benefit of the Company's
chairman. The assets of the trust are to be distributed to the Company's
chairman upon termination of employment or to his estate at death. The
Company adjusted the deferred liability to the fair value of the shares
F-50
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
6. Deferred Compensation Plans (Continued)
---------------------------
held in the trust, which resulted in a decrease of $7,452 ($3,528 in 1995).
In 1994 the Company recorded deferred compensation expense related to the
plan of $11,010.
Effective June 1, 1989, the Company also entered into an executive deferred
stock bonus trust agreement with certain key employees as beneficiaries. At
the discretion of the executive committee of the board of directors, the
Company may contribute shares of common stock to the trust. The shares of
stock will be allocated to each participant's trust account based on the
participant's years of service and position with the Company. Upon a
participant's retirement, disability or death the Company is to pay to the
participant or his estate, within a period not to exceed five years, an
amount equal to the fair market value of the stock held in the participant's
trust account in exchange for the shares. Participants that are terminated
will receive their trust account's value at termination date within a period
not to exceed five years. As of September 27, 1994, the Company, at the
request of the chairman of the board of directors of the Company,
retroactively amended the trust agreement effective October 1, 1989, so that
any amounts resulting from forfeiture by a terminated participant which were
reallocated to the chairman's account shall be either returned to the Company
or used to reduce future contributions to the trust by the Company. As a
result of the preceding amendment, the Company's deferred liability under the
trust agreement was reduced by $121,745. Under terms of the agreement, the
Company will not pay any deferred compensation to participants or their
estates until the earlier of October 1, 1995, or the payment in full of the
Company's term debt obligations which were obtained to fund the Company's
loans to its ESOP (see Note 9). As of September 28, 1996 and September 30,
1995, 42,029 shares and 49,103 shares with a fair value of $499,289 and
$790,638, respectively, were held in trust or accrued by the Company. Of the
shares held in trust as of September 28, 1996 and September 30, 1995, 4,153
and 7,589 shares related to terminated participants and were frozen at a
value of $97,803, and $178,721, respectively. During 1996, the Company did
not accrue an imputed dividend and also reversed the imputed dividends of
$90,927 ($53,114 in 1995 and $45,355 in 1994) accrued during 1995 and 1994.
The Company also adjusted the deferred liability to the fair value of the
shares held in trust, which resulted in a net decrease in the Company's
deferred liability under the plan of $177,930 ($28,251 in 1995 and $345,768
in 1994).
Effective September 29, 1991, the Company adopted an executive performance
share plan. At the discretion of the executive committee of the board of
directors, the Company may award certain key employees a specified number of
"performance" shares. Each "performance" share is equivalent in value to the
fair value as of the award date of one share of the Company's common stock.
Effective each December 31, the value of an outstanding "performance" share
will be adjusted to reflect any increase or decrease in the fair value of the
Company's common stock. Participants in the plan are fifty percent vested as
to the number of their "performance" shares upon receipt of an award.
Participants become fully vested in their "performance" shares after ten
years of continuous service. As of September 28, 1996 and September 30,
1995, the Company had outstanding 123,492 "performance" shares under the plan
with a vested value of $1,172,580 and $1,820,272, respectively. While the
executive committee
F-51
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
6. Deferred Compensation Plans (Continued)
---------------------------
did not award any "performance" shares for the years ended September 28,
1996, September 30, 1995, and October 1, 1994, the Company did adjust its
deferred liability based on changes in the fair value of the "performance"
shares outstanding under the plan which resulted in decreases in its deferred
liability of $647,692 and $306,623, and an increase of $83,208, respectively.
7. Property, Plant and Equipment
-----------------------------
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Land $ 782,277 $ 782,277
Buildings and Improvements 28,035,703 24,309,693
Machinery and Equipment 58,846,585 76,243,240
Furniture and Fixtures 3,645,575 3,685,998
Transportation Equipment 124,968 222,157
Asset Under Capital Lease 2,769,738 2,769,738
------------- -------------
94,204,846 108,013,103
Less Accumulated Depreciation 42,243,756 54,145,141
------------- -------------
Net Property, Plant and Equipment $51,961,090 $ 53,867,962
============= =============
</TABLE>
8. Note Payable
------------
Effective October 31, 1996, the Company has available a line of credit with
their factor of up to $19,000,000 or 90% of factored accounts receivable.
Interest is payable monthly at 1.5% over the highest publicly announced prime
rate of certain financial institutions. The line is scheduled to mature on
October 31, 1998. Total advances on the existing line as of September 28,
1996 and September 30, 1995 were $7,000,000 and $4,000,000, with interest at
prime plus 1.0% (9.75% as of September 28, 1996 and September 30, 1995),
respectively.
F-52
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
9. Long-Term Debt
--------------
The following term notes are secured by deeds of trust on all real property
and improvements and a security interest in all receivables, finished goods
inventories, certain insurance policies, equipment and furniture and
fixtures. The Company has also assigned the stock pledge agreements with the
ESOP, which are discussed in Note 4, as collateral for the term notes.
<TABLE>
<CAPTION>
September 28, September 30,
1996 1995
------------- --------------
<S> <C> <C>
Spindale, North Carolina Operations:
Equipment obligation, due in monthly installments
based on usage, non-interest bearing, due in 1997. $ 760,500 $ -0-
Sevierville, Tennessee Operations:
Term note, due in quarterly principal installments of
$320,313 on the last day of February, May,
August and November, plus interest at 4.898%
payable monthly, and a final payment due May 31,
1997. (Loan is under technical default, therefore
due on demand.) 960,938 2,242,188
Term note, due in quarterly principal installments of
$320,312 on the last day of February, May,
August and November, plus interest at 4.898%
payable monthly, and a final payment due May 31,
1997. (Loan is under technical default, therefore
due on demand.) 960,938 2,242,188
Term line of credit agreement with maximum
borrowings of $8,000,000, due January 1997, with
interest payable monthly at the bank's prime rate,
currently 8.87% (8.75% in 1995). (Loan is under
technical default, therefore due on demand.) 6,200,000 6,700,000
Term loan, due in quarterly principal installments of
$1,350,000 beginning in January 1997, with
interest currently ranging from 7.68% to 8.08%,
through 2001. (Loan is under technical default,
therefore due on demand.) 27,000,000 27,000,000
Capital lease obligation, due in annual installments of
$18,544 through January 1999, reducing to
$15,000 through January 2019, including interest
at 2%. 275,420 289,099
------------- --------------
36,157,796 38,473,475
Less current maturities 35,896,284 2,576,179
------------- --------------
$ 261,512 $35,897,296
============= ==============
</TABLE>
F-53
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
9. Long Term Debt(continued)
-------------------------
Maturities of long-term debt as of September 28, 1996 are as follows:
1997 $ 35,896,284
1998 3,938
1999 10,781
2000 10,963
2001 11,147
Thereafter 224,683
-----------
$ 36,157,796
===========
The term note and line of credit agreements in effect as of September 28,
1996 contain restrictive covenants. Under certain of these covenants, the
Company is restricted as to the amounts which may be expended for property
and equipment, the amount of property and equipment which may be sold, and
the use of the proceeds. The covenants also prohibit or restrict changes in
senior management, dividends, loans or advances, investments in other
entities, incurrence of any new mortgages or liens and require the
maintenance of certain working capital, debt and net worth ratios. As of
September 28, 1996, the Company was not in compliance with certain of the
loan covenants described above. The Company has not received waivers of the
covenant violations and is in technical default under the terms of the note
agreements, which causes the balances to become due on demand. As a result,
the callable balances have been classified as current maturities as of
September 28, 1996. The Company is currently negotiating a sale of
substantially all of the assets of the Company which would facilitate
repayment of the above debts (see Note 19).
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining
maturities. As of September 28, 1996 and September 30, 1995, the fair value
of the long-term debt approximates the amounts recorded in the financial
statements.
10. Income Taxes (Benefit)
----------------------
Income taxes (benefit) are as follows:
1996 1995 1994
---------- ----------- ------------
Current $ -0- $ -0- $ (231,720)
Deferred 8,466,647 (3,794,515) (2,552,490)
---------- ----------- ------------
$8,466,647 $ 3,794,515 $(2,784,210)
========== =========== ============
F-54
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
10. Income Taxes (Benefit) (continued)
----------------------
Income taxes (benefit) as shown in the statements of operations varied from
the statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- --------------------- -------------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Loss Amount Loss Amount Loss
------------ -------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
At "expected" tax rate $(3,616,327) (34.0)% $(3,893,678) (34.0)% $(2,937,645) (34.0)%
Change in valuation
allowance 12,082,974 113.6 -0- -0- 0.0 0.0
Other, net -0- 0.0 99,163 .9 153,435 1.8
------------ -------- ------------ -------- ----------- -----------
$ 8,466,647 79.6% $(3,794,515) (33.1)% $(2,784,210) (32.2)%
=========== ======== ============ ======== =========== ===========
</TABLE>
As of September 28, 1996, the Company had available for federal income tax
purposes net operating loss and tax credit carryovers which expire on the
following dates in the approximate amounts shown below:
Net
Operating Tax
Losses Credits
----------- ---------
1999 $ -0- $183,716
2000 -0- 52,880
2001 -0- 34,485
2003 -0- -0-
2004 6,298,000 -0-
2005 7,270,000 -0-
2009 6,905,000 -0-
2010 8,867,000 -0-
2011 13,920,000 -0-
----------- --------
$43,260,000 $271,081
=========== ========
F-55
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
10. Income Taxes (Benefit) (continued)
----------------------
The net deferred tax asset in the 1996 and 1995 balance sheets include the
following components:
1996 1995
----------------------------
Current:
Deferred Tax Assets $ 870,340 $ 853,238
Deferred Tax (284,953) (261,441)
------------ -----------
Net Deferred Tax Assets 585,387 591,797
Less Valuation Allowance (585,387) (591,797)
------------ -----------
Net Current Deferred Tax Asset $ -0- $ -0-
============ ===========
Long-Term:
Deferred Tax Assets $ 20,293,880 $16,445,233
Deferred Tax Liabilities (6,837,549) (6,611,639)
------------ -----------
Net Deferred Tax Assets 13,456,331 9,833,594
Less Valuation Allowance (13,456,331) (1,366,947)
------------ -----------
Net Long-Term Deferred Tax Asset $ -0- $ 8,466,647
============ ===========
11. Lease Commitments
-----------------
The Company leases its Sevierville, Tennessee operating facility, a sales
office and storage space in New York City, certain equipment, and warehouse
space on an as needed basis for its Sevierville, Tennessee and its Spindale
and Harris, North Carolina locations. The operating facility lease is
classified as a capital lease and is included in property and equipment. The
Company is required to pay real and personal city property taxes on the
operating facility over the remaining lease term. The Company can purchase
the facility at the end of the lease for $1. All other leases are classified
as operating leases. Rental expense under all operating leases amounted to
$614,987 in 1996 ($685,560 in 1995 and $293,685 in 1994). Future minimum
rental payments under all noncancellable operating leases with remaining
terms in excess of one year as of September 28, 1996 are: $478,344 in 1997;
$423,447 in 1998; $366,975 in 1999; $361,830 in 2000; $357,841 in 2001; and
$1,555,797 thereafter.
F-56
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
12. Litigation
----------
The nature and scope of the Company's business brings it into regular
contact with the general public and a variety of businesses and governmental
entities in the ordinary course of business. Such activities inherently
subject the Company to the hazards of litigation.
In April 1991, a former customer of the Company filed suit seeking damages
contending that the Company breached an alleged "Confinement Agreement",
that is, an arrangement pursuant to which the Company purportedly agreed to
sell certain fabrics exclusively to the customer for an indefinite period of
time. In addition, the customer was seeking additional damages related to
the continued sales of these fabrics by the Company in the open market. On
December 27, 1995, the Company entered into a settlement agreement which
required the Company to pay $1,715,000 on January 17, 1996 to release them
from the above suit. The settlement amount was recorded in miscellaneous
expense in the Company's 1995 statement of operations.
During the year ended October 1, 1994, the Company incurred aggregate
settlement costs of approximately $597,000 related to litigation with
certain former employees. In regard to the preceding, the Company also
amended its executive deferred stock bonus trust agreement which resulted in
a reduction of the Company's deferred compensation plans liability of
$121,745 (see Note 6). The preceding items are recorded net in miscellaneous
expense in the Company's 1994 statement of operations.
The Company is currently involved in certain employment/labor relations
proceedings. On August 5, 1996, a textile converter filed an arbitration
demand and commenced an action against the Company in the Supreme Court of
the State of New York. The Company has filed for a permanent stay and a
dismissal, respectively, of these matters. It is the opinion of management
that the Company will prevail in these matters. At present, the Company's
management is not aware of any other pending or threatened litigation.
13. Capital Stock
-------------
Capital stock consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Preferred Stock- Voting- Par Value $20, Authorized
Issued and Outstanding 600,000 Shares in 1996 and 1995 $12,000,000 $12,000,000
Common Stock - Par Value $10, Authorized 3,000,000
Shares; Issued 1,797,931 Shares in 1996 and 1995 17,979,310 17,979,310
----------- -----------
$29,979,310 $29,979,310
=========== ===========
</TABLE>
F-57
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
13. Capital Stock (continued)
-------------
On October 29, 1992, the Company entered into a stock purchase agreement
with a third party to sell 600,000 shares of the Company's voting preferred
stock at a price of $20.50 per share. Subsequently, the Company amended its
charter to authorize an additional 1,200,000 shares of common stock and
600,000 shares of voting preferred stock, and on December 3, 1992, issued
the 600,000 shares of voting preferred stock in exchange for cash and notes
totalling $12,300,000. The preferred stock is non-cumulative and is
convertible into common stock through December 31, 1998 at which time the
conversion rights expire. The stock purchase agreement requires that the
Company repurchase from the third party at fair market value all or any
portion of the 600,000 shares of voting preferred stock bought, if certain
conditions of the agreement are not fulfilled (see Note 19).
14. Loss Per Share
--------------
Primary loss per share of common stock is computed based on the weighted
average number of common stock shares outstanding during the year. Fully
diluted loss per share of common stock is computed based on the weighted
average number of common stock and convertible preferred stock shares
outstanding during the year.
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Number of Shares Used in
Per Share Computations:
Primary 1,793,045 1,793,045 1,797,727
========= ========= =========
Fully Diluted 2,393,045 2,393,045 2,298,162
========= ========= =========
</TABLE>
F-58
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
15. Change in Method of Accounting for Inventory
--------------------------------------------
The Company recorded its inventories at the lower of cost or market using
the first-in, first out (FIFO) method in 1995, whereas in prior years
certain inventories were recorded at the lower of cost or market using the
last-in, first-out (LIFO) method. The new method of accounting for inventory
was adopted to more closely recognize current cost of inventory. The effect
of the accounting change on the loss in 1995 and on the loss as previously
reported for 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
Effect on:
<S> <C> <C>
Net Loss [Increase (Decrease)] $(814,335) $410,968
========= ========
Loss per common share assuming no dilution $ (.45) $ .23
========= ========
Loss per common share assuming full dilution $ (.34) $ .18
========= ========
</TABLE>
16. Spindale Plant Yarn Mill Closure
--------------------------------
In July 1995, the Spindale plant stopped processing yarn. The Company
incurred various expenses in the closure of the yarn mill facilities which
included retention pay of approximately $320,000 for employees who worked
until the yarn mill stopped production and also a loss on the sale of certain
yarn mill production equipment of approximately $903,000. Both amounts are
included in miscellaneous expense in the Company's 1995 statement of
operations. Included in miscellaneous income in the Company's 1995 statement
of operations is approximately $210,000 of the net sales proceeds from cotton
sold after the closure of the yarn mill.
17. Major Customers
---------------
During 1996, the Company had sales to two major customers (two in 1995 and
three in 1994) which accounted for approximately twenty-two percent of total
sales (twenty-nine percent in 1995 and thirty-eight percent in 1994).
F-59
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 28, 1996, SEPTEMBER 30, 1995, AND OCTOBER 1, 1994
18. Self Insurance of Health Benefits
---------------------------------
The Company self-insures health benefits. Stop-loss insurance is maintained
for claims paid in excess of $150,000 for each insured individual. Claims
were $756,288, $1,167,111, and $588,053 for the years ended September 28,
1996, September 30, 1995, and October 1, 1994, respectively.
19. Subsequent Events
-----------------
On November 20, 1996, the Company's Chairman signed a letter of intent to
negotiate the sale, subject to the shareholders approval, of substantially
all of the Company's assets to a third party for approximately $65,000,000
and the assumption by the buyer of certain operating liabilities
(liabilities considered ordinary in the course of business) of the Company.
The Company would be responsible for liquidation of all liabilities other
than those considered ordinary in the course of business, such as notes
payable and current maturities of long-term debt, using the proceeds from
the sale. Also, on November 20, 1996, the Company's Chairman and the
preferred shareholders entered into a letter agreement whereby the Company
would redeem its outstanding preferred shares for an aggregate minimum cost
of approximately $6,600,000, subject to consummation of the third party
asset sale by no later than May 31, 1997. The agreement provides that if the
Company's common shareholders either through liquidation or redemption were
to have available for distribution aggregate funds representing an amount
greater than $10.50 per share of common stock the preferred shareholders
would receive a pro-rata portion of such excess amount, if any. Should the
Company consummate the third party asset sale, any monies remaining after
secured debt repayment and the preferred stock redemption would be available
for distribution to general creditors and common shareholders, in that
respective order. The Company's common shareholders could receive an amount
significantly less than the book value per common share.
F-60
<PAGE>
THE NEW CHEROKEE CORPORATION
UNAUDITED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28,
1996
----------------------
(DOLLARS IN THOUSANDS)
ASSETS
- -----------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 882
Accounts receivable, net 15,101
Inventories 10,172
Prepaid expenses and other 340
--------
Total current assets 26,495
Property, plant and equipment 93,895
Less accumulated depreciation and amortization (43,649)
--------
Net property, plant and equipment 50,246
Other Assets 3,497
--------
$ 80,238
========
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------
Current liabilities:
Current maturities of long-term debt
and notes payable $ 37,877
Accounts payable 1,881
Accrued expenses 2,516
--------
Total current liabilities 42,274
Long-term debt 262
Deferred compensation plans 5,278
Other liabilities 343
Shareholders' equity:
Preferred stock, $20 par value, 600,000
shares authorized, issued and outstanding 12,000
Common stock, $10 par value, 3,000,000
shares authorized, 1,797,931 shares issued and
outstanding 17,979
Capital in excess of par value 20,385
Retained deficit (15,716)
Treasury stock (49)
Deferred compensation - restricted stock (1,237)
Notes receivable from ESOP (1,281)
--------
Total shareholders' equity 32,081
--------
$ 80,238
========
</TABLE>
See accompanying notes.
F-61
<PAGE>
THE NEW CHEROKEE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------
DECEMBER 28, SEPTEMBER 30,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net Sales $22,810 $27,521
Costs and expenses:
Cost of sales 19,897 25,302
Selling, general and administrative expenses 2,558 2,929
------- -------
Operating income (loss) before ESOP
contributions 355 (710)
ESOP contributions 851 1,199
------- -------
Net operating loss (496) (1,909)
Other income (expense), net (145) 127
Interest expense (903) (731)
------- -------
Loss before income taxes (1,544) (2,513)
Income tax benefit - 858
------- -------
Net loss $(1,544) $(1,655)
======= =======
</TABLE>
See accompanying notes.
F-62
<PAGE>
THE NEW CHEROKEE CORPORATION
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
DECEMBER 28, SEPTEMBER 30,
1996 1995
----------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Cash flows from operating activities: $(1,544) $(1,655)
Net loss
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,824 2,014
Deferred income tax benefit - (874)
Deferred compensation plans, net 75 (76)
Loss on sale of fixed assets 41 -
Changes in operating assets and liabilities:
Accounts receivable 7,357 4,944
Inventories 2,218 5,529
Prepaid expenses and other assets (237) (161)
Accounts payable and accrued expenses (4,818) (2,334)
Other liabilities (4) 43
------- -------
Net cash provided by operating activities 4,912 7,430
Cash flows from investing activities:
Capital expenditures (326) (1,527)
Proceeds from sale of equipment 176 -
Repayment on loans to ESOP 641 640
------- -------
Net cash provided (used) by investing
activities 491 (887)
Cash flows from financing activities:
Payments of long-term debt and notes payable (5,019) (6,540)
------- -------
Net cash used by financing activities (5,019) (6,540)
------- -------
Net increase in cash and cash equivalents 384 3
Cash and cash equivalents at beginning of period 498 316
------- -------
Cash and cash equivalents at end of period $ 882 $ 319
======= =======
</TABLE>
See accompanying notes.
F-63
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. Unaudited Condensed Financial Statements
----------------------------------------
In the opinion of management, the accompanying unaudited condensed financial
statements of the New Cherokee Corporation ("TNCC") reflect all adjustments
considered necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented. Such
adjustments consist of normal recurring accruals. Interim results are not
necessarily indicative of results for a full year. For further information,
refer to the financial statements and notes thereto for the year ended
September 28, 1996.
On February 3, 1997, TNCC sold substantially all of its assets to Dan River
Inc. for $65 million in cash, subject to a working capital adjustment, and
the assumption of certain operating liabilities. The unaudited condensed
financial statements do not include any adjustments attributable to the sale.
Also on February 3, 1997, TNCC redeemed its outstanding preferred shares for
$6.6 million in cash. The redemption agreement provides for additional
payments to the preferred shareholders in the event funds available to common
shareholders either through liquidation or redemption represent greater than
$10.50 per share of common stock.
2. Inventories
-----------
The components of inventory are as follows:
<TABLE>
<CAPTION>
December 28, September 28,
1996 1996
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Finished goods $ 6,062 $ 6,178
Work in process 2,651 4,422
Raw materials 816 1,381
Supplies 643 409
------- -------
Total inventories $10,172 $12,390
======= =======
</TABLE>
F-64
<PAGE>
THE NEW CHEROKEE CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3. Shareholders' Equity
--------------------
Activity in Shareholders' Equity is as follows:
<TABLE>
<CAPTION>
Preferred Common Capital in Retained
Stock Stock Excess of Par Deficit
--------- ------ ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at
September 28, 1996 $12,000 $17,979 $20,385 $(14,172)
Net loss - - - (1,544)
Repayment on loans
to ESOP - - - -
------- ------- ------- --------
Balance at December 28,
1996 $12,000 $17,979 $20,385 $(15,716)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Notes Total
Treasury Deferred Receivable Shareholders'
Stock Compensation from ESOP Equity
-------- ------------ ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at
September 28, 1996 $(49) $(1,237) $(1,922) $32,984
Net loss - - - (1,544)
Repayment on loans
to ESOP - - 641 641
---- ------- ------- -------
Balance at
December 28, 1996 $(49) $(1,237) $(1,281) $32,081
==== ======= ======= =======
</TABLE>
F-65
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts) expected to be incurred in connection with the sale and
distribution of the shares of Class A Common Stock being registered. All of
such expenses and costs will be paid by the Company. All of the amounts shown
are estimated except for the filing fees of the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.:
<TABLE>
<S> <C>
Securities and Exchange
Commission Filing Fee............... $34,849
NASD Filing Fee...................... *
New York Stock Exchange Listing Fee.. *
Printing and Engraving Expenses...... *
Legal Fees and Expenses.............. *
Accounting Fees and Expenses......... *
Blue Sky Fees and Expenses........... *
Transfer Agent Fees and Expenses..... *
Miscellaneous........................ *
-------
Total...................... $ *
=======
</TABLE>
__________________________
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 9 of the Underwriting Agreement filed as Exhibit 1.1 hereto contains
certain provisions pursuant to which certain officers, directors and controlling
persons of Dan River may be entitled to be indemnified by the underwriters named
therein.
The Company's Restated Charter eliminates, to the fullest extent permitted by
applicable law, the personal liability of directors to the Company or its
shareholders for monetary damages for breach of duty of care or any other duty
owed to the Company as a director. The GBCC currently provides that such
provision shall not eliminate or limit the liability of a director (i) for any
appropriation, in violation of his duties, of any business opportunity of the
Company, (ii) for acts or omissions that involve intentional misconduct or a
knowing violation of law, (iii) for unlawful corporate distributions or (iv) for
any transaction from which the director received an improper personal benefit.
Article VI of Dan River's Bylaws, as well as Article 8, Part 5 of the GBCC,
provide for the indemnification by Dan River of, and advancement of expenses to,
its directors, officers, employees and agents under certain circumstances.
II-1
<PAGE>
Statutory Authority
14-2-850. PART DEFINITIONS.
As used in this part, the term:
(1) "Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
(2) "Director" or "officer" means an individual who is or was a director or
officer, respectively, of a corporation or who, while a director or officer
of the corporation, is or was serving at the corporation's request as a
director, officer, partner, trustee, employee, or agent of another domestic
or foreign corporation, partnership, joint venture, trust, employee benefit
plan, or other enterprise. A director or officer is considered to be serving
an employee benefit plan at the corporation's request if his or her duties to
the corporation also impose duties on, or otherwise involve services by, the
director or officer to the plan or to participants in or beneficiaries of the
plan. Director or officer includes, unless the context otherwise requires,
the estate or personal representative of a director or officer.
(3) "Disinterested director" means a director who at the time of a vote
referred to in subsection (c) of Code Section 14-2-853 or a vote or selection
referred to in subsection (b) or (c) of Code Section 14-2-855 or subsection
(a) of Code Section 14-2-856 is not:
(A) A party to the proceeding; or
(B) An individual who is a party to a proceeding having a familial,
financial, professional, or employment relationship with the director whose
indemnification or advance for expenses is the subject of the decision being
made with respect to the proceeding, which relationship would, in the
circumstances, reasonably be expected to exert an influence on the director's
judgment when voting on the decision being made.
(4) "Expenses" include attorneys' fees.
(5) "Liability" means the obligation to pay a judgment, settlement,
penalty, fine (including an excise tax assessed with respect to an employee
benefit plan), or reasonable expenses incurred with respect to a proceeding.
(6) "Official capacity" means:
(A) When used with respect to a director, the office of director in a
corporation; and
(B) When used with respect to an officer, as contemplated in Code
Section 14-2-857, the office in a corporation held by the officer.
Official capacity does not include service for any other domestic or foreign
corporation or any partnership, joint venture, trust, employee benefit plan,
or other entity.
II-2
<PAGE>
(7) "Party" means an individual who was, is, or is threatened to be made a
named defendant or respondent in a proceeding.
(8) "Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative and
whether formal or informal.
14-2-851. AUTHORITY TO INDEMNIFY.
(a) Except as provided in this Code section, a corporation may indemnify an
individual who is a party to a proceeding because he or she is or was a director
against liability incurred in the proceeding if:
(1) Such individual conducted himself or herself in good faith; and
(2) Such individual reasonably believed:
(A) In the case of conduct in his or her official capacity, that such
conduct was in the best interests of the corporation;
(B) In all other cases, that such conduct was at least not opposed to
the best interests of the corporation; and
(C) In the case of any criminal proceeding, that the individual had no
reasonable cause to believe such conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he or she believed in good faith to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subsection (a) (2) (B) of this Code section.
(c) The termination of a proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of conduct
described in this Code section.
(d) A corporation may not indemnify a director under this Code section:
(1) In connection with a proceeding by or in the right of the corporation,
except for reasonable expenses incurred in connection with the proceeding if
it is determined that the director has met the relevant Standard of Conduct
under this Code section; or
(2) In connection with any proceeding with respect to conduct for which he
or she was adjudged liable on the basis that personal benefit was improperly
received by him or her, whether or not involving action in his or her
official capacity.
14-2-852. MANDATORY INDEMNIFICATION.
A corporation shall indemnify a director who was wholly successful on the
merits or otherwise, in the defense of any proceeding to which he or she was a
party because he is or was a director of the corporation against reasonable
expenses incurred by the director in connection with the proceeding.
II-3
<PAGE>
14-2-853. ADVANCE FOR EXPENSES.
(a) A corporation may, before final disposition of the proceeding, advance
funds to pay for or reimburse the reasonable expenses incurred by a director who
is a party to a proceeding because he or she is a director if he or she delivers
to the corporation:
(1) A written affirmation of his or her good faith belief that he or she
has met the relevant standard of conduct described in Code Section 14-2-851
or that the proceeding involves conduct for which liability has been
eliminated under a provision of the articles of incorporation as authorized
by paragraph (4) of subsection (b) of Code Section 14-2-202; and
(2) His or her written undertaking to repay any funds advanced if it is
ultimately determined that the director is not entitled to indemnification
under this part.
(b) The undertaking required by paragraph (2) of subsection (a) of this Code
section must be an unlimited general obligation of the director but need not be
secured and may be accepted without reference to financial ability to make
repayment.
(c) Authorizations under this Code section shall be made:
(1) By the board of directors:
(A) When there are two or more disinterested directors, by a majority
vote of all the disinterested directors (a majority of whom shall for such
purpose constitute a quorum) or by a majority of the members of a committee
of two or more disinterested directors appointed by such a vote; or
(B) When there are fewer than two disinterested directors, by the vote
necessary for action by the board in accordance with subsection (c) of Code
Section 14-2-824, in which authorization directors who do not qualify as
disinterested directors may participate; or
(2) By the shareholders, but shares owned or voted under the control of a
director who at the time does not qualify as a disinterested director with
respect to the proceeding may not be voted on the authorization.
14-2-854. COURT-ORDERED INDEMNIFICATION AND ADVANCES FOR EXPENSES.
(a) A director who is a party to a proceeding because he or she is a director
may apply for indemnification or advance for expenses to the court conducting
the proceeding or to another court of competent jurisdiction. After receipt of
an application and after giving any notice it considers necessary, the court
shall:
(1) Order indemnification or advance for expenses if it determines that the
director is entitled to indemnification under this part; or
(2) Order indemnification or advance for expenses if it determines, in view
of all the relevant circumstances, that it is fair and reasonable to
indemnify the director or to advance expenses to the
II-4
<PAGE>
director, even if the director has not met the relevant standard of conduct
set fort in subsections (a) and (b) of Code Section 14-2-851, failed to
comply with Code Section 14-2-853, or was adjudged liable in a proceeding
referred to in paragraph (1) or (2) of subsection (d) of Code Section 14-2-
851, but if the director was adjudged so liable, the indemnification shall be
limited to reasonable expenses incurred in connection with the proceeding.
(b) If the court determines that the director is entitled to indemnification
or advance for expenses under this part, it may also order the corporation to
pay the director's reasonable expenses to obtain court-ordered indemnification
or advance for expenses.
14-2-855. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION.
(a) A corporation may not indemnify a director under Code Section 14-2-851
unless authorized thereunder and a determination has been made in the specific
preceding that indemnification of the director is permissible in the
circumstances because he or she has met the relevant standard of conduct set
forth in Code Section 14-2-851.
(b) The determination shall be made:
(1) If there are two or more disinterested directors, by the board of
directors by a majority vote of all the disinterested directors (a majority
of whom shall for such purpose constitute a quorum) or by a majority of the
members of a committee of two or more disinterested directors appointed by
such a vote;
(2) By special legal counsel:
(A) Selected in the manner prescribed in paragraph (1) of this
subsection; or
(B) If there are fewer than two disinterested directors, selected by
the board of directors (in which selection directors who do not qualify as
disinterested directors may participate); or
(3) By the shareholders, but shares owned by or voted under the control of
a director who at the time does not qualify as a disinterested director may
not be voted on the determination.
(c) Authorization of indemnification or an obligation to indemnify and
evaluation as to reasonableness of expenses shall be made in the same manner as
the determination that indemnification is permissible, except that if there are
fewer than two disinterested directors or if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subparagraph
(b) (2) (B) of this Code section to select special legal counsel.
14-2-856. SHAREHOLDER APPROVED INDEMNIFICATION.
(a) If authorized by the articles of incorporation or a bylaw, contract, or
resolution approved or ratified by the shareholders by a majority of the votes
entitled to be cast, a corporation may indemnify or obligate itself to indemnify
a director made a party to a proceeding including a proceeding brought by or in
the right of the corporation, without regard to the limitations in other Code
sections of this part, but shares owned or voted under the control of a director
who at the time does not qualify as a disinterested director with respect
II-5
<PAGE>
to any existing or threatened proceeding that would be covered by the
authorization may not be voted on the authorization.
(b) The corporation shall not indemnify a director under this Code section
for any liability incurred in a proceeding in which the director is adjudged
liable to the corporation or is subjected to injunctive relief in favor of the
corporation:
(1) For any appropriation, in violation of the directors duties, of any
business opportunity of the corporation;
(2) For acts or omissions which involve intentional misconduct or a knowing
violation of law;
(3) For the types of liability set forth in Code Section 14-2-832; or
(4) For any transaction from which he received an improper personal
benefit.
(c) Where approved or authorized in the manner described in subsection (a) of
this Code section, a corporation may advance or reimburse expenses incurred in
advance of final disposition of the proceeding only if:
(1) The director furnishes the corporation a written affirmation of his
good faith belief that his conduct does not constitute behavior of the kind
described in subsection (b) of this Code section; and
(2) The director furnishes the corporation a written undertaking, executed
personally or on his behalf, to repay any advances if it is ultimately
determined that he is not entitled to indemnification under this Code
section.
14-2-857. INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS.
(a) A corporation may indemnify and advance expenses under this part to an
officer of the corporation who is a party to a proceeding because he or she is
an officer of the corporation:
(1) To the same extent as a director; and
(2) If he or she is not a director, to such further extent as may be
provided by the articles of incorporation, the bylaws, a resolution of the
board of directors, or contract except for liability arising out of conduct
that constitutes:
(A) Appropriation, in violation of his or her duties, of any business
opportunity of the corporation;
(B) Acts or omissions which involve intentional misconduct or a knowing
violation of law;
(C) The types of liability set forth in Code Section 14-2-832; or
(D) Receipt of an improper personal benefit.
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<PAGE>
(b) The provisions of paragraph (2) of subsection (a) of this Code section
shall apply to an officer who is also a director if the sole basis on which he
or she is made a party to the proceeding is an act or omission solely as an
officer.
(c) An officer of a corporation who is not a director is entitled to
mandatory indemnification under Code Section 14-2-852, and may apply to a court
under Code Section 14-2-854 for indemnification or advances for expenses, in
each case to the same extent to which a director may be entitled to
indemnification or advances for expenses under those provisions.
(d) A corporation may also indemnify and advance expenses to an employee or
agent who is not a director to the extent, consistent with public policy, that
may be provided by its articles of incorporation, bylaws, general or specific
action of its board of directors, or contract.
14-2-858. INSURANCE.
A corporation may purchase and maintain insurance on behalf of an individual
who is a director, officer, employee, or agent of the corporation or who, while
a director, officer, employee, or agent of the corporation, serves at the
corporation's request as a director, officer, partner, trustee, employee, or
agent of another domestic or foreign corporation, partnership, joint venture,
trust, employee benefit plan, or other entity against liability asserted against
or incurred by him or her in that capacity or arising from his or her status as
a director, officer, employee, or agent, whether or not the corporation would
have power to indemnify or advance expenses to him or her against the same
liability under this part.
14-2-859. APPLICATION OF PART.
(a) A corporation may, by a provision in its articles of incorporation or
bylaws or in a resolution adopted or a contract approved by its board of
directors or shareholders, obligate itself in advance of the act or omission
giving rise to a proceeding to provide indemnification or advance funds to pay
for or reimburse expenses consistent with this part. Any such obligatory
provision shall be deemed to satisfy the requirements for authorization referred
to in subsection (c) of Code Section 14-2-853 or subsection (c) of Code Section
14-2-855. Any such provision that obligates the corporation to provide
indemnification to the fullest extent permitted by law shall be deemed to
obligate the corporation to advance funds to pay for or reimburse expenses in
accordance with Code Section 14-2-853 to the fullest extent permitted by law,
unless the provision specifically provides otherwise.
(b) Any provision pursuant to subsection (a) of this Code section shall not
obligate the corporation to indemnify or advance expenses to a director of a
predecessor of the corporation, pertaining to conduct with respect to the
predecessor, unless otherwise specifically provided. Any provision for
indemnification or advance for expenses in the articles of incorporation,
bylaws, or a resolution of the board of directors or shareholders, partners, or,
in the case of limited liability companies, members or managers of a predecessor
of the corporation or other entity in a merger or in a contract to which the
predecessor is a party, existing at the time the merger takes effect, shall be
governed by paragraph (3) of subsection (a) of Code Section 14-2-1106.
(c) A corporation may, by a provision in its articles of incorporation, limit
any of the rights to indemnification or advance for expenses created by or
pursuant to this part.
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<PAGE>
(d) This part does not limit a corporation's power to pay or reimburse
expenses incurred by a director or an officer in connection with his or her
appearance as a witness in a proceeding at a time when he or she is not a party.
(e) Except as expressly provided in Code Section 14-2-857, this part does not
limit a corporation's power to indemnify, advance expenses to, or provide or
maintain insurance on behalf of an employee or agent.
Bylaw Authority
ARTICLE VI OF DAN RIVER'S BYLAWS PROVIDES:
INDEMNITY. Any person who was or is a party or is threatened to be made a
---------
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any action
by or in the right of the Corporation), by reason of the fact that such person
is or was a director, officer, employee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise shall be indemnified by the Corporation against expenses (including
reasonable attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, if such person acted in a manner he believed in good faith
to be in or not opposed to the best interests of the Corporation (and with
respect to any criminal action or proceeding, if such person had no reasonable
cause to believe such person's conduct was unlawful), the to maximum extent
permitted by, and in the manner provided by, the Georgia Business Corporation
Code.
For the undertaking with respect to indemnification, see Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
1.1 Form of Underwriting Agreement relating to the Class A
Common Stock.
2.1 Plan and Agreement of Merger of Braelan Corp. with and into
Dan River Inc./1/
2.2 Asset Purchase Agreement dated January 10, 1997 by and between Dan
River Inc. and The New Cherokee Corporation./2/
2.3 First Amendment to Asset Purchase Agreement between Dan River Inc.
and The New Cherokee Corporation dated as of February 2, 1997./2/
3.1* Amended and Restated Articles of Incorporation of Dan River
Inc.
3.2* Bylaws of Dan River Inc.
4.1* Specimen Stock Certificate.
5.1* Opinion and Consent of King & Spalding.
II-8
<PAGE>
10.1 Loan and Security Agreement, dated February 3, 1997 among
Dan River Inc. and Fleet Capital Corporation./3/
10.4 Registration Rights Agreement, dated as of September 3, 1991, among Dan
River Inc. and the Investors./4/
10.5* New Voting Agreement among Joseph L. Lanier, Jr., Richard L. Williams
and Barry F. Shea.
10.7 Employment Agreement, dated as of September 3, 1996, between Dan River
Inc. and Joseph L. Lanier, Jr./5/
10.8 Employment Agreement, dated as of September 3, 1996, between Dan River
Inc. and Richard L. Williams./5/
10.9 Employment Agreement, dated as of September 3, 1996, between Dan River
Inc. and Barry F. Shea./5/
10.10 Form of Post-employment Letter Agreement between Dan River Inc. and
certain of its officers./4/
10.12 Post-employment Letter Agreement between Dan River Inc. and
Gregory R. Boozer./7/
10.13 Post-employment Letter Agreement between Dan River Inc. and
Harry L. Goodrich./8/
10.14 Dan River Inc. Amended and Restated Stock Option Plan and form of
Option Agreement in effect prior to December 30, 1994./4/
10.14.1 Dan River Inc. Amended and Restated Stock Option Plan and form of
Option Agreement, as amended as of December 30, 1994./7/
10.15 Dan River Management Incentive Plan./4/
10.16 Form of Dan River Inc. 1997 Stock Incentive Plan.
10.18 Equipment Lease Agreement No. 2891-0, dated as of December 29, 1989, as
amended, between MDFC Equipment Leasing Corporation and Dan River
Inc./4/
10.19 Form of Dan River Inc. 1997 Stock Plan for Outside
Directors.
21.1 List of Subsidiaries./4/
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Pugh & Company, P.C.
23.2* Consent of King & Spalding (included in Exhibit 5.1).
_______________________
* To be filed by Amendment.
/1/ Exhibit 2.1 incorporated by reference to corresponding exhibit number in
Dan River's Report on Form 10-K (No. 33-70442) for the fiscal year ended
December 30, 1995.
/2/ Exhibit Nos. 2.2 and 2.3 incorporated by reference to Exhibit Nos. 2.1 and
2.2 in Dan River's Current Report on form 8-K (No. 33-70442) dated February
3, 1997.
/3/ Exhibit 10.1 incorporated by reference to corresponding exhibit number in
Dan River's Report on Form 10-K (No. 33-70442) for the fiscal year ended
December 28, 1996.
/4/ Incorporated by reference to corresponding exhibit number in Dan River's
Registration Statement on Form S-1 (No. 33-70442) filed on October 15,
1993.
/5/ Exhibit Nos. 10.7, 10.8 and 10.9 incorporated by reference to corresponding
exhibit numbers in Dan River's Report on Form 10-Q (No. 33-70442) for the
quarterly period ended September 28, 1996.
/6/ Exhibit Nos. 10.10, 10.14 and 10.15 incorporated by reference to
corresponding exhibit numbers in Dan River's Report on Form 10-K (No. 33-
70442) for the fiscal year ended December 28, 1996, and Exhibit Nos. 10.12
and 10.18 incorporated by reference to exhibit numbers 10.13 and 10.21,
respectively, in Dan River's Report on Form 10-K (No. 33-70442) for the
fiscal year ended December 28, 1996.
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<PAGE>
/7/ Exhibit Nos. 10.12 and 10.14.1 incorporated by reference to corresponding
exhibit numbers in Dan River's Report on Form 10-K (No. 33-70442) for the
fiscal year ended December 31, 1994.
/8/ Exhibit No. 10.13 incorporated by reference to exhibit number 10.12 in the
Form S-1.
(b) Financial Statement Schedules:
Schedules:
Schedule III - Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Danville,
State of Virginia on September 26, 1997.
DAN RIVER INC.
By: /S/ Joseph L. Lanier, Jr.
---------------------------------------
Name: Joseph L. Lanier, Jr.
Title: Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph L. Lanier, Jr., Barry F. Shea and Harry L.
Goodrich, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ Joseph L. Lanier, Jr. Chairman of the Board, September 26, 1997
- ---------------------------- Chief Executive
Joseph L. Lanier, Jr. Officer and Director
/S/ Barry F. Shea President-Chief Financial September 26, 1997
- ---------------------------- Officer (Principal Financial
Barry F. Shea and Accounting Officer)
II-11
<PAGE>
/S/ Richard L. Williams President, Chief Operating September 26, 1997
- ---------------------------- Officer and Director
Richard L. Williams
/S/ Paul R. Crotty Director September 26, 1997
- ----------------------------
Paul R. Crotty
/S/ John F. Maypole Director September 26, 1997
- ----------------------------
John F. Maypole
II-12
<PAGE>
_______________ SHARES
DAN RIVER INC.
CLASS A COMMON STOCK [PAR VALUE]
UNDERWRITING AGREEMENT
October , 1997
<PAGE>
EXHIBIT 1.1
October , 1997
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Dan River Inc., a Georgia corporation (the "COMPANY"), proposes to
issue and sell to the several Underwriters named in Schedule II hereto (the
"UNDERWRITERS"), and certain shareholders of the Company (the "SELLING
SHAREHOLDERS") named in Schedule I hereto severally propose to sell to the
several Underwriters, an aggregate of _______________ shares of the Class A
Common Stock [par value] of the Company (the "FIRM SHARES"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Shareholders, each Selling Shareholder
selling the amount set forth opposite such Selling Shareholder's name in
Schedule I hereto.
The Selling Shareholders also propose to sell to the several
Underwriters not more than an additional ______________ shares of Class A Common
Stock [par value] (the "ADDITIONAL SHARES") if and to the extent that you, as
Managers of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "SHARES". The shares of Class A
Common Stock [par value] of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK".
The Company and the Selling Shareholders are hereinafter sometimes collectively
referred to as the "SELLERS".
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS".
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:
<PAGE>
2
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of Georgia, has the corporate power
and authority to own its property and to conduct its business as described in
the Prospectus and is duly qualified to transact business and is in good
standing in the Commonwealth of Virginia and the states of Alabama, California,
Illinois, Massachusetts, New York, North Carolina, South Carolina and Texas,
which constitute all the jurisdictions in which the failure to so qualify would
have a material adverse effect on the Company and its subsidiaries, taken as a
whole.
(d) (i) Dan River Factory Stores, Inc., a Georgia corporation ("Factory
Stores") and DanPren LLC, a Mississippi limited liability company ("DanPren"),
are the only subsidiaries of the Company, (ii) each of Factory Stores and
DanPren has been duly organized, is validly existing and is in good standing
under the laws of the jurisdiction of its organization, has the corporate power
and authority to own its property and to conduct its businesses as described in
the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company and its subsidiaries, taken as a whole,
(iii) all of the issued shares of capital stock of Factory Stores have been duly
and validly authorzed and issued, are fully paid and non-assessable and are
owned directly by the Company, free and
<PAGE>
3
clear of all liens, encumbrances, equities or claims and (iv) the Company owns a
50% membership interest in DanPren, free and clear of all liens, encumbrances,
equities or claims.
(e) This Agreement has been duly authorized, executed and delivered by the
Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold by the
Selling Shareholders) outstanding prior to the issuance of the Shares to be sold
by the Company have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares to be sold by the Company have been duly authorized and,
when issued and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance by
the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by-laws of
the Company or any agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its subsidiaries, taken
as a whole, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any development
involving a prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive
of any amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is a party or to which any of
the properties of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus and are
not so described or any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
<PAGE>
4
Prospectus or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any and
all applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"),
(ii) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(iii) are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement.
(q) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not
<PAGE>
5
purchased any of its outstanding capital stock, nor declared, paid or otherwise
made any dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material change
in the capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus.
(r) The Company and its subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case excepts as described in or contemplated by the
Prospectus.
(s) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names currently employed by them in
connection with the business now operated by them in connections with the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(t) No material labor dispute with the employees of the Company or any of
its subsidiaries exists, except as described in or contemplated by the
Prospectus, or, to the knowledge of the Company, is imminent; and the Company is
not aware of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors that
could result in any material adverse effect on the Company and its subsidiaries,
taken as a whole.
(u) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the business in which they are engaged;
neither the Company nor any such subsidiary has been refused any insurance
coverage sought or applied for; and
<PAGE>
6
neither the Company nor any such subsidiary has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole, except as
descried in or contemplated by the Prospectus.
(v) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus.
(w) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2. Representations and Warranties of the Selling Shareholders. Each
of the Selling Shareholders represents and warrants to and agrees with each of
the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder.
(b) The execution and delivery by such Selling Shareholder of, and the
performance by such Selling Shareholder of its obligations under, this
Agreement, the Custody Agreement signed by such Selling Shareholder and
____________, as Custodian, relating to the deposit of the Shares to be sold by
such Selling Shareholder (the "CUSTODY AGREEMENT") and the Power of Attorney
appointing certain individuals as such Selling Shareholder's attorneys-in-fact
to the extent set forth therein, relating to the transactions contemplated
hereby and by the Registration Statement (the "POWER OF ATTORNEY") will not
contravene any provision of applicable law, or the certificate of incorporation
or by-laws of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon such Selling
Shareholder or
<PAGE>
7
any judgment, order or decree of any governmental body, agency or court having
jurisdiction over such Selling Shareholder, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by such Selling Shareholder of its
obligations under this Agreement or the Custody Agreement or Power of Attorney
of such Selling Shareholder, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale of the
Shares.
(c) Such Selling Shareholder has, and on the Closing Date will have, valid
title to the Shares to be sold by such Selling Shareholder and the legal right
and power, and all authorization and approval required by law, to enter into
this Agreement, the Custody Agreement and the Power of Attorney and to sell,
transfer and deliver the Shares to be sold by such Selling Shareholder.
(d) The Shares to be sold by such Selling Shareholder pursuant to this
Agreement have been duly authorized and are validly issued, fully paid and non-
assessable.
(e) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by such Selling Shareholder and are valid and
binding agreements of such Selling Shareholder.
(f) Delivery of the Shares to be sold by such Selling Shareholder pursuant
to this Agreement will pass title to such Shares free and clear of any security
interests, claims, liens, equities and other encumbrances.
(g) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph 2(g)
do not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
3. Agreements to Sell and Purchase. Each Seller, severally and not
jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the
<PAGE>
8
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from such
Seller at $______ a share (the "PURCHASE PRICE") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the number of Firm Shares to be
sold by such Seller as the number of Firm Shares set forth in Schedule II hereto
opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this Agreement,
and subject to its terms and conditions, the Selling Shareholders agree to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Selling Shareholders in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than the
Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 5 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth in Schedule II
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
Each Seller hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder, (B) the issuance by the Company of shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof of which the Underwriters have been
advised in writing or (C) transactions by any person other than the Company
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering
<PAGE>
9
of the Shares. In addition, each Selling Shareholder, agrees that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 180 days after the date of
the Prospectus, make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
4. Terms of Public Offering. The Sellers are advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold by each
Seller shall be made to such Seller in Federal or other funds immediately
available in New York City against delivery of such Firm Shares for the
respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1997, or at such other time on the same or such other
date, not later than _________, 1997, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "CLOSING
DATE".
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 3 or at such other time on the same or on such other date, in any event
not later than _______, 1997, as shall be designated in writing by you. The
time and date of such payment are hereinafter referred to as the "OPTION CLOSING
DATE".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations of the
Sellers to sell the Shares to the Underwriters and the several obligations of
the Underwriters to
<PAGE>
10
purchase and pay for the Shares on the Closing Date are subject to the condition
that the Registration Statement shall have become effective not later than 5:00
p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice
have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise,
or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 6(a)(i) above and to the effect
that the representations and warranties of the Company contained in this
Agreement are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of King & Spalding, outside counsel for the Company, dated the Closing
Date, to the effect that:
(i) (A) the Company has been duly incorporated, and based
solely on the attached certificate from the Secretary of State of
Georgia is validly existing as a corporation in good standing under the
laws of Georgia, (B) has the corporate power and authority to own,
<PAGE>
11
lease and operate its properties and to conduct its business as described in the
Registration Statement and (C) based solely on the attached certificates from
the Secretaries of State of the Commonwealth of Virginia and the states of
Alabama, California, Illinois, Massachusetts, New York, North Carolina South
Carolina and Texas, is duly qualified as a foreign corporation to transact
business and is in good standing in each such jurisdiction;
(ii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus;
(iii) the shares of Common Stock (including the Shares to be sold by the
Selling Shareholders) outstanding prior to the issuance of the Shares to be sold
by the Company have been duly authorized and are validly issued, fully paid and
non-assessable;
(iv) the Shares to be sold by the Company have been duly authorized and,
when issued and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and delivered by the
Company;
(vi) to the best of such counsel's knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed as exhibits thereto, and no default exists in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other instrument so described, referred to, or filed;
(vii) no authorization, approval, consent or order of any court or
governmental agency is required in connection with the sale by the Company of
the Securities to the Underwriters, except such as may be required under the
Securities Act, the Securities Act Regulations or state securities law; and, to
the best of their knowledge, the execution and delivery by the Company of this
Agreement and the consummation of the transactions contemplated herein will not
conflict with or constitute a breach of, or default under (which breach or
default has not been duly waived), or result in the creation of imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
its subsidiaries pursuant to, any material contract,
<PAGE>
12
indenture, mortgage, loan agreement, note, lease or other instrument filed as an
exhibit to the Registration Statement as referred to in the Prospectus to which
the Company or its subsidiaries is a party or by which any of them may be bound,
or to which any of the property or assets of the Company or its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or its subsidiaries, or any applicable law,
administrative regulation or administrative or court decree;
(viii) the statements (A) in the Prospectus under the captions "Business-
Trademarks and Licenses," "Business-Legal Proceedings," "Description of Capital
Stock" and "Underwriters" and (B) in the Registration Statement in Items 14 and
15, in each case insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(ix) to the best of such counsel's knowledge, no legal or governmental
proceedings pending or threatened which are required to be disclosed in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, other than those disclosed therein;
(x) the Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xi) the Company and its subsidiaries (A) are in compliance with any and
all applicable Environmental Laws, (B) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (C) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken as a
whole;
(xii) the Registration Statement is effective under the Securities Act
and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued under THE
<PAGE>
13
Securities Act or proceedings therefor initiated or threatened by the
Commission;
(xiii) at the time the Registration Statement became effective
and at the Representation Date, the Registration Statement (other than
the financial statements and supporting schedules included therein, as
to which no opinion need be rendered) complied as to form in all
material respects with the requirements of the Securities Act and the
rules and regulations of the Commission thereunder; and
(xiv) nothing has come to their attention that would lead them
to believe that the Registration Statement, at the time it became
effective or at the date hereof, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, at the date hereof or at the
Closing Date, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
are made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Harry L. Goodrich, Esq., General Counsel of the Company, dated
the Closing Date, to the effect that:
(i) (A) the Company has been duly incorporated, and based
solely on the attached certificate from the Secretary of State of
Georgia is validly existing as a corporation in good standing under
the laws of Georgia, (B) has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and (C) based solely on the
attached certificates from the Secretaries of State of the
Commonwealth of Virginia and the states of Alabama, California,
Illinois, Massachusetts, New York, North Carolina South Carolina and
Texas, is duly qualified as as foreign corporation to transact
business and is in good standing in each such jurisdicti on;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iii) Factory Stores and DanPren are the only subsidiaries of
the Company;
(iv) (A) Factory Stores has been duly incorporated, and based
solely on the attached certificate from the Secretary of State of
Georgia is validly existing as a corporation in good standing under
the laws of Georgia, has the corporate power and authority to own,
lease and
<PAGE>
14
operate its properties and to conduct its business as described in the
Registration Statement and, based solely on the certificates of the
Secretaries of State of the Commonwealth of Virginia and the states of
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee and West
Virginia, is duly qualified as a foreign corporation to transact
business and is in good standing in each such jurisdiction and (B) all
of the issued shares of capital stock of Factory Stores have been duly
authorized and validly issued, are fully paid and non-assessable and,
as of the close of business on the Closing Date are owned of record by
the Company free and clear of any perfected security interest and, to
the best of such counsel's knowledge and information, any other
security interest, mortgage, pledge, lien, encumbrance, claim or
equity of redemption;
(v) (A) DanPren has been duly formed, and based solely on the
attached certificate from the Secretary of State of Mississippi is
validly existing as a limited liability company in good standing under
the laws of Mississippi, has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Registration Statement and, based solely on the
certificates of the Secretaries of State of [insert states where
qualified to transact business], is duly qualified as a foreign
corporation to transact business and is in good standing in each such
jurisdiction and (B) the Company owns a 50% membership interest in
DanPren and, as of the close of business on the Closing Date such
membership interest is owned of record by the Company free and clear
of any perfected security interest and, to the best of such counsel's
knowledge and information, any other security interest, mortgage,
pledge, lien, encumbrance, claim or equity of redemption;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) to the best of his knowledge, no legal or governmental
proceedings pending or threatened which are required to be disclosed
in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, other than those disclosed
therein; and
(viii) nothing has come to his attention that would lead him to
believe that the Registration Statement, at the time it became
effective or at the date hereof, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, at the date hereof or at the
Closing Date, included an untrue statement of
<PAGE>
15
a material fact or omitted to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they are made, not misleading.
(e) The Underwriters shall have received on the Closing Date an opinion of
[ ], counsel for the Selling Shareholders, dated the Closing Date,
to the effect that:
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Shareholders;
(ii) the execution and delivery by each Selling Shareholder of,
and the performance by such Selling Shareholder of its obligations
under, this Agreement and the Custody Agreement and Powers of Attorney
of such Selling Shareholder will not contravene any provision of
applicable law, or the certificate of incorporation or by-laws of such
Selling Shareholder (if such Selling Shareholder is a corporation),
or, to the best of such counsel's knowledge, any agreement or other
instrument binding upon such Selling Shareholder or, to the best of
such counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required
for the performance by such Selling Shareholder of its obligations
under this Agreement or the Custody Agreement or Power of Attorney of
such Selling Shareholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
offer and sale of the Shares;
(iii) each of the Selling Shareholders has valid title to the
Shares to be sold by such Selling Shareholder and the legal right and
power, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and Power of Attorney of
such Selling Shareholder and to sell, transfer and deliver the Shares
to be sold by such Selling Shareholder;
(iv) the Custody Agreement and the Power of Attorney of each
Selling Shareholder have been duly authorized, executed and delivered
by such Selling Shareholder and are valid and binding agreements of
such Selling Shareholder;
(v) delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such Shares
free and clear of any
<PAGE>
16
security interests, claims, liens, equities and other encumbrances;
and
(vi) nothing has come to their attention that would lead them
to believe that the Registration Statement, at the time it became
effective or at the date hereof, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus, at the date hereof or at the
Closing Date, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
are made, not misleading.
(f) The Underwriters shall have received on the Closing Date an opinion
of Cravath, Swaine & Moore, counsel for the Underwriters, dated the Closing
Date, covering the matters referred to in Sections 6(c)(v), 6(c)(vi),
6(c)(ix) (but only as to the statements in the Prospectus under "Description
of Capital Stock" and "Underwriters") and 6(c)(xv) above.
With respect to Section 6(c)(xv) above, King & Spalding and Cravath,
Swaine & Moore, with respect to Section 6(d)(viii) above, Harry L. Goodrich,
Esq. and with respect to Section 6(e)(vi) above, [ ], may state that their
opinion and belief are based upon their participation in the preparation of
the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification, except as specified. With respect to
Section 6(e) above, [ ] may rely upon an opinion or opinions of counsel for
any Selling Shareholders and, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each
Selling Shareholder contained herein and in the Custody Agreement and Power
of Attorney of such Selling Shareholder and in other documents and
instruments; provided that (A) each such counsel for the Selling Shareholders
is satisfactory to your counsel, (B) a copy of each opinion so relied upon is
delivered to you and is in form and substance satisfactory to your counsel,
(C) copies of such Custody Agreements and Powers of Attorney and of any such
other documents and instruments shall be delivered to you and shall be in
form and substance satisfactory to your counsel and (D) _________ shall state
in their opinion that they are justified in relying on each such other
opinion.
The opinions of King & Spalding, Harry L. Goodrich, Esq. and [ ]
described in Sections 6(c), 6(d) and 6(e) above, respectively (and any
opinions of counsel for any Selling Shareholder referred to in the
immediately preceding paragraph), to the Underwriters at the request of the
Company
<PAGE>
17
or one or more of the Selling Shareholders, as the case may be, and shall so
state therein.
(f) The Underwriters shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from
Ernst & Young LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-off
date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of Exhibit A
hereto, between you and certain shareholders, officers and directors of the
Company relating to sales and certain other dispositions of shares of Common
Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, [4] signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge,
prior to 10:00 a.m. New York City time on the business day next succeeding the
date of this Agreement and during the period mentioned in Section 7(c) below,
as many copies of the Prospectus and any supplements and amendments thereto or
to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to which
you reasonably object, and to file with the Commission within the applicable
period specified in Rule 424(b) under the Securities Act any prospectus
required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering of
the Shares as in the opinion of counsel for the Underwriters the Prospectus is
required by law to be
<PAGE>
18
delivered in connection with sales by an Underwriter or dealer, any event
shall occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
not misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable law,
forthwith to prepare, file with the Commission and furnish, at its own
expense, to the Underwriters and to the dealers (whose names and addresses you
will furnish to the Company) to which Shares may have been sold by you on
behalf of the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading
or so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and to
you as soon as practicable an earning statement covering the twelve-month
period ending December 26, 1998 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated there with, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in
<PAGE>
19
connection with the review and qualification of the offering of the Shares by
the National Association of Securities Dealers, Inc., (v) all fees and expenses
in connection with the preparation and filing of the registration statement on
Form 8-A relating to the Common Stock and all costs and expenses incident to
listing the Shares on the New York Stock Exchange, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of the
Company relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged in connection with the
road show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section. It is understood, however, that except as provided in this
Section, Section 9 entitled "Indemnity and Contribution", and the last paragraph
of Section 11 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect
any agreement that the Sellers may otherwise have for the allocation of such
expenses among themselves.
9. Indemnity and Contribution. (a) The Sellers, jointly
and severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(b) Each Selling Shareholder agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement
<PAGE>
20
and each person, if any, who controls the Company within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action or
claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but only with reference to
information relating to such Selling Shareholder furnished in writing by or
on behalf of such Selling Shareholder expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company or
any Selling Shareholder within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, but
only with reference to information relating to such Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
in the Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to Section 9(a), 9(b) or 9(c), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. In any such proceeding,
<PAGE>
21
any indemnified party shall have the right to retain its own counsel, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is
understood that the indemnifying party shall not, in respect of the legal
expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for (i) the fees
and expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act, (ii) the fees and expenses of more than
one separate firm (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either such
Section and (iii) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Selling Shareholders and all
persons, if any, who control any Selling Shareholder within the meaning of
either such Section, and that all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for
the Underwriters and such control persons of any Underwriters, such firm
shall be designated in writing by Morgan Stanley & Co. Incorporated. In the
case of any such separate firm for the Company, and such directors,
officers and control persons of the Company, such firm shall be designated
in writing by the Company. In the case of any such separate firm for the
Selling Shareholders and such control persons of any Selling Shareholders,
such firm shall be designated in writing by the persons named as attorneys-
in-fact for the Selling Shareholders under the Powers of Attorney. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or
if there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have
requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated by the second and third sentences
of this paragraph, the indemnifying party agrees that it shall be liable
for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by
such indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party,
<PAGE>
22
effect any settlement of any pending or threatened proceeding in respect of
which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section 9(a),
9(b) or 9(c), is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein,
then each indemnifying party under such paragraph, in lieu of indemnifying
such indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party or parties on the
one hand and the indemnified party or parties on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 9(e)(i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
9(e)(i) above but also the relative fault of the indemnifying party or
parties on the one hand and of the indemnified party or parties on the
other hand in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on
the one hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate
Public Offering Price of the Shares. The relative fault of the Sellers on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Sellers or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute pursuant
to this Section 9 are several in proportion to the respective number of
Shares they have purchased hereunder, and not joint.
(f) The Sellers and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in
<PAGE>
23
Section 9(e). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9, (i) no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) no Selling Shareholder shall be
required to contribute any amount in excess of the amount by which the net
proceeds received from the sale of Shares by such Selling Shareholder
exceeds the amount of any damages that such Selling Shareholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The remedies provided for in this
Section 9 are not exclusive and shall not limit any rights or remedies
which may otherwise be available to any indemnified party at law or in
equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company and the Selling Shareholders contained in this Agreement shall
remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, any Selling
Shareholder or any person controlling any Selling Shareholder, or the
Company, its officers or directors or any person controlling the Company
and (iii) acceptance of and payment for any of the Shares.
10. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
<PAGE>
24
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall
fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares
with respect to which such default occurs is more than one-tenth of the
aggregate number of Firm Shares to be purchased, and arrangements satisfactory
to you, the Company and the Selling Shareholders for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders. In any such case either you or the
relevant Sellers shall have the right to postpone the Closing Date, but in no
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on
<PAGE>
25
the part of any Seller to comply with the terms or to fulfill any of the
conditions of this Agreement, or if for any reason any Seller shall be unable to
perform its obligations under this Agreement, the Sellers will reimburse the
Underwriters or such Underwriters as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and disbursements of their counsel) reasonably incurred by such
Underwriters in connection with this Agreement or the offering contemplated
hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
Dan River Inc.
By:____________________________
Name:
Title:
The Selling Shareholders
named in Schedule I hereto,
acting severally
By:____________________________
Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
Acting severally on behalf
of themselves and the
several Underwriters named
<PAGE>
26
in Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:___________________________
Name:
Title:
<PAGE>
1
SCHEDULE I
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
_______________
Total........
===============
<PAGE>
1
SCHEDULE II
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
_______________
Total ........
===============
<PAGE>
1
EXHIBIT A
[FORM OF LOCK-UP LETTER]
____________, 1997
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
SBC Warburg Dillon Read Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with Dan River Inc., a Georgia corporation (the
"COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of ___
shares (the "SHARES") of the Class A Common Stock [par value] of the Company
(the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of
any Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending
<PAGE>
2
180 days after the date of the Prospectus, make any demand for or exercise any
right with respect to, the registration of any shares of Common Stock or any
security convertible into or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
<PAGE>
EXHIBIT 10.16
Draft - 9/24/97
DAN RIVER INC.
1997 STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(S) 1 PURPOSE............................................................. 1
(S) 2 DEFINITIONS......................................................... 1
2.1 Board..................................................... 1
2.2 Change in Control......................................... 1
2.3 Code...................................................... 2
2.4 Committee................................................. 2
2.5 Dan River................................................. 2
2.6 Fair Market Value......................................... 2
2.7 ISO....................................................... 2
2.8 Key Employee.............................................. 3
2.9 1933 Act.................................................. 3
2.10 Non-ISO................................................... 3
2.11 Option.................................................... 3
2.12 Option Certificate........................................ 3
2.13 Option Price.............................................. 3
2.14 Parent Corporation........................................ 3
2.15 Plan...................................................... 3
2.16 Restricted Stock.......................................... 3
2.17 Restricted Stock Certificate.............................. 3
2.18 Rule 16b-3................................................ 4
2.19 Stock..................................................... 4
2.20 SAR Value................................................. 4
2.21 Stock Appreciation Right.................................. 4
2.22 Stock Appreciation Right Certificate...................... 4
2.23 Subsidiary................................................ 4
2.24 Ten Percent Shareholder................................... 4
(S) 3 SHARES SUBJECT TO OPTIONS, RESTRICTED STOCK GRANTS
OR STOCK APPRECIATION RIGHTS....................................... 5
(S) 4 EFFECTIVE DATE....................................................... 5
(S) 5 COMMITTEE............................................................ 6
(S) 6 ELIGIBILITY.......................................................... 6
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
(S) 7 GRANT OF OPTIONS................................................... 6
7.1 Committee Action..................................... 6
7.2 $100,000 Limit....................................... 7
7.3 Option Price......................................... 7
7.4 Exercise Period...................................... 8
(S) 8 RESTRICTED STOCK................................................... 9
8.1 Committee Action..................................... 9
8.2 Conditions........................................... 9
(a) Stock Issuance Conditions..................... .9
(b) Grants Subject to Forfeiture.................. 10
8.3 Dividends and Voting Rights.......................... 10
8.4 Satisfaction of All Conditions....................... 11
(S) 9 STOCK APPRECIATION RIGHTS.......................................... 11
9.1 Committee Action..................................... 11
9.2 Terms and Conditions................................. 11
(a) Stock Appreciation Right Certificate.......... 11
(b) Option Certificate............................ 12
9.3 Exercise............................................. 12
(S) 10 NONTRANSFERABILITY................................................. 13
(S) 11 SECURITIES REGISTRATION AND RESTRICTIONS........................... 13
(S) 12 LIFE OF PLAN....................................................... 14
(S) 13 ADJUSTMENT......................................................... 15
13.1 Capital Structure.................................... 15
13.2 Mergers.............................................. 15
13.3 Fractional Shares.................................... 16
(S) 14 CHANGE IN CONTROL.................................................. 17
(S) 15 AMENDMENT OR TERMINATION........................................... 17
(S) 16 MISCELLANEOUS...................................................... 18
16.1 No Shareholder Rights................................ 18
16.2 No Contract of Employment............................ 18
16.3 Withholding.......................................... 19
16.4 Loans................................................ 19
16.5 Rule 16b-3........................................... 19
16.6 Construction......................................... 20
</TABLE>
-ii-
<PAGE>
-iii-
<PAGE>
(S) 1
PURPOSE
The purpose of this Plan is to promote the interests of Dan River by
authorizing the Committee to grant Options, Restricted Stock and Stock
Appreciation Rights to Key Employees in order (1) to attract and retain Key
Employees, (2) to provide an additional incentive to each Key Employee to work
to increase the value of Stock and (3) to provide each Key Employee with a stake
in the future of Dan River which corresponds to the stake of each of Dan River's
shareholders.
(S) 2
DEFINITIONS
2.1 Board -- means the Board of Directors of Dan River.
-----
2.2 Change in Control -- means (a) the acquisition of the power to
-----------------
direct, or cause the direction, of the management and policies of Dan River by a
person (not previously possessing such power), acting alone or in conjunction
with others, whether through the ownership of Stock, by contract or otherwise,
or (b) the acquisition, directly or indirectly, of the power to vote 20% or more
of the outstanding Stock by a person or persons (other than a person possessing
such power on the date this Plan becomes effective or Dan River or an employee
benefit plan established and maintained by Dan River), where, for purposes of
this definition, (i) the term "person" means a natural person, corporation,
partnership, joint venture, trust, government or instrumentality of a government
and (ii) customary agreements with or between underwriters and selling group
members with respect to a bona fide public offering of Stock shall be
disregarded.
<PAGE>
2.3 Code -- means the Internal Revenue Code of 1986, as amended.
----
2.4 Committee -- means a committee of the Board which shall have at
---------
least 2 members, each of whom shall be appointed by and shall serve at the
pleasure of the Board.
2.5 Dan River -- means Dan River Inc. and any successor to such
---------
corporation.
2.6 Fair Market Value -- means (1) the closing price on any date for
-----------------
a share of Stock as reported by The Wall Street Journal (a) under the New York
-----------------------
Stock Exchange Composite Transactions if Stock is traded on the New York Stock
Exchange or, if Stock is otherwise publicly traded, (b) under the quotation
system under which such closing price is reported or, if The Wall Street Journal
-----------------------
no longer reports such closing price, such closing price as reported by a
newspaper or trade journal selected by the Committee or, if no such closing
price is available on such date, (2) such closing price as so reported in
accordance with (S) 2.6(1) for the immediately preceding business day, or, if no
newspaper or trade journal reports such closing price or if no such price
quotation is available or if Stock is not publicly traded, (3) the price which
the Committee acting in good faith determines through any reasonable valuation
method that a share of Stock might change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts.
2.7 ISO -- means an option granted under this Plan to purchase Stock
---
which is intended to satisfy the requirements of (S) 422 of the Code.
-2-
<PAGE>
2.8 Key Employee -- means an employee of Dan River or any Subsidiary
------------
or Parent who, in the judgment of the Committee acting in its absolute
discretion, is a key to the success of Dan River.
2.9 1933 Act -- means the Securities Act of 1933, as amended.
--------
2.10 Non-ISO -- means an option granted under this Plan to purchase
-------
Stock which is intended to fail to satisfy the requirements of (S) 422 of the
Code.
2.11 Option -- means an ISO or a Non-ISO which is granted under (S) 7
------
of this Plan.
2.12 Option Certificate -- means the written agreement or instrument
------------------
which sets forth the terms and conditions of an Option granted to a Key Employee
under this Plan.
2.13 Option Price -- means the price which shall be paid to purchase
------------
one share of Stock upon the exercise of an Option granted under this Plan.
2.14 Parent Corporation -- means any corporation which is a parent of
------------------
Dan River within the meaning of (S) 424(e) of the Code.
2.15 Plan -- means this Dan River Inc. 1997 Stock Incentive Plan as
----
effective as of the date adopted by the Board in 1997 and as amended from time
to time thereafter.
2.16 Restricted Stock -- means Stock granted to a Key Employee under
----------------
(S) 8 of this Plan.
2.17 Restricted Stock Certificate -- means the written agreement or
----------------------------
instrument which sets forth the terms and conditions of a Restricted Stock grant
to a Key
-3-
<PAGE>
Employee.
2.18 Rule 16b-3 -- means the exemption under Rule 16b-3 to Section
----------
16b of the Securities Exchange Act of 1934, as amended, or any successor to such
rule.
2.19 Stock -- means the Class A Common Stock of Dan River.
-----
2.20 SAR Value -- means the value assigned by the Committee to a share
---------
of Stock in connection with the grant of a Stock Appreciation Right under (S) 9.
2.21 Stock Appreciation Right -- means a right to receive the
------------------------
appreciation in a share of Stock which is granted under (S) 9 of this Plan
either as part of an Option or independent of any Option.
2.22 Stock Appreciation Right Certificate -- means the written
------------------------------------
agreement or instrument which sets forth the terms and conditions of a Stock
Appreciation Right which is granted to a Key Employee independent of an Option.
2.23 Subsidiary -- means any corporation which is a subsidiary
----------
corporation (within the meaning of (S) 424(f) of the Code) of Dan River and any
other organization which would be treated as under common control with Dan River
under (S) 414(c) of the Code if "50 percent" was substituted for "80 percent" in
the income tax regulations under (S) 414(c) of the Code.
2.24 Ten Percent Shareholder -- means a person who owns (after taking
-----------------------
into account the attribution rules of (S) 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of stock of
either Dan River, a Subsidiary or a Parent Corporation.
-4-
<PAGE>
(S) 3
SHARES SUBJECT TO OPTIONS, RESTRICTED STOCK GRANTS
OR STOCK APPRECIATION RIGHTS
There shall be 100,000 shares of Stock reserved for use under this
Plan. Such shares of Stock shall be reserved to the extent that Dan River deems
appropriate from authorized but unissued shares of Stock and from shares of
Stock which have been reacquired by Dan River. Any shares of Stock subject to
an Option which remain unissued after the cancellation or expiration of such
Option, any shares of Restricted Stock which are forfeited or canceled and any
shares of Stock subject to a Stock Appreciation Right with respect to which no
exercise has been made under (S) 9 before the cancellation or expiration of such
Stock Appreciation Right thereafter shall again become available for use under
this Plan, but any shares of Stock used to exercise an Option or to satisfy a
withholding obligation shall not again be available for use under this Plan.
(S) 4
EFFECTIVE DATE
The effective date of this Plan shall be the date this Plan is adopted
by the Board in 1997, provided Dan River's shareholders (acting at a duly called
meeting of such shareholders) approve this Plan within twelve (12) months after
the date the Board adopts this Plan. Any Option or Restricted Stock or Stock
Appreciation Right granted before such shareholder approval automatically shall
be granted subject to such approval.
-5-
<PAGE>
(S) 5
COMMITTEE
This Plan shall be administered by the Committee. The Committee
acting in its absolute discretion shall exercise such powers and take such
action as expressly called for under this Plan and, further, the Committee shall
have the power to interpret this Plan and to take such other action in the
administration and operation of this Plan as the Committee deems equitable under
the circumstances, which action shall be binding on Dan River, on each affected
Key Employee and on each other person directly or indirectly affected by such
action.
(S) 6
ELIGIBILITY
Only Key Employees shall be eligible for the grant of Options or
Restricted Stock or Stock Appreciation Rights under this Plan.
(S) 7
GRANT OF OPTIONS
7.1 Committee Action. The Committee acting in its absolute discretion
----------------
shall have the right to grant an Option to a Key Employee under this Plan from
time to time to purchase shares of Stock and, further, shall have the right to
grant a new Option to a
-6-
<PAGE>
Key Employee in exchange for the cancellation of an outstanding Option granted
to such Key Employee which has a higher or lower Option Price. Each grant of an
Option shall be evidenced by an Option Certificate, and each Option Certificate
shall
(a) specify whether the Option is an ISO or Non-ISO, and
(b) incorporate such other terms and conditions as the Committee acting in
its absolute discretion deems consistent with the terms of this Plan,
including (without limitation) a limitation on the number of shares
subject to the Option which first become exercisable on any date or a
Stock Appreciation Right which is a part of such Option.
If the Committee grants an ISO and a Non-ISO to a Key Employee on the same date,
the right of the Key Employee to exercise the ISO shall not be conditioned on
his or her failure to exercise the Non-ISO.
7.2 $100,000 Limit. The aggregate Fair Market Value of the shares of
--------------
Stock subject to ISOs and other incentive stock options (which satisfy the
requirements under (S) 422 of the Code) granted to a Key Employee under this
Plan and under any other stock option plan adopted by Dan River, a Subsidiary or
a Parent Corporation which first become exercisable in any calendar year shall
not exceed $100,000. Such Fair Market Value figure shall be determined by the
Committee on the date the ISO or other incentive stock option is granted. The
Committee shall interpret and administer the limitation set forth in this (S)
7.2 in accordance with (S) 422(d) of the Code, and the Committee shall treat
this (S) 7.2 as in effect only for those periods for which (S) 422(d) of the
Code is in effect.
7.3 Option Price. The Option Price for each share of Stock subject
------------
to an
-7-
<PAGE>
ISO or Non-ISO shall be no less than the Fair Market Value of a share of Stock
on the date the ISO or Non-ISO is granted unless the Option is an ISO and the
Option is granted to a Key Employee who is a Ten Percent Shareholder, in which
event the Option Price for each share of Stock subject to such ISO shall be no
less than 110% of the Fair Market Value of a share of Stock on the date the ISO
is granted. The Option Price shall be payable in full upon the exercise of any
Option, and an Option Certificate at the discretion of the Committee may provide
for the payment of the Option Price either in cash (which may be provided
through a loan or other extension of credit) or in Stock which has been held by
the Key Employee for at least 6 months or in any combination of cash and such
Stock. If an Option Certificate allows the payment of the Option Price in whole
or in part in Stock, such payment shall be made in Stock acceptable to the
Committee. Any payment made in Stock shall be treated as equal to the Fair
Market Value of such Stock on the date the properly endorsed certificate for
such Stock is delivered to the Committee.
7.4 Exercise Period. Each Option granted under this Plan shall be
---------------
exercisable in whole or in part at such time or times as set forth in the
related Option Certificate, but no Option Certificate shall
(a) make an Option exercisable before the end of the six month period
which starts on the date such Option is granted, or
(b) make an Option exercisable on or after the earliest of the
(1) the date which is the fifth anniversary of the date the
Option is granted, if the Option is an ISO and the Key
Employee is a Ten Percent Shareholder on the date the Option
is granted, or
-8-
<PAGE>
(2) the date which is the tenth anniversary of the date such
Option is granted, if such Option is granted to a Key
Employee who is not a Ten Percent Shareholder on the date
the Option is granted or if such Option is a Non-ISO.
An Option Certificate may provide for the exercise of an Option after the
employment of a Key Employee has terminated for any reason whatsoever, including
death or disability.
(S) 8
RESTRICTED STOCK
8.1 Committee Action. The Committee acting in its absolute
----------------
discretion shall have the right to grant Restricted Stock to a Key Employee
under this Plan from time to time and, further, shall have the right to make a
new Restricted Stock grant to a Key Employee in exchange for the cancellation of
an outstanding Restricted Stock grant to such Key Employee. Each Restricted
Stock grant shall be evidenced by a Restricted Stock Certificate, and each
Restricted Stock Certificate shall set forth the conditions, if any, under which
Stock will be issued in the name of the Key Employee and the conditions, if any,
under which the Key Employee's interest in such Stock will become
nonforfeitable.
8.2 Conditions.
----------
(a) Stock Issuance Conditions. The Committee acting in its absolute
-------------------------
discretion may make the issuance of Restricted Stock in the name of a Key
Employee subject to the satisfaction of one, or more than one, condition which
the Committee deems appropriate under the circumstances, and the related
Restricted Stock Certificate shall set
-9-
<PAGE>
forth each such condition, if any, and the deadline, if any, for satisfying each
such condition or the expiration date, if any, for each such condition. Stock
shall be issued in the name of a Key Employee only after each such condition, if
any, has been satisfied or has expired in accordance with the terms of the
related Restricted Stock Certificate, and upon issuance such Stock shall be held
by Dan River (or Dan River's delegate) pending the satisfaction or expiration of
the forfeiture conditions, if any, set forth in the related Restricted Stock
Certificate.
(b) Grants Subject to Forfeiture. The Committee acting in its
----------------------------
absolute discretion may make Restricted Stock issued in the name of a Key
Employee subject to forfeiture upon a failure to satisfy one, or more than one,
condition which the Committee acting in its absolute discretion deems
appropriate under the circumstances, and the related Restricted Stock
Certificate shall set forth each such forfeiture condition, if any, and the
related deadline, if any, for satisfying each such forfeiture condition or the
expiration date, if any, for each such condition. Stock issued in the name of a
Key Employee shall be forfeited unless each such forfeiture condition, if any,
has been satisfied or has expired in accordance with the terms of the related
Restricted Stock Certificate.
8.3 Dividends and Voting Rights. Each Restricted Stock Certificate
---------------------------
shall specify what rights, if any, a Key Employee shall have with respect to the
Stock issued in the name of a Key Employee, including rights to receive
dividends and to vote, pending the forfeiture of such Stock or the satisfaction
or expiration of each forfeiture condition, if any, with respect to such Stock.
Furthermore, the Committee may grant dividend equivalent rights on Restricted
Stock while such Stock remains subject to an issuance condition under
-10-
<PAGE>
(S) 8.2(a) under which cash equivalent to a dividend shall be paid to the Key
Employee by Dan River when a dividend is paid, and any such dividend equivalent
right shall be set forth in the related Restricted Stock Certificate.
8.4 Satisfaction of All Conditions. A share of Stock issued in the
------------------------------
name of a Key Employee shall cease to be Restricted Stock at such time as a Key
Employee's interest in such Stock becomes nonforfeitable, and the certificate
representing such share shall be released by Dan River (or Dan River's delegate)
and transferred to the Key Employee as soon as practicable thereafter.
(S) 9
STOCK APPRECIATION RIGHTS
9.1 Committee Action. The Committee acting in its absolute discretion
----------------
shall have the right to grant a Stock Appreciation Right to a Key Employee under
this Plan from time to time, and each Stock Appreciation Right grant shall be
evidenced by a Stock Appreciation Right Certificate or, if such Stock
Appreciation Right is granted as part of an Option, shall be evidenced by the
Option Certificate for the related Option.
9.2 Terms and Conditions.
--------------------
(a) Stock Appreciation Right Certificate. If a Stock Appreciation
------------------------------------
Right is evidenced by a Stock Appreciation Right Certificate, such certificate
shall set forth the number of shares of Stock to which the Key Employee has the
right to appreciation and the SAR Value of each share of Stock. Such SAR Value
shall be no less than the Fair Market Value of a share of Stock on the date that
the Stock Appreciation Right is granted. The Stock Appreciation Right
Certificate shall set forth such other terms and conditions for
-11-
<PAGE>
the exercise of the Stock Appreciation Right as the Committee deems appropriate
under the circumstances, but no Stock Appreciation Right Certificate shall make
a Stock Appreciation Right exercisable on or after the date which is the tenth
anniversary of the date such Stock Appreciation Right is granted.
(b) Option Certificate. If a Stock Appreciation Right is evidenced by
------------------
an Option Agreement, the SAR Value for each share of Stock subject to the Stock
Appreciation Right shall be the Option Price for the related Option. Each such
Option Certificate shall provide that the exercise of the Stock Appreciation
Right with respect to any share of Stock shall cancel the Key Employee's right
to exercise his or her Option with respect to such share and, conversely, that
the exercise of the Option with respect to any share of Stock shall cancel the
Key Employee's right to exercise his or her Stock Appreciation Right with
respect to such share. A Stock Appreciation Right which is granted as part of
an Option shall be exercisable only while the related Option is exercisable.
The Option Agreement shall set forth such other terms and conditions for the
exercise of the Stock Appreciation Right as the Committee deems appropriate
under the circumstances.
9.3 Exercise. A Stock Appreciation Right shall be exercisable
--------
only when the Fair Market Value of a share of Stock subject to such Stock
Appreciation Right exceeds the SAR Value for such share, and the payment due on
exercise shall be based on such excess with respect to the number of shares of
Stock to which the exercise relates. A Key Employee upon the exercise of his or
her Stock Appreciation Right shall receive a payment from Dan River in cash or
in Stock, or in a combination of cash and Stock, and any payment in Stock shall
be based on the Fair Market Value of a share of Stock on the date
-12-
<PAGE>
the Stock Appreciation Right is exercised. The Committee acting in its absolute
discretion shall have the right to determine the form and time of any payment
under this (S) 9.3.
(S) 10
NONTRANSFERABILITY
No Option, Restricted Stock or Stock Appreciation Right shall be
transferable by a Key Employee other than by will or by the laws of descent and
distribution, and any Option or Stock Appreciation Right shall be exercisable
during a Key Employee's lifetime only by the Key Employee. The person or
persons to whom an Option or Restricted Stock or Stock Appreciation Right is
transferred by will or by the laws of descent and distribution thereafter shall
be treated as the Key Employee.
(S) 11
SECURITIES REGISTRATION AND RESTRICTIONS
Each Option Certificate, Restricted Stock Certificate and Stock
Appreciation Right Certificate shall provide that, upon the receipt of shares of
Stock as a result of the exercise of an Option or a Stock Appreciation Right or
the satisfaction or expiration of the forfeiture conditions, if any, on any
Restricted Stock, the Key Employee shall, if so requested by Dan River, agree to
hold such shares of Stock for investment and not with a view of resale or
distribution to the public and, if so requested by Dan River, shall deliver to
Dan River a written statement satisfactory to Dan River to that effect. Each
Option Certificate, Restricted Stock Certificate and Stock Appreciation Right
Certificate also shall provide that, if so requested by Dan River, the Key
Employee shall make a written
-13-
<PAGE>
representation to Dan River that he or she will not sell or offer for sale any
of such Stock unless a registration statement shall be in effect with respect to
such Stock under the 1933 Act and any applicable state securities law or he or
she shall have furnished to Dan River an opinion in form and substance
satisfactory to Dan River of legal counsel satisfactory to Dan River that such
registration is not required. Certificates representing the Stock transferred
upon the exercise of an Option or Stock Appreciation Right or upon the lapse of
the forfeiture conditions, if any, on any Restricted Stock may at the discretion
of Dan River bear a legend to the effect that such Stock has not been registered
under the 1933 Act or any applicable state securities law and that such Stock
cannot be sold or offered for sale in the absence of an effective registration
statement as to such Stock under the 1933 Act and any applicable state
securities law or an opinion in form and substance satisfactory to Dan River of
legal counsel satisfactory to Dan River that such registration is not required.
(S) 12
LIFE OF PLAN
No Option, Restricted Stock or Stock Appreciation Right shall be
granted under this Plan on or after the earlier of
(a) the tenth anniversary of the effective date of this Plan, at which
point this Plan shall continue in effect only until all then
outstanding Options and Stock Appreciation Rights have been
exercised in full or no longer are exercisable and all then
outstanding Restricted Stock
-14-
<PAGE>
grants have been forfeited or the forfeiture conditions, if any,
with respect to such grants have been satisfied or expired, or
(b) the date on which all of the Stock reserved under (S) 3 of this
Plan has (as a result of the exercise of Options or Stock
Appreciation Rights or the satisfaction or expiration of the
forfeiture conditions, if any, on all Restricted Stock) been
issued or no longer is available for use under this Plan, in which
event this Plan also shall terminate on such date.
(S) 13
ADJUSTMENT
13.1 Capital Structure. The number of shares of Stock reserved under
-----------------
(S) 3 of this Plan and the number of shares of Stock subject to Options or Stock
Appreciation Rights granted under this Plan and the Option Price of such Options
and the SAR Value of such Stock Appreciation Rights as well as the number of
shares of Restricted Stock granted under this Plan shall be adjusted by the
Committee in an equitable manner to reflect any change in the capitalization of
Dan River, including, but not limited to, such changes as stock dividends or
stock splits.
13.2 Mergers. The Committee as part of any corporate transaction
-------
described in (S) 424(a) of the Code shall have the right to adjust (in any
manner which the Committee in its discretion deems consistent with (S) 424(a) of
the Code) the number, kind or class (or any combination thereof) of shares of
Stock reserved under (S) 3 of this Plan. Furthermore, the Committee as part of
any corporate transaction described in (S) 424(a) of the Code shall have the
right to adjust (in any manner which the Committee in its discretion deems
consistent with (S) 424(a) of
-15-
<PAGE>
the Code) the number, kind or class (or any combination thereof) of shares of
Stock underlying any Restricted Stock grants previously made under this Plan and
any related grant conditions and forfeiture conditions, and the number, kind or
class (or any combination thereof) of shares subject to Option and Stock
Appreciation Right grants previously made under this Plan and the related Option
Price and SAR Value for each such Option and Stock Appreciation Right, and,
further, shall have the right (in any manner which the Committee in its
discretion deems consistent with (S) 424(a) of the Code) to make Restricted
Stock, Option and Stock Appreciation Right grants to effect the assumption of,
or the substitution for, restricted stock, option and stock appreciation right
grants previously made by any other corporation to the extent that such
corporate transaction calls for such substitution or assumption of such
restricted stock, option or appreciation right grants.
13.3 Fractional Shares. If any adjustment under this (S) 13 would
-----------------
create a fractional share of Stock or a right to acquire a fractional share of
Stock, such fractional share shall be disregarded and the number of shares of
Stock reserved under this Plan and the number subject to any Option or Stock
Appreciation Right grants and Restricted Stock grants shall be the next lower
number of shares of Stock, rounding all fractions downward. An adjustment made
under this (S) 13 by the Committee shall be conclusive and binding on all
affected persons.
-16-
<PAGE>
(S) 14
CHANGE IN CONTROL
If the Board determines that there has been a Change in Control of Dan
River or a bona fide tender or exchange offer for Stock (other than a tender
offer by Dan River or an employee benefit plan established and maintained by Dan
River), the Board thereafter shall have the right to take such action, if any,
with respect to any or all then outstanding Options, Stock Appreciation Rights
and Restricted Stock grants under this Plan as the Board deems appropriate under
the circumstances to protect the interest of Dan River in maintaining the
integrity of such grants under this Plan, including waiving any conditions to
the exercise of such Options and Stock Appreciation Rights and any issuance and
forfeiture conditions on any Restricted Stock and thereafter canceling such
Options, Stock Appreciation Rights and Restricted Stock grants. The Board shall
have the right to take different action under this (S) 14 with respect to
different Key Employees or different groups of Key Employees, as the Board deems
appropriate under the circumstances.
(S) 15
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent
that the Board deems necessary or appropriate. The Board also may suspend the
granting of Options or Stock Appreciation Rights or Restricted Stock under this
Plan at any time and may terminate this Plan at any time; provided, however, Dan
River shall not have the right unilaterally to modify, amend or cancel any
Option, Stock Appreciation Right or Restricted
-17-
<PAGE>
Stock granted before such suspension or termination unless (1) the Key Employee
consents in writing to such modification, amendment or cancellation or (2) there
is a dissolution or liquidation of Dan River or a transaction described in (S)
13 or (S) 14 of this Plan.
(S) 16
MISCELLANEOUS
16.1 No Shareholder Rights. No Key Employee shall have any rights
---------------------
as a shareholder of Dan River as a result of the grant of an Option or a Stock
Appreciation Right to him or to her under this Plan or his or her exercise of
such Option or a Stock Appreciation Right pending the actual delivery of Stock
subject to such Option or Stock Appreciation Right to such Key Employee, and no
Key Employee shall have any rights as a shareholder with respect to any
Restricted Stock except those rights, if any, set forth in the related
Restricted Stock Certificate.
16.2 No Contract of Employment. The grant of an Option or a Stock
-------------------------
Appreciation Right or Restricted Stock to a Key Employee under this Plan shall
not constitute a contract of employment and shall not confer on a Key Employee
any rights upon his or her termination of employment in addition to those
rights, if any, expressly set forth in the related Option Certificate, Stock
Appreciation Right Certificate or Restricted Stock Certificate.
-18-
<PAGE>
16.3 Withholding. Each Option, Stock Appreciation Right and Restricted
-----------
Stock grant shall be made subject to the condition that the Key Employee
consents to whatever action the Committee directs to satisfy the federal and
state tax withholding requirements, if any, which the Committee in its
discretion deems applicable to the exercise of such Option or Stock Appreciation
Right or the satisfaction or expiration of any forfeiture conditions with
respect to Restricted Stock issued in the name of the Key Employee. The
Committee also shall have the right to provide in an Option Certificate, Stock
Appreciation Right Certificate or a Restricted Stock Certificate that a Key
Employee may elect to satisfy federal and state tax withholding requirements
through a reduction in the cash or the number of shares of Stock actually
transferred to him or to her under this Plan.
16.4 Loans. If approved by the Committee, Dan River may lend money
-----
to, or guarantee loans by a third party to, any Key Employee to finance the
exercise of any Option granted under this Plan, and the exercise of an Option
with the proceeds of any such loan shall be treated as an exercise for cash
under this Plan. If approved by the Committee, Dan River also may, in accordance
with a Key Employee's instructions, transfer Stock upon the exercise of an
Option directly to a third party in connection with any arrangement made by the
Key Employee for financing the exercise of such Option.
16.5 Rule 16b-3. The Committee shall have the right to amend any
----------
Option, Restricted Stock or Stock Appreciation Right grant or to withhold or
otherwise restrict the transfer of any Stock or cash under this Plan to a Key
Employee as the Committee deems
-19-
<PAGE>
appropriate in order to satisfy any condition or requirement under Rule 16b-3 to
the extent Rule 16 of the Securities Exchange Act of 1934, as amended, might be
applicable to such grant or transfer.
16.6 Construction. All of the defined terms under this Plan are set
------------
forth in (S) 2 of this Plan. All references to sections ((S)) are to sections
((S)) of this Plan unless otherwise indicated. All references to the singular
shall include the plural, and all references to the plural shall include the
singular. This Plan shall be construed under the laws of the State of Delaware.
IN WITNESS WHEREOF, Dan River Inc. has caused its duly authorized
officer to execute this Plan this ______ day of _______________, 1997 to
evidence its adoption of this Plan.
DAN RIVER INC.
By:_________________________
Title:______________________
-20-
<PAGE>
EXHIBIT 10.19
Draft - 9/24/97
DAN RIVER INC.
1997 STOCK PLAN FOR OUTSIDE DIRECTORS
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
(S) 1 PURPOSE.................................................. -1-
(S) 2 DEFINITIONS............................................... -1-
2.1. Board............................................. -1-
2.2. Change in Control................................. -1-
2.3. Code.............................................. -1-
2.4. Dan River......................................... -2-
2.6. Fair Market Value................................. -2-
2.7. Issuance Date..................................... -2-
2.8. 1933 Act.......................................... -2-
2.9. Option............................................ -3-
2.10. Option Certificate................................ -3-
2.11. Option Price...................................... -3-
2.12. Outside Director.................................. -3-
2.13. Plan.............................................. -3-
2.14. Restricted Stock.................................. -3-
2.15. Restricted Stock Certificate...................... -3-
2.16. Rule 16b-3........................................ -3-
2.17. Stock............................................. -3-
(S) 3 AVAILABLE SHARES.......................................... -4-
(S) 4 STOCK IN LIEU OF CASH..................................... -4-
4.1. Election.......................................... -4-
4.2. Election and Election Revocation Procedure........ -4-
4.3. Number of Shares.................................. -5-
4.4. Insufficient Shares............................... -5-
4.5. Restriction on Shares............................. -5-
(S) 5 OPTIONS................................................... -6-
5.1. General........................................... -6-
5.2. Terms and Conditions.............................. -6-
5.3. Minimum Terms and Conditions...................... -6-
5.4. Exercise.......................................... -6-
-i-
<PAGE>
(S) 6 RESTRICTED STOCK......................................... -7-
6.1. General........................................... -7-
6.2. Conditions........................................ -7-
(a) Issuance................................. -7-
(b) Forfeiture............................... -7-
6.3. Dividend and Voting Rights........................ -8-
6.4. Nonforfeitable Stock.............................. -8-
(S) 7 NONTRANSFERABILITY....................................... -9-
(S) 8 SECURITIES REGISTRATION AND RESTRICTIONS................. -9-
(S) 9 ADJUSTMENT...............................................-10-
(S) 10 CHANGE IN CONTROL........................................-11-
(S) 11 AMENDMENT OR TERMINATION.................................-12-
(S) 12 MISCELLANEOUS............................................-12-
12.1. No Shareholder Rights..........................-12-
12.2. No Contract....................................-12-
12.3. Stock Transfers................................-12-
12.4. Construction...................................-13-
-ii-
<PAGE>
(S) 1
PURPOSE
The purpose of this Plan is to attract and retain well qualified
individuals as Outside Directors by (1) granting Outside Directors the right to
receive compensation in Stock in lieu of cash and (2) providing for grants of
Options and Restricted Stock to Outside Directors.
(S) 2
DEFINITIONS
2.1. Board -- means the Board of Directors of Dan River.
-----
2.2. Change in Control -- means (a) the acquisition of the power to
-----------------
direct, or cause the direction, of the management and policies of Dan River by a
person (not previously possessing such power), acting alone or in conjunction
with others, whether through the ownership of Stock, by contract or otherwise,
or (b) the acquisition, directly or indirectly, of the power to vote 20% or more
of the outstanding Stock by a person or persons (other than a person possessing
such power on the date this Plan becomes effective or Dan River or an employee
benefit plan established and maintained by Dan River), where, for purposes of
this definition, (i) the term "person" means a natural person, corporation,
partnership, joint venture, trust, government or instrumentality of a government
and (ii) customary agreements with or between underwriters and selling group
members with respect to a bona fide public offering of Stock shall be
disregarded.
2.3. Code -- means the Internal Revenue Code of 1986, as amended.
----
<PAGE>
2.4. Dan River -- means Dan River Inc. and any successor to such
---------
corporation.
2.5. Effective Date -- means the date this Plan is adopted by the
--------------
Board.
2.6. Fair Market Value -- means (1) the closing price on any date for
-----------------
a share of Stock as reported by The Wall Street Journal (a) under the New York
-----------------------
Stock Exchange Composite Transactions if Stock is traded on the New York Stock
Exchange or, if Stock is otherwise publicly traded, (b) under the quotation
system under which such closing price is reported or, if The Wall Street Journal
-----------------------
no longer reports such closing price, such closing price as reported by a
newspaper or trade journal selected by the Committee or, if no such closing
price is available on such date, (2) such closing price as so reported in
accordance with (S) 2.6(1) for the immediately preceding business day, or, if no
newspaper or trade journal reports such closing price or if no such price
quotation is available or if Stock is not publicly traded, (3) the price which
the Committee acting in good faith determines through any reasonable valuation
method that a share of Stock might change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts.
2.7. Issuance Date -- means (1) with respect to shares of Stock to be
-------------
issued for fees earned on the date of a regularly scheduled meeting of the
Board, the date of such meeting, and (2) with respect to shares of Stock to be
issued for fees earned on any other date, the date of the first regularly
scheduled meeting of the Board after such date.
2.8. 1933 Act -- means the Securities Act of 1933, as amended.
--------
-2-
<PAGE>
2.9. Option -- means an option to purchase Stock which is granted
------
under (S) 5 of this Plan.
2.10. Option Certificate -- means the written agreement or instrument
------------------
which sets forth the terms and conditions of an Option granted to an Outside
Director under this Plan.
2.11. Option Price -- means the price which shall be paid to purchase
------------
one share of Stock upon the exercise of an Option granted under this Plan.
2.12. Outside Director -- means a member of the Board who is
----------------
ineligible for grants under the Dan River Inc 1997 Stock Incentive Plan, as
amended from time to time, or under any successor to such plan.
2.13. Plan -- means this Dan River Inc. 1997 Stock Plan for Outside
----
Directors as amended from time to time.
2.14. Restricted Stock -- means Stock granted to an Outside Director
----------------
under (S) 6 of this Plan.
2.15. Restricted Stock Certificate -- means the written agreement or
----------------------------
instrument which sets forth the terms and conditions of a Restricted Stock grant
to an Outside Director.
2.16. Rule 16b-3 -- means the exemption under Rule 16b-3 to Section
----------
16b of the Securities Exchange Act of 1934, as amended, or any successor to such
rule.
2.17. Stock -- means the Class A Common Stock of Dan River.
-----
-3-
<PAGE>
(S) 3
AVAILABLE SHARES
There shall be 10,000 shares of Stock made available for Stock
compensation payments under (S) 4, Options under (S) 5 and Restricted Stock
grants under (S) 6 to Outside Directors under this Plan.
(S) 4
STOCK IN LIEU OF CASH
4.1. Election. Each Outside Director shall have the right (subject
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to such minimum cash reduction or Stock purchase requirements as set from time
to time by Dan River) on or after the Effective Date to elect (in accordance
with (S) 4.2) to receive Stock in lieu of cash as part of his or her
compensation package with respect to all or a specific percentage of:
(a) any installment of his or her annual cash retainer fee as an
Outside Director;
(b) any fee payable in cash to him or to her for attending a meeting
of the Board or a committee of the Board; and
(c) any fee payable in cash to him or to her for serving as the
chairperson of a committee of the Board.
4.2. Election and Election Revocation Procedure. An election by an
------------------------------------------
Outside Director under (S) 4.1 to receive Stock in lieu of cash shall be made in
writing and shall be effective as of the date the Outside Director delivers such
election to the Secretary
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of Dan River. An election may apply to one, or more than one, cash payment
described in (S) 4.1. After an Outside Director has made an election under this
(S) 4.2, he or she may elect to revoke such election or may elect to revoke such
election and make a new election. Any such subsequent election shall be made in
writing and shall be effective as of the date the Outside Director delivers such
election to the Secretary of Dan River. There shall be no limit on the number of
elections which an Outside Director can make under this (S) 4.2.
4.3. Number of Shares. The number of shares of Stock which an
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Outside Director shall receive in lieu of any cash payment shall be determined
by Dan River by dividing the amount of the cash payment which the Outside
Director has elected under (S) 4.1 to receive in the form of Stock by the Fair
Market Value of a share of Stock on the Issuance Date, and by rounding down to
the nearest whole share of Stock. Such shares shall be issued to the Outside
Director as of the Issuance Date.
4.4. Insufficient Shares. If the number of shares of Stock available
-------------------
under this Plan is insufficient as of any date to issue the Stock called for
under (S) 4.3, Dan River shall issue Stock under (S) 4.3 to each Outside
Director based on a fraction of the then available shares of Stock, the
numerator of which fraction shall equal the amount of the cash payment to the
Outside Director on which the issuance of such Stock was to be based under (S)
4.1 and the denominator of which shall equal the amount of the total cash
payments to all Outside Directors on which the issuance of such Stock was to be
based under (S) 4.1. All elections made under this (S) 4 thereafter shall be
null and void, and no further Stock shall be issued under this Plan with respect
to any such elections.
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4.5. Restriction on Shares. Dan River shall have the right to issue
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the shares of Stock which an Outside Director shall receive in lieu of any cash
payment subject to a restriction that the Outside Director have no right to
transfer such Stock (except to the extent permissible under Rule 16b-3) for the
six month period which starts on the date the Stock is issued or to take such
other action as Dan River deems necessary or appropriate to make sure that the
Outside Director satisfies the applicable holding period requirement, if any,
set forth in Rule 16b-3.
(S) 5
OPTIONS
5.1. General. The Board as part of an Outside Director's
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compensation package may grant Options to purchase Stock to such Outside
Director.
5.2. Terms and Conditions. Each Option granted under this Plan
--------------------
shall be evidenced by an Option Certificate which shall set forth the specific
terms and conditions, if any, under which such Option has been granted in
addition to the minimum terms and conditions set forth in (S) 5.3.
5.3. Minimum Terms and Conditions.
----------------------------
(a) The Option Price for a share of Stock subject to an Option shall
be no less than the Fair Market Value of a share of Stock on the date the Option
is granted.
(b) No Outside Director shall have the right to exercise an Option
until after the end of the six month period which begins on the date the Option
is granted.
(c) Each Option shall expire no later than the tenth anniversary of
the date
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the Option is granted.
5.4. Exercise. The Option Price for a share of Stock shall be
--------
payable in full upon the exercise of any Option, and an Outside Director may pay
the Option Price either in cash (which may be provided through a loan or other
extension of credit) or in Stock which has been held by the Outside Director for
at least six months or in any combination of cash and such Stock. If the Option
Price is paid in whole or in part in Stock, such payment shall be made in Stock
acceptable to the Board, and any such payment shall be treated as equal to the
Fair Market Value of a share of Stock on the date the properly endorsed
certificate for such Stock is delivered to the Secretary of Dan River.
(S) 6
RESTRICTED STOCK
6.1. General. The Board as part of an Outside Director's
-------
compensation package may grant Restricted Stock to such Outside Director. Each
Restricted Stock grant shall be evidenced by a Restricted Stock Certificate, and
each such certificate shall set forth the conditions, if any, under which the
Stock will be issued in the name of the Outside Director and the conditions, if
any, under which the Outside Director's interest in such Stock will become
nonforfeitable.
6.2. Conditions.
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(a) Issuance. The Board acting in its absolute discretion may make
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the issuance of Restricted Stock in the name of an Outside Director subject to
one, or more than one, condition which the Board deems appropriate under the
circumstances,
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and the shares of Restricted Stock subject to a Restricted Stock grant shall be
issued by Dan River in the name of the Outside Director (subject to (S) 6.4)
only after the Board determines that each such condition, if any, has been
satisfied or has expired.
(b) Forfeiture. The Board acting in its absolute discretion may make
----------
Restricted Stock issued in the name of an Outside Director subject to one, or
more than one, forfeiture condition which the Board deems appropriate under the
circumstances, and any Stock issued in the name of an Outside Director shall be
forfeited unless the Board determines that each such forfeiture condition, if
any, has been satisfied or has expired.
6.3. Dividend and Voting Rights. Each Restricted Stock certificate
--------------------------
shall specify what dividend and voting rights, if any, an Outside Director shall
have with respect to the Restricted Stock issued in his or her name pending the
forfeiture of such Restricted Stock or the satisfaction or expiration of each
forfeiture condition, if any, with respect to such Stock.
6.4. Nonforfeitable Stock. A share of Stock issued in the name of an
--------------------
Outside Director shall cease to be Restricted Stock at such time as the Outside
Director's interest in such Stock becomes nonforfeitable, and the certificate
representing such share shall be released by Dan River and transferred to the
Outside Director as soon as practicable thereafter. However, if a share of
Restricted Stock is issued and is nonforfeitable before the end of the six month
period which starts on the date the Restricted Stock is granted to an Outside
Director, Dan River shall have the right to issue such
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Stock subject to a restriction that the Outside Director hold such Stock for the
remainder of such six month period or to take such other action as Dan River
deems necessary or appropriate to make sure that the Outside Director satisfies
the applicable holding period requirement, if any, set forth in Rule 16b-3.
(S) 7
NONTRANSFERABILITY
No Option or Restricted Stock grant shall be transferable by an
Outside Director other than by will or by the laws of descent and distribution,
and any Option shall be exercisable during an Outside Director's lifetime only
by the Outside Director. The person or persons to whom an Option or Restricted
Stock is transferred by will or by the laws of descent and distribution
thereafter shall be treated as the Outside Director.
(S) 8
SECURITIES REGISTRATION AND RESTRICTIONS
Each Option Certificate and Restricted Stock Certificate shall provide
that, upon the receipt of shares of Stock as a result of the exercise of an
Option or the satisfaction or expiration of the forfeiture conditions, if any,
on any Restricted Stock, the Outside Director shall, if so requested by Dan
River, agree to hold such shares of Stock for investment and not with a view of
resale or distribution to the public and, if so requested by Dan River, shall
deliver to Dan River a written statement satisfactory to
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Dan River to that effect. Each Option Certificate and Restricted Stock
Certificate also shall provide that, if so requested by Dan River, the Outside
Director shall make a written representation to Dan River that he or she will
not sell or offer for sale any of such Stock unless a registration statement
shall be in effect with respect to such Stock under the 1933 Act and any
applicable state securities law or he or she shall have furnished to Dan River
an opinion in form and substance satisfactory to Dan River of legal counsel
satisfactory to Dan River that such registration is not required. Certificates
representing the Stock transferred upon the exercise of an Option or upon the
satisfaction or expiration of the forfeiture conditions, if any, on any
Restricted Stock may at the discretion of Dan River bear a legend to the effect
that such Stock has not been registered under the 1933 Act or any applicable
state securities law and that such Stock cannot be sold or offered for sale in
the absence of an effective registration statement as to such Stock under the
1933 Act and any applicable state securities law or an opinion in form and
substance satisfactory to Dan River of legal counsel satisfactory to Dan River
that such registration is not required.
(S) 9
ADJUSTMENT
The number of shares of Stock reserved under (S) 3 of this Plan and
the number of shares of Stock subject to Options granted under this Plan and the
Option Price of such Options as well as the number of shares of Restricted Stock
granted under this Plan shall be adjusted by the Board in an equitable manner to
reflect any
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change in the capitalization of Dan River, including, but not limited to, such
changes as stock dividends or stock splits. Furthermore, the Board shall have
the right to adjust (in a manner which satisfies the requirements of (S) 424(a)
of the Code) the number of shares of Stock reserved under (S) 3 of this Plan and
the number of shares subject to Options granted under this Plan and the Option
Price of such Options as well as the number of shares of Restricted Stock
granted under this Plan and any related issuance or forfeiture conditions in the
event of any corporate transaction described in (S) 424(a) of the Code which
provides for the substitution or assumption of such Options or Restricted Stock.
If any adjustment under this (S) 9 would create a fractional share of Stock or a
right to acquire a fractional share of Stock, such fractional share shall be
disregarded and the number of shares of Stock reserved under this Plan and the
number subject to any Option and Restricted Stock grants under this Plan shall
be the next lower number of shares of Stock, rounding all fractions downward. An
adjustment made under this (S) 9 by the Board shall be conclusive and binding on
all affected persons.
(S) 10
CHANGE IN CONTROL
If the Board determines that there has been a Change in Control of Dan
River or a bona fide tender or exchange offer for Stock (other than a tender
offer by Dan River or an employee benefit plan established and maintained by Dan
River), the Board thereafter shall have the right to take such action, if any,
with respect to any or
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all then outstanding Options and Restricted Stock grants under this Plan as the
Board deems appropriate under the circumstances to protect the interest of Dan
River in maintaining the integrity of such grants under this Plan, including
waiving any conditions to the exercise of such Options and any issuance and
forfeiture conditions on any Restricted Stock and thereafter canceling such
Options and Restricted Stock grants.
(S) 11
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent
that the Board deems necessary or appropriate. The Board also may unilaterally
modify, amend or cancel any Option or Restricted Stock grant if there is a
dissolution or liquidation of Dan River or a transaction described in (S) 9 or
(S) 10 of this Plan.
(S) 12
MISCELLANEOUS
12.1. No Shareholder Rights. No Outside Director shall have any
---------------------
rights as a shareholder of Dan River as a result of the grant of an Option to
him or to her under this Plan or his or her exercise of such Option pending the
actual delivery of Stock subject to such Option to such Outside Director, and no
Outside Director shall have any rights as a shareholder with respect to any
Restricted Stock except those rights, if any, set forth in the related
Restricted Stock Certificate.
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12.2. No Contract. The grant of an Option or Restricted Stock to
-----------
an Outside Director under this Plan shall not constitute a contract to continue
his or her status as a member of the Board.
12.3. Stock Transfers. Dan River may in accordance with
---------------
instructions from an Outside Director transfer Stock upon the exercise of an
Option directly to a third party in connection with any arrangement made by such
Outside Director for financing the exercise of such Option.
12.4. Construction. All of the defined terms under this Plan are
------------
set forth in (S) 2 of this Plan. All references to sections ((S)) are to
sections ((S)) of this Plan unless otherwise indicated. All references to the
singular shall include the plural, and all references to the plural shall
include the singular. This Plan shall be construed under the law of the State of
Delaware.
IN WITNESS WHEREOF, Dan River Inc. has caused its duly authorized officer to
execute this Plan this ______ day of _______________, 1997 to evidence its
adoption of this Plan.
DAN RIVER INC.
By:_________________________
Title:______________________
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Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997, except as to Note 12, as to which
the date is September 25, 1997, in the Registration Statement (Form S-1) and
related Prospectus of Dan River Inc. for the registration of shares of its
common stock dated September 26, 1997.
Our audits also include the financial statement schedules of Dan River Inc.
listed in Item 16(b). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Charlotte, North Carolina
September 25, 1997
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 18, 1996 (except for Notes 8 and 19, as to
which the dates are October 31, 1996 and November 20, 1996, respectively), in
the Registration Statement (Form S-1) and related Prospectus of Dan River Inc.
for the registration of shares of its common stock dated September 26, 1997.
/S/ Pugh & Company, P.C.
Knoxville, Tennessee
September 25, 1997
