UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- -------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number 0-20080
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GALEY & LORD, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1593207
------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) (Identification No.)
980 Avenue of the Americas
New York, New York 10018
- ---------------------------------------- ---------------------
(Address of principal executive offices) Zip Code
212/465-3000
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- ---------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 11,960,754 shares as of May 8, 2000.
Exhibit Index at page 36
1
INDEX
GALEY & LORD, INC.
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
April 1, 2000, April 3, 1999,
and October 2, 1999
Consolidated Statements of Income -- 4
Three months and Six months ended April 1, 2000
and April 3, 1999
Consolidated Statements of Cash Flows -- 5
Six months ended April 1, 2000 and
April 3, 1999
Notes to Consolidated Financial Statements -- 6-17
April 1, 2000
Item 2. Management's Discussion and Analysis of 18-32
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 33
Market Risk
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 3. Defaults upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security 34
Holders
Item 5 Other Information 34
Item 6. Exhibits and Reports on Form 8 - K 34
SIGNATURES 35
- ----------
EXHIBIT INDEX 36
- -------------
2
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
APRIL 1, APRIL 3, OCTOBER 2,
2000 1999 1999
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- ----------
Current assets:
Cash and cash equivalents $ 20,135 $ 9,576 $ 14,300
Trade accounts receivable 193,462 183,875 176,547
Sundry notes and accounts receivable 7,229 4,182 6,994
Inventories 193,356 181,411 175,101
Income taxes receivable 8,507 4,463 10,586
Deferred income taxes 10,135 14,310 11,776
Prepaid expenses and other current assets 3,393 3,076 4,773
-------------- --------------- -----------------
Total current assets 436,217 400,893 400,077
Property, plant and equipment, at cost 519,052 511,481 520,383
Less accumulated depreciation and
amortization (155,292) (117,514) (136,682)
---------------- ---------------- ------------------
363,760 393,967 383,701
Investments in and advances to associated
companies 24,766 25,334 22,966
Deferred charges, net 14,289 15,192 15,437
Other non-current assets 1,950 1,333 2,391
Intangibles, net 151,760 157,626 154,144
---------------- ---------------- ------------------
$ 992,742 $ 994,345 $ 978,716
================ ================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,056 $ 3,607 $ 3,072
Trade accounts payable 64,095 59,557 63,288
Accrued salaries and employee benefits 26,145 23,615 25,278
Accrued liabilities 29,803 34,787 32,931
Income taxes payable 2,194 1,349 4,790
---------------- ---------------- ------------------
Total current liabilities 125,293 122,915 129,359
Long-term debt 689,634 665,484 658,051
Other long-term liabilities 19,805 23,797 21,561
Deferred income taxes 57,148 59,703 61,008
Stockholders' equity:
Common stock 124 122 123
Contributed capital in excess of par value 39,552 39,087 39,420
Retained earnings 70,136 84,125 70,825
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (6,703) 1,359 616
---------------- ---------------- ------------------
Total stockholders' equity 100,862 122,446 108,737
---------------- ---------------- ------------------
$ 992,742 $ 994,345 $ 978,716
================ ================ ==================
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
3
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
---------------------------------------- ---------------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
Net sales $ 251,000 $ 237,433 $ 452,144 $ 483,468
Cost of sales 226,552 215,227 404,987 433,340
-------------- -------------- -------------- --------------
Gross profit 24,448 22,206 47,157 50,128
Selling, general and
administrative expenses 7,951 8,932 17,221 16,831
Amortization of intangibles 1,192 1,285 2,384 2,417
-------------- -------------- -------------- --------------
Operating income 15,305 11,989 27,552 30,880
Interest expense 16,627 15,219 32,480 30,175
Income from associated companies (1,688) (1,112) (3,465) (2,427)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 366 (2,118) (1,463) 3,132
Income tax expense (benefit):
Current (897) (318) 980 1,772
Deferred 1,061 (694) (1,754) (904)
-------------- -------------- -------------- --------------
Net income (loss) $ 202 $ (1,106) $ (689) $ 2,264
============== ============== ============== ==============
Net income (loss) per common
share:
Basic:
Average common shares
outstanding 11,942 11,875 11,922 11,858
Net income (loss) per common
share - Basic $ .02 $ (.09) $ (.06) $ .19
============== ============== ============== ==============
Diluted:
Average common shares
outstanding 11,952 11,875 11,922 11,964
Net income (loss) per common
share - Diluted $ .02 $ (.09) $ (.06) $ .19
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended
-----------------------------
April 1, April 3,
2000 1999
---------------- ------------
Cash flows from operating activities:
Net income (loss) $ (689) $ 2,264
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 20,238 20,839
Amortization of intangible assets 2,384 2,417
Amortization of deferred charges 1,414 1,216
Deferred income taxes (1,754) (904)
Non-cash compensation 133 76
(Gain)/loss on disposals of property, plant
and equipment 267 (229)
Undistributed income from associated companies (3,465) (2,427)
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net (19,166) (3,042)
(Increase)/decrease in sundry notes & accounts receivable (680) 7,584
(Increase)/decrease in inventories (20,835) 2,660
(Increase)/decrease in prepaid expenses and other
current assets 1,068 1,078
(Increase)/decrease in other non-current assets 352 25
(Decrease)/increase in accounts payable - trade 2,858 (4,907)
(Decrease)/increase in accrued liabilities (1,038) (7,965)
(Decrease)/increase in income taxes payable (807) (513)
(Decrease)/increase in other long-term liabilities (681) (395)
---------- -----------
Net cash provided by (used in) operating activities (20,401) 17,777
Cash flows from investing activities:
Property, plant and equipment expenditures (7,453) (16,886)
Proceeds from sale of property, plant and equipment 21 3,853
Distributions received from associated companies 1,072 2,874
Other 97 510
---------- -----------
Net cash provided by (used in) investing activities (6,263) (9,649)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit 35,700 (4,100)
Principal payments on long-term debt (2,665) (13,026)
Increase in common stock - 24
Payment of bank fees and loan costs (100) (1,185)
---------- -----------
Net cash provided by (used in) financing activities 32,935 (18,287)
Effect of exchange rate changes on cash and cash equivalents (436) (211)
---------- ------------
Net increase/(decrease) in cash and cash equivalents 5,835 (10,370)
Cash and cash equivalents at beginning of period 14,300 19,946
---------- -----------
Cash and cash equivalents at end of period $ 20,135 $ 9,576
========== ===========
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly-owned subsidiaries. Investments in affiliates in
which the Company owns 20 to 50 percent of the voting stock are accounted for
using the equity method. Intercompany items have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position as of April 1, 2000 and the results of operations and
cash flows for the periods ended April 1, 2000 and April 3, 1999. Such
adjustments consisted only of normal recurring items. Interim results are not
necessarily indicative of results for a full year. These financial statements
should be read in conjunction with the financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 2, 1999.
NOTE B - INVENTORIES
The components of inventory at April 1, 2000, April 3, 1999, and October 2, 1999
consisted of the following (in thousands):
April 1, April 3, October 2,
2000 1999 1999
----------------- ----------------- ------------------
Raw materials $ 5,763 $ 10,122 $ 7,503
Stock in process 31,312 28,355 28,413
Produced goods 154,261 144,090 139,949
Dyes, chemicals and supplies 11,283 11,592 11,050
-------------- ------------- -------------
202,619 194,159 186,915
Less LIFO and other reserves (9,263) (12,748) (11,814)
-------------- ------------- -------------
$ 193,356 $ 181,411 $ 175,101
============== ============= =============
NOTE C - LONG-TERM DEBT
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank ("FUNB"), as agent and
lender and its syndicate of lenders. The amendment became effective as of July
3, 1999 (the "Amendment"). Under the Amendment, for the period beginning July 4,
1999 through February 15, 2001, the revolving line of credit borrowings bear
interest at a per annum rate, at the Company's option, of either (i) (a) the
greater of the prime rate or the federal funds rate plus .50% plus (b) a margin
of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bear
interest at a
6
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
per annum rate, at the Company's option, of (A) with respect to Term Loan B
either (i)(a) the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% or (B) with
respect to Term Loan C, either (i)(a) greater of the prime rate or federal funds
rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR plus a margin of 3.75%.
In addition, the Company repaid $25 million principal amount of its term loan
balance using available borrowings under its revolving line of credit and
reduced the maximum amount of borrowings under the revolving line of credit by
$25 million to $200 million. The repayment of the Term Loan B and Term Loan C
principal balances ratably reduces the remaining quarterly principal payments.
NOTE D - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Three Months Ended Six Months Ended
------------------------------ ---------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
---------- ------------ ---------- ----------
Numerator:
Net income (loss) $ 202 $ (1,106) $ (689) $ (2,264)
========== ============ ========== ===========
Denominator:
Denominator for basic earnings per
share 11,942 11,875 11,922 11,858
share - weighted average shares
Effect of dilutive securities:
Stock options 10 - - 106
---------- ------------ ---------- -----------
Diluted potential common shares
denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exercises 11,952 11,875 11,922 11,964
========== ============= ========== ===========
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 875,598 shares
and 880,299 shares of common stock were outstanding during the three months
ended April 1, 2000 and April 3, 1999, respectively, and options to purchase
941,748 and 561,649 shares of common stock were outstanding during the six
months ended April 1, 2000 and April 3, 1999, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares.
Options to purchase 15,000 shares of common stock were outstanding during the
three and six months ended April 1, 2000 and April 3, 1999 but were not included
in the
7
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE D - NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
computation of diluted earnings per share pursuant to the contingent share
provisions of Financial Accountant Standards Board Statement No. 128, "Earnings
Per Share". Vesting of these options is contingent upon the market price of
common shares reaching certain target prices, which were greater than the
average market price of the common shares.
NOTE E - STOCKHOLDERS' EQUITY
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income." FAS 130 requires that the Company report comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income represents the change in stockholders' equity during the period from
non-owner sources. Currently, changes from non-owner sources consist of net
income and foreign currency translation adjustments. Total comprehensive income
(loss) for the three and six months ended April 1, 2000 was $(4.1) million and
$(8.0) million, respectively, and for the three and six months ended April 3,
1999 was $(6.9) million and $(5.5) million, respectively.
Activity in Stockholders' Equity is as follows (in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income(Loss) Stock Capital Earnings Stock Income Total
------------ ----- ------- -------- ----- ------ -----
Balance at
October 2, 1999 $ 123 $ 39,420 $ 70,825 $ (2,247) $ 616 $ 108,737
Issuance of 57,839
shares of Restricted
Common Stock 1 119 - - - 120
Compensation earned
related to stock
options - 13 - - - 13
Comprehensive
income(loss):
Net loss for six
months ended
April 1, 2000 $ (689) - - (689) - - (689)
Foreign currency
translation
adjustment
(7,319) - - - - (7,319) (7,319)
----------- ---------- ------------- ---------- ----------- ----------- -------
Total comprehensive
Income(loss) $ (8,008)
==========
Balance at
April 1, 2000 $ 124 $ 39,552 $ 70,136 $ (2,247) $ (6,703) $ 100,862
======= =========== ========== =========== ========== ===========
8
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE F - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Three Months Ended Six Months Ended
------------------------- ------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
----------- ----------- ------------ ---------
Current tax provision:
Federal $ - $ - $ - $ -
State 40 16 54 34
Foreign (937) (334) 926 1,738
----------- ----------- ----------- ---------
Total current tax provision (897) (318) 980 1,772
Deferred tax provision:
Federal (213) (1,916) (4,284) (3,091)
State (61) (122) (276) (198)
Foreign 1,335 1,344 2,806 2,385
----------- ----------- ----------- ---------
Total deferred tax provision 1,061 (694) (1,754) (904)
----------- ----------- ----------- ---------
Total provision for income taxes $ 164 $ (1,012) $ (774) $ 868
=========== =========== =========== =========
The Company's overall tax rate for the three and six months ended April 1, 2000
was approximately 44.8% and 52.9%, respectively, as compared to 47.8% and 27.7%
for the three and six months ended April 3, 1999, respectively. The difference
from the statutory rate resulted primarily from changes in the relative amounts
of domestic and foreign earnings in the March quarter 2000 and the first six
months of fiscal 2000 as compared to the March quarter 1999 and the first six
months of fiscal 1999. In both the March quarter 2000 and the first six months
of fiscal 2000, domestic losses were offset by higher foreign earnings.
At April 1, 2000, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $37.4 million.
Of this amount, approximately $13.4 million will be carried back to recover
federal taxes paid in prior years. Approximately $24 million will be carried
forward to offset future taxable income and will expire in 2019 if unused. In
addition, the Company has Italian NOLs of approximately $8.4 million that expire
in fiscal 2000. Management has reviewed the Company's operating results for
recent years as well as the outlook for its businesses in concluding it is more
likely than not that the deferred tax assets of $30.9 million at April 1, 2000
will be realized. This review, along with the timing of the reversal of the
Company's temporary differences and the expiration dates of the NOLs, were
considered in reaching this conclusion. The Company's ability to generate future
taxable income is dependent on numerous factors, including the state of the
apparel industry, general economic conditions and other factors beyond
management's control. Accordingly, there can be no assurance that the Company
will meet its expectation of future taxable income.
9
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE G - SEVERANCE CHARGE
During the June quarter 1999, the Company recognized a $1.8 million charge
associated with the termination of 46 salaried employees. The charge was
recorded as a component of selling, general and administrative expenses. All
affected employees have been terminated with cash payments expected to be spread
over a period not to exceed two years. At April 1, 2000, there remained a
balance of $0.4 million which is equal to the expected future cash expenditures
to such terminated employees.
NOTE H - SEGMENT INFORMATION
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", which was adopted by the Company during its
September quarter 1999. FAS 131 requires that a public company report financial
and descriptive information about its reportable operating segments pursuant to
criteria that differ from previous accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements. FAS 131
also requires information about products and services, geographic areas of
operation, and major customers. The Company is principally organized around
differences in products; however, one segment exists primarily due to geographic
location. The business segments are managed separately and distribute products
through different marketing channels.
The Company's operations are classified into four business segments: Galey &
Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. Galey
& Lord Apparel manufactures and sells woven cotton and cotton blended apparel
fabrics and garment packages. Swift Denim manufactures and markets a wide
variety of denim products for apparel and non-apparel uses. Klopman
International manufactures principally workwear and careerwear fabrics as well
as woven sportswear apparel fabrics primarily for consumption in Europe. Home
Fashion Fabrics manufactures and sells dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories as
well as greige fabrics (undyed and unfinished) which it sends to independent
contractors for dyeing and finishing.
The Company evaluates performance and allocates resources based on operating
income; therefore, certain expenses principally net interest expense and income
taxes are excluded from the chief operating decision
10
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE H - SEGMENT INFORMATION (CONTINUED)
makers' assessment of segment performance. Accordingly, such expenses have not
been allocated to segment results. The corporate segment's operating income
(loss) represents principally the administrative expenses from the Company's
various holding companies. Additionally, the corporate segment assets consist
primarily of corporate cash, deferred bank charges and investments in and
advances to associated companies.
Information about the Company's operations in its different industry segments
for the three and six months ended April 1, 2000 and April 3, 1999 is as follows
(in thousands):
Three Months Ended Six Months Ended
---------------------------------------- ----------------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------------------- ----------------- ----------------- -------------
Net Sales to External Customers
Galey & Lord Apparel $ 117,170 $ 122,960 $ 215,879 $ 239,062
Swift Denim 91,878 65,653 155,543 147,871
Klopman International 35,498 40,038 68,689 79,022
Home Fashion Fabrics 6,454 8,782 12,033 17,513
--------------- --------------- --------------- -------------
Consolidated $ 251,000 $ 237,433 $ 452,144 $ 483,468
=============== =============== =============== =============
Operating Income (Loss)
Galey & Lord Apparel $ 10,596 $ 8,089 $ 16,092 $ 16,661
Swift Denim 1,451 (239) 5,520 6,758
Klopman International 3,507 4,266 7,428 6,822
Home Fashion Fabrics (87) (24) (513) 94
Corporate (162) (103) (975) 545
--------------- --------------- --------------- -------------
15,305 11,989 27,552 30,880
Interest expense 16,627 15,219 32,480 30,175
Income from associated
companies(1) (1,688) (1,112) (3,465) (2,427)
--------------- --------------- --------------- -------------
Income (loss) before income
taxes $ 366 $ (2,118) $ (1,463) $ 3,132
=============== =============== =============== =============
April 1, April 3,
2000 1999
---------------- --------------
Assets(2)
Galey & Lord Apparel $ 347,640 $ 348,670
Swift Denim 440,570 427,067
Klopman International 122,382 138,751
Home Fashion Fabrics 34,689 33,738
Corporate 48,996 46,119
--------------- -------------
$ 994,277 $ 994,345
=============== =============
(1)Net of amortization of $145, $166, $298 and $340, respectively.
(2)Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
11
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following summarizes condensed consolidating financial information for the
Company, segregating Galey & Lord, Inc. (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and guarantees are full, unconditional
and joint and several. Separate financial statements of each of the guarantor
subsidiaries are not presented because management believes that these financial
statements would not be material to investors.
April 1, 2000
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 149,240 $ 44,222 $ - $ 193,462
Inventories - 154,535 39,525 (704) 193,356
Other current
assets 2,837 120,162 25,320 (98,920) 49,399
------------ -------------- -------------- ------------------ ----------------
Total current
assets 2,837 423,937 109,067 (99,624) 436,217
Property, plant and
equipment, net - 271,068 92,692 - 363,760
Intangibles - 151,760 - - 151,760
Other assets 893,626 7,473 107,732 (967,826) 41,005
------------ -------------- -------------- ------------------ ----------------
$ 896,463 $ 854,238 $ 309,491 $ (1,067,450) $ 992,742
=========== ============== ============== ================== ================
Current liabilities:
Trade accounts
payable $ 125 $ 41,324 $ 22,646 $ - $ 64,095
Accrued
liabilities 19,835 18,278 17,852 (17) 55,948
Other current
liabilities 100,937 5,668 9,045 (110,400) 5,250
------------ -------------- -------------- ------------------ ----------------
Total current
liabilities 120,897 65,270 49,543 (110,417) 125,293
Long-term debt 672,454 720,863 10,160 (713,843) 689,634
Other non-current
liabilities 2,250 63,542 8,037 3,124 76,953
Stockholders' equity 100,862 4,563 241,751 (246,314) 100,862
------------ -------------- -------------- ------------------ ----------------
$ 896,463 $ 854,238 $ 309,491 $ (1,067,450) $ 992,742
=========== ============== ============== ================== ================
12
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
April 3, 1999
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 134,920 $ 48,955 $ - $ 183,875
Inventories - 140,830 43,016 (2,435) 181,411
Other current
assets 3,694 83,740 17,818 (69,645) 35,607
------------ -------------- -------------- -------------- ----------------
Total current
assets 3,694 359,490 109,789 (72,080) 400,893
Property, plant and
equipment, net - 288,859 105,108 - 393,967
Intangibles - 157,626 - - 157,626
Other assets 833,738 14,736 55,218 (861,833) 41,859
------------ -------------- -------------- -------------- ----------------
$ 837,432 $ 820,711 $ 270,115 $ (933,913) $ 994,345
=========== ============== ============== ============== ================
Current liabilities:
Trade accounts
payable $ - $ 36,072 $ 25,065 $ (1,580) $ 59,557
Accrued
liabilities 21,847 21,695 14,466 394 58,402
Other current
liabilities 35,396 27,235 30,983 (88,658) 4,956
------------ -------------- -------------- -------------- ----------------
Total current
liabilities 57,243 85,002 70,514 (89,844) 122,915
Long-term debt 651,338 616,702 6,455 (609,011) 665,484
Other non-current
liabilities 6,405 69,304 16,049 (8,258) 83,500
Stockholders' equity 122,446 49,703 177,097 (226,800) 122,446
------------ -------------- -------------- -------------- ----------------
$ 837,432 $ 820,711 $ 270,115 $ (933,913) $ 994,345
=========== ============== ============== ============== ================
13
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Three Months Ended April 1, 2000
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 203,679 $ 68,205 $ (20,884) $ 251,000
Gross profit (29) 16,541 7,825 111 24,448
Operating income (98) 10,166 5,126 111 15,305
Interest expense,
income taxes and
other, net (2,106) 15,011 1,589 609 15,103
Net income (loss) $ 2,008 $ (4,845) $ 3,537 $ (498) $ 202
Six Months Ended April 1, 2000
-------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 363,238 $ 124,963 $ (36,057) $ 452,144
Gross profit - 31,542 15,450 165 47,157
Operating income (515) 18,012 9,890 165 27,552
Interest expense,
income taxes and
other, net (3,850) 28,454 3,159 478 28,241
Net income (loss) $ 3,335 $ (10,442) $ 6,731 $ (313) $ (689)
14
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Three Months Ended April 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 184,650 $ 62,943 $ (10,160) $ 237,433
Gross profit 35 13,886 8,182 103 22,206
Operating income 40 6,515 5,468 (34) 11,989
Interest expense,
income taxes and
other, net (547) 13,249 2,460 (2,067) 13,095
Net income (loss) $ 587 $ (6,734) $ 3,008 $ 2,033 $ (1,106)
Six Months Ended April 3, 1999
-------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 376,110 $ 127,652 $ (20,294) $ 483,468
Gross profit 35 33,974 15,991 128 50,128
Operating income 173 20,021 10,695 (9) 30,880
Interest expense,
income taxes and
other, net (1,814) 27,745 5,258 (2,573) 28,616
Net income (loss) $ 1,987 $ (7,724) $ 5,437 $ 2,564 $ 2,264
15
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Six Months Ended April 1, 2000
------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 7,540 $ (35,096) $ 7,954 $ (799) $ (20,401)
Cash provided by
(used in) investing
activities (1,124) (6,017) 69 809 (6,263)
Cash provided by
(used in) financing
activities (6,369) 39,889 (575) (10) 32,935
Effect of exchange
rate change on cash
and equivalents - - (436) - (436)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents 47 (1,224) 7,012 - 5,835
Cash and cash
equivalents at
beginning of period - 6,126 8,174 - 14,300
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 47 $ 4,902 $ 15,186 $ - $ 20,135
=========== =============== =============== ============= ===============
16
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Six Months Ended April 3, 1999
------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 1,379 $ 13,266 $ (91) $ 3,223 $ 17,777
Cash provided by
(used in) investing
activities 7,798 (18,513) 5,755 (4,689) (9,649)
Cash provided by
(used in) financing
activities (9,200) 650 (11,203) 1,466 (18,287)
Effect of exchange
rate change on cash
and equivalents - - (211) - (211)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents (23) (4,597) (5,750) - (10,370)
Cash and cash
equivalents at
beginning of period 114 8,326 11,506 - 19,946
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 91 $ 3,729 $ 5,756 $ - $ 9,576
=========== =============== =============== ============= ===============
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
During the March quarter 2000, management continued to see improvement from the
conditions the Company experienced during fiscal year 1999. The Company's March
quarter 2000 results, while reflecting lower selling prices, are reflecting
positive sales volume trends, lower raw material prices and the cost reduction
efforts taken in fiscal 1999. Management continues to review each of its
businesses' strategic positions for the future in addition to continuous
evaluations of opportunities to streamline operations and reduce costs.
Management anticipates that the June quarter 2000 will continue to show year
over year and quarter over quarter improvements.
The Company's operations are primarily classified into four operating segments:
(1) Galey & Lord Apparel, (2) Swift Denim, (3) Klopman International and (4)
Home Fashion Fabrics. Results for the three month and six month periods ended
April 1, 2000 and April 3, 1999 for each segment are shown below:
Three Months Ended Six Months Ended
------------------------------- ----------------------------
April 1, April 3, April 1, April 3,
2000 1999 2000 1999
------------- ------------- ------------- ----------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $ 117,170 $ 122,960 $ 215,879 $ 239,062
Swift Denim 91,878 65,653 155,543 147,871
Klopman International 35,498 40,038 68,689 79,022
Home Fashion Fabrics 6,454 8,782 12,033 17,513
-------------- ------------- -------------- -------------
Total $ 251,000 $ 237,433 $ 452,144 $ 483,468
============== ============= ============== =============
Operating Income (Loss) Per Segment
Galey & Lord Apparel $ 10,596 $ 8,089 $ 16,092 $ 16,661
Swift Denim 1,451 (239) 5,520 6,758
Klopman International 3,507 4,266 7,428 6,822
Home Fashion Fabrics (87) (24) (513) 94
Corporate (162) (103) (975) 545
-------------- ------------- -------------- -------------
15,305 11,989 27,552 30,880
Interest expense 16,627 15,219 32,480 30,175
Income from associated companies (1,688) (1,112) (3,465) (2,427)
-------------- ------------- -------------- -------------
Income (loss) before income taxes $ 366 $ (2,118) $ (1,463) $ 3,132
============== ============= ============== =============
MARCH QUARTER 2000 COMPARED TO MARCH QUARTER 1999
NET SALES
Net sales for the March quarter 2000 (second quarter of fiscal 2000) were $251.0
million as compared to $237.4 million for the March quarter 1999 (second quarter
of fiscal 1999).
GALEY & LORD APPAREL Galey & Lord Apparel's net sales for the March quarter 2000
were $117.2 million, a $5.8 million decline as compared
18
to the March quarter 1999 net sales of $123.0 million. The net sales decline was
primarily attributable to a 4% decline in fabric sales volume, partially offset
by a 67% increase in unit sales of garment packages. The increase in unit sales
of garment packages reflects the additional production capacity at the Company's
new Monclova, Mexico garment facility which is continuing to increase
production. Overall, average selling prices, inclusive of product mix changes,
declined approximately 5%.
SWIFT DENIM Swift Denim's net sales for the March quarter 2000 were $91.9
million as compared to $65.7 million in the March quarter 1999. The $26.2
million increase was primarily attributable to a 44% increase in sales volume
and a favorable change in product mix, partially offset by a 5% decline in the
sales price of denim fabrics.
KLOPMAN INTERNATIONAL Klopman International's net sales for the March quarter
2000 were $35.5 million, a $4.5 million decline as compared to the March quarter
1999 net sales of $40.0 million. The decline was primarily attributable to a 12%
decline in net sales due to exchange rate changes used in translation and a 3%
decline in selling prices, partially offset by foreign currency transaction
exchange gains on sales not denominated in Euros.
HOME FASHION FABRICS Net sales for Home Fashion Fabrics for the March quarter
2000 were $6.5 million compared to $8.8 million for the March quarter 1999. The
$2.3 million decline in net sales primarily resulted from a 34% decline in
volume from March quarter 1999 and lower selling prices, partially offset by
favorable product mix.
OPERATING INCOME
Operating income for the March quarter 2000 was $15.3 million as compared to
$12.0 million for the March quarter 1999.
GALEY & LORD APPAREL Galey & Lord Apparel's operating income was $10.6 million
for the March quarter 2000 as compared to $8.1 million for the March quarter
1999. The $2.5 million increase principally reflects the impact of $4.4 million
of lower raw material price variances and $0.7 million in improvement in the
Company's garment production facilities in Mexico, partially offset by $1.0
million in lower volume and $4.6 million in lower selling prices. While the
Company's garment facilities have shown improvement in the current quarter, the
Company expects to continue to incur start-up costs at the Company's new
Monclova, Mexico garment facility until it reaches full production.
SWIFT DENIM March quarter 2000 operating income for Swift Denim was $1.5
million, a $1.7 million increase as compared to the March quarter 1999 operating
loss of $0.2 million. The increase in Swift Denim's operating income principally
reflects $3.0 million related to the impact of higher sales volume and changes
in product mix, $1.1 million
19
in improved manufacturing variances associated with reduced fixed costs spending
and absorption and $0.7 million in lower selling, general and administrative
expenses, partially offset by $3.5 million related to declines in selling
prices. Lower cotton prices in the March quarter 2000 have been offset by
premiums paid on purchased yarns.
KLOPMAN INTERNATIONAL Klopman International's operating income in the March
quarter 2000 decreased $0.8 million to $3.5 million as compared to the March
quarter 1999 operating income of $4.3 million. The decrease principally reflects
$1.2 million related to the impact of lower selling prices, partially offset by
$0.7 million related to product mix changes and foreign exchange gains on sales
not denominated in Euros. In addition, Klopman International's results were
negatively impacted $0.7 million by foreign currency translation due to the
weakness of the Euro against the US Dollar.
HOME FASHION FABRICS Home Fashion Fabrics reported an operating loss for the
March quarter 2000 of $87 thousand as compared to an operating loss for the
March quarter 1999 of $24 thousand. The decrease in operating income was
principally due to the lower sales volume and selling prices discussed above.
CORPORATE The corporate segment reported an operating loss for the March quarter
2000 of $0.2 million as compared to an operating loss for the March quarter 1999
of $0.1 million. The corporate segment's operating income (loss) typically
represents the administrative expenses from the Company's various holding
companies.
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies was $1.7 million in the March quarter 2000 as
compared to $1.1 million in the March quarter 1999. The income represents
amounts from several joint venture interests that manufacture and sell denim
products.
INTEREST EXPENSE
Interest expense was $16.6 million for the March quarter 2000 compared to $15.2
million for the March quarter 1999. The increase in interest expense was
primarily due to higher interest rates paid by the Company as a result of
increased spreads over LIBOR due to the July 13, 1999 amendment of the Senior
Credit Facility (as defined herein), higher prime and LIBOR base rates in the
March quarter 2000 as compared to the March quarter 1999 and higher average debt
balances in the March quarter 2000 as compared to the March quarter 1999. The
average interest rate paid by the Company on its bank debt in the March quarter
2000 was 9.2% per annum as compared to 8.6% per annum in the March quarter 1999.
20
INCOME TAXES
The Company's overall tax rate for the March quarter 2000 was approximately
44.8% as compared to 47.8% for the March quarter 1999. The difference from the
statutory rate resulted primarily from changes in the relative amounts of
domestic and foreign earnings in the March quarter 2000 as compared to the March
quarter 1999. In the March quarter 2000, higher domestic losses were partially
offset by foreign earnings.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
Net income for the March quarter 2000 was $0.2 million or $.02 per common share,
compared to a net loss for the March quarter 1999 of $1.1 million or $.09 per
common share.
FIRST SIX MONTHS OF FISCAL 2000 COMPARED TO FIRST SIX MONTHS
OF FISCAL 1999
NET SALES
Net sales for the first six months of fiscal 2000 were $452.1 million as
compared to $483.5 million for the first six months of fiscal 1999.
GALEY & LORD APPAREL Galey & Lord Apparel's net sales for the first six months
of fiscal 2000 were $215.9 million, a $23.2 million decline over the first six
months of fiscal 1999 net sales of $239.1 million. The net sales decline was
primarily attributable to a 9% decline in fabric sales volume, partially offset
by a 45% increase in unit sales of garment packages. The increase in unit sales
of garment packages reflects the additional production capacity at the Company's
new Monclova, Mexico garment facility which is continuing to increase
production. Overall, average selling prices, inclusive of product mix changes,
declined approximately 3%.
SWIFT DENIM Swift Denim's net sales for the first six months of fiscal 2000 were
$155.5 million as compared to $147.9 million in the first six months of fiscal
1999. The $7.6 million increase was primarily attributable to a 11% increase in
sales volume, partially offset by a 5% decline in the sales price of denim
fabrics and by changes in product mix.
KLOPMAN INTERNATIONAL Klopman International's net sales for the first six months
of fiscal 2000 were $68.7 million, a $10.3 million decline as compared to the
first six months of fiscal 1999 net sales of $79.0 million. The decline was
primarily attributable to a 12% decline in net sales due to exchange rate
changes, a 2% decline in sales volume and a 3% decline in selling prices,
partially offset by changes in product mix.
HOME FASHION FABRICS Net sales for Home Fashion Fabrics for the first
21
six months of fiscal 2000 were $12.0 million compared to $17.5 million for March
quarter 1999. The $5.5 million decline in net sales primarily resulted from a
35% decline in volume from the first six months of fiscal 1999 and lower selling
prices, partially offset by favorable manufacturing variances and improvement in
product mix.
OPERATING INCOME
Operating income for the first six months of fiscal 2000 was $27.6 million as
compared to $30.9 million for the first six months of fiscal 1999.
GALEY & LORD APPAREL Galey & Lord Apparel's operating income was $16.1 million
for the first six months of fiscal 2000 as compared to $16.7 million for the
first six months of fiscal 1999. The $0.6 million decrease principally reflects
$4.1 million of lower volume, $7.0 million of lower selling prices and continued
start-up costs at the Company's new Monclova, Mexico garment facility, partially
offset by the impact of $7.4 million of lower raw material price variances.
SWIFT DENIM The first six months of fiscal 2000 operating income for Swift Denim
was $5.5 million, a $1.3 million decline as compared to the first six months of
fiscal 1999 operating income of $6.8 million. The decline in Swift Denim's
operating income principally reflects $6.9 million related to declines in
selling prices, $2.0 million related to changes in product mix and $1.1 million
of increased raw material prices principally due to premiums paid on purchased
yarns, partially offset by $7.2 million in improved manufacturing variances
associated with reduced fixed cost spending and absorption and $1.0 million
related to the impact of higher sales volume. Additionally, selling, general and
administrative expenses were $0.7 million lower.
KLOPMAN INTERNATIONAL Klopman International's operating income in the first six
months of fiscal 2000 increased $0.6 million to $7.4 million as compared to the
first six months of fiscal 1999 operating income of $6.8 million. The increase
principally reflects a $0.7 million improvement in manufacturing efficiencies,
$1.1 million related to product mix changes and $0.2 million in lower selling,
general and administrative expenses, partially offset by $2.7 million related to
the impact of lower selling prices and sales volume. In addition, Klopman's
results were negatively impacted $1.0 million by foreign currency translation
due to the weakness of the Euro to the US Dollar.
HOME FASHION FABRICS Home Fashion Fabrics reported an operating loss for the
first six months of fiscal 2000 of $0.5 million as compared to operating income
for the first six months of fiscal 1999 of $0.1 million. The decrease in
operating income was principally due to the lower sales volume and selling
prices discussed above, partially offset by favorable manufacturing variances
and improvement in product mix.
22
CORPORATE The corporate segment reported an operating loss for the first six
months of fiscal 2000 of $1.0 million as compared to operating income for the
first six months of fiscal 1999 of $0.6 million. The corporate segment's
operating income (loss) typically represents the administrative expenses from
the Company's various holding companies. In addition to the on-going
administrative expenses, during the first six months of fiscal 2000, the
corporate segment recorded a $0.3 million foreign currency exchange loss on its
loan to an associated company and $0.2 million of additional expense related to
the Company's July 13, 1999 amendment of its Senior Credit Facility.
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies was $3.5 million in the first six months of
fiscal 2000 as compared to $2.4 million in the first six months of fiscal 1999.
The income represents amounts from several joint venture interests that
manufacture and sell denim products.
INTEREST EXPENSE
Interest expense was $32.5 million for the first six months of fiscal 2000
compared to $30.2 million for the first six months of fiscal 1999. The increase
in interest expense was primarily due to higher interest rates paid by the
Company as a result of increased spreads over LIBOR due to the July 13, 1999
amendment of the Senior Credit Facility (as defined herein) and higher prime and
LIBOR base rates in the March quarter 2000 as compared to the March quarter
1999. These increases were partially offset by lower average debt balances in
the first six months of fiscal 2000 as compared to the first six months of
fiscal 1999. The average interest rate paid by the Company on its bank debt in
the first six months of fiscal 2000 was 9.2% per annum as compared to 8.5% per
annum in the first six months of fiscal 1999.
INCOME TAXES
The Company's overall tax rate for the first six months of fiscal 2000 was
approximately 52.9% as compared to 27.7% for the first six months of fiscal
1999. The difference from the statutory rate resulted primarily from changes in
the relative amounts of domestic and foreign earnings in the first six months of
fiscal 2000 as compared to the first six months of fiscal 1999. In the first six
months of fiscal 2000, higher domestic losses were partially offset by foreign
earnings.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The net loss for the first six months of fiscal 2000 was $0.7 million or $.06
per common share, compared to net income for the first six months of fiscal 1999
of $2.3 million or $.19 per common share.
23
ORDER BACKLOG
The Company's order backlog at April 1, 2000 was $194.1 million, a 16.7%
increase from the April 3, 1999 backlog of $166.3 million. Many apparel
manufacturers, including many of the Company's customers, have modified their
purchasing procedures and have shortened lead times from order to delivery. The
Company believes that as a result of its customers shortening lead times, order
backlogs do not provide as meaningful information in regards to the Company's
future sales as in the past.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries had cash and cash equivalents totaling $20.1
million and $9.6 million at April 1, 2000 and April 3, 1999, respectively. The
Company had a total of $38.1 million of revolving credit borrowing availability
under its Senior Credit Facility at April 1, 2000.
The Company, during the first quarter of fiscal 2000, increased its investment
in inventory in anticipation of higher volumes of certain products during the
March, June and September quarters. The March quarter net sales met management's
expectations and partially reduced the Company's investment in inventory. Based
on current order patterns, June quarter net sales should also meet management's
expectations. Accordingly, the Company expects inventory at the end of June and
September will be lower than the current level.
During the March quarter 2000, the Company primarily utilized its available cash
and revolving credit borrowings under its Senior Credit Facility to fund the
Company's operating and investing requirements.
SENIOR CREDIT FACILITY
On January 29, 1998 the Company entered into a new credit agreement (as amended,
the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent
and lender, and, as of March 27, 1998, with a syndicate of lenders. The Senior
Credit Facility provides for (i) a revolving line of credit under which the
Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million (reduced to
$200 million pursuant to the Amendment, as defined below) or a borrowing base
(comprised of eligible accounts receivable and eligible inventory, as defined in
the Senior Credit Facility), (ii) a term loan in the principal amount of $155.0
million ("Term Loan B") and (iii) a term loan in the principal amount of $110.0
million ("Term Loan C"). Portions of Term Loan B and Term Loan C were repaid
pursuant to the Amendment.
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with FUNB, as agent and lender and
24
its syndicate of lenders. The amendment, which became effective as of July 3,
1999 (the "Amendment"), replaced the Adjusted Leverage Ratio covenant (as
defined in the Amendment) with a minimum EBITDA covenant (as defined in the
Amendment) until the Company's December quarter 2000, replaced the Consolidated
Net Worth covenant with a Consolidated Retained Earnings covenant (both as
defined in the Amendment), waived compliance by the Company with the Adjusted
Fixed Charge Coverage Ratio (as defined in the Amendment) until the Company's
December quarter 2000 and modified the Company's covenant related to capital
expenditures.
Under the Senior Credit Facility (as amended by the Amendment), for the period
beginning July 4, 1999 through February 15, 2001, the revolving line of credit
borrowings bear interest at a per annum rate, at the Company's option, of either
(i) (a) the greater of the prime rate or the federal funds rate plus .50% plus
(b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term
Loan C bear interest at a per annum rate, at the Company's option, of (A) with
respect to Term Loan B either (i)(a) the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of
3.50% or (B) with respect to Term Loan C, either (i)(a) greater of the prime
rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR
plus a margin of 3.75%. In addition, pursuant to the Amendment, the Company
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million.
The repayment of the Term Loan B and Term Loan C principal balances ratably
reduces the remaining quarterly principal payments. In addition, the Company and
each of its domestic subsidiaries granted the lenders, as additional collateral,
a lien on all real property owned in the United States.
Beginning with the quarter ending December 30, 2000, the Company will be subject
to leverage and fixed charge coverage ratios, as amended pursuant to the
Amendment. In addition, under the Senior Credit Facility, the revolving line of
credit expires on March 27, 2004 and the principal amount of (i) Term Loan B is
repayable in quarterly payments of $349,157 through March 27, 2004, three
quarterly payments of $32,820,773 and final amount of $27,854,048 on Term Loan
B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly
payments of $247,687 through April 2, 2005, three quarterly payments of
$23,034,918 and a final amount of $19,511,595 on Term Loan C's maturity of April
1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998 and
July 3, 1999, the revolving line of credit borrowings bear interest at a per
annum rate, at the Company's option, of either (i) (a) the greater of the prime
rate or the federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%,
.75%, 1.00% or 1.25%, based on the Company achieving certain leverage ratios (as
defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of
25
1.25%, 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on the Company achieving
certain leverage ratios. Term Loan B and Term Loan C bear interest at a per
annum rate, at the Company's option, of (A) with respect to Term Loan B either
(i) (a) the greater of the prime rate or federal funds rate plus .50%, plus (b)
a margin of 1.00%, 1.25%, 1.50% or 1.75%, based on the Company achieving certain
leverage ratios or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%,
based on the Company achieving certain leverage ratios or (B) with respect to
Term Loan C, either (i) (a)the greater of the prime rate or federal funds rate
plus .50%, plus (b) a margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the
Company achieving certain leverage ratios, or (ii) LIBOR plus a margin of 2.50%,
2.75%, 3.00% or 3.25%, based on the Company's achieving certain leverage ratios.
Pursuant to the Amendment, borrowings under the Senior Credit Facility will bear
interest in accordance with the foregoing pricing options beginning on February
16, 2001.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the Amendment, are secured by all of the assets of the Company and each of
its domestic subsidiaries, a pledge by the Company and each of its domestic
subsidiaries of all the outstanding capital stock of its respective domestic
subsidiaries and a pledge of 65% of the outstanding voting capital stock, and
100% of the outstanding non-voting capital stock, of certain of its respective
foreign subsidiaries. In addition, payment of all obligations under the Senior
Credit Facility is guaranteed by each of the Company's domestic subsidiaries.
Under the Senior Credit Facility, the Company is required to make mandatory
prepayments of principal annually in an amount equal to 50% of Excess Cash Flow
(as defined in the Senior Credit Facility), and also in the event of certain
dispositions of assets or debt or equity issuances (all subject to certain
exceptions) in an amount equal to 100% of the net proceeds received by the
Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
The Company was in full compliance with all of its lenders' covenants as of
April 1, 2000.
SENIOR SUBORDINATED DEBT
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from
26
the offering of $289.3 million (net of Initial Purchaser's discount and offering
expenses), were used to repay (i) $275.0 million principal amount of bridge
financing borrowings incurred to partially finance the acquisition of the
apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii)
a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
will be paid March 1 and September 1 of each year. The first interest payment on
the Notes was made on September 1, 1998.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
TAX MATTERS
At April 1, 2000, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $37.4 million.
Of this amount, approximately $13.4 million will be carried back to recover
federal taxes paid in prior years. Approximately $24 million will be carried
forward to offset future taxable income and will expire in 2019 if unused. In
addition, the Company has Italian NOLs of approximately $8.4 million that expire
in fiscal 2000. Management has reviewed the Company's operating results for
recent years as well as the outlook for its businesses in concluding it is more
likely than not that the deferred tax assets of
27
$30.9 million at April 1, 2000 will be realized. This review, along with the
timing of the reversal of the Company's temporary differences and the expiration
dates of the NOLs, were considered in reaching this conclusion. The Company's
ability to generate future taxable income is dependent on numerous factors,
including the state of the apparel industry, general economic conditions and
other factors beyond management's control. Accordingly, there can be no
assurance that the Company will meet its expectation of future taxable income.
OTHER
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company was
obligated to provide $5.0 million of additional funding to three defined benefit
pension plans previously sponsored by Dominion Textile, Inc., $3.0 million of
which was paid at the closing of the Acquisition, $1.0 million was paid in the
March quarter 1999 and the remaining $1.0 million was paid in the March quarter
2000. The Pension Funding Agreement also gives the PBGC a priority lien of $10.0
million on certain land and building assets of the Company to secure payment of
any liability to the PBGC that might arise if one or more of the pension plans
were terminated. The Company's obligations under the Pension Funding Agreement
terminate upon the earlier to occur of (a) the termination of the pension plans
and (b) on or after January 30, 2003, if either (i) the pension plans are fully
funded for two consecutive years or (ii) the Company receives an investment
grade rating on its debt.
The Company expects to spend approximately $21.3 million for capital
expenditures in fiscal 2000, of which $7.5 million was spent in the first six
months of fiscal 2000. The Company anticipates that approximately $3.0 million
will be used to increase the Company's capacity while the remaining $14.4
million will be used to maintain existing capacity.
The Company anticipates that cash requirements including working capital and
capital expenditure needs will be met through funds generated from operations
and through revolving credit borrowings under the Company's Senior Credit
Facility. In addition, from time to time, the Company uses borrowings under
secured and unsecured bank loans, through capital leases or through operating
leases for various equipment purchases.
YEAR 2000 COMPLIANCE
The Company developed a comprehensive plan to address Year 2000 issues. As part
of the plan, the Company selected teams to identify, evaluate and implement
remediation efforts aimed at bringing the Company's information technology and
non-information technology systems into Year 2000 compliance prior to December
31, 1999. The Company's remediation efforts were successful and, accordingly,
the
28
Company experienced no interruption in its' business systems.
The total cost of the Company's Year 2000 assessment and remediation efforts has
not been material to the Company's results of operations or liquidity. The total
expenditures in the first six months of fiscal 2000 to complete the remediation
of the Company's Year 2000 issues, inclusive of its ongoing systems initiatives,
was $0.2 million. The capitalization or expense of the foregoing expenditures
has been determined using current authoritative guidance.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash
transactions. During this time period, the Euro will be traded on currency
exchanges and will be the basis of valuing legacy currencies. The legacy
currencies will continue to be legal tender. Beginning January 1, 2002, the
participating countries will issue new Euro-denominated bills and coins for use
in cash transactions, and no later than July 1, 2002, will withdraw all bills
and coins denominated in the legacy currencies. The legacy currencies will then
no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the Participating Countries. The Company
believes that the conversion to the Euro will eliminate much of the advantage or
disadvantage coming from exchange rate fluctuation resulting from transactions
involving legacy currencies in Participating Countries. Accordingly,
competitiveness will be solely based on price, quality and service. While the
Company believes the increased competitiveness based on these factors will
provide the Company with a strategic advantage over smaller local companies, it
cannot assess the magnitude of this impact on its operations.
As contemplated by the Company's Euro conversion plan, invoicing of products in
both local currencies and Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems will be completed during
the Company's 2000 fiscal year. The Company believes that the Euro conversion
will be completed prior to the beginning of its 2001 fiscal year and that the
costs related to the conversion will not be material to the Company's operating
results or liquidity although no assurances can be made in this regard.
29
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 1999. The
effective date has been delayed to June 15, 2000, the Company's fiscal year
2001, as a result of the FASB's issuance in August 1999 of FAS 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
date of FASB Statement No. 133". FAS 133 requires that all derivatives be
recorded on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
would be either offset against the change in the fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value would immediately be
recognized in earnings. The Company has not yet determined what the effect of
FAS 133 will be on the earnings and financial position of the Company.
RECENT DEVELOPMENTS
The Company has agreed in principle to the basic terms of a joint venture (the
"Joint Venture") in Mexico pursuant to which the Company will receive an equity
interest in a newly formed Mexican entity which will simultaneously acquire an
existing denim manufacturing business (the "Existing Business") from a group
which includes the Company's partner in the Joint Venture. The Existing Business
is a "state-of-the-art" denim fabric factory built within the past three years.
To date the Company has not entered into a definitive agreement with respect to
the Joint Venture and there can be no assurance that the Company will enter into
a definitive agreement and consummate the Joint Venture.
Since the North American Free Trade Agreement ("NAFTA") was enacted in 1994,
some U.S. denim fabric producers as well as many jeans sewing factories have
established operations in Mexico. The advantages of moving denim fabric
production to Mexico include:
o FAVORABLE TRADE POLICIES. NAFTA allows denim fabric and apparel made in
Mexico to enter the U.S. quota and duty free.
o LOWER LABOR RATES. Mexico's importance to the U.S. textile and apparel
industry has been enhanced by the abundance of lower-cost labor in
Mexico. With the average wages in Mexico only approximately 18% of
those in the U.S. textile industry, Mexico presents an attractive
alternative to domestic production for many textile and apparel
manufacturers.
o FAVORABLE LOCATION. Mexico's proximity to the U.S. is a key factor in
the growing interest of textile and apparel manufacturers in
30
locating manufacturing facilities in Mexico. Not only do Mexican denim
producers have an advantage over Asian manufacturers who are trying to
import to the U.S. but they also have the advantage of being close to
many U.S. jeans producers who have relocated sewing operations to
Mexico.
o HEDGE AGAINST REMOVAL OF QUOTAS IN 2005. The lower cost of denim fabric
production and jeans apparel production in Mexico helps to mitigate the
impact of U.S. quotas being removed in 2005.
Driven by these advantages, annual trade in textiles and apparel between the
U.S. and Mexico has reached $14.6 billion in 1998, more than triple the $4.1
billion figure from 1993. Due to the higher labor content of their products,
apparel producers were among the first to take advantage of Mexico's lower labor
rates. Some basic denim fabric manufacturers have followed apparel manufacturers
in moving manufacturing operations to Mexico to be closer to their customers and
lower labor costs.
The Company believes the proposed Joint Venture will enable it to:
o LOWER OUR RISK OF ENTERING MEXICO. The Joint Venture will enable the
Company to enter Mexico to manufacture denim, with a partner with an
existing denim manufacturing business, who has local expertise in
everything from hiring and communication with the work force to dealing
with legal and governmental and regulatory issues. In addition, the
Company's joint venture partner is already operating its modern
manufacturing facilities profitably, which eliminates a major risk
inherent in building a new manufacturing facility.
o ACCELERATE OUR MOVE INTO MEXICO AT A LOWER CAPITAL COST. The Joint
Venture will provide the Company with a two-year head start in
establishing a denim manufacturing facility in Mexico. It would take
the Company two years to build a new manufacturing facility in Mexico.
Also, building a new facility would require capital expenditures and
interest expense all during the two-year construction period as well as
significant start-up cost in the first year of operations. With the
Joint Venture the Company will invest in and start with a business that
is already profitable.
o LOWER FABRIC COST PER YARD. The Joint Venture will enable the Company
to produce some basic denim fabric, which is unprofitable in our U.S.
manufacturing facilities, in Mexico. Due to the lower cost of
production of the Joint Venture, the Company will be able to produce
such basic denim fabric profitably which the Company believes will
enable it to maintain its market share in all price points of denim
fabric.
31
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of the
Company and its management team. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, competitive and economic factors in
the textile, apparel and home furnishings markets, raw materials and other
costs, weather-related delays, general economic conditions and other risks and
uncertainties that may be detailed herein or in the Company's Annual Report on
Form 10-K for the fiscal year ended October 2, 1999.
32
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relative to the Company's market risk sensitive instruments by major
category at October 2, 1999 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended October 2, 1999.
FOREIGN CURRENCY EXPOSURES
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. As of April 1, 2000, the result of a uniform 10% change in the
value of the U.S. dollar relative to currencies of countries in which the
Company manufactures or sells its products would not be material.
COTTON COMMODITY EXPOSURES
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. A 10% decline in market
price as of April 1, 2000 would have a negative impact of approximately $5.7
million.
INTEREST RATE EXPOSURES
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The fair values of the
agreements are not materially different from the notional values as of April 1,
2000.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on short-term assets and commitments. These short-term assets
and commitments principally relate to accounts receivable and trade payable
positions and fixed asset purchase obligations. Unrealized gains and losses
related to outstanding forward exchange contracts at April 1, 2000 are not
material.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes at the Annual Meeting of
the Company's Stockholders held on February 8, 2000.
Broker
------
Matter For Against Withheld Abstentions Non-Votes
------ --- ------- -------- ----------- ---------
1. Election of Directors:
Arthur Wiener 9,345,792 - 86,871 - -
Michael T. Bradley 9,346,482 - 86,181 - -
Paul G. Gillease 9,346,142 - 86,521 - -
William deR. Holt 9,346,482 - 86,181 - -
Howard S. Jacobs 9,263,442 - 169,221 - -
William M.R. Mapel 9,346,482 - 86,181 - -
Stephen C. Sherrill 9,346,542 - 86,121 - -
2. Ratification of selection of Ernst & Young LLP as independent auditors for
the 2000 fiscal year.
Broker
------
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
9,423,563 8,850 - 250 -
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits to this Form 10-Q are listed in the
accompanying Exhibit Index
(b) Reports on Form 8-K - None.
34
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Galey & Lord, Inc.
-------------------------
(Registrant)
/s/ Michael R. Harmon
---------------------
Michael R. Harmon
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer), Treasurer
and Secretary
May 11, 2000
- ------------
Date
35
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
10.59 Amended and Restated Retirement Plan for
Employees of Galey & Lord, Inc.
10.60 Amended and Restated Galey & Lord Retirement
Savings Plan (401(k))
27 Financial Data Schedule
36