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 July 1, 2000
------------
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
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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 July 26, 2000.
Exhibit Index at page 36
INDEX
GALEY & LORD, INC.
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
July 1, 2000, July 3, 1999,
and October 2, 1999
Consolidated Statements of Income -- 4
Three months and Nine months ended July 1, 2000
and July 3, 1999
Consolidated Statements of Cash Flows -- 5
Nine months ended July 1, 2000 and
July 3, 1999
Notes to Consolidated Financial Statements -- 6-17
July 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)
July 1, July 3, October 2,
2000 1999 1999
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- -----------------
Current assets:
Cash and cash equivalents $ 19,302 $ 29,691 $ 14,300
Trade accounts receivable 204,450 192,659 176,547
Sundry notes and accounts receivable 7,069 6,016 6,994
Inventories 177,046 169,418 175,101
Income taxes receivable 6,144 10,986 10,586
Deferred income taxes 12,710 10,152 11,776
Prepaid expenses and other current assets 4,147 4,272 4,773
---------------- ---------------- ----------------
Total current assets 430,868 423,194 400,077
Property, plant and equipment, at cost 521,506 514,380 520,383
Less accumulated depreciation and
amortization (164,379) (126,951) (136,682)
---------------- ---------------- ----------------
357,127 387,429 383,701
Investments in and advances to associated
companies 25,187 24,681 22,966
Deferred charges, net 13,599 14,632 15,437
Other non-current assets 1,675 1,727 2,391
Intangibles, net 150,568 155,372 154,144
-------------- ---------------- ----------------
$ 979,024 $ 1,007,035 $ 978,716
============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,064 $ 3,099 $ 3,072
Trade accounts payable 61,971 53,989 63,288
Accrued salaries and employee benefits 24,452 23,714 25,278
Accrued liabilities 41,378 43,333 32,931
Income taxes payable 2,326 1,566 4,790
---------------- ---------------- ----------------
Total current liabilities 133,191 125,701 129,359
Long-term debt 665,993 687,387 658,051
Other long-term liabilities 19,799 24,266 21,561
Deferred income taxes 58,094 55,932 61,008
Stockholders' equity:
Common stock 124 122 123
Contributed capital in excess of par value 39,651 39,211 39,420
Retained earnings 72,642 78,245 70,825
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (8,223) (1,582) 616
---------------- ---------------- ----------------
Total stockholders' equity 101,947 113,749 108,737
---------------- ---------------- ----------------
$ 979,024 $ 1,007,035 $ 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 Nine Months Ended
---------------------------------------- -------------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------ -------------- -------------- --------------
Net sales $ 262,243 $ 249,476 $ 714,387 $ 732,944
Cost of sales 231,731 234,369 636,718 667,709
-------------- -------------- -------------- --------------
Gross profit 30,512 15,107 77,669 65,235
Selling, general and
administrative expenses 9,960 8,599 27,181 25,430
Amortization of intangibles 1,192 1,217 3,576 3,634
-------------- -------------- -------------- --------------
Operating income 19,360 5,291 46,912 36,171
Interest expense
16,850 15,081 49,330 45,256
Income from associated companies
(1,549) (1,082) (5,014) (3,509)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 4,059 (8,708) 2,596 (5,576)
Income tax expense (benefit):
Current 3,066 (3,043) 4,046 (1,271)
Deferred (1,513) 215 (3,267) (689)
-------------- -------------- -------------- --------------
Net income (loss) $ 2,506 $ (5,880) $ 1,817 $ (3,616)
============== ============== ============== ==============
Net income (loss) per common
share:
Basic:
Average common shares
outstanding 11,961 11,903 11,935 11,873
Net income (loss) per common
share - Basic $ .21 $ (.49) $ .15 $ (.30)
============== ============== =============== ==============
Diluted:
Average common shares
outstanding 11,979 11,903 11,949 11,873
Net income (loss) per common
share - Diluted $ .21 $ (.49) $ .15 $ (.30)
============== ============== =============== ==============
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Nine Months Ended
-------------------------------
July 1, July 3,
2000 1999
---------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,817 $ (3,616)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 30,169 31,055
Amortization of intangible assets 3,576 3,634
Amortization of deferred charges 2,122 1,840
Deferred income taxes (3,267) (689)
Non-cash compensation 232 200
(Gain)/loss on disposals of property, plant
and equipment 293 (84)
Undistributed income from associated companies (5,014) (3,509)
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net (30,601) (12,421)
(Increase)/decrease in sundry notes & accounts receivable (198) 5,247
(Increase)/decrease in inventories (5,216) 13,860
(Increase)/decrease in prepaid expenses and other
current assets 309 (208)
(Increase)/decrease in other non-current assets 625 (411)
(Decrease)/increase in accounts payable - trade 761 (9,495)
(Decrease)/increase in accrued liabilities 8,870 1,346
(Decrease)/increase in income taxes payable 1,692 (7,390)
(Decrease)/increase in other long-term liabilities (665) 337
---------- -----------
Net cash provided by (used in) operating activities 5,505 19,696
Cash flows from investing activities:
Property, plant and equipment expenditures (11,775) (22,388)
Proceeds from sale of property, plant and equipment 336 4,212
Distributions received from associated companies 1,808 3,851
Other 362 1,271
---------- -----------
Net cash provided by (used in) investing activities (9,269) (13,054)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit 21,900 7,400
Principal payments on long-term debt (12,559) (20,750)
Issuance of long-term debt - 18,000
Increase in common stock - 24
Payment of bank fees and loan costs (100) (1,212)
---------- -----------
Net cash provided by (used in) financing activities 9,241 3,462
Effect of exchange rate changes on cash and cash equivalents (475) (359)
---------- -----------
Net increase/(decrease) in cash and cash equivalents 5,002 9,745
Cash and cash equivalents at beginning of period 14,300 19,946
---------- -----------
Cash and cash equivalents at end of period $ 19,302 $ 29,691
========== ===========
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 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 July 1, 2000 and the results of operations and cash
flows for the periods ended July 1, 2000 and July 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 July 1, 2000, July 3, 1999, and October 2, 1999
consisted of the following (in thousands):
July 1, July 3, October 2,
2000 1999 1999
---------------- ----------------- -----------------
Raw materials $ 5,610 $ 9,200 $ 7,503
Stock in process 33,467 30,570 28,413
Produced goods 136,295 132,209 139,949
Dyes, chemicals and supplies 11,403 10,884 11,050
---------------- ----------------- -----------------
186,775 182,863 186,915
Less LIFO and other reserves (9,729) (13,445) (11,814)
---------------- ----------------- -----------------
$ 177,046 $ 169,418 $ 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
July 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) the 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 Nine Months Ended
------------------------------ ------------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------- ------------- ------------ -------------
Numerator:
Net income (loss) $ 2,506 $ (5,880) $ 1,817 $ (3,616)
============= ============= ============ =============
Denominator:
Denominator for basic earnings per
share 11,961 11,903 11,935 11,873
Effect of dilutive securities:
Stock options 18 - 14 -
------------- ------------- ------------ -------------
Diluted potential common shares
denominator for diluted earnings
per share - adjusted weighted 11,979 11,903 11,949 11,873
============= ============= ============ =============
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 874,499 shares
and 889,299 shares of common stock were outstanding during the three months
ended July 1, 2000 and July 3, 1999, respectively, and options to purchase an
average of 874,499 and 667,282 shares of common stock were outstanding during
the nine months ended July 1, 2000 and July 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 105,000 shares and 15,000 shares of common stock were
outstanding during the three and nine months ended July 1, 2000 and July
7
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE D - Net Income (Loss) Per Common Share (Continued)
3, 1999, respectively, but were not included in the 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 nine months ended July 1, 2000 was $1.0 million and
$(7.0) million, respectively, and for the three and nine months ended July 3,
1999 was $(8.8) million and $(14.4) 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(Loss) 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 - 112 - - - 112
Comprehensive
income(loss):
Net income for nine
months ended
July 1, 2000 $ 1,817 - - 1,817 - - 1,817
Foreign currency
translation
adjustment (8,839) - - - - (8,839) (8,839)
---------- --------- ------------- ---------- ----------- ----------- ------------
Total comprehensive
income(loss) $ (7,022)
==========
Balance at
July 1, 2000 $ 124 $ 39,651 $ 72,642 $ (2,247) $ (8,223) $ 101,947
======= =========== ========== =========== ========== ===========
8
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE F - Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Three Months Ended Nine Months Ended
-------------------------------------- -----------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------------- ----------------- ----------------- ---------------
Current tax provision:
Federal $ - $ (3,393) $ - $ (3,393)
State 253 8 307 42
Foreign 2,813 342 3,739 2,080
----------------- ----------------- ----------------- ---------------
Total current tax provision 3,066 (3,043) 4,046 (1,271)
Deferred tax provision:
Federal (3,573) (669) (7,857) (3,760)
State (622) (242) (898) (440)
Foreign 2,682 1,126 5,488 3,511
----------------- ----------------- ----------------- ---------------
Total deferred tax provision (1,513) 215 (3,267) (689)
----------------- ----------------- ----------------- ---------------
Total provision for income taxes $ 1,553 $ (2,828) $ 779 $ (1,960)
================= ================= ================= ===============
The Company's overall tax rate for the three and nine months ended July 1, 2000
was approximately 38.3% and 30.0%, respectively, as compared to 32.5% and 35.2%
for the three and nine months ended July 3, 1999, respectively. The difference
from the statutory rate resulted primarily from changes in the relative amounts
of domestic and foreign earnings in the June quarter 2000 and the first nine
months of fiscal 2000 as compared to the June quarter 1999 and the first nine
months of fiscal 1999. In both the June quarter 2000 and the first nine months
of fiscal 2000, domestic losses were offset by higher foreign earnings.
At July 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 was 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 $37.0 million at July 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
July 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 July 1, 2000, there remained a balance
of $0.3 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
July 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 nine months ended July 1, 2000 and July 3, 1999 is as follows
(in thousands):
Three Months Ended Nine Months Ended
-------------------------------------- ----------------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
--------------- --------------- --------------- -------------
Net Sales to External Customers
Galey & Lord Apparel $ 124,060 $ 114,828 $ 339,939 $ 353,890
Swift Denim 99,182 91,913 254,725 239,784
Klopman International 34,357 35,757 103,046 114,779
Home Fashion Fabrics 4,644 6,978 16,677 24,491
--------------- --------------- --------------- -------------
Consolidated $ 262,243 $ 249,476 $ 714,387 $ 732,944
=============== =============== =============== =============
Operating Income (Loss)
Galey & Lord Apparel $ 11,847 $ 3,441 $ 27,939 $ 20,102
Swift Denim 5,576 (1,243) 11,096 5,515
Klopman International 2,935 3,380 10,363 10,202
Home Fashion Fabrics (728) (322) (1,241) 223
Corporate (270) 35 (1,245) 129
--------------- --------------- --------------- -------------
19,360 5,291 46,912 36,171
Interest expense 16,850 15,081 49,330 45,256
Income from associated
companies(1) (1,549) (1,082) (5,014) (3,509)
--------------- --------------- --------------- -------------
Income (loss) before income
taxes $ 4,059 $ (8,708) $ 2,596 $ (5,576)
=============== =============== =============== =============
July 1, July 3,
2000 1999
------------------ ----------
Assets(2)
Galey & Lord Apparel $ 312,980 $ 305,874
Swift Denim 443,814 446,813
Klopman International 117,998 129,366
Home Fashion Fabrics 56,883 56,966
Corporate 47,349 68,016
--------------- ---------------
$ 979,024 $ 1,007,035
=============== ===============
(1)Net of amortization of $138, $156, $436 and $496, respectively.
(2)Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
11
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 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.
July 1, 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- ------------------ ----------------
Financial Position
Current assets:
Trade accounts
receivable $ - $ 157,681 $ 46,769 $ - $ 204,450
Inventories - 141,141 36,567 (662) 177,046
Other current
assets 635 122,454 24,435 (98,152) 49,372
------------ -------------- -------------- ------------------ ----------------
Total current
assets 635 421,276 107,771 (98,814) 430,868
Property, plant and
equipment, net - 265,913 91,214 - 357,127
Intangibles - 150,568 - - 150,568
Other assets 888,220 7,618 107,959 (963,336) 40,461
------------ -------------- -------------- ------------------ ----------------
$ 888,855 $ 845,375 $ 306,944 $ (1,062,150) $ 979,024
=========== ============== ============== ================== ================
Current liabilities:
Trade accounts
payable $ 325 $ 39,158 $ 22,488 $ - $ 61,971
Accrued
liabilities 27,938 18,981 18,923 (12) 65,830
Other current
liabilities 99,723 2,508 12,421 (109,262) 5,390
------------ -------------- -------------- ------------------ ----------------
Total current
liabilities 127,986 60,647 53,832 (109,274) 133,191
Long-term debt 658,096 714,574 1,274 (707,951) 665,993
Other non-current
liabilities 826 68,192 9,698 (823) 77,893
Stockholders' equity 101,947 1,962 242,140 (244,102) 101,947
------------ -------------- -------------- ------------------ ----------------
$ 888,855 $ 845,375 $ 306,944 $ (1,062,150) $ 979,024
=========== ============== ============== ================== ================
12
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE I - Supplemental Condensed Consolidating Financial Information (Continued)
July 3, 1999
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ----------------
Financial Position
Current assets:
Trade accounts
receivable $ - $ 142,176 $ 50,483 $ - $ 192,659
Inventories - 129,290 41,066 (938) 169,418
Other current
assets 12,826 26,608 27,696 (6,013) 61,117
------------ -------------- -------------- -------------- ----------------
Total current
assets 12,826 298,074 119,245 (6,951) 423,194
Property, plant and
equipment, net - 286,272 101,157 - 387,429
Intangibles - 155,372 - - 155,372
Other assets 848,767 95,510 66,029 (969,266) 41,040
------------ -------------- -------------- -------------- ----------------
$ 861,593 $ 835,228 $ 286,431 $ (976,217) $ 1,007,035
=========== ============== ============== ============== ================
Current liabilities:
Trade accounts
payable $ - $ 31,021 $ 22,968 $ - $ 53,989
Accrued
liabilities 28,187 20,723 17,826 311 67,047
Other current
liabilities 3,487 29,698 33,649 (62,169) 4,665
------------ -------------- -------------- -------------- ----------------
Total current
liabilities 31,674 81,442 74,443 (61,858) 125,701
Long-term debt 709,765 643,214 17,610 (683,202) 687,387
Other non-current
liabilities 6,405 69,290 17,452 (12,949) 80,198
Stockholders' equity 113,749 41,282 176,926 (218,208) 113,749
------------ -------------- -------------- -------------- ----------------
$ 861,593 $ 835,228 $ 286,431 $ (976,217) $ 1,007,035
=========== ============== ============== ============== ================
13
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE I - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended July 1, 2000
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ----------------
Results of Operations
Net sales $ - $ 213,037 $ 69,112 $ (19,906) $ 262,243
Gross profit - 22,337 8,200 (25) 30,512
Operating income (loss) (371) 14,042 5,714 (25) 19,360
Interest expense,
income taxes and
other, net (1,872) 16,872 4,231 (2,377) 16,854
Net income (loss) $ 1,501 $ (2,830) $ 1,483 $ 2,352 $ 2,506
Nine Months Ended July 1, 2000
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ----------------
Results of Operations
Net sales $ - $ 576,275 $ 194,075 $ (55,963) $ 714,387
Gross profit - 53,879 23,650 140 77,669
Operating income (loss) (886) 32,054 15,604 140 46,912
Interest expense,
income taxes and
other, net (5,722) 45,326 7,390 (1,899) 45,095
Net income (loss) $ 4,836 $ (13,272) $ 8,214 $ 2,039 $ 1,817
14
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE I - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended July 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ----------------
Results of Operations
Net sales $ - $ 192,763 $ 65,083 $ (8,370) $ 249,476
Gross profit 42 7,683 7,292 90 15,107
Operating income (loss) 78 613 4,509 91 5,291
Interest expense,
income taxes and
other, net (1,490) 10,122 1,800 739 11,171
Net income (loss) $ 1,568 $ (9,509) $ 2,709 $ (648) $ (5,880)
Nine Months Ended July 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ -------------- -------------- -------------- ----------------
Results of Operations
Net sales $ - $ 560,001 $ 192,735 $ (19,792) $ 732,944
Gross profit 77 41,687 23,283 188 65,235
Operating income (loss) 251 20,664 15,204 52 36,171
Interest expense,
income taxes and
other, net (3,304) 37,867 7,058 (1,834) 39,787
Net income (loss) $ 3,555 $ (17,203) $ 8,146 $ 1,886 $ (3,616)
15
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE I - Supplemental Condensed Consolidating Financial Information (Continued)
Nine Months Ended July 1, 2000
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- --------------- --------------- ------------- ---------------
Cash Flows
Cash provided by
(used in) operating
activities $ 18,466 $ (26,765) $ 14,597 $ (793) $ 5,505
Cash provided by
(used in) investing
activities 7,316 (8,477) (166) (7,942) (9,269)
Cash provided by
(used in) financing
activities (25,739) 35,618 (9,373) 8,735 9,241
Effect of exchange
rate change on cash
and equivalents - - (475) - (475)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents 43 376 4,583 - 5,002
Cash and cash
equivalents at
beginning of period - 6,126 8,174 - 14,300
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 43 $ 6,502 $ 12,757 $ - $ 19,302
=========== =============== =============== ============= ===============
16
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
July 1, 2000
(Unaudited)
NOTE I - Supplemental Condensed Consolidating Financial Information (Continued)
Nine Months Ended July 3, 1999
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
Cash Flows
Cash provided by
(used in) operating
activities $ 13,785 $ 5,980 $ 99 (168) $ 19,696
Cash provided by
(used in) investing
activities 6,155 (25,070) 7,563 (1,702) (13,054)
Cash provided by
(used in) financing
activities (10,999) 17,024 (4,433) 1,870 3,462
Effect of exchange
rate change on cash
and equivalents - - (359) - (359)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents 8,941 (2,066) 2,870 - 9,745
Cash and cash
equivalents at
beginning of period 114 8,326 11,506 - 19,946
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 9,055 $ 6,260 $ 14,376 $ - $ 29,691
=========== =============== =============== ============= ===============
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
During the June quarter 2000, management continued to see improvement from the
conditions the Company experienced during fiscal year 1999. The Company's June
quarter 2000 results exhibited 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 long term
competitiveness and profitability in addition to continuous evaluations of cost
reduction initiatives. Management anticipates that the September quarter 2000
will remain strong for its products; however, the September quarter historically
is the Company's weakest quarter principally due to the European August vacation
period.
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
July 1, 2000 and July 3, 1999 for each segment are shown below:
Three Months Ended Nine Months Ended
------------------------------- -------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------- ------------- ------------- --------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $ 124,060 $ 114,828 $ 339,939 $ 353,890
Swift Denim 99,182 91,913 254,725 239,784
Klopman International 34,357 35,757 103,046 114,779
Home Fashion Fabrics 4,644 6,978 16,677 24,491
-------------- ------------- -------------- -------------
Total $ 262,243 $ 249,476 $ 714,387 $ 732,944
============== ============= ============== =============
Operating Income (Loss) per Segment
Galey & Lord Apparel $ 11,847 $ 3,441 $ 27,939 $ 20,102
Swift Denim 5,576 (1,243) 11,096 5,515
Klopman International 2,935 3,380 10,363 10,202
Home Fashion Fabrics (728) (322) (1,241) 223
Corporate (270) 35 (1,245) 129
-------------- ------------- -------------- -------------
19,360 5,291 46,912 36,171
Interest expense 16,850 15,081 49,330 45,256
Income from associated companies (1,549) (1,082) (5,014) (3,509)
-------------- ------------- -------------- -------------
Income (loss) before income taxes $ 4,059 $ (8,708) $ 2,596 $ (5,576)
============== ============= ============== =============
June Quarter 2000 Compared to June Quarter 1999
Net Sales
Net sales for the June quarter 2000 (third quarter of fiscal 2000) were $262.2
million as compared to $249.5 million for the June quarter 1999 (third quarter
of fiscal 1999).
18
Galey & Lord Apparel Galey & Lord Apparel's net sales for the June quarter
2000 were $124.1 million, a $9.3 million increase as compared to the June
quarter 1999 net sales of $114.8 million. The net sales improvement was
primarily attributable to an 8% increase in fabric sales volume and by a 59%
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 2.5%.
Swift Denim Swift Denim's net sales for the June quarter 2000 were $99.2
million as compared to $91.9 million in the June quarter 1999. The $7.3 million
increase was primarily attributable to a 14% 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 June quarter
2000 were $34.3 million, a $1.5 million decline as compared to the June quarter
1999 net sales of $35.8 million. The decline was primarily attributable to a 13%
decline in net sales due to exchange rate changes used in translation and a 4%
decline in selling prices, partially offset by a 10% increase in sales volume
and foreign currency transaction exchange gains on sales not denominated in
Euros.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the June quarter
2000 were $4.6 million compared to $7.0 million for the June quarter 1999. The
$2.4 million decline in net sales primarily resulted from a 20% decline in
volume from June quarter 1999, lower selling prices and changes in product mix.
Operating Income
Operating income for the June quarter 2000 was $19.4 million as compared to $5.3
million for the June quarter 1999.
Galey & Lord Apparel Galey & Lord Apparel's operating income was $11.9
million for the June quarter 2000 as compared to $3.4 million for the June
quarter 1999. The increase principally reflects the impact of $7.0 million
related to lower raw material price variances, increased sales volume and
improved product mix, a $0.4 million charge related to severance in the June
quarter 1999 and $1.5 million in improvement in the Company's garment production
facilities in Mexico, partially offset by $5.3 million in lower fabric 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.
In addition, during the June quarter 2000 the Company received a $1.9 million
recovery from the arbitration settlement of a claim with a
19
supplier. The claim resulted from the delivery of defective chemicals which
rendered inventory produced unsuitable for the intended customer's use. The
inventory was written down to expected sellable value in prior periods.
Swift Denim June quarter 2000 operating income for Swift Denim was $5.6
million, a $6.8 million increase as compared to the June quarter 1999 operating
loss of $1.2 million. The increase in Swift Denim's operating income principally
reflects $11.1 million related to the impact of higher sales volume and changes
in product mix, improved manufacturing variances associated with reduced fixed
costs spending and absorption and improvement in raw material variances and a
$1.4 million charge related to severance in the June quarter 1999, partially
offset by $5.4 million related to declines in selling prices and higher selling,
general and administrative expenses.
Klopman International Klopman International's operating income in the June
quarter 2000 decreased $0.5 million to $2.9 million as compared to the June
quarter 1999 operating income of $3.4 million. The decrease principally reflects
$1.4 million related to the impact of lower selling prices, partially offset by
$0.7 million related to increases in sales volume, 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
June quarter 2000 of $0.7 million as compared to an operating loss for the June
quarter 1999 of $0.3 million. 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 June
quarter 2000 of $0.3 million as compared to operating income for the June
quarter 1999 of $35 thousand. The corporate segment's operating income (loss)
typically represents the administrative expenses from the Company's various
holding companies and $0.4 million of expenses related to the Company's bond
solicitation (see "Liquidity and Capital Resources").
Income from Associated Companies
Income from associated companies was $1.5 million in the June quarter 2000 as
compared to $1.1 million in the June quarter 1999. The income represents amounts
from several joint venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $16.9 million for the June quarter 2000 compared
20
to $15.1 million for the June 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
June quarter 2000 as compared to the June quarter 1999 and higher average debt
balances in the June quarter 2000 as compared to the June quarter 1999. The
average interest rate paid by the Company on its bank debt in the June quarter
2000 was 9.4% per annum as compared to 8.4% per annum in the June quarter 1999.
Income Taxes
The Company's overall tax rate for the June quarter 2000 was approximately 38.3%
as compared to 32.5% for the June quarter 1999. The difference from the
statutory rate resulted primarily from changes in the relative amounts of
domestic and foreign earnings in the June quarter 2000 as compared to the June
quarter 1999. In the June quarter 2000, domestic losses were partially offset by
higher foreign earnings.
Net Income (Loss) and Net Income (Loss) Per Share
Net income for the June quarter 2000 was $2.5 million or $.21 per common share,
compared to a net loss for the June quarter 1999 of $5.9 million or $.49 per
common share. In June quarter 2000, the arbitration settlement with a supplier
positively impacted net income $1.1 million or $.10 per share. In the June
quarter 1999, the severance charge increased the net loss by $1.2 million or
$.10 per share.
First Nine Months of Fiscal 2000 Compared to First Nine Months of Fiscal 1999
Net Sales
Net sales for the first nine months of fiscal 2000 were $714.4 million as
compared to $732.9 million for the first nine months of fiscal 1999.
Galey & Lord Apparel Galey & Lord Apparel's net sales for the first nine
months of fiscal 2000 were $339.9 million, a $14.0 million decline over the
first nine months of fiscal 1999 net sales of $353.9 million. The net sales
decline was primarily attributable to a 3% decline in fabric sales volume,
partially offset by a 50% 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 2%.
Swift Denim Swift Denim's net sales for the first nine months of fiscal 2000
were $254.7 million as compared to $239.8 million in the
21
first nine months of fiscal 1999. The $14.9 million increase was primarily
attributable to a 12% 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 nine
months of fiscal 2000 were $103.1 million, a $11.6 million decline as compared
to the first nine months of fiscal 1999 net sales of $114.7 million. The decline
was primarily attributable to a 12% decline in net sales due to exchange rate
changes and a 3% decline in selling prices, partially offset by a 2% increase in
sales volume, changes in product mix and foreign currency transaction exchange
gains on sales not denominated in Euros.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the first nine
months of fiscal 2000 were $16.7 million compared to $24.5 million for the first
nine months of fiscal 1999. The $7.8 million decline in net sales primarily
resulted from a 30% decline in volume from the first nine months of fiscal 1999
and lower selling prices.
Operating Income
Operating income for the first nine months of fiscal 2000 was $46.9 million as
compared to $36.2 million for the first nine months of fiscal 1999.
Galey & Lord Apparel Galey & Lord Apparel's operating income was $27.9
million for the first nine months of fiscal 2000 as compared to $20.1 million
for the first nine months of fiscal 1999. The $7.8 million increase principally
reflects $12.7 million related to lower raw material price variances and
improved sales mix, $1.9 million representing the recovery from a vendor for
previous product losses due to defective chemicals as previously discussed and a
$0.4 million charge related to severance in fiscal 1999, partially offset by
$14.5 million of lower volume and lower selling prices and continued start-up
costs at the Company's new Monclova, Mexico garment facility.
Swift Denim The first nine months of fiscal 2000 operating income for Swift
Denim was $11.1 million, a $5.6 million increase as compared to the first nine
months of fiscal 1999 operating income of $5.5 million. The increase in Swift
Denim's operating income principally reflects $19.1 million related to improved
manufacturing variances associated with reduced fixed cost spending and
absorption and a $1.4 million charge related to severance in fiscal 1999, higher
sales volume and improvements in raw material variances, partially offset by
$13.5 million related to declines in selling prices and changes in product mix.
Klopman International Klopman International's operating income in the first
nine months of fiscal 2000 increased $0.1 million to $10.3 million as compared
to the first nine months of fiscal 1999 operating income of $10.2 million. The
increase principally reflects a $3.3
22
million improvement related to manufacturing efficiencies, changes in product
mix, lower selling, general and administrative expenses and foreign exchange
gains on sales not denominated in Euros, partially offset by $3.8 million
related to the impact of lower selling prices and sales volume. In addition,
Klopman's results were negatively impacted $1.6 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 nine months of fiscal 2000 of $1.2 million as compared to operating income
for the first nine months of fiscal 1999 of $0.3 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.
Corporate The corporate segment reported an operating loss for the first
nine months of fiscal 2000 of $1.2 million as compared to operating income for
the first nine months of fiscal 1999 of $0.1 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 nine months of fiscal 2000, the
corporate segment recorded $0.4 million of expense related to the Company's bond
solicitation 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 $5.0 million in the first nine months of
fiscal 2000 as compared to $3.5 million in the first nine months of fiscal 1999.
The income represents amounts from several joint venture interests that
manufacture and sell denim products.
Interest Expense
Interest expense was $49.3 million for the first nine months of fiscal 2000
compared to $45.3 million for the first nine 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 June quarter 2000 as compared to the June quarter 1999
and higher average debt balances in the first nine months of fiscal 2000. The
average interest rate paid by the Company on its bank debt in the first nine
months of fiscal 2000 was 9.3% per annum as compared to 8.5% per annum in the
first nine months of fiscal 1999.
Income Taxes
The Company's overall tax rate for the first nine months of fiscal 2000 was
approximately 30.0% as compared to 35.2% for the first nine months of fiscal
1999. The difference from the statutory rate resulted primarily from changes in
the relative amounts of domestic
23
and foreign earnings in the first nine months of fiscal 2000 as compared to the
first nine months of fiscal 1999. In the first nine months of fiscal 2000,
domestic losses were partially offset by higher foreign earnings.
Net Income (Loss) and Net Income (Loss) Per Share
Net income for the first nine months of fiscal 2000 was $1.8 million or $.15 per
common share, compared to a net loss for the first nine months of fiscal 1999 of
$3.6 million or $.30 per common share. In the first nine months of fiscal 2000,
the arbitration settlement with a supplier positively impacted net income $1.1
million or $.10 per share. In the first nine months of fiscal 1999, the
severance charge increased the net loss by $1.2 million or $.10 per share.
Order Backlog
The Company's order backlog at July 1, 2000 was $215.0 million, a 31.2% increase
from the July 3, 1999 backlog of $163.9 million. While the Company's backlog has
increased from the previous year, 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 $19.3
million and $29.7 million at July 1, 2000 and July 3, 1999, respectively. The
Company had a total of $52.2 million of revolving credit borrowing availability
under its Senior Credit Facility at July 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. As anticipated the March and June quarters
net sales reduced the Company's investment in inventory to $177.0 million. Based
on current order patterns, September quarter net sales should meet management's
expectations. Accordingly, the Company expects inventory at the end of September
will be lower than the current level.
The Company's investment in trade accounts receivable was $204.5 million and
reflects the higher sales volume in the June quarter as well as a large customer
discontinuing its long time practice of paying invoices 30 days early in
exchange for a discount.
During the June 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.
24
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 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.
25
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 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
26
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 July
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 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 Company solicited consents of the holders of record on May 9, 2000 of its
Notes to an amendment to the indenture, dated February 24, 1998, among the
Company, its domestic subsidiaries party thereto, as guarantors, and SunTrust
Bank (f/k/a SunTrust Bank, Atlanta), as trustee, which governs the Notes. The
proposed amendment to the Indenture (the "Amendment") will amend the definition
of "Permitted Investment" in the Indenture to allow the Company and its
Restricted Subsidiaries (as defined in the Indenture) to make additional
Investments (as defined in the Indenture) totaling $15 million at any time
outstanding in one or more joint ventures which conduct
27
manufacturing operations primarily in Mexico. The consent solicitation expired
on May 24, 2000 (the "Expiration Date"). The Company has obtained consents of
holders of approximately 97% of the aggregate outstanding principal amount of
the Notes. The effectiveness of the Amendment remains conditioned upon the
consummation of the Joint Venture (discussed in "Recent Developments").
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 July 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.
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
28
additional funding to three defined benefit pension plans previously sponsored
by Dominion Textile, Inc. ("Dominion"), $3.0 million of which was paid at the
closing of the acquisition of the apparel fabrics business of Dominion, $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 $21.0 million for capital
expenditures in fiscal 2000, of which $11.8 million was spent in the first nine
months of fiscal 2000. The Company anticipates that approximately $3.0 million
will be used to increase the Company's capacity while the remaining $18.0
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 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 nine 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
29
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 2001 fiscal year. The Company's Euro conversion plan has been
delayed due to the unavailability of software upgrades. The upgrades are
expected to be available during the Company's 2001 fiscal year and the related
Euro conversion will be completed at that time. 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.
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
statement was amended and the effective date was delayed to June 15, 2000, the
Company's fiscal year 2001, as a result of the FASB's issuance in June 2000 of
FAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities". FAS 138 requires that certain 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
30
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 138 will be on the earnings and financial position of the Company.
Recent Developments
The Company has signed a contract to form a 50/50 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.
The transaction is subject to customary closing conditions and is scheduled to
be completed by mid August 2000.
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 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 under NAFTA helps to
mitigate the impact of U.S. quotas being removed in 2005 as a result of
GATT.
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
31
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 Its 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 Its 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 costs 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 in Mexico, which is unprofitable in our
U.S. manufacturing facilities. 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.
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 July 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 July 1, 2000 would have a negative impact of approximately $9.5
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 July 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 July 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 (not applicable)
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 - The Registrant filed a Form 8-K on June
1, 2000 to report, among other things, that the Company had
solicited consents of the holders of record on May 9, 2000 of
its 9 1/8 % Senior Subordinated Notes Due 2008 (the "Notes")
to an amendment to the indenture, dated as of February 24,
1998, among the Company, its domestic subsidiaries party
thereto, as guarantors, and SunTrust Bank (f/k/a SunTrust
Bank, Atlanta), as trustee, which governs the Notes.
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
August 2, 2000
- --------------
Date
35
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
27 Financial Data Schedule
36