UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 29, 1998
-------------------
GALEY & LORD, INC.
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Exact name of registrant as specified in its charter
DELAWARE 56-1593207
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State or other jurisdiction of IRS Employer Identification No.
incorporation or organization
980 Avenue of the Americas, New York, New York 10018
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Address of principal executive offices Zip Code
212/465-3000
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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.
ITEM 2. ACQUISITION OF ASSETS.
Incorporated by reference herein and attached as an exhibit hereto is the press
release of Galey & Lord, Inc. (the "Company" or "Galey & Lord") dated January
30, 1998 announcing that Galey & Lord, Inc. had completed its acquisition of
Dominion Textile's Apparel Fabrics Business.
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer Group Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary of
Polymer, Dominion Textile, Inc. ("Dominion") and certain other parties thereto,
pursuant to which the Company acquired the apparel fabrics business (the
"Acquired Business") of Dominion from DTA for a cash purchase price of $464.5
million (the "Acquisition"). The total purchase price was funded with borrowings
under the Company's credit facilities (described in Item 7 below). The Acquired
Business primarily consists of several subsidiaries and operating divisions of
Dominion, which comprises Swift Denim and Klopman workwear and career wear
divisions, which manufacture and market denim fabrics and fabrics for the
commercial uniform market. The Company currently intends to operate the Acquired
Business and does not have any plans with respect to the disposition of any
material assets currently used in the continuing operations of the Acquired
Business.
ITEM 5. OTHER EVENTS.
On January 29, 1998, the Company entered into a credit agreement (the "Senior
Credit Facility") with First Union National Bank ("FUNB"), as agent and lender.
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 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"). Under the Senior Credit
Facility borrowings were, and are required to be, used to refinance the
Company's prior senior credit facility with FUNB, to fund the Acquisition, to
pay for certain closing costs and expenses related to the Acquisition and for
general corporate and working capital purposes.
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 24
quarterly payments of $387,500 until March 27, 2004 and, thereafter, four
quarterly payments of $36,425,000 until Term Loan B's maturity on April 2, 2005
and (ii) Term Loan C is repayable in 28 quarterly payments of $275,000 until
April 2, 2005 and, thereafter, four quarterly payments of $25,575,000 until Term
Loan C's maturity on April 1, 2006. Under the Senior Credit Facility, the
interest rate on the Company's borrowings under its revolving line of credit and
term loans initially is fixed at a per annum rate, at the Company's option, of
either LIBOR plus 2.25%, LIBOR plus 2.75% and LIBOR plus 3.00%, respectively, or
the greater of the prime rate or the federal funds rate plus .50% plus a margin
of 1.00% for revolving loans, 1.5% for Term Loan B and 1.75% for Term Loan C for
at least two full fiscal quarters following the closing of the Acquisition.
Thereafter, the revolving line of credit borrowings will 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% or 1.00%, based on the Company achieving certain leverage ratios (as
defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of .75%,
1.00%, 1.25%, 1.50%, 1.75%, 2.00% or 2.25%, based on the Company achieving
certain leverage ratios. Term Loan B and Term Loan C will 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 .25%, .50%, .75%, 1.00%, 1.25% or 1.50%, based on the Company
achieving certain leverage ratios or (ii) LIBOR plus a margin of 1.50%, 1.75%,
2.00%, 2.25%, 2.50% or 2.75%, 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 .50%, .75%,
1.00%, 1.25%, 1.50% or 1.75%, based on the Company achieving certain leverage
ratios, or (ii) LIBOR plus a margin of 1.75%, 2.00%, 2.25%, 2.50%, 2.75%, or
3.00%, based on the Company's achieving certain leverage ratios.
2
The Company's obligations under the Senior Credit Facility are secured by all of
the assets (other than real property) of the Company and each of its domestic
subsidiaries, and a pledge by the Company and each of its 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 any 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 Senior Subordinated Credit Agreement, dated December 19, 1997, as amended on
January 29, 1998, ("Bridge Financing") provides for borrowings of $275 million,
of which $145.6 million was initially borrowed on December 19, 1997 and the
remainder of which was borrowed on January 29, 1998. All borrowings under the
Bridge Financing were used to fund the Acquisition (including fees and
expenses). The outstanding principal amount of all borrowings under the Bridge
Financing will be due and payable on December 19, 2007; provided, however, that
the Company is required to make certain mandatory prepayments of principal in
the event of certain dispositions of assets, capital contributions or other debt
or equity issuances. Borrowings under the Bridge Financing bear interest, which
is payable monthly, at a per annum rate initially of LIBOR plus 4.50% and
increasing by .25% for each month that borrowings under the Bridge Financing
remain outstanding. In no event shall the interest rate on such borrowings
exceed 18% (with the maximum interest rate with respect to interest payable in
cash not to exceed 14% and the remainder to be payable in kind).
All borrowings under the Bridge Financing are unsecured and payment by the
Company of all obligations under the Bridge Financing is subordinated to the
prior payment in full of all obligations under the Senior Credit Facility. The
Bridge Financing contains certain covenants, including, without limitation,
those limiting the Company's ability to incur indebtedness, incur liens, sell or
acquire assets or businesses, change the nature of its business or make
dividends.
The Company expects to replace the Bridge Financing with 10 year senior
subordinated notes during February 1998. The Company has obtained a commitment
regarding the issuance and sale of the 10 year senior subordinated notes (the
"Note Issuance").
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
The following are historical financial statements of the Acquired Business and
the pro forma combined financial statements of the Company and the Acquired
Business.
Financial Statements of the Acquired Business
AUDITED COMBINED FINANCIAL STATEMENTS OF THE APPAREL FABRICS
BUSINESS OF DOMINION TEXTILE INC.:
Report of the Independent Auditors 5
Combined Statements of Income and Deficit for the Years Ended
June 30, 1995, 1996 and 1997 6
Combined Balance Sheets as of June 30, 1996 and 1997 7
Combined Statements of Cash Flows for the Years Ended
June 30, 1995, 1996 and 1997 8
Notes to Combined Financial Statements 9 - 24
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS OF THE APPAREL FABRICS
BUSINESS OF DOMINION TEXTILE INC.:
Unaudited Condensed Combined Statements of Income and Deficit for the
Three-Month Periods Ended September 30, 1996 and 1997 25
Unaudited Condensed Combined Balance Sheets as of June 30, 1997 and
September 30, 1997 26
Unaudited Condensed Combined Statements of Cash Flows for the Three-
Month Periods Ended September 30, 1996 and 1997 27
Notes to Unaudited Condensed Combined Financial Statements 28 - 29
Pro Forma Combined Financial Statements
Unaudited Pro Forma Combined Balance Sheet as of
September 30, 1997 31
Notes to Unaudited Pro Forma Combined Balance Sheet 32 -33
Unaudited Pro Forma Combined Statement of Operations for the
Year Ended September 27, 1997 34
Notes to Unaudited Pro Forma Combined Statement of Operations 35
4
INDEPENDENT AUDITORS' REPORT
To Boards of Directors and Stockholders of Galey & Lord, Inc. and Polymer
Group, Inc.
We have audited the accompanying combined balance sheets of the Apparel Fabrics
Business of Dominion Textile Inc. (the "Business") as of June 30, 1996 and 1997,
and the related combined statements of income and deficit and cash flows for the
years ended June 30, 1995, 1996 and 1997. These financial statements are the
responsibility of the Business' management. Our responsibility is to express an
opinion on these combined financial statements based on our audits. We did not
audit the financial statements of Swift Textiles Europe Limited, the Business'
investment which is accounted for using the equity method. The Business' equity
of $3.2 million and $2.8 million in the Swift Textiles Europe Limited net assets
at June 30, 1996 and 1997, respectively, and of $6.3 million, $8.3 million and
$7.4 million in the net income for the years ended June 30, 1995, 1996 and 1997,
respectively are included in the accompanying combined financial statements. The
financial statements of Swift Textiles Europe Limited were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such company, is based solely on the report
of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
combined financial statements present fairly, in all material respects, the
combined financial position of the Business as of June 30, 1996 and 1997, and
the combined results of its operations and its cash flows for the years ended
June 30, 1995, 1996 and 1997, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying combined financial statements have been prepared from the
separate records maintained by the Business and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if the Business had been operated as a separate entity for all
periods presented. Portions of certain income, expenses, assets and liabilities
represent allocations made from Dominion Textile Inc.'s headquarters, as
explained in the basis of presentation.
DELOITTE & TOUCHE
Chartered Accountants
January 29, 1998
5
APPAREL FABRICS BUSINESS
COMBINED STATEMENTS OF INCOME AND DEFICIT
For the Years Ended
June 30, June 30, June 30,
1995 1996 1997
--------- -------- ------
Sales......................................................... $633,690,769 $650,862,549 $610,573,010
Cost of goods sold............................................ 529,723,906 577,238,622 552,669,567
Restructuring charges (Note 1)................................ -- 3,558,000 17,816,145
------------ --------- ----------
Gross profit.................................................. 103,966,863 70,065,927 40,087,298
----------- ---------- ----------
Selling expenses.............................................. 20,267,232 23,024,674 20,265,482
Administrative expenses....................................... 32,183,500 32,745,972 32,046,918
Goodwill amortization......................................... 1,990,263 1,991,969 1,988,145
--------- --------- ---------
54,440,995 57,762,615 54,300,545
Operating income (loss)....................................... 49,525,868 12,303,312 (14,213,247)
Interest expense, net......................................... (28,732,689) (18,736,557) (17,412,760)
Share in net income of associated companies................... 6,308,424 8,325,611 7,409,584
Other expense, net (Note 2)................................... (1,497,313) (711,651) (73,495)
----------- --------- --------
Income (loss) before provision for (recovery of) income
taxes...................................................... 25,604,290 1,180,715 (24,289,918)
Provision for (recovery of) income taxes (Note 3)............. 6,577,499 (3,587,550) (10,183,601)
--------- ----------- ------------
Net income (loss) before extraordinary loss................... 19,026,791 4,768,265 (14,106,317)
Extraordinary loss on early extinguishment of debt............ -- (2,223,007) --
----------- ----------- ------------
Net income (loss)............................................. 19,026,791 2,545,258 (14,106,317)
---------- --------- ------------
Deficit, at beginning......................................... (137,499,011) (118,472,220) (115,926,962)
------------- ------------- -------------
Deficit, at end............................................... (118,472,220) (115,926,962) (130,033,279)
============= ============= =============
See notes to the combined financial statements.
6
APPAREL FABRICS BUSINESS
COMBINED BALANCE SHEETS
June 30, June 30,
1996 1997
------- ------
Assets
Current assets
Cash and cash equivalents..................................................... $17,696,400 $36,797,072
Receivables
Trade, net of allowance for doubtful accounts of $2,214,213
(1996 -- $2,423,183)..................................................... 124,535,410 118,459,831
Other....................................................................... 9,763,297 17,987,082
Inventories (Note 4).......................................................... 93,141,222 84,972,495
Other current assets.......................................................... 24,487,994 11,392,840
---------- ----------
269,624,323 269,609,320
Investments and advances (Note 5)............................................... 8,136,681 6,576,251
Property, plant and equipment, net (Note 6)..................................... 273,060,797 244,025,312
Intangible assets, net (Note 7)................................................. 64,783,364 62,213,219
Other assets (Note 8)........................................................... 17,346,872 8,688,738
---------- ---------
Total assets.................................................................... 632,952,037 591,112,840
=========== ===========
Liabilities and stockholders' equity
Current liabilities
Accounts payable.............................................................. 31,580,971 32,999,742
Payroll, related taxes and other employee related liabilities................. 19,053,253 15,951,978
Other accrued liabilities..................................................... 22,544,038 37,578,824
Interest payable.............................................................. 5,933,779 5,656,732
Income taxes payable.......................................................... 4,623,042 4,320,246
Long-term debt due within one year (Note 9)................................... 916,297 1,535,908
------- ---------
84,651,380 98,043,430
Long-term debt (Note 9)......................................................... 247,897,323 197,971,915
Deferred income taxes (Note 3).................................................. 41,245,274 30,291,948
Other non-current liabilities................................................... 47,520,476 43,293,000
---------- ----------
Total liabilities............................................................... 421,314,453 369,600,293
----------- -----------
Stockholders' equity
Additional paid-in capital.................................................... 334,205,229 370,598,557
Deficit....................................................................... (115,926,962) (130,033,279)
Cumulative translation adjustment (Note 11)................................... (6,640,683) (19,052,731)
----------- ------------
Total stockholders' equity...................................................... 211,637,584 221,512,547
----------- -----------
Total liabilities and stockholders' equity...................................... 632,952,037 591,112,840
=========== ===========
See notes to the combined financial statements.
7
APPAREL FABRICS BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30, June 30, June 30,
1995 1996 1997
---- ---- ----
Operating activities
Net income (loss).............................................. $19,026,791 $2,545,258 $(14,106,317)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt....... -- 2,223,007 --
Depreciation and amortization............................ 32,142,141 34,402,833 35,471,104
Deferred income taxes.................................... (5,467,126) (457,006) (10,953,325)
Loss on disposal of property, plant and equipment........ 2,048,236 3,238,143 2,454,532
Share in net income of associated companies.............. (6,308,424) (8,325,611) (7,409,584)
Dividends received from associated companies............. 7,105,000 9,283,126 7,621,617
Changes in assets and liabilities:
Receivables, net............................................ (8,317,959) 2,258,602 (2,912,386)
Inventories................................................. 4,092,963 (15,105,401) 5,426,948
Other current assets........................................ (6,140,899) (4,117,510) 12,729,080
Other assets................................................ 1,213,408 11,101,967 8,198,519
Current liabilities......................................... (10,155,921) (4,258,069) 5,805,026
Other liabilities........................................... 2,951,519 (2,754,030) (3,284,321)
Other, net.................................................. (2,589,795) (1,675,400) 18,325
----------- ----------- ------
Net cash provided by operating activities...................... 29,599,934 28,359,909 39,059,218
---------- ---------- ----------
Investing activities
Capital expenditures........................................... (27,061,662) (52,580,250) (17,164,366)
Proceeds from sale of property, plant and equipment............ 3,728,894 2,763,172 3,328,188
Investments in associated companies and other.................. (2,948,045) 489,997 1,772,462
Other, net..................................................... (7,532,631) 1,656,072 5,944,680
----------- --------- ---------
Net cash used in investing activities.......................... (33,813,444) (47,671,009) (6,119,036)
------------ ------------ -----------
Financing activities
Repayment of short-term borrowings............................. (12,034,909) -- (12,922,743)
Repayment of long-term debt.................................... (120,238,155) (206,783,360) (49,880,066)
Issue of short-term borrowings................................. -- -- 12,922,743
Issue of long-term debt........................................ 97,915,928 220,695,364 822,389
Debt issue costs............................................... -- (3,373,158) --
Changes in additional paid-in capital.......................... 24,764,445 (3,990,150) 36,393,328
---------- ----------- ----------
Net cash (used in) provided by financing activities............ (9,592,691) 6,548,696 (12,664,349)
----------- --------- ------------
Effect of changes in exchange rates on cash and cash
equivalents................................................. 1,702,437 439,027 (1,175,161)
--------- ------- -----------
Net increase (decrease) in cash and cash equivalents........... (12,103,764) (12,323,377) 19,100,672
Cash and cash equivalents, beginning of year................... 42,123,542 30,019,778 17,696,400
---------- ---------- ----------
Cash and cash equivalents, end of year......................... 30,019,778 17,696,401 36,797,072
========== ========== ==========
Supplemental disclosure of cash flow information Net cash paid (received) during
the year for:
Interest................................................... 30,840,440 21,248,309 18,841,124
---------- ---------- ----------
Income taxes............................................... (1,464,625) 2,145,272 (2,695,072)
----------- --------- -----------
See notes to the combined financial statements.
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION
Years ended June 30, 1995, 1996 and 1997
GENERAL
The consolidated financial statements of Dominion Textiles Inc. (the
"Corporation"), a Canadian company, have been issued to stockholders.
All dollar amounts in the combined financial statements are stated in US
dollars.
The combined financial statements of the Apparel Fabrics Business of Dominion
Textile Inc. (the "Business") include the operations of Swift Denim, Inc.,
Klopman International S.p.A. and Swift Textiles Europe Limited which were
operated as subsidiaries or associated companies of Dominion Textile Inc. On
December 29, 1997, pursuant to a takeover offer, DT Acquisition Inc., an
affiliate of Polymer Group, Inc. ("PBI") acquired all shares tendered which
approximated 98% of the outstanding common stock of the Corporation. In
connection with the change of control, PBI entered into a preliminary agreement
with Galey & Lord, Inc., to sell it certain operations. In contemplation of the
change in control and the subsequent sale of certain operations, the operations
and the net assets of the Corporation have been essentially divided into two
groups: the Apparel Fabrics Business and the Dominion Nonwovens and Industrial
Products Business.
The combined financial statements have been prepared using the Corporation's
historical basis in the assets and liabilities and historical results of
operations related to the Business. Changes in additional paid-in capital
represent the Corporation's contribution of its net operating investment plus
net cash transfers to or from the Corporation. The combined financial statements
reflect the results of operations, financial position and cash flows of the
Business as if it had operated as a separate entity for all periods presented
and may not be indicative of actual results of operations and financial position
of the Business under different ownership.
Additionally, the combined financial statements include allocations of certain
corporate headquarters assets, liabilities (excluding deferred income taxes),
and net expenses. All significant intergroup transactions and balances have been
eliminated.
ALLOCATIONS
The liabilities of the Business include outstanding direct third-party
indebtedness and the amount of debt based on the ratio of the Business' average
net operating investment to the aggregate net operating investment of the two
groups. Interest expense shown in the combined financial statements reflects the
interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of the Corporation's long-term weighted
average interest rates for the applicable period.
General corporate overhead related to the Corporation's headquarters has been
allocated to the Business based on the ratio of the Business' sales to the
aggregate sales of the Corporation. The costs of the services charged to the
Business are not necessarily indicative of the costs that would have been
incurred if the Business had performed these functions as a stand-alone entity.
Additionally, income taxes on allocated general corporate overhead are
calculated using the Corporation's statutory tax rate.
Management believes that the basis of allocation is reasonable.
9
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION -- Continued
The following table illustrates the results of applying the allocation method
described above on various financial statement items:
For the years ended June 30,
1995 1996 1997
---- ---- ----
Net impact on gross profit..................................... $(656,376) $(1,053,173) $(3,453,504)
General corporate overhead, net................................ (12,101,010) (4,381,800) (7,454,020)
Recovery of income taxes....................................... 4,949,866 3,143,589 4,293,493
Extraordinary loss on early extinguishment of debt............. -- (2,223,007) --
-- ----------- --
(7,807,520) (4,514,391) (6,614,031)
=========== =========== ===========
As of June 30,
1996 1997
---- ----
Net assets excluding long-term debt............ 457,385 14,539,529
Long-term debt................................. 245,247,741 197,049,432
Cumulative translation adjustment.............. (575,472) (4,252,709)
10
APPAREL FABRICS BUSINESS
SIGNIFICANT ACCOUNTING POLICIES
Years Ended June 30, 1995, 1996 and 1997
The combined financial statements have been prepared in accordance with US
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The most significant accounting policies are as follows:
The combined financial statements include the accounts of Swift Denim, Inc. and
of Klopman International S.p.A., plus certain allocations from the corporate
headquarters as explained in the basis of presentation. The investment in
associated companies is carried at the Business' equity therein. All significant
intercompany transactions are eliminated.
The business acquisitions are accounted for using the purchase method. The
assets and liabilities of the acquired entities are adjusted to appropriate
carrying values.
NATURE OF OPERATIONS
The Business produces denim and polycotton fabrics for careerwear and markets
these products on a worldwide basis.
FISCAL YEAR
The Business' fiscal year is the 52- or 53-week period ending on the last
Saturday in June. Fiscal 1995 includes operations for a 52-week period, whereas
fiscal 1996 includes operations for a 53-week period and fiscal 1997 includes
operations for a 52-week period.
TRANSLATION OF FOREIGN CURRENCIES
Unrealized translation gains and losses on assets and liabilities denominated in
foreign currencies are reflected in income of the period. Unrealized translation
gains or losses on debt designated as a hedge of foreign self-sustaining
operations are included in the cumulative translation adjustment in
stockholders' equity.
The assets and liabilities of foreign operations, all of which are
self-sustaining, are translated at exchange rates in effect at the balance sheet
dates. Revenue and expense items are translated at average exchange rates
prevailing during the period. The resulting gains and losses are accumulated in
the cumulative translation adjustment in stockholders' equity.
11
APPAREL FABRICS BUSINESS
SIGNIFICANT ACCOUNTING POLICIES -- Continued
FINANCIAL INSTRUMENTS
The Business enters into a variety of financial instruments to manage its
exposure to foreign currency rates and market risk related to its cotton
purchase requirements. These instruments are used for hedging purposes and are
employed in connection with an underlying asset, liability, firm commitment or
anticipated transaction.
Gains and losses on hedges of existing assets and liabilities are included in
the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying hedges of firm commitments or anticipated transactions are also
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transaction occurs. Gains and losses on financial instruments that do not
qualify as hedges for accounting purposes are recognized in income.
CASH EQUIVALENTS
Cash equivalents include all highly liquid short-term instruments purchased with
a maturity of three months or less.
INVENTORY VALUATION
Inventories are valued at the lower of cost (determined substantially on the
first-in, first-out method) and net realizable value or replacement value for
certain supplies. The cost of work in process and finished goods includes raw
materials, direct labor and certain manufacturing overhead expenses. Adequate
provision is made for slow moving and obsolete inventories.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at historical cost. Depreciation is
provided on a straight-line basis at varying rates which allocate the cost of
the assets over their estimated economic lives. Buildings are amortized
primarily over 25 years and machinery and equipment over 3 to 15 years.
Goodwill which represents, at the acquisition date, the excess of cost over the
fair value of companies acquired, is amortized on a straight-line basis over a
maximum of 40 years. The Business evaluates the carrying value of goodwill for
potential permanent impairment on an ongoing basis. In order to determine if
such a permanent impairment exists, the Business' management considers each
business unit's financial condition and expected future cash flows, using
projected financial performance. A permanent impairment in the value of goodwill
is written off against income in the year such impairment is recognized.
Other intangible assets are amortized over their respective estimated useful
lives for periods ranging from 4 to 25 years. Deferred refinancing costs are
amortized over the term of the related debt.
ADOPTION OF NEW ACCOUNTING STANDARD
During 1997, the Business adopted Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of." SFAS 121 establishes accounting standards
for recording the impairment of long-lived assets, certain identifiable
intangibles, goodwill and assets to be disposed of. The management determined
that no impairment loss was needed to be recognized for applicable assets of its
operations. Such determination does not envisage the change of control described
in the basis of presentation.
12
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
1. RESTRUCTURING CHARGES
In the fourth quarter of 1997, the Business recorded provisions totaling $17.8
million for the restructuring of its Klopman International unit and for its
share in a company-wide cost reduction program.
The Klopman charge totaled $15.1 million and primarily covered severance
payments and the writedown of assets to net realizable value in connection with
the shutdown of a greige mill located in Tralee, Ireland and the rationalization
of manufacturing operations at a plant located in Frosinone, Italy. Cash
payments related to the Klopman charge are expected to approximate $8.6 million
with spending primarily taking place in 1998 and to be financed through working
capital.
The Business' share in the charge related to the company-wide cost reduction
program amounted to $2.7 million and provided for severance payments and
rationalization costs in the general and administrative areas to be implemented
in 1998.
In 1996, a provision of $3.6 million in connection with an earlier
rationalization program at Klopman's Tralee, Ireland plant was fully utilized
during the year.
2. OTHER EXPENSE, NET
1995 1996 1997
---- ---- ----
Loss on disposal of property, plant and equipment............. $(2,048,236) $(3,238,143) $(2,454,532)
Business' share in gain realized upon termination of
pension plan................................................. -- 2,550,648 2,797,173
Other items, net.............................................. 550,923 (24,156) (416,136)
------- -------- ---------
(1,497,313) (711,651) (73,495)
=========== ========= ========
3. INCOME TAXES
The Business follows Statement of Financial Accounting Standards No. 109 in
accounting for income taxes.
Dominion Textile Inc., as a Canadian company, is subject to Canadian tax
legislation. The combined income taxes differ from the income taxes calculated
using the Canadian statutory rates for the following reasons:
1995 1996 1997
---- ---- ----
Income (loss) before income taxes.............................. $25,604,290 $1,180,715 $(24,289,918)
----------- ---------- -------------
Statutory income tax rates in Canada........................... 38.80% 38.95% 38.83%
Income taxes based on combined basic Canadian federal
and provincial rates.......................................... 9,934,465 459,888 (9,431,775)
Increase (decrease) in income taxes resulting from:
Losses incurred in the year not tax affected.................. 1,702,709 4,979,532 4,018,342
Share in net income of associated companies................... (2,447,669) (3,242,826) (2,877,142)
Utilization of tax benefits carried forward................... (3,687,267) (3,807,516) (1,281,954)
Other......................................................... 1,075,261 (1,976,630) (611,073)
--------- ----------- ---------
6,577,499 (3,587,550) (10,183,601)
--------- ----------- ------------
Income taxes (recovery)
Current....................................................... 2,622,110 4,182,050 (5,225,610)
Deferred...................................................... 3,955,389 (7,769,600) (4,957,991)
--------- ----------- -----------
Total income taxes............................................. 6,577,499 (3,587,550) (10,183,601)
========= =========== ============
13
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
3. INCOME TAXES (CONTINUED)
At June 30, 1996 and 1997, the deferred tax assets (included in other current
assets), the deferred tax liabilities and the valuation allowances are as
follows:
1996 1997
---- ----
Deferred tax assets
Accounts receivable......................................... $1,092,933 $1,252,468
Non-deductible items........................................ 1,982,689 3,034,626
Revenue not currently taxable............................... (1,024,112) (711,499)
Net operating losses........................................ 11,680,972 12,277,698
---------- ----------
13,732,482 15,853,293
========== ==========
Deferred tax liabilities
Postretirement obligation................................... 4,339,684 4,339,684
Other non-deductible accruals............................... (638,043) 5,068,225
Property, plant and equipment............................... (44,946,915) (39,699,857)
------------ ------------
(41,245,274) (30,291,948)
============ ============
Valuation allowances......................................... (11,680,972) (12,277,698)
============ ============
As of June 30, 1997, the Business has unused income tax losses pertaining to
1997 and prior years of approximately $33.2 million, which may be used to reduce
future years' taxable income. The benefit resulting from these income tax losses
has not been recognized in the accounts. The amount, the form and the timing of
the benefit resulting from these income tax losses could be affected by the
change in control discussed in the basis of presentation. These losses expire as
follows:
(in thousands
of dollars)
1998 $8,481
1999 15,357
2000 --
2001 9,345
-----
33,183
======
The Internal Revenue Service is examining the income tax returns of Dominion
Textile (USA) Inc., a company under common control, for the years 1987 through
1989. Management is of the opinion that it has adequately provided for any
additional income taxes that may be assessed as a result of this examination.
Foreign tax credits would offset the amount of undistributed income of
international subsidiaries and affiliates which would be subject to additional
income taxes if distributed.
14
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
4. INVENTORIES
1996 1997
---- ----
Finished goods....................................................................... $37,189,428 $40,863,615
Work in process, including greige fabric for further processing...................... 33,086,176 29,674,463
Raw materials and supplies........................................................... 22,865,618 14,434,417
---------- ----------
93,141,222 84,972,495
=========== ===========
5. INVESTMENTS AND ADVANCES
1996 1997
---- ----
Investment in associated companies (a).................. $3,156,324 $2,751,447
Other investments and advances (b)...................... 4,980,357 3,824,804
---------- ----------
8,136,681 6,576,251
=========== =========
(a) Summarized information, derived from the latest audited financial
statements of Swift Textiles Europe Limited is presented below:
For the years ended March 31
----------------------------
1995 1996 1997
---- ---- ----
Sales................................... $68,573,890 $74,762,092 $69,570,334
Operating income........................ 5,994,852 8,430,129 7,991,862
As of March 31
--------------
1996 1997
---- ----
Current assets...................... $21,752,158 $23,481,778
Fixed assets........................ 8,715,812 7,482,574
Net assets.......................... 1,289,050 1,159,568
(b) Other investments and advances include secured loans to Swift Textiles
Europe Limited of $2.4 million, $3.2 million and $3.7 million in 1995,
1996 and 1997, respectively. The loans outstanding at June 30, 1997 bear
interest at 8% and are payable in installments through 2007.
6. PROPERTY, PLANT AND EQUIPMENT, NET
1996 1997
---- ----
Land............................................................... $1,084,818 $868,519
Buildings and leasehold improvements............................... 125,677,367 123,851,835
Less: Accumulated depreciation..................................... (52,847,179) (56,504,736)
------------ ------------
73,915,006 68,215,618
---------- ----------
Machinery and equipment............................................ 387,296,973 372,649,745
Less: Accumulated depreciation..................................... (188,151,182) (196,840,051)
------------- -------------
199,145,791 175,809,694
----------- -----------
273,060,797 244,025,312
=========== ===========
Depreciation and amortization of property, plant and equipment amounts to
$30,362,520, $32,412,514 and $33,482,826 in 1995, 1996 and 1997, respectively.
15
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
7. INTANGIBLE ASSETS, NET
1996 1997
---- ----
Goodwill....................................................... $83,221,796 $82,492,240
Other.......................................................... 407,870 347,964
------- -------
83,629,666 82,840,204
Less: Accumulated amortization................................. (18,846,302) (20,626,985)
------------ ------------
64,783,364 62,213,219
========== ==========
Total intangible asset amortization charged to income amounts to $1,779,621, $1,990,318 and $1,988,278 in 1995, 1996 and
1997, respectively.
8. OTHER ASSETS
1996 1997
---- ----
Deferred refinancing and other costs.................................... $7,224,213 $6,777,166
Pension asset........................................................... 2,368,273 1,911,572
Note receivable(a)...................................................... 7,754,386 --
--------- ----------------
17,346,872 8,688,738
========== =========
(a) The $10.0 million note received on the sale of Wayn-Tex Inc., a former
subsidiary of the Corporation, and due in August 1999, was prepaid
subsequent to year-end and accordingly has been reclassified in other
current receivables at June 30, 1997. The Business was allocated a
portion of the note based on the allocation method explained in the basis
of presentation. The interest rate on the note was 11.75%.
9. LONG-TERM DEBT
The Business' long-term debt is as follows:
1996 1997
---- ----
Secured
Term notes (3.7 billion lira) due June 1998 at 8.65%.......................... $3,118,903 $2,458,391
Other......................................................................... 446,976 --
Unsecured
Business' share in general corporate long-term debt (a)....................... 245,247,741 197,049,432
----------- -----------
248,813,620 199,507,823
Long-term debt due within one year............................................ (916,297) (1,535,908)
--------- -----------
247,897,323 197,971,915
=========== ===========
(a) As of June 30, 1997 and 1996, the general corporate long-term debt is as
follows:
1996 1997
---- ----
Unsecured and Guaranteed Senior Notes, Due
November 2003(i)............................................................. $150,000,000 $150,000,000
Unsecured and Guaranteed Senior Notes, Due April 2006 (ii)..................... 125,000,000 125,000,000
Unsecured Revolving Credit Facility (ii)....................................... 57,000,000 --
Other.......................................................................... 685,997 --
------------- -------------------
332,685,997 275,000,000
Long-term debt due within one year............................................. (55,866) --
--------------- -------------------
332,630,131 275,000,000
================ ====================
16
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
9. LONG-TERM DEBT (CONT'D)
(i) These notes were issued by Dominion Textile (USA) Inc. and are
unconditionally guaranteed by the Corporation.
(ii) In 1996, the Corporation completed a refinancing plan which included
the issue by Dominion Textile (USA) Inc. of $125 million of Guaranteed
Senior Notes and the concurrent arrangement of the Revolving Credit
Facility. Proceeds of the senior notes and from certain simultaneous
borrowings under the Revolving Credit Facility were used to prepay secured
loans outstanding (including prepayment premiums and accrued interest).
The Revolving Credit Facility of $100 million will mature on April 1, 2001
and bears interest at a floating rate equal to, at the borrower's option (i)
the higher of the prime rate or Federal Funds Rate plus 0.5%; or (ii) LIBOR
plus a margin which is subject to change within a range of 0.5% and 2.0%
depending on the consolidated debt to cash flow ratio of the Corporation.
Interest payment dates vary in accordance with the maturity period selected
for each borrowing made under the facility. The facility also provides for
availability of letters of credit.
The credit facilities governing the long-term indebtedness of the
Corporation contain covenants which include, among others, covenants
restricting certain investments, capital expenditures, other indebtedness,
disposition of assets, mergers and acquisitions, liens and encumbrances, and
also set out certain financial covenants. These financial covenants include,
among others, requirements for the Corporation to maintain various
consolidated financial ratios and net worth levels in excess of predefined
levels.
In addition, the change of control, discussed in the basis of presentation,
will cause Dominion Textile (USA) Inc. to offer, within 30 days after the
change of control, to repurchase all outstanding senior notes at a
predefined price.
As of June 30, 1997, letters of credit aggregating $4.3 million were issued,
representing contingent liabilities of the Corporation under the Revolving
Credit Facility and $95.7 million was unutilized and available.
(b) The payments required on the long-term debt are as follows:
General
corporate
long-term Business'
debt share
1998 $ -- $1,535,908
1999 -- 922,483
2000 -- --
2001 -- --
2002 -- --
2003 and subsequent years 275,000,000 197,049,432
----------- -----------
275,000,000 199,507,823
============ ===========
(c) Interest expense related to long-term debt totaled $24.3 million, $19.4
million, and $19.5 million in 1995, 1996 and 1997, respectively.
17
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
9. LONG-TERM DEBT (CONT'D)
(d) The following table presents the interest rates as of June 30, 1997:
Canadian prime rate................ 4.75%
US prime rate...................... 8.50%
Federal Funds rate................. 5.63%
LIBOR-3 month-period............... 5.81%
(e) As of June 30, 1997, the Business maintained other available bank lines
of credit for general corporate purposes, at the bank's prime rate of
interest or equivalents, to meet normal operating requirements.
10. FINANCIAL INSTRUMENTS
RISK MANAGEMENT
The Business operates internationally and is exposed to market risks from
changes in foreign exchange rates and in the cost of cotton, its principal raw
material.
FOREIGN CURRENCY HEDGING
During the period, the Business used forward contracts to hedge certain
operating and capital cash flows. As of June 30, 1997, $20.9 million notional
amount of forward exchange contracts were outstanding.
COTTON HEDGING
For hedging purposes, the Business enters principally into futures contracts and
option positions to reduce the impact of changes in the cost of cotton used in
its manufacturing process. The option positions primarily include long-calls
that qualify for hedge accounting. As of June 30, 1997, the Business had
aggregate open futures contracts and long-call options to purchase approximately
24 million pounds of cotton.
INTEREST RATES
Substantially all long-term debt is issued at fixed interest rates.
FAIR VALUES
Fair values approximate amounts at which financial instruments could be
exchanged between willing parties, based on current markets for instruments of
the same risk, principal and remaining maturities. Fair values are based on
estimates using present value and other valuation techniques which are
significantly affected by the assumptions used concerning the amount and timing
of future cash flows and discount rates which reflect varying degrees of risk.
Therefore, due to the use of subjective judgment and uncertainties, the
aggregate fair value amount should not be interpreted as being realizable in an
immediate settlement of the instruments.
As of June 30, 1997 and 1996 the carrying value of all financial instruments
approximates fair value with the following exceptions:
1996 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
Long-term debt.................................... $248,813,620 $243,474,606 $199,507,823 $205,659,328
Derivatives, asset (liability) position
Futures and forward exchange contracts.......... -- (1,155,800) -- (606,055)
Options......................................... 4,027,400 2,114,500 637,900 402,200
18
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
10. FINANCIAL INSTRUMENTS (CONT'D)
CREDIT RISK
The Business is exposed to credit-related losses in the event of non-performance
by counterparties to financial instruments, but it does not expect any
counterparties to fail to meet their obligations, given their high credit
ratings. Where appropriate, the Business obtains collateral in the form of
rights to securities or arranges master netting agreements. The credit exposure
of the financial instruments is represented by the fair value of contracts with
a positive fair value at the reporting date, reduced by the effects of master
netting agreements.
The Business is exposed to credit risk from customers. However, the Business has
a large number of diverse customers which minimizes the concentration of this
risk. Sales to two customers represented 35% in 1997 (1996 - 38% and 1995 - 33%)
of the Business' combined sales.
GUARANTEES
As of June 30, 1997, the Corporation had outstanding guarantees of $4.3 million
(1996 - nil) representing financial guarantees issued in the normal course of
business.
11. CUMULATIVE TRANSLATION ADJUSTMENT
The changes in the cumulative translation adjustment are as follows:
1996 1997
---- ----
Balance at beginning..................... $(7,130,922) $(6,640,683)
Changes during the year.................. 490,239 (12,412,048)
------- ------------
Balance at end........................... (6,640,683) (19,052,731)
=========== ============
12. EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION PLANS
The Corporation maintains defined benefit pension plans that provide for
pensions for both hourly and salaried employees based on length of service and
rate of pay. The Corporation funding policy is to make contributions to its
pension funds based on various actuarial cost methods as permitted by pension
regulatory bodies. The companies are responsible to adequately fund the plans.
Plan assets at June 30, 1996 and 1997 consisted primarily of listed stocks,
mutual funds and bonds. Contributions reflect actuarial assumptions concerning
future investment returns, salary projections and future service benefits.
The cost of pensions is accrued and charged to income over employees' working
lives. Pension expense was calculated using a value of assets adjusted to market
over periods of up to five years. The weighted average discount rate was 7.75%
in 1995, 1996 and 1997, the rate of increase in future compensation levels used
in determining the actuarial present value of the accrued pension benefits was
5.0% in 1997 (1996 and 1995 - 5.0% to 6.5%), and the expected long-term rate of
return on plan assets was 8.0% in 1996 and 1997.
19
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. EMPLOYEE BENEFITS (CONT'D)
The funded status of the Corporation's defined benefit pension plans as of the
most recent valuation dates for June 30, 1996 and 1997, is as follows:
(IN THOUSANDS OF DOLLARS)
1996 1997
---- ----
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
benefits assets benefits asset
------------ ----------- ---------- --------
Actuarial present value of benefit obligation.............. $(38,794) $(29,374) $(22,174) $(30,166)
--------- --------- --------- ---------
Accumulated benefit obligation............................. (39,116) (29,905) (22,331) (30,846)
-------- -------- -------- --------
Projected benefit obligation
for service rendered to date.............................. (39,998) (31,659) (23,277) (33,828)
Plan assets at fair value.................................. 53,957 23,115 32,742 26,339
------ ------ ------ ------
Projected benefit obligation less than (in excess of)
plan assets............................................... 13,959 (8,544) 9,465 (7,489)
Unrecognized net (gain) loss............................... (13,200) 1,854 (9,210) 353
Additional minimum liability recognized.................... (105) (2,263) -- (1,912)
Prior service cost not yet recognized in net periodic
pension cost.............................................. 413 3,088 370 2,753
Unrecognized net (asset) liability at transition........... (596) 425 (263) 1,719
----- --- ----- -----
Pension asset (liability).................................. 471 (5,440) 362 (4,576)
=== ======= === =======
The Corporation's net pension cost for 1995, 1996 and 1997 includes the
following:
(IN THOUSANDS OF DOLLARS) 1995 1996 1997
---- ---- ----
Service cost - benefits earned during the year....................... $2,026 $1,665 $1,726
Interest cost on projected benefit obligation........................ 8,034 2,891 3,183
Actual return on plan assets......................................... (14,907) (7,235) (5,254)
Settlement loss...................................................... -- -- 466
Net amortization and deferral........................................ 7,560 5,492 2,752
----- ----- -----
2,713 2,813 2,873
===== ===== =====
TERMINATION OF PENSION PLANS
In 1996, Dominion Textile Inc. terminated THE STAFF RETIREMENT INCOME PLAN FOR
EMPLOYEES AT LOCATIONS IN A PROVINCE OTHER THAN QUEBEC (the "Ontario Plan") and
proposed to its members to share the surplus equally between the members and the
Corporation. The proposal was approved in 1997 by the members and by the Pension
Commission of Ontario. A gain of $2.8 million representing the Business' share
of the Ontario Plan surplus has been recorded and included under the caption
"Other expense, net", in the combined statements of income.
In 1995, Dominion Textile Inc. terminated THE STAFF RETIREMENT INCOME PLAN FOR
EMPLOYEES AT LOCATIONS IN THE PROVINCE OF QUEBEC (the "Quebec Plan") and
proposed to its members to share the surplus equally between the members and the
Corporation. The proposal was approved by the members in 1996 and Dominion
Textile Inc. received $17.5 million, representing its share of the Quebec Plan
surplus. A gain of $2.6 million representing the Business' share of proceeds
received in excess of the net pension asset was recorded.
20
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. EMPLOYEE BENEFITS (CONT'D)
CAPITAL ACCUMULATION PLANS
The Business maintains capital accumulation plans covering approximately 1,800
employees. The Business' expense with respect to those plans amounted to $1.5
million in 1995, $3.0 million in 1996 and $2.7 million in 1997.
OTHER BENEFITS
In addition to its pension plans, the Corporation provides certain health care
and life insurance benefits for a large number of its retired employees in North
America who have met the eligibility conditions. The cost of the other benefits
is charged to income as expenditures are incurred.
The following table sets forth the status of the Corporation's plan based on the
latest actuarial valuations:
1996 1997
---- ----
(IN THOUSANDS OF DOLLARS)
Retirees........................................... $9,194 $7,626
Fully eligible active plan participants............ 2,125 1,772
Other active plan participants..................... 4,439 4,490
----- -----
15,758 13,888
Unrecognized gain.................................. 518 1,112
--- -----
Postretirement obligation.......................... 16,276 15,000
====== ======
The Corporation's net periodic postretirement benefit cost for 1995, 1996 and
1997 consisted of the following components:
1995 1996 1997
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Service cost - benefits earned during the period................................. $537 $407 $414
Interest cost on accumulated postretirement benefit obligation................... 1,526 1,146 983
Net gain (including $0.7 million in 1997 for settlements)........................ (306) (112) (724)
----- ----- -----
1,757 1,441 673
===== ===== ===
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 14%, 14% and 10%, gradually declining to
5% and 6% by 2003 in 1995, 1996 and 1997, respectively, after which it remains
constant. A one-percentage-point increase in the assumed health care cost trend
rate would increase the accumulated postretirement benefit obligation by
approximately 11%, 9%, and 8% and would increase the periodic service and
interest costs by approximately 17%, 16% and 9% during fiscal 1995, 1996 and
1997, respectively. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% during fiscal 1997, 1996
and 1995.
SUMMARY
The Business' share in the Corporation's employee benefit plans, based on its
proportionate number of employees, is as follows:
1995 1996 1997
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Net benefit costs
Pension plans.................................. $2,119 $2,197 $2,244
Postretirement benefit other than pensions..... 1,372 1,126 526
21
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. EMPLOYEE BENEFITS (CONT'D)
1996 1997
---- ----
(IN THOUSANDS OF DOLLARS)
Unfunded obligation, net
Pension plans............................................... 3,959 3,291
Postretirement benefit other than pension................... 12,711 11,714
13. COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENTS
As of June 30, 1997, the future minimum payments for building and equipment
leases with initial non-cancelable lease terms in excess of one year are as
follows:
1998 $3,166,897
1999 2,768,942
2000 1,814,464
2001 1,334,072
2002 1,077,019
2003 and subsequent years 115,000
-------
10,276,394
===========
OTHER COMMITMENTS
As of June 30, 1997, the Business had outstanding purchase contracts for cotton
and other fibers of approximately $80.0 million and commitments for capital
expenditures of approximately $1.7 million.
ENVIRONMENTAL MATTERS
The Business, primarily as a result of its manufacturing operations, is subject
to numerous environmental laws and regulations and exposed to liabilities and
compliance costs arising from its past and current generation, management and
disposition of hazardous substances and wastes. Based on information presently
available, management believes that the existing accruals are sufficient to
satisfy probable and reasonably estimable environmental liabilities related to
known environmental matters.
LITIGATION
In the normal course of operations, the Business becomes involved in various
claims and legal proceedings. While the final outcome with respect to claims and
legal proceedings pending at June 30, 1997 cannot be predicted with certainty,
it is the opinion of management that their resolution will not have a material
adverse effect on the Business' combined financial position or results of
operations.
22
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
14. SEGMENTED INFORMATION
The Apparel Fabrics Business produces denim, polycotton fabrics for careerwear
and industrial applications and markets these products on a worldwide basis.
United
Canada States International Eliminations Total
------- -------- ------------- ------------ -------
(IN THOUSANDS OF DOLLARS)
1995
Sales to customers (a).......................... $72,498 $393,603 $167,590 $ $633,691
Transfers between geographic areas (b).......... 7,644 10,559 -- (18,203) --
------- ------ -------- -------- ---------
80,142 404,162 167,590 (18,203) 633,691
Operating income................................ 422 46,723 2,381 49,526
Identifiable assets............................. 62,828 394,161 169,284 626,273
1996
Sales to customers (a).......................... 88,385 410,640 151,838 650,863
Transfers between geographic areas (b).......... 7,968 13,055 -- (21,023) --
------- ------ --------- -------- ---------
96,353 423,695 151,838 (21,023) 650,863
Operating income (loss)......................... 3,157 20,200 (11,054) 12,303
Identifiable assets............................. 71,577 407,514 153,861 632,952
------ ------- ------- -------
1997
Sales to customers(a)........................... 85,758 373,015 151,800 610,573
Transfers between geographic areas(b)........... 6,711 17,093 -- (23,804) --
------- ------ --------- -------- --------
92,469 390,108 151,800 (23,804) 610,573
Operating income (loss)......................... 968 866 (16,047) (14,213)
Identifiable assets............................. 53,009 391,869 146,235 591,113
------ ------- ------- -------
(a) Canadian sales include export sales of $43.3 million (1996 - $42.5
million, 1995 - $31.9 million) made primarily to the United States.
(b) Transfers between geographic areas are accounted for at prices comparable
to open market prices for similar products and services.
23
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- ----------
1996
Sales........................... 152,505,770 162,755,768 148,039,142 187,561,869
Gross profit.................... 14,850,987 18,690,952 15,711,525 20,812,463
Operating income................ 628,008 3,505,390 2,494,310 5,675,604
Net income (loss)............... (175,110) 1,974,470 (3,034,944) 3,780,842
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- ------- -------
1997
Sales............................ 152,521,204 152,353,791 139,890,867 165,807,148
Gross profit..................... 15,109,688 16,099,677 7,870,519 1,007,414
Operating income (loss).......... 1,770,457 2,364,174 (5,600,638) (12,747,240)
Net income (loss)................ (369,887) 1,378,119 (7,208,793) (7,905,756)
24
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED STATEMENTS OF INCOME AND DEFICIT
For the Three-Month Periods Ended September 30, 1996 and 1997
1996 1997
---- ----
Sales.................................................................. $152,521,204 $152,169,004
Cost of goods sold..................................................... 137,411,515 132,372,886
----------- -----------
Gross profit........................................................... 15,109,689 19,796,118
---------- ----------
Operating expenses
Selling expenses..................................................... 4,979,960 4,325,021
Administrative expenses.............................................. 7,861,278 7,250,418
Goodwill amortization................................................ 497,993 497,036
------- -------
13,339,231 12,072,475
---------- ----------
Operating income....................................................... 1,770,458 7,723,643
Interest expense, net.................................................. (4,782,268) (4,423,789)
Share in net income of associated companies............................ 1,979,753 1,239,298
Other income (expense), net............................................ (472,990) 56,845
--------- ------
Income (loss) before recovery of income taxes.......................... (1,505,047) 4,595,997
Recovery of income taxes............................................... 1,135,160 177,624
--------- -------
Net income (loss)...................................................... (369,887) 4,773,621
Deficit at beginning................................................... (115,926,962) (130,033,279)
------------- -------------
Deficit at end......................................................... (116,296,849) (125,259,658)
============= =============
See Notes to Unaudited Condensed Combined Financial Statements.
25
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED BALANCE SHEETS
June 30, September 30,
1997 1997
------ ------
Assets
Current assets
Cash and cash equivalents..................................................... $36,797,072 $47,139,315
Receivables
Trade, net of allowance for doubtful accounts of $2,295,033
(June 30, 1997 -- $2,214,213).............................................. 118,459,831 115,945,136
Other......................................................................... 17,987,082 11,567,953
Inventories................................................................... 84,972,495 81,406,541
Other current assets.......................................................... 11,392,840 10,907,187
---------- ----------
269,609,320 266,966,132
Investments and advances......................................................... 6,576,251 7,373,101
Property, plant and equipment, net............................................... 244,025,312 238,987,286
Intangible assets, net........................................................... 62,213,219 61,692,604
Other assets..................................................................... 8,688,738 8,557,227
--------- ---------
Total assets..................................................................... 591,112,840 583,576,350
=========== ===========
Liabilities and stockholders' equity
Current liabilities
Short-term borrowings......................................................... -- 562,809
Accounts payable.............................................................. 32,999,742 29,083,789
Payroll, related taxes and other employee related liabilities................. 15,951,978 13,218,469
Other accrued liabilities..................................................... 37,578,824 34,981,441
Interest payable.............................................................. 5,656,732 10,753,624
Income taxes payable.......................................................... 4,320,246 10,352,417
Long-term debt due within one year............................................ 1,535,908 1,573,443
--------- ---------
98,043,430 100,525,992
Long-term debt................................................................... 197,971,915 192,551,264
Deferred income taxes............................................................ 30,291,948 29,323,655
Other non-current liabilities.................................................... 43,293,000 43,102,919
---------- ----------
Total liabilities................................................................ 369,600,293 365,503,830
----------- -----------
Stockholders' equity
Additional paid-in capital.................................................... 370,598,557 362,228,316
Deficit....................................................................... (130,033,279) (125,259,658)
Cumulative translation adjustment............................................. (19,052,731) (18,896,138)
------------ ------------
Total stockholders' equity....................................................... 221,512,547 218,072,520
----------- -----------
Total liabilities and stockholders' equity....................................... 591,112,840 583,576,350
=========== ===========
See Notes to Unaudited Condensed Combined Financial Statements.
26
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
For the Three-Month Periods Ended September 30, 1996 and 1997
1996 1997
---- ----
Operating activities
Net income (loss).............................................................. $(369,887) $4,773,621
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization................................................. 8,955,836 8,330,355
Deferred income taxes......................................................... (3,716,425) (968,293)
Gain on disposal of property, plant and equipment............................. (128,193) (290,388)
Share in net income of associated companies................................... (1,979,753) (1,239,298)
Changes in assets and liabilities
Receivables, net.............................................................. 11,707,388 9,115,274
Inventories................................................................... (7,627,079) 3,286,017
Other current assets.......................................................... 4,575,834 503,819
Other assets.................................................................. 366,695 211,138
Current liabilities........................................................... (2,135,549) 1,700,770
Other liabilities............................................................. 703,461 (129,312)
Other, net..................................................................... 4,629,256 1,621,685
--------- ---------
Net cash provided by operating activities...................................... 14,981,584 26,915,388
---------- ----------
Investing activities
Capital expenditures........................................................... (4,313,732) (3,481,214)
Proceeds from sale of property, plant and equipment............................ 754,100 399,344
Investment in associated companies and other................................... (365,100) 1,238,843
Other, net..................................................................... (478,814) (1,225,263)
--------- -----------
Net cash used in investing activities.......................................... (4,403,546) (3,068,290)
----------- -----------
Financing activities
Repayment of long-term debt.................................................... (45,481,376) (5,383,116)
Issue of short-term borrowings................................................. 1,162,401 562,809
Issue of long-term debt........................................................ 773,143 --
Additional paid-in capital..................................................... 46,391,341 (8,370,241)
---------- -----------
Net cash (used in) provided by financing activities............................ 2,845,509 (13,190,548)
--------- ------------
Effect of changes in exchange rates on cash and cash equivalents............... (160,824) (314,307)
--------- ---------
Net increase in cash and cash equivalents...................................... 13,262,723 10,342,243
Cash and cash equivalents, beginning of period................................. 17,696,400 36,797,072
---------- ----------
Cash and cash equivalents, end of period....................................... 30,959,123 47,139,315
========== ==========
Supplemental disclosure of cash flow information Net cash paid during the
period for:
Interest...................................................................... (882,533) (389,816)
--------- ---------
Income taxes.................................................................. (1,538,397) (43,988)
----------- --------
See Notes to Unaudited Condensed Combined Financial Statements.
27
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION
For the Three-Month Periods Ended September 30, 1996 and 1997
GENERAL
The consolidated financial statements of Dominion Textile Inc. (the
"Corporation"), a Canadian company, have been issued to the stockholders.
All dollar amounts in the combined financial statements are stated in US
dollars.
The combined financial statements of the Apparel Fabrics Business of Dominion
Textile Inc. (the "Business") include the operations of Swift Denim, Inc.,
Klopman International S.p.A. and Swift Textiles Europe Limited which were
operated as subsidiaries or associated companies of Dominion Textile Inc. On
December 19, 1997, pursuant to a takeover offer, DT Acquisition Inc., an
affiliate of Polymer Group, Inc. ("PGI") acquired all shares tendered which
approximated 98% of the outstanding common stock of the Corporation. In
connection with the change of control, PGI entered into a preliminary agreement
with Galey & Lord, Inc., to sell it certain operations. In contemplation of the
change in control and the subsequent sale of certain operations, the operations
and the net assets of the Corporation have been essentially divided into two
groups: the Apparel Fabrics Business and the Nonwovens Business.
The combined financial statements have been prepared using the Corporation's
historical basis in the assets and liabilities and historical results of
operations related to the Business. Changes in additional paid-in capital
represent the Corporation's contribution of its net operating investment plus
net cash transfers to or from the Corporation. The combined financial statements
reflect the results of operations, financial position and cash flows of the
Business as if it had operated as a separate entity for all periods presented
and may not be indicative of actual results of operations and financial position
of the Business under different ownership.
Additionally, the combined financial statements include allocations of certain
corporate headquarters' assets, liabilities (excluding deferred income taxes),
and net expenses. All significant intergroup transactions and balances have been
eliminated.
ALLOCATIONS
The liabilities of the Business include outstanding direct third-party
indebtedness and the amount of debt based on the ratio of the Business' average
net operating investment to the aggregate net operating investment of the two
groups. Interest expense shown in the combined financial statements reflects the
interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of the Corporation's long-term weighted
average interest rates for the applicable period.
General corporate overhead related to the Corporation's headquarters has been
allocated to the Business based on the ratio of the Business' sales to the
aggregate sales of the Corporation. The costs of the services charged to the
Business are not necessarily indicative of the costs that would have been
incurred if the Business had performed these functions as a stand-alone entity.
Additionally, income taxes on allocated general corporate overhead are
calculated using the Corporation's statutory tax rate.
Management believes that the basis of allocation is reasonable.
28
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION (CONTINUED)
For the Three-Month Periods Ended September 30, 1996 and 1997
The following table illustrates the results of applying the allocation method
described above on various financial statement items:
For the three-month periods ended September 30
-----------------------------------------------
1996 1997
---- -----
Net impact on gross profit..................................... $846,089 $(1,121,850)
General corporate overhead, net................................ (2,644,869) (2,821,733)
Recovery of income taxes....................................... 697,927 1,530,110
------- ---------
(1,100,853) (2,413,473)
=========== ===========
June 30, September 30,
1997 1997
----- -------
As of:
Net assets excluding long-term debt......................... 14,539,529 6,588,661
Long-term debt.............................................. 197,049,432 192,407,033
Cumulative translation adjustment........................... (4,252,709) (2,853,072
29
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of the Galey &
Lord give effect to the Acquisition and the financing thereof (including the
Note Issuance) as if they had occurred: (i) at September 27, 1997, in the case
of the Unaudited Pro Forma Combined Balance Sheet and (ii) at September 29,
1996, the first day of the Company's 1997 fiscal year, in the case of the
Unaudited Pro Forma Combined Statement of Operations for the year ended
September 27, 1997.
The Acquisition was accounted for using the purchase method of accounting. The
total cost of the Acquisition has been preliminarily allocated to the assets
acquired and liabilities assumed based upon their respective fair values as
determined through preliminary appraisals and internal estimates that the
Company believes are reasonable. The actual allocation of purchase cost,
however, and the resulting effect on income may differ from the pro forma
amounts included herein.
The following unaudited pro forma combined financial information is presented
for illustrative purposes only, does not purport to be indicative of the
Company's financial position or results of operations as of the date hereof, or
as of or for any other future date, and is not necessarily indicative of what
the Company's actual financial position or results of operations would have been
had the foregoing transactions occurred on September 27, 1997 or September 29,
1996, nor does it give effect to (i) any transactions other than the foregoing
transactions and those described in the accompanying notes to unaudited pro
forma combined financial information of the Company or (ii) Galey & Lord's or
the Acquired Business' results of operations since September 27, 1997 and
September 30, 1997, respectively.
The following unaudited pro forma combined financial should be read in
conjunction with Galey & Lord's historical financial statements, the notes
thereto and the other information contained in the 1997 Annual Report on Form
10-K and the Acquired Business' historical financial statements, the notes
thereto and the other information contained elsewhere herein..
The Unaudited Pro Forma Combined Balance Sheet at September 27, 1997 is based
upon Galey & Lord's financial position at September 27, 1997 and upon the
Acquired Business' financial position at September 30, 1997. The Unaudited Pro
Forma Combined Statement of Operations for the year ended September 27, 1997 is
based upon Galey & Lord's results of operations for its fiscal year ended
September 27, 1997 and upon the Acquired Business' results of operations for the
twelve months ended September 30, 1997. Such financial information has been
derived from Galey & Lord's audited financial statements for its fiscal year
ended September 27, 1997 and from the Acquired Business' audited financial
statements for its fiscal year ended June 30, 1997 (eliminating the results from
the unaudited three months ended September 30, 1996) and reflecting results from
its unaudited financial statements for the three months ended September 30,
1997.
30
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 27, 1997
(IN THOUSANDS)
Historical Pro Forma
----------------------------- -------------------------------
Acquired
Galey & Lord Business
(September 27, (September 30,
1997) 1997) Adjustments Combined
----- ----- ----------- --------
ASSETS
Current assets:
Cash....................................... $2,277 $47,139 $(12,057) (1) $37,359
-- (2)
Accounts receivable........................ 80,839 127,513 6,500 (3a) 214,852
Inventories................................ 92,517 81,407 (3,030) (3b) 170,894
Income taxes receivable.................... 1,412 -- 318 1,730
Prepaid expenses and other
current assets............................ 3,894 10,907 -- 14,801
----- ------ -- ------
Total current assets.................... 180,939 266,966 (8,269) 439,636
Property, plant and equipment, net........... 129,445 238,987 26,013 (3c) 394,445
Goodwill, net................................ 37,987 61,693 136,955 (3) 174,942
(61,693) (3d)
Other assets, net............................ 820 15,930 15,600 (2) 35,600
12,627 (3e)
(8,557) (3f)
(820) (4)
Total assets............................ $349,191 $583,576 $111,856 $1,044,623
======== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings...................... $-- $563 $-- $563
Accounts payable........................... 23,488 29,084 -- 52,572
Accrued expenses........................... 13,032 58,953 28,016 (3g) 100,001
Income taxes payable....................... -- 10,353 -- 10,353
Current portion of long-term debt.......... 13,281 1,573 (9,350) (6) 5,504
Deferred income taxes...................... 633 -- -- 633
--- -- -- ---
Total current liabilities............... 50,434 100,526 18,666 169,626
Long-term debt............................. 176,755 192,551 (192,407) (1) 666,373
489,474 (6)
Deferred income taxes...................... 17,685 29,324 10,197 (3h) 57,206
Other non-current liabilities.............. -- 43,103 4,500 (3i) 47,603
--------- ------ ----- ------
Total liabilities....................... 244,874 365,504 330,430 940,808
Stockholders' equity:
Common stock............................... 121 -- -- 121
Additional paid-in capital................. 35,877 362,228 (362,228) (5) 35,877
Retained earnings.......................... 70,566 (125,260) 125,260 (5) 70,064
(502) (4)
Treasury stock............................. (2,247) -- -- (2,247)
Currency translation adjustment............ -- (18,896) 18,896 (5) --
--------- -------- ------ --
Total stockholders' equity.............. 104,317 218,072 (218,574) 103,815
------- ------- --------- -------
Total liabilities and stockholders'
equity................................. $349,191 $583,576 $111,856 $1,044,623
======== ======== ======== ==========
31
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(1) Reflects the adjustment to eliminate certain assets of the Acquired
Business not purchased and certain liabilities not assumed.
Net assets of Acquired Business.................................................... $218,072
Cash not purchased................................................................. (12,057)
Long-term debt not assumed......................................................... 192,407
-------
Net book value of assets acquired.................................................. $398,422
========
(2) Reflects the adjustment to record the following:
Initial borrowings under the Senior Credit Facility................................. $387,224
Gross proceeds from the issuance and sale of the Notes offered hereby .. 275,000
Cash paid for the Acquired Business................................................. (464,524)
Repayment of Galey & Lord's prior senior credit facility............................ (182,100)
Financing costs..................................................................... (15,600)
--------
Net cash adjustment................................................................. $ --
============
(3) The Purchase Price has been preliminarily allocated as follows:
Purchase Price............................................................... $464,524
Less net book value of assets acquired....................................... 398,422
-------
Excess of cost over net book value of assets acquired........................ $66,102
Adjustments to record assets and liabilities acquired at estimated fair
value:
Accounts receivable....................................................... 6,500 (a)
Inventory................................................................. (3,030)(b)
Property, plant and equipment............................................. 26,013 (c)
Intangibles............................................................... (61,693)(d)
Investments and advances.................................................. 12,627 (e)
Deferred charges.......................................................... (8,557)(f)
Accrued liabilities....................................................... (28,016) (g)
Deferred taxes............................................................ (10,197) (h)
Other non-current liabilities............................................. (4,500) (i)
70,853
Excess of cost over fair value of net assets acquired (goodwill) . $136,955
========
(a) Represents a receivable from the seller of the Acquired Business for
certain shared tax benefits.
(b) Reflects the write-down of raw materials inventory to fair value.
(c) Reflects a preliminary adjustment to record the Acquired Business'
fixed assets at fair value. The preliminary adjustment is based
upon preliminary appraisals and internal estimates and is allocated
as follows:
Land............................... $10,000
Buildings.......................... 3,000
Machinery and Equipment............ 13,013
------
$26,013
========
(d) Reflects the write-off of the existing goodwill of the Acquired
Business.
(e) Reflects the adjustment to record joint venture investment at fair
value.
(f) Reflects the adjustment to write off the unamortized balance of debt
issuance costs of the Acquired Business.
32
(g) Reflects the assumption of the following liabilities.
Severance and other employee benefits................ $13,300
Acquisition related tax liabilities.................. 3,300
Liability for unfavorable cotton commitments......... 7,647
Professional fees.................................... 700
Other................................................ 3,069
-----
$28,016
=======
(h) To record the deferred tax liability related to the temporary
difference between the financial statement carrying amount as
adjusted and the tax basis of the assets of the Acquired Business
at an assumed income tax rate of 38.8%.
(i) Reflects the adjustment to record the pension liability of the Acquired
Business at fair value.
(4) Reflects the adjustment to write-off the unamortized balance of debt
issuance costs related to Galey & Lord's prior senior credit facility, net
of tax.
(5) Reflects the adjustment to eliminate the Acquired Business' net equity.
(6) Reflects the adjustment to long-term debt for total debt outstanding
immediately after the Acquisition.
Initial borrowings under the Senior Credit Facilities........... $387,224
Gross proceeds from the issuance and sale of the Notes
offered hereby................................................. 275,000
Less repayment of Galey & Lord's prior senior credit facility... (182,100)
---------
Total adjustment to debt........................................ 480,124
Adjustment to current portion of long-term debt................. 9,350
Adjustment to long-term debt.................................... $(489,474)
----------
--
==========
33
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 27, 1997
(IN THOUSANDS)
Historical Pro Forma
------------------------------------------ ------------------------------
Galey & Lord Acquired Business
(Year Ended (Year Ended
September 27, 1997) September 30, 1997) Adjustments Combined
------------------- --------------------- ------------- ----------
Statement of Operations Data:
Net sales................................. $493,362 $610,221 $ -- $1,103,583
Cost of sales............................. 439,207 547,631 (5,195) (1) 981,643
Restructuring............................. -- 17,816 -- 17,816
--------- ------ --------- ------
Gross profits........................... 54,155 44,774 5,195 104,124
Selling, general and administrative
expenses................................ 18,123 51,046 (12,661) (2) 56,508
Amortization of goodwill.................. 1,679 1,987 1,437 (1) 5,103
--------- ----- --------- -----
Operating income (loss)................. 34,353 (8,259) 16,419 42,513
Other (income) expense:
Interest expense........................ 12,326 17,055 30,457 (3) 59,838
Other expense (income), net............. -- (456) -- (456)
Share in net (income) of associated
companies.............................. -- (6,669) 631 (4) (6,038)
--------- ------- --------- -------
Income (loss) before income taxes......... 22,027 (18,189) (14,669) (10,831)
Income tax expense (benefit).............. 8,350 (9,227) (5,447) (5) (6,324)
-------- ------- ------- -------
Net income (loss)......................... $13,677 $(8,962) $(9,222) $(4,507)
======= ======== ======== ========
Net income (loss) per common share:
Average common shares outstanding 11,610 11,610
Net income (loss) per common share - basic $ 1.18 $ (.39)
======= =======
Average common shares outstanding 11,986 11,986
Net income (loss) per common share - diluted $ 1.14 $ (.39)
======= =======
34
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Reflects incremental depreciation and amortization expense as a result of
the preliminary adjustment to fair value of the Acquired Business'
property, plant and equipment and the excess of cost over fair market
value of the net assets acquired as follows:
Estimated Year Ended
Useful Life September 27, 1997
------------ --------------------
Depreciation adjustment on Acquired Business' property, plant and
equipment................................................................... 9.5 years $(5,195)
Amortization of excess of cost over fair value of net assets acquired........ 40 years $1,437
(2) Reflects the elimination of duplicative corporate overhead expenses of
$10,196 and $3,365 for Swift overhead expenses less additional Galey &
Lord overhead expenses of $900.
(3) Reflects an adjustment to record additional interest expense and
amortization of debt issuance costs incurred in connection with the
additional debt. Interest expense is calculated based on an average
interest rate of 9.1%. For each 1/8% change in the assumed effective
interest rate, interest expense would change by $838 for the year ended
September 27, 1997.
(4) To reflect the amortization of the excess of the fair value of the
investment in associated companies over the portion of the historical net
equity attributable to Galey & Lord at the time of the Acquisition. Such
excess is being amortized over 20 years.
(5) Reflects the income tax benefit related to the effects of the pro forma
adjustments based upon an assumed composite income tax rate of 38.8%.
35
FORWARD-LOOKING STATEMENTS
This Form 8-K 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 material and other costs,
weather-related delays, general economic conditions and other risks and
uncertainties that may be detailed herein.
Exhibits
1 Press Release of Galey & Lord, Inc., dated January 30, 1998.
2 Master Separation Agreement, dated January 29, 1998, among the Company,
Polymer, DTA, Dominion and certain other parties thereto.
3 Senior Credit Facility dated as of January 29, 1998 among the Company,
Galey & Lord Industries, Inc. ("Industries"), G&L Service Company, North
America, Inc. ("Service Company"), Swift Textiles Inc. ("Textiles"), Swift
Denim Services Inc. ("Denim") and First Union National Bank, as agent and
lender, and the other lenders' party thereto.
4 Security Agreement dated as of January 29, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union National Bank,
as Collateral Agent.
5 Pledge Agreement dated as of January 29, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union National Bank,
as Collateral Agent.
6 Foreign Subsidiary Pledge Agreement dated as of January 29, 1998, among the
Company, certain of its subsidiaries party thereto and First Union National
Bank, as Collateral Agent.
7 First Amendment to Senior Subordinated Credit Agreement dated as of January
29, 1998 among Industries, the Company and First Union Corporation, as
agent and lender.
8 Second Amendment to Senior Subordinated Credit Agreement dated as of
January 29, 1998 among the Company, Industries, Service Company, Textiles,
Denim and First Union Corporation, as agent and lender.
23.1 Consent of Deloitte & Touche - Auditors for Apparel Fabrics Business of
Dominion Textile Inc.
23.2 Consent of KPMG - Auditors for Swift Textiles Europe Limited
99.1 Report of KPMG - Auditors for Swift Textiles Europe Limited
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto 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
February 9, 1998
------------------
Date
37