UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 1999
------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- -------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- ------------
Commission File Number 0-20080
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GALEY & LORD, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1593207
------------------------------ ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) (Identification No.)
980 Avenue of the Americas
New York, New York 10018
- ---------------------------------------- ----------
(Address of principal executive offices) Zip Code
212/465-3000
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- -------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 11,902,916 shares as of August 10, 1999.
Exhibit Index at page 32
INDEX
GALEY & LORD, INC.
Page
----
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
July 3, 1999, June 27, 1998
and October 3, 1998
Consolidated Statements of Operations -- 4
Three and nine months ended July 3, 1999
and June 27, 1998
Consolidated Statements of Cash Flows -- 5
Nine months ended July 3, 1999
and June 27, 1998
Notes to Consolidated Financial Statements -- 6-17
July 3, 1999
Item 2. Management's Discussion and Analysis of 18-28
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 29
Market Risk
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security 30
Holders
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
- ----------
EXHIBIT INDEX 32
- -------------
2
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
July 3, June 27, October 3,
1999 1998 1998
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- ----------
Current assets:
Cash and cash equivalents $ 29,691 $ 25,271 $ 19,946
Trade accounts receivable 192,659 189,347 183,192
Sundry notes and accounts receivable 6,016 7,573 12,166
Inventories 169,418 180,946 185,497
Income taxes receivable 10,986 - 4,348
Deferred income taxes 10,152 3,946 11,370
Prepaid expenses and other current assets 4,272 4,017 4,339
---------------- ---------------- ----------------
Total current assets 423,194 411,100 420,858
Property, plant and equipment, at cost 514,380 500,383 515,899
Less accumulated depreciation and
amortization (126,951) (88,374) (98,334)
---------------- ---------------- ----------------
387,429 412,009 417,565
Investments in and advances to associated
companies 24,681 24,693 26,327
Deferred charges, net 14,632 15,667 15,148
Other non-current assets 1,727 2,787 3,100
Intangibles, net 155,372 168,359 155,295
---------------- ---------------- ----------------
$ 1,007,035 $ 1,034,615 $ 1,038,293
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,099 $ 3,533 $ 4,051
Trade accounts payable 53,989 58,416 66,098
Accrued salaries and employee benefits 23,714 26,303 28,085
Accrued liabilities 43,333 68,719 39,504
Income taxes payable 1,566 468 1,748
---------------- ---------------- ----------------
Total current liabilities 125,701 157,439 139,486
Long-term debt 687,387 686,740 682,926
Other long-term liabilities 24,266 25,203 26,647
Deferred income taxes 55,932 50,317 61,357
Stockholders' equity:
Common stock 122 122 122
Contributed capital in excess of par
value 39,211 38,968 38,987
Retained earnings 78,245 78,749 81,861
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (1,582) (676) 9,154
---------------- ---------------- ----------------
Total stockholders' equity 113,749 114,916 127,877
---------------- ---------------- ----------------
$ 1,007,035 $ 1,034,615 $ 1,038,293
================ ================ ================
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
3
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
------------- ------------ ------------ ---------
Net sales $ 249,476 $ 275,296 $ 732,944 $ 640,089
Cost of sales 234,369 241,459 667,709 564,539
----------- ------------- ------------- -------------
Gross profit 15,107 33,837 65,235 75,550
Selling, general and administrative
expenses 8,599 9,588 25,430 21,299
Amortization of goodwill 1,217 1,234 3,634 2,607
----------- ------------- ------------- -------------
Operating income 5,291 23,015 36,171 51,644
Interest expense
15,081 15,883 45,256 32,012
Income from associated companies
(1,082) (1,046) (3,509) (1,878)
Bridge financing interest expense - - - 3,928
Loss on foreign currency hedges - - - 2,745
----------- ----------- ------------- -------------
Income (loss) before income taxes and
extraordinary loss (8,708) 8,178 (5,576) 14,837
Income tax expense (benefit):
Current (3,043) 3,935 (1,271) 6,245
Deferred 215 (478) (689) (115)
----------- ------------- ------------- -------------
Income (loss) before extraordinary loss (5,880) 4,721 (3,616) 8,707
Extraordinary loss from debt refinancing,
net of taxes of $332 - - - (524)
------------ ------------- ------------- -------------
Net income (loss) $ (5,880) $ 4,721 $ (3,616) $ 8,183
============ ======= ======== =======
Net income (loss) per common share:
Basic:
Average common shares outstanding 11,903 11,781 11,873 11,710
Income (loss) per share before
extraordinary loss $ (.49) $ .40 $ (.30) $ .74
Extraordinary loss from debt
refinancing - - - (.04)
------------ ------------- ------------- -----------
Net income (loss) per common share -
Basic $ (.49) $ .40 $ (.30) $ .70
=========== =========== ============ =========
Diluted:
Average common shares outstanding 11,941 12,368 11,949 12,216
Income(loss) per share before
extraordinary loss
$ (.49) $ .38 $ (.30) $ .71
Extraordinary loss from debt
refinancing - - - (.04)
------------ ------------- ------------- -----------
Net income (loss) per common share -
Diluted $ (.49) $ .38 $ (.30) $ .67
=========== ============ ============ ===========
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Nine Months Ended
-----------------
July 3, June 27,
1999 1998
---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (3,616) $ 8,183
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 31,055 21,293
Amortization of intangible assets 3,634 2,607
Amortization of deferred charges 1,840 3,395
Deferred income taxes (689) (478)
Non-cash compensation 200 1,170
(Gain)/loss on disposals of property, plant
and equipment (84) 210
Undistributed income from associated companies (3,509) (1,878)
Extraordinary loss from debt refinancing - 524
Changes in assets and liabilities (net of acquisition):
(Increase)/decrease in accounts receivable - net (12,421) (32,701)
(Increase)/decrease in sundry notes & accounts receivable 5,247 15,237
(Increase)/decrease in inventories 13,860 (7,480)
(Increase)/decrease in prepaid expenses and other
current assets (208) 7,035
(Increase)/decrease in other non current assets (411) 548
(Decrease)/increase in accounts payable - trade (9,495) (7,604)
(Decrease)/increase in accrued liabilities 1,346 21,756
(Decrease)/increase in income taxes payable (7,390) 595
(Decrease)/increase in other long-term liabilities 337 (3,803)
---------------- ---------------
Net cash provided by (used in) operating activities 19,696 28,609
Cash flows from investing activities:
Acquisition of business - net of cash acquired - (456,908)
Property, plant and equipment expenditures (22,388) (23,759)
Proceeds from sale of property, plant and equipment 4,212 1,668
Dividends received from associated companies 3,851 -
Other 1,271 253
---------------- -------------
Net cash provided by (used in) investing activities (13,054) (478,746)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit 7,400 (12,300)
Principal payments on long-term debt (20,750) (817,398)
Issuance of long-term debt 18,000 1,319,157
Increase in common stock 24 1,770
Payment of bank fees and loan costs (1,212) (18,242)
Other - 152
---------------- ---------------
Net cash provided by (used in) financing activities 3,462 473,139
Effect of exchange rate changes on cash and cash equivalents (359) (8)
---------------- ---------------
Net increase/(decrease) in cash and cash equivalents 9,745 22,994
Cash and cash equivalents at beginning of period 19,946 2,277
--------------- ---------------
Cash and cash equivalents at end of period $ 29,691 $ 25,271
================ ===============
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly-owned subsidiaries. Investments in affiliates in
which the Company owns 20 to 50 percent of the voting stock are accounted for
using the equity method. Intercompany items have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position as of July 3, 1999 and the results of operations and cash
flows for the periods ended July 3, 1999 and June 27, 1998. Such adjustments
consisted only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. These financial statements should be read
in conjunction with the financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1998.
Certain prior period amounts have been reclassified to conform to the current
period presentation. These amounts include $3,425 and $5,624 for the three and
nine months ended June 27, 1998, respectively, which have been reclassified from
selling, general and administrative to cost of sales to reflect certain expenses
within the acquired businesses on a basis consistent with the Parent Company's
accounting practices. The reclassification did not impact operating or net
income.
NOTE B - RESTATEMENT
As announced in the Company's annual earnings release on November 8, 1999, the
Company has restated its December quarter 1998 operating results to correct the
Company's computation of its LIFO inventory reserves. The restatement increased
inventory by $1,758 and reduced the Company's net loss for the nine months ended
July 3, 1999 by $1,128 or $.10 per common share. Due to the change in the first
quarter results, the Company has also restated its cumulative income statements
and related balance sheets and statements of cash flow for the nine months ended
July 3, 1999. The operating results for the quarter ended July 3, 1999 did not
require restatement for the above correction.
NOTE C - BUSINESS ACQUISITIONS
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, pursuant
to which the Company acquired (the "Acquisition") the apparel fabrics business
(the "Acquired Business") of Dominion from DTA for a cash purchase price of
$466.9 million including certain costs related to the Acquisition. The Acquired
Business primarily consists of subsidiaries and joint venture interests, which
comprise the Swift Denim Group ("Swift Denim"), Klopman International S.p.A.
("Klopman") and Swift Europe. Swift Denim is the second largest supplier of
denim in the world, Klopman is one of the largest suppliers of uniform fabrics
in Europe and Swift Europe is a major international supplier of denim to Europe,
North Africa and Asia. The total purchase price of the Acquisition was funded
with borrowings under the Company's credit facilities. The Company used the net
proceeds from the private placement on February 24, 1998 of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 to repay
portions of such credit facilities. In connection with the Acquisition, which
has been accounted for as a purchase transaction, the Company acquired assets
with a fair value of approximately $587.0 million and assumed liabilities of
approximately $192.0 million. The Company has
6
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE C - BUSINESS ACQUISITIONS (CONTINUED)
finalized the allocation of the fixed portion of the purchase price and has
recorded goodwill of approximately $71.9 million for the excess purchase price
(including assumed liabilities) over the fair market value of the assets
acquired. As of July 3, 1999, the Company and Polymer have not completed the
final cash settlement related to the Acquisition. The results of operations of
the Acquired Business have been included in the consolidated financial
statements from the date of the Acquisition.
The following unaudited pro forma results of operations assumes that the
Acquisition of the Apparel Business of Dominion had occurred at the beginning of
fiscal 1998. These pro forma results give effect to certain adjustments,
including depreciation of property, plant and equipment, amortization of the
cost of the Acquisition in excess of net assets acquired and interest expense
resulting from the Acquisition and related financing. The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations that would actually have occurred had the combination been
in effect on the dates indicated or which may occur in the future.
Nine Months Ended
June 27, 1998
-----------------
(in thousands except per share data)
Net sales $ 803,401
Loss before extraordinary item $ (185)
Loss before extraordinary item
per share - diluted $ (.02)
Net loss $ (709)
Net loss per share - diluted $ (.06)
NOTE D - INVENTORIES
The components of inventory at July 3, 1999, June 27, 1998 and October 3, 1998
consisted of the following (in thousands):
July 3, June 27, October 3,
1999 1998 1998
--------------- -------------- ----------------
Raw materials $ 9,200 $ 15,367 $ 13,029
Stock in process 22,795 31,194 34,554
Produced goods 139,984 134,548 142,015
Dyes, chemicals and supplies 10,884 13,303 13,011
------------ -------------- -----------
182,863 194,412 202,609
Less LIFO and other reserves (13,445) (13,466) (17,112)
------------ -------------- -----------
$ 169,418 $ 180,946 $ 185,497
============ ============== ===========
7
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE E - LONG-TERM DEBT
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank, as agent and lender and
its syndicate of lenders. The amendment which became effective as of July 3,
1999 (the "Amendment") replaced the Adjusted Leverage Ratio covenant (as defined
in the Amendment) with a minimum EBITDA covenant (as defined in the Amendment)
until the Company's December quarter 2000, replaced the Consolidated Net Worth
covenant with a Consolidated Retained Earnings covenant (as defined in the
Amendment), waived compliance by the Company with the Adjusted Fixed Charge
Coverage Ratio until the Company's December quarter 2000 and modified the
Company's covenant related to capital expenditures. The Company is currently in
compliance with the debt covenants discussed above.
Under the Amendment, for the period beginning July 4, 1999 through February 15,
2001 the revolving line of credit borrowings bear interest at a per annum rate,
at the Company's option, of either (i) (a) the greater of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a
margin 3.00%. Term Loan B and Term Loan C bear interest at a per annum rate, at
the Company's option, of (A) with respect to Term Loan B either (i)(a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
2.25% or (ii) LIBOR plus a margin or (B) with respect to Term Loan C, either
(i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 2.50% or (ii) LIBOR plus a margin of 3.75%. In addition, the Company
repaid $25 million principal amount of its term loan balance using available
cash and borrowings under its revolving line of credit and reduced the maximum
amount of borrowings under the revolving line of credit by $25 million to $200
million. In addition, the Company and each of its domestic subsidiaries granted
the lenders, as additional collateral, a lien on all real property owned in the
United States.
Beginning with the quarter ending December 30, 2000, the Company will be subject
to leverage and fixed charge coverage ratios, as amended on July 13, 1999. In
addition, beginning on February 16, 2001 under the Senior Credit Facility, as
amended, 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%, 1.00% or 1.25%, based on the Company achieving certain leverage ratios (as
defined in the amended Senior Credit Facility) or (ii) LIBOR plus a margin of
1.25%, 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on the Company achieving
certain leverage ratios. Term Loan B and Term Loan C bear interest at a per
annum rate, at the
8
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE E - LONG-TERM DEBT (CONTINUED)
Company's option, of (A) with respect to Term Loan B either (i)(a) the greater
of the prime rate or federal funds rate plus .50%, plus (b) a margin of 1.00%,
1.25%, 1.50% or 1.75%, based on the Company achieving certain leverage ratios or
(ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios or (B) with respect to Term Loan C, either
(i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the Company achieving certain
leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%, 3.00% or 3.25%,
based on the Company's achieving certain leverage ratios.
NOTE F - NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Income (loss) before extraordinary
item $ (5,880) $ 4,721 $ (3,616) $ 8,707
Extraordinary loss - - - (524)
------------ ------------ ------------ ----------
Net income (loss) $ (5,880) $ 4,721 $ (3,616) $ 8,183
============ ============ ============ ==========
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,903 11,781 11,873 11,710
Effect of dilutive securities:
Stock options 38 587 76 506
------------ ------------ ------------ ----------
Diluted potential common shares
denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exercises 11,941 12,368 11,949 12,216
============ ============ ============ ========
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 889,299 shares
and 7,000 shares of common stock were outstanding during the three months ended
July 3, 1999 and June 27, 1998, respectively, and options to purchase 667,282
shares and 7,000 shares of common stock were outstanding during the nine months
ended July 3, 1999 and June 27, 1998, respectively, but were not included in the
computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the common shares. Options
to purchase 15,000 shares and 12,000 shares of common stock were outstanding
during the three months ended July 3,
9
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE F - NET INCOME PER COMMON SHARE (CONTINUED)
1999 and June 27, 1998, respectively, and options to purchase 15,000 shares and
12,000 shares of common stock were outstanding during the nine months ended July
3, 1999 and June 27, 1998, respectively, but were not included in the
computation of diluted earnings per share pursuant to the contingent share
provisions of Financial Accountant Standards Board Statement No. 128, "Earnings
Per Share". Vesting of these options is contingent upon the market price of
common shares reaching certain target prices, which were greater than the
average market price of the common shares.
NOTE G - STOCKHOLDERS' EQUITY
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income." FAS 130 requires that the Company report comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income represents the change in stockholder's equity during the period from
non-owner sources. Currently, changes from non-owner sources consist of net
income (loss) and foreign currency translation adjustments. The Company adopted
FAS 130 on October 4, 1998. Total comprehensive income (loss) for the three and
nine months ended July 3, 1999 was $(8.8) million and $(14.4) million,
respectively, and for the three and nine months ended June 27, 1998 was $(4.5)
million and $(7.5) million, respectively.
10
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income (Loss) Stock Capital Earnings Stock Income (Loss) Total
------------- ----- ------- -------- ----- ------------- -----
Balance at
October 3, 1998 $ 122 $38,987 $ 81,861 $(2,247) $ 9,154 $ 127,877
Issuance of 26,700
shares of Common
Stock upon exercise
of options - 24 - - - 24
Issuance of 27,530
shares of Restricted
Common Stock - 138 - - - 138
Compensation earned
related to stock
options - 62 - - - 62
Comprehensive income (loss):
Net loss for nine
months ended
July 3, 1999 $ (3,616) - - (3,616) - - (3,616)
Foreign currency
translation
adjustment (10,736) - - - - (10,736) (10,736)
------- ---- ------- ---------- ------ ------- -----------
Total comprehensive
Income (loss) $(14,352)
==========
Balance at
July 3, 1999 $ 122 $ 39,211 $ 78,245 $ (2,247) $ (1,582) $ 113,749
======= ======== ========== ========= =========== =========
11
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following summarizes condensed consolidating financial information for the
Company, segregating Galey and Lord, Inc. (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and guarantees are full, unconditional
and joint and several to the maximum extent permitted by law. Separate financial
statements of each of the guarantor subsidiaries are not presented because
management believes that these financial statements would not be material to
investors.
July 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 142,176 $ 50,483 $ - $ 192,659
Inventories - 129,290 41,066 (938) 169,418
Other current
assets 12,826 26,608 27,696 (6,013) 61,117
------------ -------------- -------------- -------------- ----------------
Total current
assets 12,826 298,074 119,245 (6,951) 423,194
Property, plant and
equipment, net - 286,272 101,157 - 387,429
Intangibles - 155,372 - - 155,372
Other assets 848,767 95,510 66,029 (969,266) 41,040
------------ -------------- -------------- -------------- ----------------
$ 861,593 $ 835,228 $ 286,431 $ (976,217) $ 1,007,035
=========== ============== ============== ============== ================
Current liabilities:
Trade accounts
payable $ - $ 31,021 $ 22,968 $ - $ 53,989
Accrued
liabilities 28,187 20,723 17,826 311 67,047
Other current
liabilities 3,487 29,698 33,649 (62,169) 4,665
------------ -------------- -------------- -------------- ----------------
Total current
liabilities 31,674 81,442 74,443 (61,858) 125,701
Long-term debt 709,765 643,214 17,610 (683,202) 687,387
Other non-current
liabilities 6,405 69,290 17,452 (12,949) 80,198
Stockholders' equity 113,749 41,282 176,926 (218,208) 113,749
------------ -------------- -------------- -------------- ----------------
$ 861,593 $ 835,228 $ 286,431 $ (976,217) $ 1,007,035
=========== ============== ============== ============== ================
12
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
June 27, 1998
----------------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 143,136 $ 46,211 $ - $ 189,347
Inventories - 143,397 38,288 (739) 180,946
Other current
assets 23,217 50,366 19,275 (52,051) 40,807
------------ --------------- ----------------- ----------------- ------------------
Total current
assets 23,217 336,899 103,774 (52,790) 411,100
Property, plant and
equipment, net - 300,780 111,229 - 412,009
Intangibles - 168,359 - - 168,359
Other assets 816,725 2,799 37,639 (814,016) 43,147
------------ --------------- ---------------- ---------------- ------------------
$ 839,942 $ 808,837 $ 252,642 $ (866,806) $ 1,034,615
============ =============== ================ ================ ==================
Current liabilities:
Trade accounts
payable $ 378 $ 32,654 $ 25,384 $ - $ 58,416
Accrued
liabilities 30,296 38,738 25,878 110 95,022
Other current
liabilities 11,353 47,325 15,880 (70,557) 4,001
------------ --------------- ---------------- ----------------- ------------------
Total current
liabilities 42,027 118,717 67,142 (70,447) 157,439
Long-term debt 677,999 560,395 12,538 (564,192) 686,740
Other non-current
liabilities 5,000 74,896 1,089 (5,465) 75,520
Stockholders' equity 114,916 54,829 171,873 (226,702) 114,916
------------ --------------- ---------------- ---------------- ------------------
$ 839,942 $ 808,837 $ 252,642 $ (866,806) $ 1,034,615
=========== =============== ================ ================= ==================
13
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Three Months Ended July 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 192,763 $ 65,083 $ (8,370) $ 249,476
Gross profit 42 7,683 7,292 90 15,107
Operating income 78 613 4,509 91 5,291
Interest expense,
income taxes and
other, net (1,490) 10,122 1,800 739 11,171
Net income (loss) $ 1,568 $ (9,509) $ 2,709 $ (648) $ (5,880)
Nine Months Ended July 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 560,001 $ 192,735 $ (19,792) $ 732,944
Gross profit 77 41,687 23,283 188 65,235
Operating income 251 20,664 15,204 52 36,171
Interest expense,
income taxes and
other, net (3,304) 37,867 7,058 (1,834) 39,787
Net income (loss) $ 3,555 $ (17,203) $ 8,146 $ 1,886 $ (3,616)
14
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Three Months Ended June 27, 1998
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 226,179 $ 65,490 $ (16,373) $ 275,296
Gross Profit 112 24,420 9,511 (206) 33,837
Operating Income (97) 17,448 6,171 (507) 23,015
Interest expense and
income taxes 331 17,875 1,655 (1,567) 18,294
Net income (loss) $ (428) $ (427) $ 4,516 $ 1,060 $ 4,721
Nine Months Ended June 27, 1998
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 541,175 $ 117,320 $ (18,406) $ 640,089
Gross Profit 595 60,257 15,465 (767) 75,550
Operating Income (141) 41,667 10,200 (82) 51,644
Interest expense and
income taxes 1,061 41,135 2,832 (1,567) 43,461
Net income (loss) $ (1,202) $ 532 $ 7,368 $ 1,485 $ 8,183
15
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Nine Months Ended July 3, 1999
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 13,785 $ 5,980 $ 99 $ (168) $ 19,696
Cash provided by
(used in) investing
activities 6,155 (25,070) 7,563 (1,702) (13,054)
Cash provided by
(used in) financing
activities (10,999) 17,024 (4,433) 1,870 3,462
Effect of exchange
rate change on cash
and equivalents - - (359) - (359)
---------- ------------- ------------- ------------- -------------
Net change in cash
and cash equivalents 8,941 (2,066) 2,870 - 9,745
Cash and cash
equivalents at
beginning of period 114 8,326 11,506 - 19,946
---------- ------------- ------------- ------------- -------------
Cash and cash
equivalents at end
of period $ 9,055 $ 6,260 $ 14,376 $ - $ 29,691
========== ============= ============= ============= =============
16
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 3, 1999
(UNAUDITED)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Nine Months Ended June 27, 1998
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 13,003 $ (14,769) $ 30,375 $ - $ 28,609
Cash provided by
(used in) investing
activities (466,051) (20,499) 7,804 - (478,746)
Cash provided by
(used in) financing
activities 453,310 34,795 (14,966) - 473,139
Effect of exchange
Rate change on cash
and cash equivalents - - (8) - (8)
------------- --------------- --------------- ----------------- ----------------
Net change in cash and
cash equivalents 262 (473) 23,205 22,994
Cash and cash
equivalents at
beginning of period - 2,221 56 - 2,277
------------ --------------- --------------- ----------------- ----------------
Cash and cash
equivalents at
end of period $ 262 $ 1,748 $ 23,261 $ - $ 25,271
============ =============== =============== ================= ================
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of the
Company and its management team. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, competitive and economic factors in
the textile, apparel and home furnishings markets, raw materials and other
costs, weather-related delays, general economic conditions and other risks and
uncertainties that may be detailed herein or in the Company's Annual Report on
Form 10-K for the fiscal year ended October 3, 1998.
SIGNIFICANT EVENTS
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 pursuant
to which the Company acquired (the "Acquisition") the apparel fabrics business
(the "Acquired Business") of Dominion from DTA for a cash purchase price of
$466.9 million including certain costs related to the Acquisition. The Acquired
Business primarily consists of subsidiaries and joint venture interests, which
comprise the Swift Denim Group, the Klopman Group and Swift Europe. Swift Denim
is the second largest supplier of denim in the world, Klopman is one of the
largest suppliers of uniform fabrics in Europe and Swift Europe is a major
international supplier of denim to Europe, North Africa and Asia. The total
purchase price of the Acquisition was funded with borrowings under the Company's
credit facilities(see Liquidity and Capital Resources below). The Company used
the net proceeds from the private placement on February 24, 1998 of $300.0
million aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008
(the "Initial Notes")to repay portions of such credit facilities.
18
RESULTS OF OPERATIONS
The Company's operations are primarily classified into two operating segments:
(1) apparel fabrics, consisting of cotton casuals, denim, corduroy and uniform
fabrics and (2) home fabrics. Results for the three and nine month periods ended
July 3, 1999 and June 27, 1998 for each segment are shown below:
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------
July 3, June 27, July 3, June 27,
1999 1998 1999 1998*
--------------- ----------------- --------------- -----------
(dollar amounts in millions)
Net Sales to External Customers
- -------------------------------
Apparel fabrics $ 242.5 $ 264.9 $ 708.4 $ 603.7
Home fabrics 7.0 10.4 24.5 36.4
-------- ---------- ---------- -----------
Total net sales $ 249.5 $ 275.3 $ 732.9 $ 640.1
======== ========== ========== ===========
Operating Income (Loss) Per Segment
- -----------------------------------
Apparel fabrics $ 5.6 $ 22.4 $36.0 $ 49.5
% of Apparel Fabrics Net Sales 2.3% 8.5% 5.1% 8.2%
Home fabrics $(0.3) $ 0.6 $ 0.2 $ 2.1
% of Home Fabrics Net Sales (4.3)% 5.8% 0.8% 5.8%
------- --------- ------ ----------
Total $ 5.3 $ 23.0 $36.2 $ 51.6
% of Total Net Sales 2.1% 8.4% 4.9% 8.1%
*Includes results of operations of the Acquired Business for the five month
period from January 30, 1998 through June 27, 1998.
NET SALES
Net sales for the June quarter 1999 (third quarter of fiscal 1999) were $249.5
million as compared to $275.3 million for the June quarter 1998 (third quarter
of fiscal 1998). The $25.8 million decline in net sales is primarily due to
lower volume in denim, corduroy and Home Fashion Fabrics as well as overall
lower selling prices in denim, partially offset by growth in woven sportswear
and garment packages. Net sales for the first nine months of fiscal 1999 were
$732.9 million as compared to $640.1 million for the first nine months of fiscal
1998. The increase in net sales resulted from the inclusion of $153.2 million of
Acquired Business net sales, representing four additional months of net sales in
fiscal 1999 as a result of the timing of the Acquisition on January 29, 1998,
and from increased net sales of woven sportswear, partially offset by lower
volume in denim, corduroy and Home Fashion Fabrics as well as overall lower
selling prices in denim.
Apparel fabrics' net sales for the June quarter 1999 were $242.5 million, a
$22.4 million decrease over the June quarter 1998 net sales of $264.9 million.
The decrease in apparel sales is primarily due to lower volume in denim and
corduroy and overall lower denim sales prices, partially offset by growth in
woven sportswear and garment packages. Apparel fabrics' net sales for the first
nine months of fiscal 1999 were $708.4 million, a $104.7 million increase over
the first nine months of fiscal 1998 net sales of $603.7 million. The
19
increase in net sales is primarily attributable to the inclusion of the Acquired
Business net sales for the entire period of fiscal 1999 as compared to five
months in fiscal 1998 and to higher net sales of woven sportswear, partially
offset by lower net sales of corduroy and lower denim net sales in the
comparable five months. Sales of denim are currently lower than those in
historical periods due to the softness in the current retail environment.
Home fabrics' net sales for the June quarter 1999 and first nine months of
fiscal 1999 were $7.0 million and $24.5 million, respectively, as compared to
$10.4 million and $36.4 million, respectively, for the June quarter 1998 and for
the first nine months of fiscal 1998. The decline in home fabrics net sales
reflects a softness in the home fashion markets in which the Company
participates.
OPERATING INCOME
Operating income for the June quarter 1999 and first nine months of fiscal 1999
was $5.3 million and $36.2 million, respectively, as compared to $23.0 million
and $51.6 million, respectively, for the June quarter 1998 and first nine months
of fiscal 1998.
Apparel fabrics operating income was $5.6 million for the June quarter 1999, a
$16.8 million decline when compared to June quarter 1998 operating income of
$22.4 million. Apparel fabrics operating income for the first nine months of
fiscal 1999 was $36.0 million as compared to $49.5 million for the first nine
months of fiscal 1998. Decreases in apparel fabrics operating income for the
three and nine month comparable periods are due to lower denim manufacturing
efficiencies created by lower volume as well as a $1.8 million charge related to
severance, partially offset by greater manufacturing efficiencies achieved in
woven sportswear and overall reductions in selling, general and administrative
expenses.
Home fabrics experienced an operating loss of $0.3 million for the June quarter
1999 as compared to operating income of $0.6 million in the June quarter 1998.
For the nine months ended June 1999, operating income was lower than the
comparable period in the previous year by $1.9 million. Lower operating results
for the three and nine month periods are due to lower volume and sales prices.
INTEREST EXPENSE
Interest expense was $15.1 million and $45.3 million for the June quarter 1999
and first nine months of fiscal 1999, respectively, as compared to $15.9 million
and $35.9 million for the June quarter 1998 and first nine months of fiscal
1998, respectively. The increase in interest expense for the comparable nine
month period was primarily due to added interest expense on additional
indebtedness incurred to finance the Acquisition.
20
INCOME TAXES
The Company's overall tax rate for the first nine months of fiscal 1999 was
approximately 35.2%. The difference from the statutory rate reflects the offset
of foreign taxable earnings with domestic taxable losses.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The Company incurred a net loss for the June quarter 1999 of $5.9 million or
$.49 per common share, compared to net income of $4.7 million or $.38 per common
share for the June quarter 1998. Net loss for the first nine months of fiscal
1999 was $3.6 million or $.30 per common share as compared to net income of $8.2
million or $.67 per common share for the first nine months of fiscal 1998 which
included charges of $7.5 million (pre-tax) or $.38 per common share related to
the Acquisition.
ORDER BACKLOG
The Company's order backlog at July 3, 1999 was $163.9 million, a 33% decrease
from the June 27, 1998 backlog of $245.9 million. Many apparel manufacturers,
including many of the Company's customers, have modified their purchasing
procedures and have shortened lead times from order to delivery. The Company
believes that as this trend continues, order backlogs will decline and may not
provide as meaningful information with regard to the Company's future sales as
order backlogs have in the past.
LIQUIDITY AND CAPITAL RESOURCES
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank, as agent and lender and
its syndicate of lenders. The amendment which became effective as of July 3,
1999 (the "Amendment") replaced the Adjusted Leverage Ratio covenant (as defined
in the Amendment) with a minimum EBITDA covenant (as defined in the Amendment)
until the Company's December quarter 2000, replaced the Consolidated Net Worth
covenant with a Consolidated Retained Earnings covenant (both as defined in the
Amendment), waived compliance by the Company with the Adjusted Fixed Charge
Coverage Ratio until the Company's December quarter 2000 and modified the
Company's covenant related to capital expenditures. The Company is currently in
compliance with the debt covenants discussed above.
Under the Amendment, for the period beginning July 4, 1999 through February 15,
2001 the revolving line of credit borrowings bear interest at a per annum rate,
at the Company's option, of either (i) (a) the greater of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a
margin 3.00%. Term
21
Loan B and Term Loan C bear interest at a per annum rate, at the Company's
option, of (A) with respect to Term Loan B either (i)(a) the greater of the
prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii)
LIBOR plus a margin or (B) with respect to Term Loan C, either (i)(a) greater of
the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or
(ii) LIBOR plus a margin of 3.75%. In addition, the Company repaid $25 million
principal amount of its term loan balance using available borrowings under its
revolving line of credit and reduced the maximum amount of borrowings under the
revolving line of credit by $25 million to $200 million. The repayment of the
Term Loan B and Term Loan C principal balances ratably reduces the remaining
quarterly principal payments. In addition, the Company and each of its domestic
subsidiaries granted the lenders, as additional collateral, a lien on all real
property owned in the United States. In connection with the July 13, 1999
amendment, the Company, during the September 1999 quarter, expects to incur
charges of $0.5 million to $0.8 million principally related to the real estate
liens and legal fees.
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of the
initial purchaser's discount and offering expenses) were used to repay (i)
$275.0 million principal amount of borrowings under the Bridge Financing
Facility (as defined below) incurred to partially finance the Acquisition and
(ii) a portion of the outstanding amount under a revolving line of credit
provided for under the Senior Credit Facility (as defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated July 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on July 22, 1998. The terms of the Notes are identical in all
material respects to those of the Initial Notes except that the Notes are freely
transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
is paid March 1 and September 1 of each year.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
22
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company's and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
On January 29, 1998, the Company entered into a new credit agreement (as
amended, the "Senior Credit Facility"), with First Union National Bank ("FUNB"),
as agent and lender, and, as of March 27, 1998, with a syndicate of lenders. The
Senior Credit Facility provides for (i) a revolving line of credit under which
the Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million 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 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. Beginning with the quarter ending
December 30, 2000, the Company will be subject to leverage and fixed charge
coverage ratios, as amended on July 13, 1999. In addition, under the Senior
Credit Facility, the revolving line of credit expires on March 27, 2004 and the
principal amount of (i) Term Loan B is repayable in quarterly payments of
$349,157 until March 27, 2004 and, thereafter, four quarterly payments of
$32,820,773 until Term Loan B's maturity on July 2, 2005 and (ii) Term Loan C is
repayable in quarterly payments of $247,687 until July 2, 2005 and, thereafter,
four quarterly payments of $23,034,918 until Term Loan C's maturity on July 1,
2006. Under the Senior Credit Facility, as amended on December 22, 1998 and July
3, 1999, the revolving line of credit borrowings bear interest at a per annum
rate, at the Company's option, of either (i) (a) the greater of the prime rate
or the federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%, .75%,
1.00% or 1.25%, based on the Company achieving certain leverage ratios (as
defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 1.25%,
1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on the Company achieving certain
leverage ratios. Term Loan B and Term Loan C bear interest at a per annum rate,
at the Company's option, of (A) with respect to Term Loan B either (i) (a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
1.00%, 1.25%, 1.50% or 1.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the
Company achieving certain leverage ratios or (B) with respect to Term Loan C,
either (i) (a)the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the Company
23
achieving certain leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%,
3.00% or 3.25%, based on the Company's achieving certain leverage ratios.
Pursuant to the amendment executed as of July 3, 1999, borrowings under the
Senior Credit Facility will bear interest in accordance with the foregoing
pricing options beginning on February 16, 2001.
The Company's obligations under the Senior Credit Facility are secured by all of
the assets of the Company and each of its domestic subsidiaries, a pledge by the
Company and each of its domestic subsidiaries of all the outstanding capital
stock of its respective domestic subsidiaries and a pledge of 65% of the
outstanding voting capital stock, and 100% of the outstanding non-voting capital
stock, of certain of its respective foreign subsidiaries. In addition, payment
of all obligations under the Senior Credit Facility is guaranteed by each of the
Company's domestic subsidiaries. Under the Senior Credit Facility, the Company
is required to make mandatory prepayments of principal annually in an amount
equal to 50% of Excess Cash Flow (as defined in the Senior Credit Facility), and
also in the event of certain dispositions of assets or debt or equity issuances
(all subject to certain exceptions) in an amount equal to 100% of the net
proceeds received by the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
On December 19, 1997, the Company entered into a $470.0 million credit agreement
(the "Interim Credit Agreement") with FUNB, as agent and lender. Initial
revolving credit line borrowings under the Interim Credit Agreement were used to
refinance the existing term loan and revolving credit facility. The Interim
Credit Agreement was replaced on January 29, 1998 when the Company entered into
the Senior Credit Facility.
On December 19, 1997, the Company entered into a Senior Subordinated Credit
Agreement (the "Bridge Financing Facility") with First Union Corporation, as
agent and lender, which was amended on January 29, 1998 and provided for
borrowings of $275.0 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 Facility were used to fund the
Acquisition (including fees and expenses). The Bridge Financing Facility was
repaid on February 24, 1998 when the Company closed its private offering of
$300.0 million aggregate principal amount of Initial Notes.
24
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company will
provide $5.0 million additional funding to three defined benefit pension plans
previously sponsored by Dominion, $3.0 million of which was paid at the closing
of the Acquisition, $1.0 million was paid during the March quarter 1999 and the
remaining $1.0 million is to be paid in January 2000. The Pension Funding
Agreement also gives the PBGC a priority lien of $10.0 million on certain land
and building assets of the Company to secure payment of any liability to the
PBGC that might arise if one or more of the pension plans were terminated. The
Company's obligations under the Pension Funding Agreement terminate upon the
earlier to occur of (a) the termination of the pension plans and (b) on or after
January 30, 2003, if (i) the pension plans are fully funded for two consecutive
years and (ii) the Company receives an investment grade rating on its debt.
For the nine months of fiscal 1999, the Company spent approximately $22.4
million for capital expenditures. The Company expects to spend approximately
$30.0 million for capital expenditures in fiscal 1999. The Company anticipates
that approximately $14.7 million will be used to increase the Company's capacity
while the remaining $15.3 million will be used to maintain or modernize existing
capacity. The Company expects to fund these expenditures through funds from
operations and borrowings under its revolving line of credit under the Senior
Credit Facility.
Working capital increased approximately $43.8 million to $297.5 million at July
3, 1999 as compared to $253.7 million at June 27, 1998. The increase is
primarily due to a decrease in accrued liabilities, an increase in income tax
receivables and an increase in the deferred income tax asset balance offset by a
decrease in inventories. The decrease in accrued liabilities reflects the
finalization of the fixed portion of the purchase accounting allocation related
to the Acquisition. Additionally, accrued liabilities declined as a result of
the satisfaction of obligations in the normal course of business. As a result of
generating net taxable losses for the current year, the income tax asset
balances have increased to reflect anticipated income tax refunds or future
benefits. The decrease in inventories is attributed to management's planned
reduction of inventories.
The Company anticipates that cash requirements including working capital and
capital expenditure needs will be met through funds generated from operations
and through revolving credit borrowings under the Company's Senior Credit
Facility. In addition, from time to time, the Company uses borrowings under
secured and unsecured bank loans, through capital leases or through operating
leases for various equipment purchases.
25
YEAR 2000 COMPLIANCE
Until recently, computer programs were generally written using two digits rather
than four to define the applicable year. Accordingly, such programs may be
unable to distinguish properly between the Year 1900 and the Year 2000. This
could result in system failures or data corruption for the Company, its
customers or suppliers which could cause disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
business activities or to receive information, services, raw materials and
supplies, or payment from suppliers, customers or business partners or any other
companies with which the Company conducts business.
The Company, including the Acquired Business, has developed a comprehensive plan
intended to address Year 2000 issues. As part of the plan, the Company has
selected a team to identify, evaluate and implement remediation efforts aimed at
bringing the Company's information technology and non-information technology
systems into Year 2000 compliance prior to December 31, 1999. During fiscal
1998, the team completed its assessment of the Company's information technology
and non-information technology systems. Additionally, the Company has engaged an
independent consulting firm that specializes in implementing and reviewing Year
2000 programs. Such firm has evaluated significant portions of the Company's
remediation plan and has identified improvements to the Company's overall
remediation efforts.
The Company's information technology remediation efforts are substantially
complete and the Company's significant efforts in fiscal 1999 will consist of
testing the updated systems. It is anticipated that additional remediation
efforts resulting principally from the testing procedures will be completed by
the end of the Company's 1999 fiscal year. The Company has also prioritized and
completed the significant steps of its non-information technology systems plan.
The Company's remaining remediation efforts related to non-information
technology systems are expected to be completed during fiscal 1999. If the
Company's remaining remediation efforts are not completed on a timely basis, the
Year 2000 issue could have an adverse effect on the Company's operations.
Based upon the remediation efforts completed, the Company does not believe a
formal contingency plan will be required. Individual locations or business units
will develop informal contingency plans in the event that they do not expect to
be fully Year 2000 compliant within the current time estimates. To date, the
cost of the Company's Year 2000 assessment and remediation efforts has not been
material to the Company's results of operations or liquidity. The total
expenditures in fiscal 1999 to remediate the Company's year 2000 issues,
inclusive of its ongoing systems initiatives is not expected to exceed $2.5
million. The Company is funding the expenditures related to the Year 2000 plan
with cash flows from operations. The
26
capitalization or expense of the foregoing expenditures will be determined using
current authoritative guidance.
The Company is also communicating with its significant suppliers, customers and
business partners to coordinate Year 2000 conversion efforts. Additionally,
during fiscal 1999 the Company will be contacting second tier suppliers to
assess their Year 2000 readiness. Currently, the Company is unaware of any
material exposures or contingencies in regards to these parties. However, the
Company cannot reasonably estimate the potential impact on its financial
position, results of operations or cash flows in the event these parties do not
become Year 2000 capable on a timely basis.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash
transactions. During this time period, the Euro will be traded on currency
exchanges and will be the basis of valuing legacy currencies. The legacy
currencies will continue to be legal tender. Beginning January 1, 2002, the
participating countries will issue new Euro-denominated bills and coins for use
in cash transactions, and no later than July 1, 2002, will withdraw all bills
and coins denominated in the legacy currencies. The legacy currencies will then
no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the Participating Countries. The Company
believes that the conversion to the Euro will eliminate much of the advantage or
disadvantage coming from exchange rate fluctuation resulting from transactions
involving legacy currencies in Participating Countries. Accordingly,
competitiveness will be solely based on price, quality and service. While the
Company believes the increased competitiveness based on these factors will
provide the Company with a strategic advantage over smaller local companies, it
cannot assess the magnitude of this impact on its operations.
The Company's Euro conversion plan provides for the invoicing of products in
both local currencies and Euro beginning January 1, 1999. However, the
conversion of the Company's financial reporting and information systems will not
begin until the Company's 2000 fiscal year. The Company believes that the Euro
conversion will be completed prior to the beginning of its 2001 fiscal year and
that the costs
27
related to the conversion will not be material to the Company's operating
results or liquidity although no assurances can be made in this regard.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS 131,
"Disclosures about Segments of an Enterprise and Related Information", effective
for years beginning after December 15, 1997, the Company's fiscal year 1999. FAS
131 requires that a public company report financial and descriptive information
about its reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The financial information to be
reported includes segment profit or loss, certain revenue and expense items and
segment assets and reconciliations to corresponding amounts in the general
purpose financial statements. FAS 131 also requires information about products
and services, geographic areas of operation, and major customers. The Company
has not completed its analysis of the effect of adoption on its financial
statement disclosure, however, the adoption of FAS 131 will not affect results
of operations or financial position, but may affect the disclosure of segment
information.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities". In June 1999, the FASB deferred the effective date of
this statement for one year, from years beginning after June 15, 1999, to years
beginning after June 15, 2000, the Company's fiscal year 2001. FAS 133 requires
that all derivatives be recorded on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives would be either offset against the change in the fair value
of assets, liabilities, or firm commitments through earnings or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value would immediately be
recognized in earnings. The Company has not yet determined what the effect of
FAS 133 will be on the earnings and financial position of the Company.
28
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relative to the Company's market risk sensitive instruments by major
category at October 3, 1998 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended October 3, 1998.
FOREIGN CURRENCY EXPOSURES
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. As of July 3, 1999, the result of a uniform 10% change in the
value of the U.S. dollar relative to currencies of countries in which the
Company manufactures or sells its products would not be material.
COTTON COMMODITY EXPOSURES
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. Due to decreases in the
spot rate and quoted futures contract prices of cotton between the Company's
fiscal year ended October 3, 1998 and July 3, 1999, a 10% decline in market
prices as of July 3, 1999 would have an additional negative impact on the value
of outstanding contracts of $20.3 million compared to the Company's fiscal year
end.
INTEREST RATE EXPOSURES
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The fair values of the
agreements are not materially different from the notional values as of July 3,
1999.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on short-term assets and commitments. These short-term assets
and commitments principally relate to accounts receivable and trade payable
positions and fixed asset purchase obligations. Unrealized gains and losses
related to outstanding forward exchange contracts at July 3, 1999 are not
material.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits to this Form 10-Q are listed in
the accompanying Exhibit Index
(b) Reports on Form 8-K - The Registrant filed a Form 8-K on July
13, 1999 to report, among other things, that the Company had
amended the terms of its Senior Credit Facility.
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Galey & Lord, Inc.
------------------------------
(Registrant)
/s/Michael R. Harmon
-------------------------------
Michael R. Harmon
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer), Treasurer
and Secretary
December 8, 1999
- ---------------
Date
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
32