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 April 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 - 11,902,917 shares as of May 17, 1999.
Exhibit Index at page 31
INDEX
GALEY & LORD, INC.
Page
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
April 3, 1999, March 28, 1998
and October 3, 1998
Consolidated Statements of Income -- 4
Three and six months ended April 3, 1999
and March 28, 1998
Consolidated Statements of Cash Flows -- 5
Six months ended April 3, 1999
and March 28, 1998
Notes to Consolidated Financial Statements -- 6-16
April 3, 1999
Item 2. Management's Discussion and Analysis of 17-27
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security 29
Holders
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
- ----------
EXHIBIT INDEX 31
- -------------
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
April 3, March 28, OCTOBER 3,
1999 1998 1998
ASSETS (Unaudited) (Unaudited) *
----------- ----------- -----------
Current assets:
Cash and cash equivalents $ 9,576 $ 16,505 $ 19,946
Trade accounts receivable 183,875 197,388 183,192
Sundry notes and accounts receivable 4,182 11,946 12,166
Inventories 181,411 178,591 185,497
Income taxes receivable 4,463 - 4,348
Deferred income taxes 14,310 13,350 11,370
Prepaid expenses and other current assets 3,076 5,751 4,339
---------------- ---------------- ----------------
Total current assets 400,893 423,531 420,858
Property, plant and equipment, at cost 511,481 490,115 515,899
Less accumulated depreciation and
amortization (117,514) (78,639) (98,334)
---------------- ---------------- ----------------
393,967 411,476 417,565
Investments in and advances to associated
companies 25,334 23,609 26,327
Deferred charges, net 15,192 15,743 15,148
Other non-current assets 1,333 1,078 3,100
Intangibles, net 157,626 169,593 155,295
---------------- ---------------- ----------------
$ 994,345 $ 1,045,030 $ 1,038,293
================ ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,607 $ 4,250 $ 4,051
Trade accounts payable 59,557 63,981 66,098
Accrued salaries and employee benefits 23,615 26,725 28,085
Accrued liabilities 34,787 54,883 39,504
Income taxes payable 1,349 14 1,748
---------------- ---------------- ----------------
Total current liabilities 122,915 149,853 139,486
Long-term debt 665,484 698,059 682,926
Other long-term liabilities 23,797 24,251 26,647
Deferred income taxes 59,703 64,161 61,357
Stockholders' equity:
Common stock 122 121 122
Contributed capital in excess of par
value 39,087 37,281 38,987
Retained earnings 84,125 74,028 81,861
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income 1,359 (477) 9,154
---------------- ---------------- ----------------
Total stockholders' equity 122,446 108,706 127,877
---------------- ---------------- ----------------
$ 994,345 $ 1,045,030 $ 1,038,293
================ ================ ================
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
3
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
------------- ------------ ------------ ---------
Net sales $ 237,433 $ 237,645 $ 483,468 $ 364,792
Cost of sales 215,227 205,728 433,340 323,079
----------- ------------- ------------- -------------
Gross profit 22,206 31,917 50,128 41,713
Selling, general and administrative
expenses 8,932 8,324 16,831 11,711
Amortization of goodwill 1,285 952 2,417 1,373
----------- ------------- ------------- -------------
Operating income 11,989 22,641 30,880 28,629
Interest expense 15,219 12,629 30,175 16,129
Income from associated companies (1,112) (832) (2,427) (832)
Bridge financing interest expense - 3,549 - 3,928
Loss on foreign currency hedges - - - 2,745
----------- ----------- ------------- -------------
Income (loss) before income taxes and
extraordinary loss (2,118) 7,295 3,132 6,659
Income tax expense (benefit):
Current (318) 3,161 1,772 2,310
Deferred (694) 38 (904) 363
----------- ------------- ------------- -------------
Income (loss) before extraordinary loss (1,106) 4,096 2,264 3,986
Extraordinary loss from debt refinancing,
net of taxes of $332 - - - (524)
------------ ------------- ------------- -------------
Net income (loss) $ (1,106) $ 4,096 $ 2,264 $ 3,462
============ ======= ======= =============
Net income per common share:
Basic:
Average common shares outstanding 11,875 11,682 11,858 11,673
Income (loss) per share before
extraordinary loss $ (.09) $ .35 $ .19 $ .34
Extraordinary loss from debt
refinancing - - - (.04)
------------ ------------- ------------- -----------
Net income (loss) per common share - Basic $ (.09) $ .35 $ .19 $ .30
=========== ===== ===== ===========
Diluted:
Average common shares outstanding 11,936 12,088 11,964 12,071
Income(loss) per share before
extraordinary loss $ (.09) $ .34 $ .19 $ .33
Extraordinary loss from debt
refinancing - - - (.04)
------------ ------------- ------------- -----------
Net income (loss) per common share - Diluted $ (.09) $ .34 $ .19 $ .29
=========== ============ ===== =====
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended
---------------------------------
April 3, March 28,
1999 1998
---------------- ------------
Cash flows from operating activities:
Net income (loss) $ 2,264 $ 3,462
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 20,839 11,384
Amortization of intangible assets 2,417 1,373
Amortization of deferred charges 1,216 2,475
Deferred income taxes (904) 363
Non-cash compensation 76 782
(Gain)/loss on disposals of property, plant
and equipment (229) 221
Undistributed income from associated companies (2,427) (832)
Extraordinary loss from debt refinancing - 524
Changes in assets and liabilities (net of acquisition):
(Increase)/decrease in accounts receivable - net (3,042) (40,742)
(Increase)/decrease in sundry notes & accounts receivable 7,584 14,441
(Increase)/decrease in inventories 2,660 (5,125)
(Increase)/decrease in prepaid expenses and other
current assets 1,078 5,301
(Increase)/decrease in other non current assets 25 3,391
(Decrease)/increase in accounts payable - trade (4,907) (2,039)
(Decrease)/increase in accrued liabilities (7,965) 230
(Decrease)/increase in income taxes payable (513) 141
(Decrease)/increase in other long-term liabilities (395) 2,015
--------------- ---------------
Net cash provided by (used in) operating activities 17,777 (2,635)
Cash flows from investing activities:
Acquisition of business - net of cash acquired - (456,908)
Property, plant and equipment expenditures (16,886) (15,029)
Proceeds from sale of property, plant and equipment 3,853 4,041
Other 3,384 373
--------------- -------------
Net cash provided by (used in) investing activities (9,649) (467,523)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit (4,100) (2,200)
Principal payments on long-term debt (13,026) (814,802)
Issuance of long-term debt - 1,319,008
Increase in common stock 24 622
Payment of bank fees and loan costs (1,185) (18,242)
--------------- ---------------
Net cash provided by (used in) financing activities (18,287) 484,386
Effect of exchange rate changes on cash and cash equivalents (211) -
------------- ---------------
Net increase/(decrease) in cash and cash equivalents (10,370) 14,228
Cash and cash equivalents at beginning of period 19,946 2,277
-------------- ---------------
Cash and cash equivalents at end of period $ 9,576 $ 16,505
=============== ===============
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 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 April 3, 1999 and the results of operations and
cash flows for the periods ended April 3, 1999 and March 28, 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 $2,199 for the three and six months
ended March 28, 1998 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 increased the Company's net income for the six months
ended April 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 six
months ended April 3, 1999. The operating results for the quarter ended April 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 $585.9 million and assumed liabilities of
approximately $191.5 million. The Company has
6
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 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 $72.5 million for the excess purchase price
(including assumed liabilities) over the fair market value of the assets
acquired. As of April 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.
Six Months Ended
March 28, 1998
--------------
(in thousands except per share data)
Net sales $ 528,105
Loss before extraordinary item $ (4,906)
Loss before extraordinary item
per share - diluted $ (.41)
Net loss $ (5,430)
Net per share - diluted $ (.45)
NOTE D - INVENTORIES
The components of inventory at April 3, 1999, March 28, 1998 and October 3, 1998
consisted of the following (in thousands):
April 3, March 28, October 3,
1999 1998 1998
--------------- ----------------- --------------
Raw materials $ 10,122 $ 12,396 $ 13,029
Stock in process 22,710 38,814 34,554
Produced goods 144,090 123,728 142,015
Dyes, chemicals and supplies 17,237 13,168 13,011
--------------- ----------------- --------------
194,159 188,106 202,609
Less LIFO and other reserves (12,748) (9,515) (17,112)
--------------- ----------------- --------------
$ 181,411 $ 178,591 $ 185,497
=============== ================= ==============
7
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
(UNAUDITED)
NOTE E - LONG-TERM DEBT
On December 23, 1998, the Company amended its Senior Credit Facility with its
current bank group led by First Union National Bank, as agent and lender. Under
the Senior Credit Facility, as amended, 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) 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. The Company is currently in compliance with its restrictive
debt covenants. However, given the current apparel environment it is likely that
the Company could violate one of its restrictive covenants within the next
twelve months. The Company is evaluating its alternatives in the event it is
unable to comply with its restrictive covenants in the near term. The
alternatives include, but are not limited to, obtaining waivers for possible
future violations, amending the covenants or refinancing the Company's Senior
Credit Facility. If it becomes necessary to obtain waivers or amendments, the
Company does not expect that these alternatives would have a material impact on
future results of operations. However, should it become necessary to refinance
the Company's Senior Credit Facility, the Company may incur costs and expenses
and debt extinguishment losses.
8
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
(UNAUDITED)
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 Six Months Ended
------------------------------ ---------------------------
April 3, March 28, April 3, March 28,
1999 1998 1999 1998
------------ ------------- ------------- -----------
Numerator:
Income (loss) before extraordinary
item $ (1,106) $ 4,096 $ 2,264 $ 3,986
Extraordinary loss - - - (524)
------------ ------------ ------------ ----------
Net income (loss) $ (1,106) $ 4,096 $ 2,264 $ 3,462
============ ============ ============ ==========
Denominator:
Denominator for basic earnings per share - weighted
average shares 11,875 11,682 11,858 11,673
Effect of dilutive securities:
Stock options 61 406 106 398
------------ ------------ ------------ ----------
Diluted potential common shares
denominator for diluted earnings per share -
adjusted weighted average shares and assumed exercises 11,936 12,088 11,964 12,071
============ ============ ============ ========
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 880,299 shares
and 3,000 shares of common stock were outstanding during the three months ended
April 3, 1999 and March 28, 1998, respectively, and options to purchase 561,649
shares and 2,000 shares of common stock were outstanding during the six months
ended April 3, 1999 and March 28, 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 251,000 shares of common stock were outstanding
during the three months ended April 3, 1999 and March 28, 1998, respectively,
and options to purchase 15,000 shares and 266,166 shares of common stock were
outstanding during the six months ended April 3, 1999 and March 28, 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.
9
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
(UNAUDITED)
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
six months ended April 3, 1999 was $(6.9) million and $(5.5) million,
respectively, and for the three and six months ended March 28, 1998 was $4.5
million and $3.9 million, respectively.
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income 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 3,530
shares of Restricted
Common Stock - 30 - - - 30
Compensation earned
related to stock
options - 46 - - - 46
Comprehensive income:
Net income for six
months ended
April 3, 1999 $ 2,264 - - 2,264 - - 2,264
Foreign currency
translation
adjustment (7,795) - - - - (7,795) (7,795)
------ ---- ------- ---------- ------ ------- -----------
Total comprehensive
income (loss) $(5,531)
=======
Balance at
April 3, 1999 $ 122 $39,087 $84,125 $(2,247) $ 1,359 $ 122,446
======= ======= ======= ======= ======= =========
10
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 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.
April 3, 1999
---------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 134,920 $ 48,955 $ - $ 183,875
Inventories - 140,830 43,016 (2,435) 181,411
Other current
assets 3,694 83,740 17,818 (69,645) 35,607
------------ -------------- -------------- -------------- ----------------
Total current
assets 3,694 359,490 109,789 (72,080) 400,893
Property, plant and
equipment, net - 288,859 105,108 - 393,967
Intangibles - 157,626 - - 157,626
Other assets 833,738 8,840 55,218 (855,937) 41,859
------------ -------------- -------------- -------------- ----------------
$ 837,432 $ 814,815 $ 270,115 $ (928,017) $ 994,345
=========== ============== ============== ============== ================
Current liabilities:
Trade accounts
payable $ - $ 36,072 $ 25,065 $ (1,580) $ 59,557
Accrued
liabilities 21,847 21,695 14,466 394 58,402
Other current
liabilities 35,396 27,235 30,983 (88,658) 4,956
------------ -------------- -------------- -------------- ----------------
Total current
liabilities 57,243 85,002 70,514 (89,844) 122,915
Long-term debt 651,338 616,702 6,455 (609,011) 665,484
Other non-current
liabilities 6,405 69,304 16,049 (8,258) 83,500
Stockholders' equity 122,446 43,807 177,097 (220,904) 122,446
------------ -------------- -------------- -------------- ----------------
$ 837,432 $ 814,815 $ 270,115 $ (928,017) $ 994,345
=========== ============== ============== ============== ================
11
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
April 3, 1999
(Unaudited)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
March 28, 1998
---------------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- -------------- -------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 151,587 $ 45,801 $ - $ 197,388
Inventories - 141,353 37,551 (313) 178,591
Other current
assets 55,686 22,561 24,888 (55,583) 47,552
------------ ------------- ----------- --------- -------------
Total current
assets 55,686 315,501 108,240 (55,896) 423,531
Property, plant and
equipment, net - 300,647 110,829 - 411,476
Intangibles 8,756 160,837 - - 169,593
Other assets 782,357 275 24,687 (766,889) 40,430
------------ ------------- ---------- -------------- -------------
$ 846,799 $ 777,260 $ 243,756 $ (822,785) $ 1,045,030
============ =========== ========= ============== =============
Current liabilities:
Trade accounts
payable $ 437 $ 36,998 $ 26,546 $ - $ 63,981
Accrued
liabilities 36,546 32,509 13,106 (553) 81,608
Other current
liabilities 1,988 33,389 24,505 (55,618) 4,264
------------ ----------- --------- --------------- -------------
Total current
liabilities 38,971 102,896 64,157 (56,171) 149,853
Long-term debt 690,124 563,500 37,435 (593,000) 698,059
Other non-current
liabilities - 76,552 12,152 (292) 88,412
Stockholders' equity 117,704 34,312 130,012 (173,322) 108,706
------------ ----------- --------- -------------- -------------
$ 846,799 $ 777,260 $ 243,756 $ (822,785) $ 1,045,030
=========== =========== ========= =============== =============
12
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
April 3, 1999
(Unaudited)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Three Months Ended April 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 184,650 $ 62,943 $ (10,160) $ 237,433
Gross profit 35 13,886 8,182 103 22,206
Operating income 40 6,515 5,468 (34) 11,989
Interest expense,
income taxes and
other, net (547) 13,249 2,460 (2,067) 13,095
Net income (loss) $ 587 $ (6,734) $ 3,008 $ 2,033 $ (1,106)
Six Months Ended April 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 376,110 $ 127,652 $ (20,294) $ 483,468
Gross profit 35 33,974 15,991 128 50,128
Operating income 173 20,021 10,695 (9) 30,880
Interest expense,
income taxes and
other, net (1,814) 27,745 5,258 (2,573) 28,616
Net income (loss) $ 1,987 $ (7,724) $ 5,437 $ 2,564 $ 2,264
13
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
April 3, 1999
(Unaudited)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Three Months Ended March 28, 1998
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 196,888 $ 47,635 $ (6,878) $ 237,645
Gross Profit (10) 26,107 5,888 (68) 31,917
Operating Income (44) 18,391 3,963 331 22,641
Interest expense and
income taxes 730 16,684 1,131 - 18,545
Net income (loss) $ (774) $ 1,707 $ 2,832 $ 331 $ 4,096
Six Months Ended March 28, 1998
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 324,035 $ 51,829 $ (11,072) $ 364,792
Gross Profit (10) 35,837 5,954 (68) 41,713
Operating Income (44) 24,219 4,029 425 28,629
Interest expense and
income taxes 730 23,260 1,177 - 25,167
Net income (loss) $ (774) $ 959 $ 2,852 $ 425 $ 3,462
14
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
April 3, 1999
(Unaudited)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Six Months Ended April 3, 1999
--------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
Cash provided by
(used in) operating
activities $ 1,379 $ 13,266 $ (91) $ 3,223 $ $ 17,777
Cash provided by
(used in) investing
activities 7,798 (18,513) 5,755 (4,689) (9,649)
Cash provided by
(used in) financing
activities (9,200) 650 (11,203) 1,466 (18,287)
Effect of exchange
rate change on cash
and equivalents - - (211) - (211)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents (23) (4,597) (5,750) - (10,370)
Cash and cash
equivalents at
beginning of period 114 8,326 11,506 - 19,946
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 91 $ 3,729 $ 5,756 $ - $ 9,576
=========== =============== =============== ============= ===============
15
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
April 3, 1999
(Unaudited)
NOTE H - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
Six Months Ended March 28, 1998
--------------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
Cash provided by
(used in) operating
activities $ (320) $ (10,063) $ 7,748 $ - $ (2,635)
Cash provided by
(used in) investing
activities (466,071) (13,064) 11,612 - (467,523)
Cash provided by
(used in) financing
activities 469,391 22,335 (7,340) - 484,386
------------ --------------- --------------- -------------- ----------------
Net change in cash and cash
equivalents 3,000 (792) 12,020 - 14,228
Cash and cash equivalents at
beginning of period - 2,277 - - 2,277
------------ --------------- --------------- -------------- ----------------
Cash and cash equivalents at
end of period $ 3,000 $ 1,485 $ 12,020 $ - $ 16,505
============ =============== =============== ============== ================
16
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.
17
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 six month periods ended
April 3, 1999 and March 28, 1998 for each segment are shown below:
Three Months Ended Six Months Ended
------------------- ----------------
April 3, March 28, April 3, March 28,
1999 1999 1999 1999
--------------- ----------------- --------------- ---------
(dollar amounts in millions)
Net Sales to External Customers
- -------------------------------
Apparel fabrics $ 228.6 $ 225.1 $ 466.0 $ 338.8
Home fabrics 8.8 12.5 17.5 26.0
-------- ---------- ---------- -----------
Total net sales $ 237.4 $ 237.6 $ 483.5 $ 364.8
======== ========== ========== ===========
Operating Income Per Segment
- ----------------------------
Apparel fabrics $ 12.0 $ 22.0 $ 30.4 $ 27.1
% of Apparel Fabrics Net Sales 5.0% 9.8% 6.5% 8.0%
Home fabrics $ - $ .6 $ .5 $ 1.5
% of Home Fabrics Net Sales -% 5.4% 3.1% 6.0%
-------- --------- -------- ---------
Total $ 12.0 $ 22.6 $ 30.9 $ 28.6
% of Total Net Sales 5.0% 9.5% 6.4% 7.9%
NET SALES
Net sales for the March quarter 1999 (second quarter of fiscal 1999) were $237.4
million as compared to $237.6 million for the March quarter 1998 (second quarter
of fiscal 1998). Net sales remained flat for the March quarter 1999 as compared
to the March quarter 1998. The change in net sales reflects the inclusion in the
March quarter 1999 of $32.0 million of January 1999 net sales for the Acquired
Business, which was not included in the March quarter 1998 because of the timing
of the Acquisition which was consummated on January 29, 1998, offset by a
decline in Acquired Business net sales for the remainder of the quarter of $21.9
million, a $6.6 million decline in apparel fabrics net sales (excluding net
sales for the Acquired Business) and a $3.7 million decline in home fabrics net
sales. Net sales for the first six months of fiscal 1999 were $483.5 million as
compared to $364.8 million for the first six 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, partially offset by
a $21.9 million decline in Acquired Business net sales for the remainder of the
period, a $4.1 million decline in apparel fabrics net sales (excluding net sales
for the Acquired Business) and an $8.5 million decline in home fabrics net
sales.
Apparel fabrics' net sales for the March quarter 1999 were $228.6 million, a
$3.5 million increase over the March quarter 1998 net sales
18
of $225.1 million. The increase in net sales is primarily attributable to the
inclusion of the Acquired Business net sales for the entire March quarter 1999
as compared to two months in the March quarter 1998 and to higher net sales of
woven sportswear. These increases were partially offset by lower net sales of
corduroy as well as lower denim net sales in the comparable two months. Apparel
fabrics' net sales for the first six months of fiscal 1999 were $466.0 million,
a $127.2 million increase over the first six months of fiscal 1998 net sales of
$338.8 million. The 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 two 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 two months. Sales of denim are currently lower than
those in historical periods due to the softness in the current retail
environment. The Company currently expects its sales volume of denim to improve
in the June quarter 1999; however, it expects pricing pressures attributable to
competition from low priced imports to continue.
Home fabrics' net sales for the March quarter 1999 and first six months of
fiscal 1999 were $8.8 million and $17.5 million, respectively, as compared to
$12.5 million and $26.0 million, respectively, for the March quarter 1998 and
for the first six 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 March quarter 1999 and first six months of fiscal 1999
was $12.0 million and $30.9 million, respectively, as compared to $22.6 million
and $28.6 million, respectively, for the March quarter 1998 and first six months
of fiscal 1998. Apparel fabrics operating income was $12.0 million for the March
quarter 1999, a $10.0 million decline when compared to March quarter 1998
operating income of $22.0 million. The decrease in apparel fabrics operating
income is primarily due to the change in net sales discussed above and pricing
pressures from imported fabrics. Apparel fabrics operating income for the first
six months of fiscal 1999 was $30.4 million as compared to $27.1 million for the
first six months of fiscal 1998. The overall increase in apparel fabrics
operating income is primarily due to the net sales changes discussed above and
pricing pressures from imported fabrics. Additionally, Swift Denim's lower sales
volume has adversely impacted its absorption of fixed costs resulting in lower
operating income than in historical periods. Home fabrics operating income did
not change significantly between the March quarter 1999 and March quarter 1998
or between the first six months of fiscal 1999 and the first six months of
fiscal 1998.
19
INTEREST EXPENSE
Interest expense was $15.2 million and $30.2 million for the March quarter 1999
and first six months of fiscal 1999, respectively, as compared to $12.6 million
and $16.1 million for the March quarter 1998 and first six months of fiscal
1998, respectively. The increase in interest expense was primarily due to added
interest expense on additional indebtedness incurred to finance the Acquisition.
INCOME TAXES
The Company's overall tax rate for the first six months of fiscal 1999 was
approximately 27.7%. The difference from the statutory rate reflects the offset
of foreign taxable earnings with domestic taxable losses.
NET INCOME AND NET INCOME PER SHARE
The Company incurred a net loss for the March quarter 1999 of $1.1 million or
$.09 per common share, compared to net income of $4.1 million or $.34 per common
share for the March quarter 1998 which included charges of $3.5 million
(pre-tax) related to the Acquisition. Excluding the Acquisition charges, net
income for the March quarter 1998 would have been $6.3 million or $.52 per
common share. Net income for the first six months of fiscal 1999 was $2.3
million or $.19 per common share as compared to $3.5 million or $.29 per common
share for the first six months of fiscal 1998 which included charges of $7.5
million (pre-tax) or $.28 per common share related to the Acquisition. Excluding
the Acquisition charges, net income for the first six months of fiscal 1998
would have been $8.1 million or $.67 per common share.
ORDER BACKLOG
The Company's order backlog at April 3, 1999 was $166.3 million, a 36% decrease
from the March 28, 1998 backlog of $261.6 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 in regards to the Company's future sales as in
the past.
LIQUIDITY AND CAPITAL RESOURCES
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)
20
a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
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.
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. 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
21
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, as amended on December 22, 1998, the revolving line of
credit borrowings bear interest at a per annum rate, at the Company's option, of
either (i) (a) the greater of the prime rate or the federal funds rate plus .50%
plus (b) a margin of 0%, .25%, .50%, .75%, 1.00% or 1.25%, based on the Company
achieving certain leverage ratios (as defined in the Senior Credit Facility) or
(ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on
the Company achieving certain leverage ratios. Term Loan B and Term Loan C bear
interest at a per annum rate, at the Company's option, of (A) with respect to
Term Loan B either (i) (a) the greater of the prime rate or federal funds rate
plus .50%, plus (b) a margin of 1.00%, 1.25%, 1.50% or 1.75%, based on the
Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios or
(B) with respect to Term Loan C, either (i) (a)the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 1.25%, 1.50%, 1.75% or 2.00%,
based on the Company achieving certain leverage ratios, or (ii) LIBOR plus a
margin of 2.50%, 2.75%, 3.00% or 3.25%, based on the Company's achieving certain
leverage ratios. The Company is currently in compliance with its restrictive
debt covenants. However, given the current apparel environment it is likely that
the Company could violate one of its restrictive covenants within the next
twelve months. The Company is evaluating its alternatives in the event it is
unable to comply with its restrictive covenants in the near term. The
alternatives include, but are not limited to, obtaining waivers for possible
future violations, amending the covenants or refinancing the Company's Senior
Credit Facility. If it becomes necessary to obtain waivers or amendments, the
Company does not expect that these alternatives would have a material impact on
future results of operations. However, should it become necessary to refinance
the Company's Senior Credit Facility, the Company may incur costs and expenses
and debt extinguishment losses.
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, 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
22
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. In connection with the current sales
environment for denim products, the Company and its lenders amended certain
covenants within the Company's Senior Credit Facility in December 1998.
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.
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.
23
For the six months of fiscal 1999, the Company spent approximately $16.9 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 $4.3 million to $278.0 million at April
3, 1999 as compared to $273.7 million at March 28, 1998. The increase is
primarily due to a decrease in accrued liabilities offset by a decrease in
accounts receivable. 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. The decrease
in accounts receivable is due to lower net sales during the March quarter 1999
compared to the March quarter 1998.
The Company anticipates that cash requirements including working capital and
capital expenditure needs will be met through funds generated from operations
and through revolving credit borrowings under the Company's Senior Credit
Facility. In addition, from time to time, the Company uses borrowings under
secured and unsecured bank loans, through capital leases or through operating
leases for various equipment purchases.
YEAR 2000 COMPLIANCE
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
24
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 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
25
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 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 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
26
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," effective for years beginning after June 15, 1999, the
Company's fiscal year 2000. 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.
27
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 April 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 April 3, 1999, a 10% decline in market
prices as of April 3, 1999 would have an additional negative impact on the value
of outstanding contracts of $12.0 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 April 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 April 3, 1999 are not
material.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes at the Annual Meeting of
the Company's Stockholders held on February 9, 1999:
Broker
Matter For Against Withheld Abstentions Non-Votes
------ --- ------- -------- ----------- ---------
1.Election of Directors:
Arthur Wiener 9,826,424 - - 77,017 -
Lee Abraham 9,827,674 - - 75,767 -
Michael T. Bradley 9,827,574 - - 75,867 -
Paul G. Gillease 9,827,674 - - 75,767 -
William deR. Holt 9,827,774 - - 75,667 -
Howard S. Jacobs 9,744,674 - - 158,767 -
William M.R. Mapel 9,827,774 - - 75,667 -
Stephen C. Sherrill 8,750,087 - - 1,153,354 -
David F. Thomas 8,872,287 - - 1,161,154 -
2. Adoption of the 1999 Stock Option Plan for officers, directors, consultants
and employees of the Company and its subsidiaries:
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
9,795,502 106,134 - 1,805 -
3. Ratification of selection of Ernst & Young LLP as independent auditors for the 1999 fiscal year:
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
9,901,838 700 - 903 -
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits to this Form 10-Q are listed in
the accompanying Exhibit Index
(b) Reports on Form 8-K - None.
29
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
30
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule