UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ------ ACT OF 1934
For the fiscal year ended Commission File Number 0-20080
October 2, 1999 -------
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GALEY & LORD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-1593207
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(State of Incorporation) (I.R.S. Employer Identification No.)
980 Avenue of the Americas
New York, New York 10018
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(Address of principal executive offices) (Zip Code)
212/465-3000
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on December 21, 1999, was approximately
$10,567,162.
The number of shares outstanding of Common Stock, as of December 21, 1999, was
11,902,915 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for the 2000 annual meeting of
stockholders of the Company are incorporated by reference into Part III.
Exhibit Index at Pages 64 - 69
PART I
ITEM 1. BUSINESS
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THIS 1999 ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH
CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT TEAM.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER
THINGS, COMPETITIVE AND ECONOMIC FACTORS IN THE TEXTILE, APPAREL AND HOME
FURNISHINGS MARKETS, RAW MATERIALS AND OTHER COSTS, WEATHER-RELATED DELAYS,
GENERAL ECONOMIC CONDITIONS AND OTHER RISKS AND UNCERTAINTIES THAT MAY BE
DETAILED HEREIN.
GENERAL
Galey & Lord, Inc. (the "Company" or the "Registrant") was incorporated
in Delaware in 1987 for the purpose of acquiring, in February 1988,
substantially all of the assets of the Blends Apparel and Prints divisions of
Burlington Industries, Inc. ("Burlington"). The Company acquired these
businesses through its wholly-owned subsidiary Galey & Lord Industries, Inc.
("Industries"). Prior to April 1992, the Company was known as Galey & Lord
Holdings, Inc., and Industries operating subsidiary was known as Galey & Lord,
Inc. In June 1996, the Company, through a subsidiary of Industries, G&L Service
Company, North America, Inc. ("G&L Service Company"), acquired the capital stock
of Dimmit Industries, S.A. de C.V. ("Dimmit") and certain related assets from
Farah Incorporated. In January 1998, the Company acquired the apparel fabrics
business of Dominion Textile, Inc. ("Dominion"), which primarily consists of
subsidiaries and joint venture interests, which comprise the Swift Denim Group
("Swift"), the Klopman International Group ("Klopman") and Swift Textiles
Europe, Ltd. ("Swift Europe"). The Company conducts all of its operations
through its subsidiaries and equity investments. Unless otherwise specified
herein, all references to the Company or the Registrant include the Company,
Industries, G&L Service Company, Dimmit, Swift and Klopman.
The Company is a leading global manufacturer of textiles for sportswear,
including cotton casuals, denim and corduroy, as well as a major international
manufacturer of workwear fabrics. The Company also is a manufacturer of dyed and
printed fabrics for use in home fashions. In order to offer customers a complete
package of fabrics and garments from one source, the Company has established
garment manufacturing operations, which the Company believes provide a
competitive advantage over other fabric manufacturing companies.
The Company believes that it is the market leader in producing innovative
woven sportswear fabrics as a result of its expertise in sophisticated and
diversified finishing. Fabrics are designed in close partnership with customers
to capture a large share of the middle and high end of the bottomweight woven
market. The Company sells its woven sportswear products to a diversified
customer base.
2
In April 1994, the Company, through Industries, acquired the Decorative
Prints Division of Burlington. This business, which was renamed Galey & Lord
Home Fashion Fabrics, sells greige, dyed and printed fabrics to the home
furnishings trade for use in bedspreads, comforters and curtains. During fiscal
1999, the Company began selling fabric for use in upholstery applications.
On September 19, 1995, the Company closed its printed apparel fabrics
businesses, made up of Galey & Lord Prints and Galey & Lord Group II, due to
declining business conditions that the printed apparel fabrics businesses had
experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and laid off approximately 450
employees located primarily in Society Hill, South Carolina and New York City.
On June 7, 1996, the Company, through its subsidiary, G&L Service
Company, acquired the capital stock of Dimmit and certain related assets from
Farah Incorporated for approximately $22.8 million in cash including certain
costs related to the acquisition (the "Mexico Acquisition"). Dimmit is composed
of six manufacturing facilities located in Piedras Negras, Mexico and sews and
finishes pants and shorts for the casual wear market. Funding for the Mexico
Acquisition was provided through funds generated by operations, working capital
reductions and through borrowings under the Company's term loan and revolving
credit facility existing at that time. The results of operations of G&L Service
Company and Dimmit have been included in the consolidated financial statements
from the date of acquisition.
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 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 approximately
$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 one of the largest producers 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
Senior Credit Facility (as defined herein) and the Bridge Financing Facility (as
defined herein). 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 the Bridge Financing Facility and a portion
of the Senior Credit Facility. The results of operations of the Acquired
Business have been included in the consolidated financial statements from the
date of the Acquisition.
STRATEGY
The Company's strategy is (i) to be either first or second in each of the
product categories it offers, (ii) to make products that can be distinguished
from those made by its competitors, (iii) to continue to modernize its
facilities in order to maintain its competitive position, and (iv) to further
integrate the manufacture of garments with the manufacture of fabrics in order
to increase strategic relationships with customers and increase market share.
3
Key tactics of the Company's strategy include:
EMPHASIZING INNOVATIVE PRODUCTS AND SERVICES. Historically, product
development was split between fabric and garment manufacturers. Through its
state-of-the-art facilities, the Company is able to combine these two steps into
one. This permits the Company to present fully developed commercially made
sample garments which assists the Company's customers in reducing their product
development cycle times and allows the Company to develop more innovative
products.
EMPHASIZING CUSTOMER SERVICE. The Company is committed to being an
industry leader in providing superior customer service. The key elements of this
tactic include (i) providing timely and complete order delivery, (ii) building
partnerships with customers, (iii) providing electronic data information
services, and (iv) providing inventory management support.
CAPITALIZING ON THE CHANGING MANUFACTURING CHAIN. The Company believes
that a significant change is occurring in the apparel manufacturing chain. Many
of the Company's customers are either dependent on, or increasing their
dependency on, outsourcing their garment manufacturing requirements. The
Company's ability to provide customers with a "package" utilizing Company
fabrics and finished garments allows customers to avoid dealing with multiple
contractors to bring their products to market. By reducing the number of vendors
with which its customers are required to enter into commercial relationships,
the Company has simplified the customers' sourcing process. The Company believes
that this method will be the manufacturing chain of the future and believes that
it is on the cutting edge in supplying these services from its owned and
operated garment facilities located in Mexico.
EXPANDING INTERNATIONAL OPERATIONS. Through the expansion of
international manufacturing capabilities and sales offices, the Company is
better able to service both local markets in various parts of the world, as well
as its U.S. customers as they expand globally. As a result of the Acquisition,
the Company acquired manufacturing facilities in the U.S., Canada and Italy and
a joint venture interest in a facility in Tunisia, as well as sales offices in
Eastern and Western Europe, South America and Asia, to complement its previously
existing manufacturing facilities in the U.S. and Mexico. During fiscal 1999,
the Company began operations through a leased facility in Tunisia and continues
to build production in its Monclova, Mexico garment facility that began
production during the September quarter of fiscal 1998. As of October 2, 1999,
approximately 31% of the Company's long lived assets were located outside of the
United States.
INCREASING MANUFACTURING EFFICIENCIES. The Company has made significant
investments in its manufacturing operations to provide for the flexible
production of its broad line of value-added fabrics and to reduce production
costs.
4
PRODUCTS AND CUSTOMERS
The following chart sets forth the Company's net sales for Galey & Lord
Apparel, Swift Denim, Klopman International and Home Fashion Fabrics, for each
of the last three fiscal years.
Fiscal Year
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1999 1998(1) 1997
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(dollar amounts in thousands)
Galey & Lord Apparel................. $457,851 48.0% $481,422 53.3% $456,597 92.5%
Swift Denim.......................... 324,661 34.1% 277,313 30.7% - -
Klopman International................ 140,838 14.8% 97,812 10.8% - -
Home Fashion Fabrics................. 29,766 3.1% 46,104 5.2% 36,765 7.5%
----------- -------- ----------- -------- ----------- --------
Totals......................... $953,116 100.0% $902,651 100.0% $493,362 100.0%
======== ====== ======== ====== ======== ======
(1) Sales in 1998 include the Acquired Businesses since January 29, 1998,
the date of the Acquisition.
For additional financial information with respect to the four segments
and for geographical segment data, see Note N to the Company's consolidated
financial statements contained herein.
GALEY & LORD APPAREL
Galey & Lord Apparel manufacturers and sells woven cotton and cotton
blended apparel fabrics, corduroy fabrics, uniform fabrics and garment packages.
The Company is the largest domestic producer by capacity of cotton and
cotton blended fabrics used in apparel, with approximately 35% of U.S.
production. These fabrics are primarily used for the production of men's and
women's pants and shorts. Because of its capital investment in sophisticated
dyeing and finishing equipment, the Company is able to weave a limited number of
substrates and to finish each of them into a variety of esthetics. This enables
the Company to work with its customers to provide new products for the
marketplace that are unique. The Company's cotton casual fabrics are often
presented to customers in the form of commercially made sample garments rather
than in the traditional method of just showing fabrics. The Company believes
that by presenting fabrics in this manner customers are able to make purchasing
decisions earlier, thereby enabling them to bring products to market quicker and
more efficiently.
The Company is the only vertically integrated manufacturer of corduroy
in the U.S. and is the largest domestic manufacturer. It manufactures fabrics in
a variety of wales and weights. In addition to the traditional corduroy fabrics,
the Company uses its finishing expertise to differentiate its products and
produce new corduroy fabrics, including corduroy that stretches.
The Company's uniform fabrics are distributed to the industrial laundry
market, the hospitality market and to the healthcare market. Durability of
fabric, compliance with strict standards for fitness for use, continuity of
color and customer service are the factors most important to the Company's
customers. The Company sells chemically treated fabrics, including fabrics
treated with Flamex(TM), a fire retardant finish, and Bioguard(TM), an
anti-bacterial finish.
5
In June 1996, the Company acquired garment manufacturing facilities
located in Piedras Negras, Mexico where employees cut, sew and finish men's and
women's pants and shorts. G&L Service Company allows the Company to offer its
customers a finished package of fabric and garments from one source. This
provides customers with logistical and quality benefits that result in goods
reaching the market in a more timely manner.
The Company maintains rigorous quality control throughout each
production process. Testing and inspection occur at various stages in the
spinning, weaving, dyeing, finishing, sewing and laundering processes. The
Company's plants employ computers to monitor and control manufacturing processes
and the flow of products.
The Company is a vertically integrated manufacturer of woven cotton and
cotton blended apparel fabrics with various plants involved in spinning, weaving
and dyeing and finishing. The spun yarn is woven into greige fabric using
high-speed air-jet looms. The Company dyes and finishes all of its woven cotton
casual and uniform fabrics at its Society Hill, South Carolina manufacturing
facility. The Company has significant assets devoted to creating value-added
fabrics, including an extensive range of faced finished flannel and suede
finished fabrics. The finishing process used by the Company depends upon the
type and style of fabrics being produced in accordance with customer
specifications. Fabrics are woven by the Company based on projected sales but
are dyed and finished according to customer purchase orders. In order to operate
its dyeing and finishing facility at optimum capacity, the Company purchases a
portion of its greige fabric requirements from outside sources. During periods
of lower demand for dyed and finished fabrics, the Company reduces its purchases
of greige fabrics from outside sources and uses its internal capacity to supply
market demands.
The Company is the only vertically integrated manufacturer of corduroy
in the U.S. The Company's weaving and dyeing and finishing equipment and
processes may be used to produce both corduroy and other woven cotton casual
apparel and uniform fabrics. The ability to produce both types of fabric using
substantially the same equipment and processes allows the Company to schedule
its production to both economically and efficiently meet changes in demand which
varies seasonally (corduroy for the fall/winter selling season and cotton casual
for the spring/summer selling season), and to maintain consistent levels of
production throughout the entire year.
Through its garment manufacturing facilities in Piedras Negras, Mexico,
the Company cuts, sews and finishes garments for its apparel customers. The
location of the Company's garment manufacturing facilities in Mexico allows the
Company to respond quickly to the needs of its U.S. apparel customers and to
compete effectively with competitors in the Far East who have longer lead times
for delivery of goods to the U.S. To meet increasing demand, the Company opened
an additional garment manufacturing facility in Monclova, Mexico during the last
quarter of fiscal 1998.
The Company's cotton and cotton blended fabrics are sold principally to
manufacturers of men's and women's wear. Fabrics produced for these markets are
predominately 100% cotton. The Company's leading men's wear customers are
Levi's, Haggar, Savane and Tropical Sportswear Int'l Corporation ("Tropical
Sportswear Int'l"). The Company's women's wear customers include brand name and
private label manufacturers and chain stores. They include Levi's, Polo Ralph
Lauren, Calvin Klein, Gap, Inc. ("Gap"), Banana Republic, Polo Jeans Co. and Liz
Claiborne. In addition, the Company sells to suppliers of mail order catalogs.
6
Major corduroy customers are Levi's, Haggar, Polo Ralph Lauren, H.D.
Lee Co. Inc., as well as Aalfs, Hagale Industries Inc., Oxford Industries, Inc.,
and Tropical Sportswear Int'l who are private label and mail order suppliers.
Domestic customers for uniform fabrics include Riverside Manufacturing
Co., Garment Corporation of America, Superior Surgical Mfg. Co., Inc., Landau
Uniforms Corp., Cintas Corporation and Kellwood Company.
The Company currently provides garment packages to cutomers such as
Levi's, Liz Claiborne and Calvin Klein.
SWIFT DENIM
As a result of the Acquisition, the Company is one of the world's
largest producers of denim, operating under the tradename SWIFT DENIM. Swift
manufactures and markets a wide variety of denim products for apparel and
non-apparel uses, such as home furnishings. These products are manufactured in a
full range of colors, weights and finishes. Swift's product development
concentrates on high value-added products that are developed primarily for the
mid and upper ranges of distribution as determined by retail selling prices.
Swift has established leadership in developing differentiated denim products
such as black denim, ring spun denim, eco denim and rebel ring products. The
Company believes that domestically most of its products are in the mid to upper
range of the market and that 52% of its products are in the upper range of the
market.
Swift is one of the world's largest producers of denim. The Company
believes that Swift is the world's largest producer of value-added denim. In
manufacturing denim, yarn is spun in its natural state, and then dyed prior to
being woven into fabric. The woven fabric is then finished in variety of ways.
Swift enjoys a wide distribution, and its major customers include
Levi's, Polo Jeans Co., Tommy Hilfiger Corporation, Gap, Old Navy, Wrangler,
Nautica, Guess, Inc. and H.D. Lee Co. Inc. It also is a supplier to private
label programs through Aalfs Manufacturing Inc. - Arizona Jeans, PL Industries
and Border Corp. and sells to mail order suppliers including Land's End, Inc.,
L.L. Bean Inc., Eddie Bauer, Inc. and J. Crew Group Inc. Swift's international
customers include Levi's, Revelacion En El Vestir S.A., Western Glove, Jack
Spratt, Hoi Kosher Garment Fty. Ltd. and Luen Fung (Hop Kee) Garment.
KLOPMAN INTERNATIONAL
As a result of the Acquisition, the Company is a leading supplier of
workwear and careerwear fabrics in Europe. The Company produces high performance
workwear fabrics that retain their comfort, appearance and performance over an
extended wear life. Klopman International produces two high performance workwear
fabrics, Superbandmaster 2000 and Indestructible 2000. These fabrics
significantly extend the wear life of the garment while maintaining comfort and
appearance. The workwear and careerwear fabrics are distributed primarily to the
industrial laundry, hospitality and healthcare markets. In the last two fiscal
years, Klopman has expanded its production and marketing of
7
woven casual wear fabric. As part of these efforts, the Company is continuing to
expand into the cotton casual apparel fabrics market in Europe.
Klopman operates a spinning, weaving and dyeing and finishing plant in
Frosinone, Italy and during fiscal 1999 Klopman began operating a spinning and
weaving facility in Tunisia. The Company's European operations have executed a
strategy to purchase greige fabric worldwide in order to achieve more
competitive costs.
Klopman International's customers include Alexandra Workwear plc., CCM
Limited, Alsico NV, Mulliez Freres, Amuco International SpA and Van Moer.
HOME FASHION FABRICS
As a result of the April 1994 acquisition of the Home Fashion Fabrics
Division from Burlington, the Company entered into the non-apparel textile
market. This division manufactures dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories and
beginning in fiscal 1999 for upholstery applications. The Company also
manufactures greige fabrics (undyed and unfinished) which it sends to
independent contractors for dyeing and finishing.
The Company operates its own yarn and greige manufacturing facilities
to produce fabrics for the home furnishings trade. The Home Fashion Fabrics
division's weaving facility operates wide Sulzer looms, which allow it to
manufacture fabrics ranging from 48" to 127" in width. The Company believes that
having wide weaving capability is key to being able to offer the fabrics
required by the home furnishing trade for comforters and bedspreads. The Company
distinguishes itself by producing weave effects that simulate jacquard loom
fabrics which can be sold at lower prices. The Company purchases outside dyeing
and printing services from various suppliers to dye and print fabrics according
to customers' specifications.
Home Fashion Fabrics' major customers include Regency Home Fashions
Inc., Arley Corp., Burlington Industries, Inc., CHF Industries, Inc. and
American Home Ensembles Inc.
SALES AND MARKETING
The Company's personnel work continually with customers to develop
product lines well in advance of actual shipment. Sales personnel often present
fabrics to customers in the form of commercially made sample garments rather
than the traditional method of just showing fabrics. The Company believes this
enables customers to bring products to market more quickly and efficiently.
The Company has separate sales and marketing groups for Galey & Lord
Apparel, Swift Denim, Klopman International and Swift Europe (which markets
denim in Europe). The Company believes in training individuals to sell and
market specific products as opposed to marketing fabrics generally.
Sales for fiscal year 1999 and fiscal year 1998 to various divisions of
Levi Strauss & Co., Inc. accounted for approximately 22% and 19%, respectively,
of the Company's total net sales for each year. These divisions of Levi Strauss
& Co. Inc. purchase fabrics from the Company independently of each
8
other, and the loss of business from any one division would not necessarily
affect the Company's orders from other divisions. No other customer accounts for
more than 10% of the Company's total net sales.
At October 2, 1999, the Company had approximately 5,000 customer
accounts.
RAW MATERIALS AND SERVICES
The Company's principal raw materials are cotton and polyester. Cotton
is available from a large number of suppliers. The quantity of plantings, crop
and weather conditions, agricultural policies, domestic uses, exports and market
conditions can significantly affect the cost and availability of cotton, but, to
date, the Company has experienced no difficulty obtaining adequate supplies of
cotton. The Company enters into contracts for cotton several months in advance
of expected delivery to ensure availability. The prices associated with these
contracts may be either fixed at the time the contract is signed or at a later
date.
In order to make the price of domestic cotton competitive with prices
quoted in the world market, the United States Department of Agriculture had
adopted a program under which it pays rebates to users of domestically produced
cotton according to a formula based on relative world and domestic cotton prices
when domestic prices exceed world prices, based upon a formula. The domestic
price for cotton did not begin to exceed the world price for cotton until July
1997. From July 1997 until the initial program's funding was exhausted in
December 1998, the criteria for receiving rebates was met and the Company
received the related rebates. In October 1999, the U.S. Congress approved
funding to reestablish the rebate program effective October 1, 1999. The Company
is currently receiving rebates under the criteria established in the program.
The Company believes that any future discontinuance of the program will not
adversely impact its financial position since the Company will be able to
purchase cotton on the world market at comparable prices.
The price of polyester is determined by supply and demand and other
uses of the petroleum used to produce polyester. While the Company currently
purchases polyester from two principal suppliers, polyester is readily available
from other suppliers. The Company has not experienced any difficulty in
obtaining sufficient quantities of polyester, and although no assurances can be
made, does not anticipate any difficulty in meeting its needs in the future.
The Company purchases spun yarn and greige fabric to supplement its own
production. These products are available from a number of suppliers.
The Company purchases its dyes and chemicals from several suppliers.
Dyes and chemicals are available from a large number of suppliers, and the
Company has not experienced any difficulty in obtaining sufficient quantities.
The Company in its Home Fashions business employs the services of
several outside processors to dye or print greige fabric in accordance with
customers' specifications. The Company has established strong relationships with
the outside processors and has not experienced any difficulty in meeting
customer delivery dates. These services are also available from other providers.
9
TRADEMARKS AND PATENTS
The Company owns, or has the right to use under license various
patents, trademarks and service marks. The Company's "Galey & Lord, "Swift
Denim" and "Swift Textile" trademarks are registered with many countries
worldwide, including the United States Patent and Trademark Office. In addition,
the Company's "Klopman" trademarks are registered with many European countries.
Other than the "Galey & Lord", "Swift Denim", "Swift Textile" and "Klopman"
trademarks, the Company does not consider any of its patents, licensed
technology, trademarks or service marks to be material to the conduct of its
business.
BACKLOG
The Company's order backlog at October 2, 1999 was $124.2 million, a
42% decrease from the October 3, 1998 backlog of $214.1 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.
SEASONALITY
The Company's business is not highly seasonal. Galey & Lord Apparel's
product mix varies seasonally (with demand for corduroy fabric primarily in the
fall/winter selling season and sportswear in the spring/summer selling season).
The Galey & Lord Apparel's weaving, dyeing and finishing equipment and processes
are configured to produce both corduroy and other woven fabrics, allowing the
Company to adapt to seasonal demand and to maintain consistent levels of
production throughout the entire year. Swift Denim's sales, consistent with the
denim industry, are historically lower in the March quarter; however, to meet
June and September customers demands, production is generally unaffected.
Klopman International's sales are historically lower in the September quarter
due to the European vacation period in August. The Home Fashion Fabrics Division
experiences a very minimal fluctuation in the demand for the products it
produces.
COMPETITION
GENERAL. The Company has numerous competitors in each of the categories
in which it competes.
Purchasing decisions by the Company's customers are influenced by a
number of factors, including quality, price, manufacturing flexibility, delivery
time, customer service, product styling and differentiation. Competition among
U.S. and foreign manufacturers is affected by changing relative labor and raw
material costs, lead times, political instability and infrastructure
deficiencies of newly industrializing countries, ecological concerns, human
resource laws, fluctuating currency exchange rates, individual government
policies and international agreements regarding textile and apparel trade.
U.S. government policy has been favorable to the U.S. textile industry.
The Company's customers receive favorable duty and, in certain instances, quota
treatment by taking advantage of the U.S. "807" and "807A" tariff programs, as
well as NAFTA. Under tariff program "807," garment
10
textile components cut in the U.S. and assembled offshore can be brought back
into the U.S. subject to existing quotas, with duty only imposed on the value
added offshore. Under tariff program "807A", which falls under the Caribbean
Basin Initiative, garments that are cut in the U.S. using U.S. fabric and trim
and then assembled in a beneficiary country benefit from preferential quota as
well as duty treatment upon import into the U.S.
The Company believes that it has benefited, and will continue to
benefit, from the 1994 implementation of NAFTA, which phase out duties and
quotas on certain textiles and apparel shipped between Mexico, the U.S. and
Canada. NAFTA's yarn forward rule of origin assures that only those textiles
produced in NAFTA countries benefit from the phasing out of duties and quotas.
The Company believes that GATT and the ATC will, for the most part,
have a negative effect on the domestic textile and apparel industry. The
ten-year phaseout of quotas under the ATC, which replaces the existing system of
bilateral import restrictions imposed under the Multifiber Arrangement, will
gradually allow more imports to enter the country. The Company, however, also
believes that there may be some benefits from GATT and the ATC, as they will
open foreign markets to the Company's customers which the Company believes will
allow it to supply customers in such foreign markets.
GALEY & LORD APPAREL. There are several major competitors in the
finished cotton casual apparel fabrics business, none of which dominates the
market. The Company's major competitors include Delta Woodside Industries, Inc.,
Graniteville Company, a division of Avondale Mills, Inc. and Milliken & Company
Inc. The Company's technical expertise in finishing enables it to provide a
number of value-added fabrics to differentiate itself from its competitors,
including an extensive range of faced finished flannel and suede finished
fabrics. The Company is the only vertically integrated domestic producer of
corduroy fabrics. Competition to the Company's corduroy business is mostly from
imported garments and, to a lesser extent, a domestic converter of fabrics. As
previously discussed the Company produces garment packages for its fabric
customers thereby allowing its customers to avoid dealing with multiple
suppliers to bring products to market.
The Company's major domestic competitors in the workwear and careerwear
business are Graniteville Company, Riegel Textile Corp., a division of Mount
Vernon Mills, Inc., Milliken & Company Inc. and Spring Industries, Inc.
SWIFT DENIM. The U.S. denim market is highly concentrated with four
denim manufacturers supplying approximately 70% of the market. Cone Mills
Corporation, Avondale Mills, Inc. and Burlington are Swift's major competitors.
KLOPMAN INTERNATIONAL. Klopman is the leading pan-European manufacturer
and distributor of workwear and careerwear fabrics. It competes with domestic
suppliers in each country it serves. Its major competitors in its principal
markets are Lauffenmuhle GmbH (recently sold to Matfatial Industries of India),
Carrington Career and Workwear Fabrics and Royal Ten-Cate NV.
HOME FASHION FABRICS. The Company's Home Fashion Fabrics division
competes with a number of printers and dyers offering similar services,
including Raytex Finishing Company, Santee Print Works, Inc. and Slater Screen
Print Works.
11
OTHER. In Europe, the Company believes that its joint venture, Swift
Europe, is the leader in the value-added market with a rich mix of
differentiated products. Its principal competitors include Kaihara in Japan,
Hellenic Fabrics S.A. in Greece, Orta Anadolu in Turkey, Atlantic Mills Ltd. in
Ireland and Tavex Alogodoner, S.A. in Spain.
EMPLOYEES
At October 2, 1999, the Company had approximately 5,900 U.S. employees,
approximately 600 of whom where covered by a collective bargaining agreement. Of
these U.S. employees, approximately 5,200 were employed in manufacturing and 700
in administration and sales. The collective bargaining agreement covering the
employees referred to above expires in January 2001. At October 2, 1999, G&L
Service Company had approximately 3,300 employees in Mexico. Approximately 70%
of these employees are covered by a collective bargaining agreement which
expires January 1, 2001. In January 2000, the Company will be negotiating the
compensation portion of the contract for the upcoming year with union officials.
Also, at October 2, 1999, the Company had approximately 725 Canadian employees
and 825 employees in operations elsewhere in the world, mainly in Europe. The
majority of these employees are covered by collective bargaining agreements.
Substantially all of the Company's employees are full-time. The Company believes
that its employee relations are satisfactory.
GOVERNMENT REGULATION
The Company is subject to various environmental laws and regulations in
its operations governing the discharge, storage, handling and disposal of a
variety of substances in the North American and European countries in which it
operates. In particular, such laws include (i) in the United States, the Federal
Water Pollution Control Act, the Federal Clean Air Act, the Resource
Conservation Recovery Act (including amendments relating to underground tanks)
and the Federal "Superfund" program, and (ii) in Canada, the Canadian
Environmental Protection Act, the Hazardous Products Act, the Hazardous Material
Information Review Act, the Fisheries Act, the Environmental Protection Act
(Ontario), the Water Resources Act (Ontario) and the Environmental Quality Act
(Quebec). In addition, the Company's operations are governed by laws and
regulations relating to workplace safety and worker health in the North American
and European countries in which it operates. In particular in the United States,
the Occupational, Safety and Health Act and regulations thereunder, among other
things, establish cotton dust, formaldehyde, asbestos and noise standards, and
regulate the use of hazardous chemicals in the workplace. Additionally, in
Canada the Occupational Health and Safety Act (Ontario), the Act Respecting
Occupational Health and Safety (Quebec) and their respective regulations
establish standards for dust, noise and substances including, among others,
asbestos and formaldehyde and regulate the use of hazardous chemicals in the
workplace.
YEAR 2000 COMPLIANCE
For a discussion of the impact of Year 2000 compliance issues, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Year 2000 Compliance."
12
ITEM 2. PROPERTIES
- -------------------
The following table sets forth the general location, principal uses and
approximate size of the Company's principal properties and whether such
properties are leased or owned:
APPROXIMATE LEASED
AREA IN OR
FACILITY NAME LOCATION USE SQUARE FEET OWNED
- ------------- -------- --- ----------- -----
Flint......................... Gastonia, NC Spinning 250,000 Owned
Brighton...................... Shannon, GA Spinning and weaving 877,000 Owned
McDowell...................... Marion, NC Weaving 222,000 Owned
Society Hill.................. Society Hill, SC Dyeing and finishing 527,000 Owned
Society Hill II............... Society Hill, SC Dyeing, finishing and warehousing 250,000 Owned
Asheboro...................... Asheboro, NC Weaving and greige cloth storage 386,000 Owned
Caroleen...................... Caroleen, NC Spinning 375,000 Owned
Corporate Offices............. Greensboro, NC Corporate 24,000 Leased
Executive Offices............. New York, NY Executive and sales office 22,000 Leased
Blue Warehouse................ Society Hill, SC Greige and finished cloth storage 100,000 Owned
Hermitage Warehouse........... Rome, GA Cotton and yarn storage 45,000 Leased
Riverside Warehouse........... Rome, GA Cotton and yarn storage 20,000 Leased
Red Warehouse................. Marion, NC Yarn storage 33,000 Owned
Elm Street Warehouse.......... Greensboro, NC Finished cloth storage 108,000 Owned
Dimmit Industries............. Piedras Negras, MX 6 sewing & garment finishing facilities 228,000 Leased
Alta Loma..................... Monclova, MX Sewing and warehousing facilities 200,000 Leased
Eagle Pass Facilities......... Eagle Pass, TX 1 cutting and 1 warehousing facility 16,000 Leased
Swift Executive Offices....... Atlanta, GA Executive offices 14,000 Leased
Swift Operations Offices...... Columbus, GA Operations and sales 27,000 Leased
Erwin Plant................... Erwin, NC Spinning 1,325,000 Owned
Erwin Plant................... Erwin, NC Weaving, dyeing and finishing 343,000 Owned
6th Avenue Plant.............. Columbus, GA Spinning 963,000 Owned
Boland Plant.................. Columbus, GA Weaving, dyeing and finishing 480,000 Owned
Drummondville Plant........... Drummondville, Quebec Spinning, weaving, dyeing and finishing 523,000 Owned
Klopman Plant................. Frosinone, Italy Spinning, weaving, dyeing and finishing 861,000 Owned
Tunisia Plant................. Monastir, Tunisia Spinning and weaving 79,500 Leased
The Company believes that its facilities are suitable to service its
current level of sales and have additional capacity to satisfy its foreseeable
needs.
13
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is involved in various lawsuits incidental to its business
operations, as well as product liability litigation. In the opinion of the
Company, none of such litigation in which it is currently involved will have a
material effect on the Company's financial condition or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
- ------------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
The Company's common stock, $.01 par value, (the "Common Stock") is
traded on the New York Stock Exchange under the symbol "GNL". As of November 30,
1999, the Company had approximately 2,050 stockholders of record. The following
table sets forth the high and low sales prices for the Common Stock for the
periods indicated.
1999 1998
----------------------------- -------------------------
High Low High Low
---- --- ---- ---
First Quarter......................... $13 3/4 $8 $19 3/4 $16 3/4
Second Quarter........................ $8 15/16 $3 1/2 $22 1/4 $15 3/16
Third Quarter......................... $5 3/16 $3 1/16 $28 7/8 $14 7/8
Fourth Quarter........................ $5 1/2 $2 1/2 $15 1/16 $8 3/4
No dividend or other distribution with respect to the Common Stock has
ever been paid by the Company. Any payment of future dividends and the amounts
thereof will be dependent upon the Company's earnings, financial requirements
and other factors deemed relevant by the Company's Board of Directors. The
Company currently does not intend to pay any cash dividends in the foreseeable
future; rather, the Company intends to retain earnings to provide for the
operation and expansion of its business. Certain restrictive covenants contained
in the agreement governing the Company's term loan and revolving credit line
currently limit its ability to make dividend and other payments.
15
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR
-----------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA (1): 1999 1998(2) 1997(3) 1996(4) 1995 (5)
---- ------- ------- ------- -----
Net sales................................................. $ 953,116 $ 902,651 $ 493,362 $ 411,455 $ 502,220
Cost of sales............................................. 874,571 796,219 439,207 367,992 451,314
Gross profit.............................................. 78,545 106,432 54,155 43,463 50,906
Selling, general and administrative expenses.............. 34,269 30,524 18,123 13,526 15,877
Amortization of intangible assets......................... 4,826 3,793 1,679 1,298 1,119
Business closing charge................................... - - - - 12,065
Operating income.......................................... 39,450 72,115 34,353 28,639 21,845
Interest expense.......................................... 60,935 47,566 12,326 11,579 13,103
Income from associated companies.......................... (4,240) (2,621) - - -
Bridge financing interest expense......................... - 3,928 - - -
Loss on foreign currency hedges........................... - 2,745 - - -
Write-off of merger costs................................. - - - 1,600 -
Income (loss) before income taxes and extraordinary items. (17,245) 20,497 22,027 15,460 8,742
Income tax expense (benefit).............................. (6,209) 8,678 8,350 5,982 3,390
Income (loss) before extraordinary items.................. (11,036) 11,819 13,677 9,478 5,352
Extraordinary items....................................... - (524) - - (1,342)
Net income (loss) ........................................ $ (11,036) $ 11,295 $ 13,677 $ 9,478 $ 4,010
Weighted average number of shares outstanding............. 11,881 12,173 11,986 11,910 12,037
Net income (loss) per common share - diluted:
Income (loss) before extraordinary items.................. $ (.93) $ .97 $ 1.14 $ .80 $ .44
Extraordinary items....................................... - (.04) - - (0.11)
Net income (loss) - diluted............................... $ (.93) $ .93 $ 1.14 $ .80 $ .33
Cash dividends per common share........................... $ - $ - $ - $ - $ -
BALANCE SHEET DATA:
Total assets............................................ $ 978,716 $ 1,038,293 $ 349,191 $ 304,876 $ 305,039
Long-term debt.......................................... 658,051 682,926 176,755 149,265 162,084
Stockholders' equity.................................... 108,737 127,877 104,317 89,645 81,879
(1) The Company uses a 52-53 week fiscal year. Fiscal 1998 was a 53-week year.
All other fiscal years presented were 52-week years.
(2) Includes the acquisition of the apparel fabrics business of Dominion
Textile, Inc. which occurred on January 29, 1998.
(3) Selling, general and administrative expenses include a $3.0 million pre-tax
charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
(4) Includes the write-off of merger costs associated with the termination of
the previously announced merger of the Company and the Graniteville Company.
(5) Includes the business closing charge related to closing the Company's
printed apparel fabrics businesses.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
SIGNIFICANT EVENTS
On January 29, 1998, Galey & Lord, Inc. entered into a Master Separation
Agreement with Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a
subsidiary of Polymer, Dominion Textile, Inc. and certain other parties pursuant
to which the Company acquired the apparel fabrics business of Dominion from DTA
for a cash purchase price of approximately $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 one of the largest producers
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 to repay portions of such credit
facilities that was replaced by publicly registered 9 1/8% Senior Subordinated
Notes Due 2008 in May 1998.
RESULTS OF OPERATIONS
OVERVIEW
Fiscal year 1999 and especially the Company's fourth quarter was the most
difficult in the Company's 11 year history. The Asian crisis coupled with
worldwide over-capacity for apparel textiles put a strain on the entire apparel
products industry throughout the year. Management took actions to reduce costs
of operations in all the Company's businesses during fiscal 1999. Cost
reductions were achieved through changing the product mix in its' garment
operations to improve productivity, various productivity enhancements throughout
the Company's operating units and employee initiatives that included eliminating
111 wage and salary positions through attrition and terminations for which the
Company expects savings of $5.8 million of which $4.7 million will be saved
annually. In connection with the employee initiatives the Company incurred a
charge of $1.8 million for severance related to affected employees in the June
quarter. All of these actions will benefit fiscal 2000. Management continues to
review each of its business' strategic position for the future. It has and
continues to look for ways to streamline operations and eliminate costs where
possible. In addition, the Company is evaluating joint venture opportunities for
its' denim business in Mexico. While no agreements have been reached it is
possible that during fiscal 2000 the Company will conclude on a joint venture
investment.
17
The Company's operations are classified into four operating segments: (1) Galey
& Lord Apparel, (2) Swift Denim, (3) Klopman International and (4) Home Fashion
Fabrics. Results for fiscal 1999, 1998 and 1997 for each segment are show below:
Fiscal Year Ended
October 2, October 3, September 27,
1999 1998* 1997
---- ----- ----
NET SALES PER SEGMENT
Galey & Lord Apparel $ 457.9 $ 481.5 $ 456.6
Swift Denim 324.7 277.3 -
Klopman International 140.8 97.8 -
Home Fashion Fabrics 29.7 46.1 36.8
--------- --------- -----------
Total $ 953.1 $ 902.7 $ 493.4
========= ========= ===========
OPERATING INCOME (LOSS) PER SEGMENT
Galey & Lord Apparel $ 23.0 $ 26.7 $ 36.8
Swift Denim 5.2 37.6 -
Klopman International 11.6 5.5 -
Home Fashion Fabrics (.2) 2.8 (2.4)**
Corporate*** (.2) (.5) -
--------- --------- -----------
Total $ 39.4 $ 72.1 $ 34.4
========= ========= ===========
* Includes the results for the Acquired Business from January 29, 1998, the
date the acquisition was completed.
** Operating income for the home fabrics segment for fiscal 1997 includes a
$3.0 million pre-tax charge taken due to the bankruptcy of a Home Fashion
Fabrics' customer.
*** Corporate operating income (loss) consists principally of administrative
expenses from the Company's various holding companies.
The Company's order backlog at October 2, 1999 was $124.2 million, a 42%
decrease from the October 3, 1998 backlog of $214.1 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.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES
Net sales for fiscal 1999 were $953.1 million as compared to $902.7 million for
fiscal 1998. The $50.4 million increase in net sales primarily resulted from
four additional months of net sales in fiscal 1999 from the Acquired Businesses,
due to the timing of the Acquisition on January 29, 1998, partially offset by a
$23.6 million decline in Galey & Lord Apparel net sales and a $16.4 million
decline in Home
18
Fashion Fabrics net sales. Fiscal 1999 was also a 52-week year compared to a
53-week year in fiscal 1998.
GALEY & LORD APPAREL Galey & Lord Apparel's net sales for fiscal 1999 were
$457.9 million, a $23.6 million decline over fiscal 1998's net sales of $481.5
million. Fabric sales volume declined 5% primarily due to lower volume in
corduroy and uniform fabrics partially offset by an increase in woven
sportswear. In garments, which represents approximately 10% of the segment's
sales, volume increased 38% due principally to the addition of the Monclova,
Mexico facility that began production at the end of fiscal 1998. Overall, the
segment's average selling prices declined slightly principally due to reduced
volume of corduroy which has higher average selling prices than other fabrics.
SWIFT DENIM Swift Denim's net sales for fiscal 1999 were $324.7 million as
compared to $277.3 million in fiscal 1998. Of the $47.4 million increase in net
sales, an increase of $99.0 million is attributable to an additional four months
of net sales in fiscal 1999, due to the timing of the acquisition on January 29,
1998. The increase was partially offset by a 12% decline in volume and a 4%
decline in selling prices with the remainder due to changes in product mix.
KLOPMAN INTERNATIONAL Klopman International's net sales for fiscal 1999 were
$140.8 million, a $43.0 million increase over fiscal 1998's net sales of $97.8
million. Of the $43.0 million increase in net sales, an increase of $54.1
million is attributable to an additional four months of net sales in fiscal
1999, due to the timing of the Acquisition. The increase was partially offset by
a 5% decline in volume and a 5% decline in sales due to exchange rate changes
with the remainder due to sales price declines.
HOME FASHION FABRICS Net sales for Home Fashion Fabrics for fiscal 1999 were
$29.7 million compared to $46.1 million for fiscal 1998. The $16.4 million
decline in net sales has principally resulted from a 21% decline in volume and a
17% decline in average selling due to product mix from fiscal 1998.
OPERATING INCOME
Operating income for fiscal 1999 was $39.4 million compared to $72.1 million in
fiscal 1998. Included in consolidated operating income in fiscal 1999 is a $1.8
million charge related to severance in connection with the management's goal of
reducing ongoing costs. Each of the segments' results below reflect the impact
of the severance charge for that segments' affected employees. All the employees
affected were terminated prior to the end of fiscal 1999. Cash expenditures
related to the affected employees will be made over the next two fiscal years.
GALEY & LORD APPAREL Galey & Lord Apparel's operating income was $23.0 million
for fiscal year 1999 as compared to $26.7 million for fiscal year 1998. The $3.7
million decline principally reflects the impact of $5.2 million related to lower
volume in fabric sales, $6.6 million for changes in price and product mix, $2.6
million related to manufacturing inefficiencies in garment manufacturing
principally related to start up costs at the Monclova, Mexico garment operation
that began production in the September quarter of fiscal 1998 and a $.4 million
charge related to severance in connection with the management's goal of reducing
ongoing costs. These declines were partially offset by improvement of $10.1
million in raw material prices, manufacturing efficiencies and higher first
quality yields in woven
19
sportswear fabric production. In addition, selling, general and administrative
expenses declined $1.2 million.
During fiscal 1999, the Company's garment operations continued to experience
lower efficiencies and profitability then management's expectations.
Accordingly, the Company, as discussed previously, initiated a change in product
mix in its garment operations during the September quarter of fiscal 1999. The
change was designed to improve productivity and profitability by reducing the
number of garment styles produced thereby reducing the number of style changes
that generally result in lower efficiencies.
SWIFT DENIM Fiscal year 1999 operating income for Swift Denim was $5.2 million,
a $32.4 million decline from the fiscal 1998 operating income of $37.6 million.
The decline in Swift Denim's operating income principally reflects the impact of
$25.3 million related to lower volume including the related impacts on
manufacturing efficiencies, $11.1 million in selling prices and a charge of $1.4
million related to severance in connection with the management's goal of
reducing ongoing costs. These declines were partially offset by $4.7 million for
the impact of four additional months of results in fiscal 1999.
KLOPMAN INTERNATIONAL Klopman International's operating income in fiscal 1999
increased $6.1 million to $11.6 million as compared to fiscal year 1998's
operating income of $5.5 million. The increase was primarily due to $3.6 million
related to four additional months of results in fiscal 1999, due to the timing
of the Acquisition and $6.7 million in manufacturing efficiencies partially
offset by $3.9 million related to the impact of volume and pricing changes
discussed above and $.5 million related to the effect of foreign currency
translation.
HOME FASHION FABRICS Home Fashion Fabrics reported an operating loss for fiscal
1999 of $0.2 million as compared to operating income for fiscal 1998 of $2.8
million. The decrease in the operating income for fiscal 1999 is principally due
to $3.2 in lower margins resulting from the lower volumes and the decline in
average sales prices. This decrease was partially offset by lower selling,
general and administrative expenses of $.2 million.
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies was $4.2 million in fiscal 1999 as compared to
$2.6 million in fiscal 1998. The income represents amounts from several joint
venture interests that were acquired in the Acquisition. The increase of $1.6
million is attributable to an additional four months of ownership of the
Acquired Business in fiscal 1999. The joint ventures manufacture and sell denim
products.
INTEREST EXPENSE
Interest expense was $60.9 million in fiscal 1999 compared to $51.5 million in
fiscal 1998 which included a $1.8 million pre-tax charge related to borrowings
under the Bridge Financing Facility (as defined herein) and a charge of $2.1
million pre-tax of loan costs related to the Bridge Financing Facility. The
increase in interest expense in fiscal 1999 compared to fiscal 1998 was due
indebtedness incurred to fund the Acquisition being outstanding for the full
fiscal year as compared to the eight months in the 1998 fiscal year. In addition
to the higher overall average outstanding balances, interest expense also
increased due to higher spreads over LIBOR due to the amendments of the Senior
Credit
20
Facility (as defined herein) during the 1999 fiscal year. The average interest
rate paid by the Company on its bank debt in fiscal 1999 was 8.5% as compared to
8.6% in fiscal 1998.
INCOME TAXES
The Company's overall tax rate for fiscal 1999 was approximately 36.0% as
compared to 42.3% for fiscal 1998. The difference from the statutory rate
reflects the offset of state tax benefits with the effect on pre-tax income of
nondeductible goodwill associated with the Acquisition.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The Company reported a net loss of $11.0 million, or $.93 per common share on a
diluted basis, as compared to net income of $11.3 million, or $.93 per common
share on a diluted basis, for fiscal 1998. Fiscal 1998's net income included
charges of $7.5 million pre-tax, or $.38 per common share, related to the
Acquisition.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales for fiscal 1998 were $902.7 million compared to $493.4 million for
fiscal 1997. The $409.3 million increase in net sales primarily resulted from
the addition of $375.1 million of net sales from Swift Denim and Klopman
International as a result of the Acquisition, a $24.9 million increase in
apparel fabrics net sales and a $9.3 million increase in home fabrics net sales.
Fiscal 1998 was also a 53-week year as compared to a 52-week year in fiscal
1997.
GALEY & LORD APPAREL Galey & Lord Apparel's net sales for fiscal 1998 were
$481.5 million, a $24.9 million increase over fiscal 1997's net sales of $456.6
million. Fabric sales volume increased 9% primarily due to higher volume in
woven sportswear and uniform fabrics partially offset by a decrease in corduroy
volume. In garments, which represented approximately 7% of the segment's fiscal
1998 sales, sales dollars increased 63% as the Company's garment manufacturing
facilities located in Mexico and acquired in fiscal 1996, changed from
commission finishing goods to completed garment sales. Overall, the segment's
selling prices declined slightly principally due to reduced volume of corduroy
that has higher selling prices than other fabrics and the impact of increased
sales of off quality goods.
SWIFT DENIM Swift Denim reported net sales of $277.3 million for the eight
months of fiscal 1998 since the Acquisition. While not reflected in the
segment's sales results, Swift Denim's volume and selling prices were lower than
the comparable pre-acquisition period while the business was owned by Dominion,
which reflected the overall weaker market conditions in denim.
KLOPMAN INTERNATIONAL Klopman International reported net sales of $97.8 million
for the eight months of fiscal 1998 since the Acquisition. Klopman
International's sales results remained consistent with the comparable
pre-acquisition period while the business was owned by Dominion.
HOME FASHION FABRICS Fiscal 1998 net sales for Home Fashion Fabrics was $46.1
million compared to $36.8 million for fiscal 1997. The increase in Home Fashion
Fabrics' net sales resulted from a 9%
21
increase in volume and a 15% increase in average selling prices in 1998 compared
to 1997 as the market for home decorative prints improved during fiscal 1998.
OPERATING INCOME
Fiscal year 1998 operating income increased $37.7 million to $72.1 million
compared to $34.4 million for fiscal 1997. The increase in operating income is
primarily a result of the Acquisition of Swift Denim and Klopman International,
partially offset by decreased operating income from Galey & Lord Apparel as a
result of lower net corduroy sales resulting from a weaker corduroy market in
fiscal 1998.
GALEY & LORD APPAREL Galey & Lord Apparel reported operating income for fiscal
1998 of $26.7 million as compared to $36.8 million for fiscal 1997. The decrease
in operating income is primarily due to $10.3 million related to higher off
quality production, $4.6 million in inefficiencies incurred in garment
manufacturing as the production transitioned to additional new customers and
away from commission finishing, $1.2 million in higher selling, general and
administrative costs, a $.9 million charge for off quality goods due to
defective raw materials received from a supplier. The declines were partially
offset by $5.2 million due to increased first quality sales volume and changes
in product mix as well as $1.7 in margin improvements principally due to
improved manufacturing variances on the increase in production volume.
SWIFT DENIM Swift Denim reported operating income of $37.6 million for the eight
months of fiscal 1998 after the Acquisition. While not reflected in the
segment's results, Swift Denim's operating income was lower than the comparable
pre-acquisition period while the business was owned by Dominion due to the
market changes in denim discussed above.
KLOPMAN INTERNATIONAL Klopman International reported operating income of $5.5
million for the eight months of fiscal 1998 after the Acquisition. While not
reflected in the segment's results, Klopman International's operating income was
comparable to the pre-acquisition period while the business was owned by
Dominion.
HOME FASHION FABRICS Home Fashion Fabrics' operating income for fiscal 1998 was
$2.8 million compared to an operating loss in fiscal 1997 of $2.4 million. The
increase in Home Fashion Fabrics' operating income was primarily attributable to
a $3.0 million charge taken in fiscal 1997 as a result of a major Home Fashion
Fabrics' customer filing for bankruptcy protection and $2.2 million reflecting
the higher sales volume and selling prices.
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies was $2.6 million in fiscal 1998. The income
represents amounts from several joint venture interests that were acquired in
the Acquisition. The joint ventures manufacture and sell denim products.
INTEREST EXPENSE
Interest expense was $51.5 million in fiscal 1998 compared to $12.3 million in
fiscal 1997. The increase was due to higher debt levels and higher interest
rates in fiscal 1998 compared to fiscal 1997.
22
The increase in interest expense was primarily due to added interest expense on
additional indebtedness in the amount of $33.5 million incurred to finance the
Acquisition, interest expense of $1.8 million pre-tax related to borrowings
under the Bridge Financing Facility (as defined herein) and a charge of $2.1
million pre-tax of loan cost related to the Bridge Financing Facility. The
remaining interest expense increase was due to additional borrowings incurred as
a result of increased working capital requirements. The average interest rate
paid by the Company on its bank debt in fiscal 1998 was 8.6% as compared to 6.9%
in fiscal 1997.
INCOME TAXES
The Company's tax rate for fiscal year 1998 was approximately 42.3% as compared
to 37.9% for fiscal 1997. The difference from the statutory rate is primarily
due to the effect on pre-tax income of nondeductible goodwill as a result of the
Acquisition and state income taxes partially offset by benefits derived from the
Company's foreign sales corporation.
NET INCOME AND NET INCOME PER SHARE
Net income for fiscal 1998 was $11.3 million, or $.93 per common share on a
diluted basis, as compared to $13.7 million, or $1.14 per common share on a
diluted basis, for fiscal 1997. Net income for fiscal 1998 was adversely
impacted by nonrecurring charges of $7.5 million pre-tax, or $.38 per common
share, related to the Acquisition. These charges included (i) a $2.7 million
pre-tax, or $.14 per common share, charge related to hedging the Canadian dollar
against currency fluctuations, allowing the Company to fix the purchase price
for the Acquired Business which was based in Canadian dollars, (ii) a $1.8
million pre-tax, or $.09 per common share, charge for interest on the Bridge
Financing, (iii) a $0.9 million pre-tax ($0.5 million after-tax), or $.04 per
common share, extraordinary charge due to the write-off of fees and expenses
related to the Company's old credit facility which was refinanced in December in
order to provide funds for the Acquisition, and (iv) a $2.1 million pre-tax, or
$.11 per common share, charge for loan costs related to the Bridge Financing.
Excluding these charges, net income for fiscal year 1998 would have been $15.9
million or $1.30 per common share on a diluted basis. Net income for fiscal 1997
was adversely impacted by the $3.0 million pre-tax, or $.15 per common share,
bad debt charge taken due to the bankruptcy of a Home Fashion Fabrics' customer.
Excluding this charge, net income would have been $15.7 million, or $1.27 per
common share, in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries had cash and cash equivalents totaling $14.3
million and $19.9 million at October 2, 1999 and October 3, 1998, respectively.
The Company had a total of $73.0 million of borrowing availability under its
Senior Credit Facility at October 2, 1999.
In fiscal 1999, the Company's operating activities provided $36.6 million of
cash flow. In addition, the Company received $6.5 million from its' equity
investments and $5.0 million from the sale of certain property, plant and
equipment. The Company utilized the cash flow provided and a portion of
available cash to repay $25.0 million principal amount of its outstanding
indebtedness and invested $27.2 million in capital expenditures, a significant
portion of which was used to expand and modernize the Company's weaving and
dyeing and finishing plants.
23
SENIOR CREDIT FACILITY
On January 29, 1998 the Company entered into a new credit agreement (as amended,
the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent
and lender, and, as of March 27, 1998, with a syndicate of lenders. The Senior
Credit Facility provides for (i) a revolving line of credit under which the
Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million (reduced to
$200 million pursuant to the Amendment, as defined below) or a borrowing base
(comprised of eligible accounts receivable and eligible inventory, as defined in
the Senior Credit Facility), (ii) a term loan in the principal amount of $155.0
million ("Term Loan B") and (iii) a term loan in the principal amount of $110.0
million ("Term Loan C"). Portions of Term Loan B and Term Loan C were repaid
pursuant to the Amendment.
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with FUNB, as agent and lender and its syndicate of
lenders. The amendment, which became effective as of July 3, 1999 (the
"Amendment"), replaced the Adjusted Leverage Ratio covenant (as defined in the
Amendment) with a minimum EBITDA covenant (as defined in the Amendment) until
the Company's December quarter 2000, replaced the Consolidated Net Worth
covenant with a Consolidated Retained Earnings covenant (both as defined in the
Amendment), waived compliance by the Company with the Adjusted Fixed Charge
Coverage Ratio until the Company's December quarter 2000 and modified the
Company's covenant related to capital expenditures.
Under the Senior Credit Facility (as amended by the Amendment), for the period
beginning July 4, 1999 through February 15, 2001 the revolving line of credit
borrowings bear interest at a per annum rate, at the Company's option, of either
(i) (a) the greater of the prime rate or the federal funds rate plus .50% plus
(b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term
Loan C bear interest at a per annum rate, at the Company's option, of (A) with
respect to Term Loan B either (i)(a) the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of
3.75% or (B) with respect to Term Loan C, either (i)(a) greater of the prime
rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR
plus a margin of 3.75%. In addition, pursuant to the Amendment, the Company
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million.
The repayment of the Term Loan B and Term Loan C principal balances ratably
reduces the remaining quarterly principal payments. In addition, the Company and
each of its domestic subsidiaries granted the lenders, as additional collateral,
a lien on all real property owned in the United States. In connection with the
Amendment, the Company incurred charges of $0.6 million during fiscal 1999
principally related to the real estate liens and legal fees.
Beginning with the quarter ending December 30, 2000, the Company will be subject
to leverage and fixed charge coverage ratios, as amended pursuant to the
Amendment. In addition, under the Senior Credit Facility, the revolving line of
credit expires on March 27, 2004 and the principal amount of (i) Term Loan B is
repayable in quarterly payments of $349,157 through March 27, 2004, three
quarterly payments of $32,820,773 and final amount of $27,854,048 on Term Loan
B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly
payments of $247,687 through April 2, 2005, three quarterly payments of
$23,034,918 and a final amount of $19,511,595 on Term Loan C's maturity of April
1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998 and
July 3, 1999,
24
the revolving line of credit borrowings bear interest at a per annum rate, at
the Company's option, of either (i) (a) the greater of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%, .75%, 1.00% or
1.25%, based on the Company achieving certain leverage ratios (as defined in the
Senior Credit Facility) or (ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%,
2.00%, 2.25% or 2.50%, based on the Company achieving certain leverage ratios.
Term Loan B and Term Loan C bear interest at a per annum rate, at the Company's
option, of (A) with respect to Term Loan B either (i) (a) the greater of the
prime rate or federal funds rate plus .50%, plus (b) a margin of 1.00%, 1.25%,
1.50% or 1.75%, based on the Company achieving certain leverage ratios or (ii)
LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios or (B) with respect to Term Loan C, either (i)
(a)the greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the Company achieving certain
leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%, 3.00% or 3.25%,
based on the Company's achieving certain leverage ratios. Pursuant to the
Amendment, borrowings under the Senior Credit Facility will bear interest in
accordance with the foregoing pricing options beginning on February 16, 2001.
At October 2, 1999, interest on the Company's term loan and revolving credit
borrowings were based on one and three-month market LIBOR rates averaging 5.87%
and on a prime rate of 8.25%. The Company's weighted average borrowing rate on
these loans at October 2, 1999 was 9.32%, which includes spreads ranging from
3.00% to 3.75% on the LIBOR borrowings and a spread of 1.75% on the prime rate
borrowings compared to an average rate of 8.11% at October 3, 1998.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the Amendment, are secured by all of the assets of the Company and each of
its domestic subsidiaries, a pledge by the Company and each of its domestic
subsidiaries of all the outstanding capital stock of its respective domestic
subsidiaries and a pledge of 65% of the outstanding voting capital stock, and
100% of the outstanding non-voting capital stock, of certain of its respective
foreign subsidiaries. In addition, payment of all obligations under the Senior
Credit Facility is guaranteed by each of the Company's domestic subsidiaries.
Under the Senior Credit Facility, the Company is required to make mandatory
prepayments of principal annually in an amount equal to 50% of Excess Cash Flow
(as defined in the Senior Credit Facility), and also in the event of certain
dispositions of assets or debt or equity issuances (all subject to certain
exceptions) in an amount equal to 100% of the net proceeds received by the
Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
The Company expects to spend approximately $17.4 million for capital
expenditures in fiscal 2000. The Company anticipates that approximately $3.0
million will be used to increase the Company's capacity while the remaining
$14.4 million will be used to maintain existing capacity.
The Company anticipates that cash requirements, including working capital and
capital expenditures, will be met through funds generated from operations and
through borrowings under the Company's
25
revolving line of credit under the Senior Credit Facility. In addition, from
time to time, the Company uses borrowings under secured bank loans, through
capital leases or through operating leases for various equipment purchases.
As discussed previously, the Company is evaluating potential joint venture
opportunities within its' denim business. While no agreements have been reached
it is possible that during fiscal 2000 the Company will conclude on a joint
venture investment. The Company anticipates that any cash investment required to
create the joint venture will be funded by cash flow from operations and its'
existing revolving line of credit under the Senior Credit Facility.
SENIOR SUBORDINATED DEBT
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of Bridge Financing (as defined herein)
borrowings under a Senior Subordinated Credit Agreement 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 April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
will be paid March 1 and September 1 of each year. The first interest payment on
the Notes was made on September 1, 1998.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
TAX MATTERS
At October 2, 1999, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $37.4 million.
Of this amount, approximately $13.4
26
million will be carried back to recover federal taxes paid in prior years.
Approximately $24 million will be carried forward to offset future taxable
income and will expire in 2019 if unused. In addition, the Company has Italian
NOLs of approximately $8.4 million that expire in fiscal 2000. Management has
reviewed the Company's operating results for recent years as well as the outlook
for its businesses in concluding it is more likely than not that the deferred
tax assets of $32.2 million at October 2, 1999 will be realized. This review,
along with the timing of the reversal of its temporary differences and the
expiration dates of the NOLs, were also considered in reaching this conclusion.
The Company's ability to generate future taxable income is dependent on numerous
factors, including the state of the apparel industry, general economic
conditions and other factors beyond management's control. Accordingly, there can
be no assurance that the Company will meet its expectation of future taxable
income.
OTHER
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company 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 the March quarter 2000. The Pension
Funding Agreement also gives the PBGC a priority lien of $10.0 million on
certain land and building assets of the Company to secure payment of any
liability to the PBGC that might arise if one or more of the pension plans were
terminated. The Company's obligations under the Pension Funding Agreement
terminate upon the earlier to occur of (a) the termination of the pension plans
and (b) on or after January 30, 2003, if (i) the pension plans are fully funded
for two consecutive years and (ii) the Company receives an investment grade
rating on its debt.
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 developed a comprehensive plan to address Year 2000 issues. As part
of the plan, the Company selected teams to identify, evaluate and implement
remediation efforts aimed at bringing the Company's information technology and
non-information technology systems into Year 2000 compliance prior to December
31, 1999. During fiscal 1998, the team completed its assessment of the Company's
information technology and non-information technology systems. Additionally, the
Company engaged an independent consulting firm that specializes in implementing
and reviewing Year 2000 programs. Such firm evaluated significant portions of
the Company's remediation plan and identified improvements to the Company's
overall remediation efforts and recommended and evaluated integrated testing of
the Company's programs. Upon completion of its review the independent consulting
firm concluded that the Company should be Year 2000 compliant.
27
All of the Company's information technology remediation efforts and testing of
the updated systems is complete. The Company also prioritized and completed the
steps of its non-information technology systems plan. Although the Company
expects its' critical systems to be compliant, there can be no assurances that
the Company has identified and remediated all susceptible systems and therefore
will not be adversely impacted.
The Company has determined that the most likely worst case scenario that could
arise is the failure of the Company's suppliers to become Year 2000 compliant.
In particular, the loss of utility service could prevent the Company from
manufacturing at a particular location or processing transactions at the
Company's data centers. The initial loss of utility service would not interrupt
the Company's ability to service its customers due to the availability of
unfinished fabric and the ability of the Company to schedule additional
finishing production if required. If the loss of utility service impacted one of
the Company's data centers the Company would utilize the procedures under its
disaster recovery plans and move processing to an alternate site. If the utility
disruption were widespread and longer than the first few days of the year 2000
the Company would be adversely impacted. The adverse impact on the Company would
depend on the length and geographic reach of the utility interruption.
The Company has communicated with its suppliers, customers and business partners
to coordinate Year 2000 conversion efforts. 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.
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, was $1.7 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.
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
28
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.
Beginning on January 1, 1999, the Company began the invoicing of products in
both local currencies and Euro. 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 the Euro conversion will be completed
prior to the beginning of its 2001 fiscal year and the costs related to the
conversion will not be material to the Company's operating results although no
assurances can be made in this regard.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 1999. The
effective date has been delayed to June 15, 2000, the Company's fiscal year
2001, as a result of the FASB's issuance in August 1999 of FAS 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
date of FASB Statement No. 133". FAS 133 requires that all derivatives be
recorded on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are 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 will be immediately 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.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
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. 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. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. In addition
to the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. The Company's analysis of
the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
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. As of October 2, 1999, a
10% decline in market price would have a negative impact of approximately $22.5
million on the value of the contracts.
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 Company currently has
interest rate swap agreements on $25.0 million of its outstanding floating-rate
bank debt. The interest rate swaps assure that the Company will pay a maximum
LIBOR rate of 5.53% (excluding any applicable spread required by the Senior
Credit Facility) for the period ending December 2000. The following table
provides information about the Company's interest rate swap agreements that are
sensitive to changes in interest rates. The table presents notional amounts and
interest rates by contractual maturity date. Notional amounts are used to
calculate the contractual payments to be made under the contracts.
Notional Amount Maturing in
Fiscal Year 1999
----------------------------------------
2000 2001 Total Fair Value
---- ---- ----- ----------
INTEREST RATE SWAPS (Dollar amounts in 000's)
Notional amount $- $13,000 $13,000 $79
$- $12,000 $12,000 $72
Average pay rate 6.08% 6.08%
Average receive rate 5.53% 5.53%
30
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 related to accounts receivable and trade payable
positions and fixed asset purchase obligations. The following table provides
information about the Company's foreign currency forward exchange contracts. The
information is provided in U.S. dollar equivalent amounts, as presented in the
Company's financial statements. The table presents the notional amounts at the
current exchange rate and contractual foreign currency exchange rates by
contractual maturity dates. The tables do not include firmly committed
transactions that have not been hedged or transactions that are not firmly
committed even though the probability of certain transactions occurring is high.
Maturity 1999 Maturity 1998
in Fair In Fair
2000 Value 1999 Value
---- ----- ---- -----
(Dollar amounts in 000's)
FORWARD CONTRACTS TO SELL GERMAN MARK
Notional amount $ - $ - $ 1,825 $ 6
Average contract rate - 1.65
FORWARD CONTRACTS TO SELL ITALIAN LIRA
Notional amount $ 1,500 $ (7) $ 5,000 $ (252)
Average contract rate 1,815.0 1,570.9
FORWARD CONTRACTS TO PURCHASE JAPANESE YEN
Notional amount $ - $ - $ 139 $ (20)
Average contract rate - 134.65
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Galey & Lord, Inc.
We have audited the accompanying consolidated balance sheets of Galey &
Lord, Inc. as of October 2, 1999 and October 3, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended October 2, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Galey & Lord, Inc. at October 2, 1999 and October 3, 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 2, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Greensboro, North Carolina
November 5, 1999
32
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
ASSETS
OCTOBER 2, OCTOBER 3,
1999 1998
---------- ------
Current assets:
Cash and cash equivalents.................................................................... $ 14,300 $ 19,946
Trade accounts receivable, less deductions for doubtful receivables, discounts, returns and
allowances of $6,531 in 1999 and $8,215 in 1998............................................ 176,547 183,192
Sundry notes and accounts receivable......................................................... 6,994 12,166
Inventories ................................................................................. 175,101 185,497
Income taxes receivable...................................................................... 10,586 4,348
Deferred income taxes........................................................................ 11,776 11,370
Prepaid expenses and other current assets.................................................... 4,773 4,339
------------ ------------
Total current assets.................................................................... 400,077 420,858
Property, plant and equipment, at cost:
Land......................................................................................... 15,946 16,632
Buildings.................................................................................... 142,476 144,129
Machinery, fixtures and equipment............................................................ 361,961 355,138
------------ ------------
520,383 515,899
Less accumulated depreciation and amortization............................................... (136,682) (98,334)
------------ ------------
383,701 417,565
Investment in and advances to associated companies............................................. 22,966 26,327
Deferred charges, net.......................................................................... 15,437 15,148
Other non-current assets....................................................................... 2,391 3,100
Intangibles, net............................................................................... 154,144 155,295
------------ ------------
$ 978,716 $ 1,038,293
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................................... $ 3,072 $ 4,051
Trade accounts payable....................................................................... 63,288 66,098
Accrued salaries and employee benefits....................................................... 25,278 28,085
Accrued liabilities.......................................................................... 32,931 39,504
Income taxes payable ........................................................................ 4,790 1,748
------------ ------------
Total current liabilities............................................................... 129,359 139,486
Long-term debt ................................................................................ 658,051 682,926
Other long-term liabilities.................................................................... 21,561 26,647
Deferred income taxes.......................................................................... 61,008 61,357
Stockholders' equity:
Common Stock-$.01 par value, authorized 25,000,000 shares; issued 12,292,121
shares in 1999 and 12,227,391 shares in 1998,
outstanding 11,902,915 shares in 1999 and 11,838,187 shares in 1998....................... 123 122
Contributed capital in excess of par value................................................... 39,420 38,987
Retained earnings............................................................................ 70,825 81,861
Less 389,206 Common Stock shares in 1999 and 389,204 Common Stock shares in 1998 in
treasury, at cost........................................................................ (2,247) (2,247)
Accumulated other comprehensive income....................................................... 616 9,154
------------ ------------
Total stockholders' equity.............................................................. 108,737 127,877
------------ ------------
$ 978,716 $ 1,038,293
============ =============
See accompanying notes to consolidated financial statements.
33
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED
-------------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
------------- ------------- -------------
Net sales............................................................................. $ 953,116 $ 902,651 $493,362
Cost of sales......................................................................... 874,571 796,219 439,207
---------- --------- ---------
Gross profit.......................................................................... 78,545 106,432 54,155
Selling, general and administrative expenses.......................................... 34,269 30,524 18,123
Amortization of intangible assets..................................................... 4,826 3,793 1,679
---------- ---------- ----------
Operating income...................................................................... 39,450 72,115 34,353
Interest expense...................................................................... 60,935 47,566 12,326
Income from associated companies...................................................... (4,240) (2,621) -
Bridge financing interest expense..................................................... - 3,928 -
Loss on foreign currency hedges....................................................... - 2,745 -
--------- --------- ---------
Income (loss) before income taxes and extraordinary item.............................. (17,245) 20,497 22,027
Income tax expense (benefit):
Current............................................................................ 374 1,014 5,796
Deferred........................................................................... (6,583) 7,664 2,554
---------- ---------- ---------
(6,209) 8,678 8,350
---------- ---------- ---------
Income (loss) before extraordinary item.............................................. (11,036) 11,819 13,677
Extraordinary loss from debt refinancing (net of income tax benefit of $332)......... - 524 -
---------- ---------- ---------
Net income (loss).................................................................... $ (11,036) $ 11,295 $ 13,677
========== ========== =========
Net income (loss) per common share:
Basic:
Average common shares outstanding.................................................. 11,881 11,743 11,610
Income (loss) per share before extraordinary item.................................. $ (.93) $ 1.01 $ 1.18
Extraordinary item................................................................. - (.05) -
---------- ----------- ---------
Net income (loss) per common share - basic......................................... $ (.93) $ .96 $ 1.18
========== ========== =========
Diluted:
Average common shares outstanding.................................................. 11,881 12,173 11,986
Income (loss) per share before extraordinary item.................................. $ (.93) $ .97 $ 1.14
Extraordinary item................................................................. - (.04) -
---------- ----------- ---------
Net income (loss) per common share - diluted....................................... $ (.93) $ .93 $ 1.14
========== ========== =========
See accompanying notes to consolidated financial statements.
34
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED
-------------------------------------------
OCTOBER 2, OCTOBER 3, SEPTEMBER 27,
1999 1998 1997
------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ (11,036) $ 11,295 $ 13,677
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment................................ 41,819 31,528 13,504
Amortization of intangible assets............................................ 4,826 3,793 1,679
Amortization of deferred charges............................................. 2,548 3,622 299
Deferred income taxes........................................................ (6,582) 7,664 2,554
Non-cash compensation........................................................ 207 1,180 550
(Gain)/loss on disposals of property, plant and equipment.................... (132) 115 147
Undistributed income from associated companies............................... (4,240) (2,621) -
Extraordinary loss from debt refinancing..................................... - 524 -
Other........................................................................ - 688 -
Changes in assets and liabilities (net of acquisition):
Accounts receivable - net.................................................. 4,509 (25,959) (6,453)
Sundry notes and accounts receivable....................................... 4,351 4,788 (42)
Inventories................................................................ 9,192 (11,690) (15,583)
Prepaid expenses and other current assets.................................. (628) 3,445 (2,041)
Other non-current assets................................................... (1,039) (848) -
Trade accounts payable..................................................... (1,509) (1,248) 2,531
Accrued liabilities........................................................ (2,325) 6,192 (1,766)
Income taxes payable....................................................... (3,510) (2,542) (2,527)
Other long-term liabilities................................................ 155 1,017 -
----------- ----------- ---------
Total adjustments....................................................... 47,642 19,648 (7,148)
----------- ----------- ---------
Net cash provided by (used in) operating activities.......................... 36,606 30,943 6,529
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business - net of cash acquired................................. - (457,078) -
Property, plant and equipment expenditures..................................... (27,185) (33,784) (36,626)
Proceeds from sale of property, plant and equipment............................ 5,014 5,812 1,271
Distributions received from associated companies............................... 6,519 3,662 -
Other.......................................................................... 1,066 (2,045) (199)
----------- ----------- ---------
Net cash provided by (used in) investing activities.......................... (14,586) (483,433) (35,554)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase/(decrease) in revolving line of credit................................ 8,600 (22,900) 42,900
Principal payments on long-term debt........................................... (51,604) (813,983) (15,635)
Issuance of long-term debt..................................................... 18,000 1,323,490 -
Net proceeds from issuance of Common Stock..................................... 22 1,779 534
Tax benefit from exercise of stock options..................................... 205 152 107
Purchase of treasury stock..................................................... - - (196)
Payment of bank fees and loan costs............................................ (2,687) (18,719) (64)
Other.......................................................................... - - (143)
----------- ----------- ---------
Net cash provided by (used in) financing activities.......................... (27,464) 469,819 27,503
Effect of exchange rate changes on cash and cash equivalents................... (202) 340 -
----------- ----------- ----------
Net increase (decrease) in cash and cash equivalents........................... (5,646) 17,669 (1,522)
Cash and cash equivalents at beginning of period............................... 19,946 2,277 3,799
----------- ----------- ---------
Cash and cash equivalents at end of period..................................... $ 14,300 $ 19,946 $ 2,277
=========== =========== =========
See accompanying notes to consolidated financial statements.
35
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated
Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income (Loss) Total
------ ----- ------- -------- ----- ------------- -----
Balance at September 28, 1996............. $ 120 $ 34,687 $ 56,889 $ (2,051) $ - $ 89,645
Issuance of 85,466 shares of Common Stock
upon exercise of options.............. 1 263 - - - 264
Issuance of 16,384 shares of Restricted
Common Stock.......................... - 270 - - - 270
Tax benefit from exercise of stock options - 107 - - - 107
Compensation earned related to issuance
of stock options...................... - 550 - - - 550
Purchase of 12,201 shares of Treasury
Stock................................. - - - (196) - (196)
Comprehensive income:
Net income for fiscal 1997............ $ 13,677 - - 13,677 - - 13,677
---------- ----- -------- --------- -------- --------- ---------
Total comprehensive income................ $ 13,677
==========
Balance at September 27, 1997............. $ 121 $ 35,877 $ 70,566 $ (2,247) $ - $ 104,317
Issuance of 166,011 shares of
Common Stock upon exercise of options. 1 1,638 - - - 1,639
Issuance of 7,686 shares of Restricted
Common Stock.......................... - 140 - - - 140
Tax benefit from exercise of stock options - 152 - - - 152
Compensation earned related to issuance
of stock options...................... - 1,180 - - - 1,180
Comprehensive income:
Foreign currency translation
adjustment......................... $ 9,154 - - - - 9,154 9,154
Net income for fiscal 1998............ 11,295 - - 11,295 - - 11,295
---------- ---- -------- --------- -------- ---------- ---------
Total comprehensive income................ $ 20,449
==========
Balance at October 3, 1998................ $ 122 $ 38,987 $ 81,861 $ (2,247) $ 9,154 $ 127,877
Issuance of 37,200 shares of Common Stock
upon exercise of options.............. 1 21 - - - 22
Issuance of 27,530 shares of Restricted
Common Stock.......................... - 138 - - - 138
Tax benefit from exercise of stock options - 205 - - - 205
Compensation earned related to issuance
of stock options...................... - 69 - - - 69
Purchase of 2 shares of Treasury Stock.... - - - - - -
Comprehensive income (loss):
Foreign currency translation
adjustment......................... $ (8,538) - - - - (8,538) (8,538)
Net income (loss) for fiscal 1999..... (11,036) - - (11,036) - - (11,036)
---------- ---- -------- --------- -------- --------- ----------
Total comprehensive income (loss)......... $ (19,574)
==========
Balance at October 2, 1999................ $ 123 $ 39,420 $ 70,825 $ (2,247) $ 616 $ 108,737
===== ======== ========= ======== ========= ==========
See accompanying notes to consolidated financial statements.
36
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
CASH EQUIVALENTS: The Company considers investments in marketable
securities with an original maturity of three months or less to be cash
equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) method is used to cost the majority of domestic
inventories. The cost of other inventories is determined by the first-in,
first-out method.
INCOME TAXES: The Company uses the liability method of accounting for
deferred income taxes which requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
PROPERTY, PLANT AND EQUIPMENT: Depreciation is provided over the estimated
useful lives of the respective assets using straight-line methods. Estimated
useful lives are 40 years for buildings and 5 to 15 years for machinery,
fixtures and equipment.
DEFERRED CHARGES: Deferred debt charges are being amortized over the lives
of related debt as an adjustment to interest expense. Accumulated amortization
at October 2, 1999 and October 3, 1998 was $3.6 million and $1.3 million,
respectively.
GOODWILL: The excess of the purchase cost over the fair value of assets
acquired is being amortized over 20 to 40 years. Accumulated amortization at
October 2, 1999 and October 3, 1998 was $11.9 million and $8.4 million,
respectively. The Company evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining life to determine whether goodwill is recoverable.
The Company believes that no impairment of goodwill existed at October 2, 1999.
OTHER INTANGIBLES: The Company has $49.9 million of other intangibles at
October 2, 1999. The other intangibles represent the value of certain trademarks
acquired in the January 1998 acquisition of the apparel assets of Dominion
Textile, Inc. These trademarks are amortized over 40 years. Accumulated
amortization at October 2, 1999 was $2.1 million.
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company follows the
accounting provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which require that the Company
recognize expense for the fair value of stock-based compensation awarded during
the year.
FOREIGN CURRENCY TRANSLATION: The assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at current exchange rates,
and revenues and expenses are translated at average exchange rates for the year.
Resulting translation adjustments are reflected as a separate component of
stockholders' equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency, except those transactions which operate effectively as a hedge of an
identifiable foreign currency commitment or as a hedge of a foreign currency
investment position, are included in the consolidated statements of operations.
Foreign currency transaction losses included in the consolidated statement of
operations are not material.
37
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DERIVATIVE FINANCIAL INSTRUMENTS: The Company utilizes derivative
financial instruments principally to manage market risks and reduce its exposure
resulting from fluctuations in foreign currency exchange rates, interest rates
and raw material cotton prices. Derivative instruments include swap agreements,
futures and option contracts and forward exchange and purchase contracts. Gains
and losses relating to qualifying hedges are deferred and are recognized in
income or as an adjustment to carrying amounts when the hedged transaction
occurs. To the extent that a qualifying hedge is terminated or ceases to be
effective as a hedge, any deferred gains and losses up to that point continue to
be deferred and are included in the basis of the underlying transaction. To the
extent that the anticipated transactions are no longer likely to occur, the
related hedges are closed with gains or losses charged to earnings on a current
basis. The Company does not utilize derivative financial instruments for trading
or other speculative purposes. The Company actively evaluates the
creditworthiness of the financial institutions that are counterparties to
derivative financial instruments, and it does not expect any counterparties to
fail to meet their obligations.
REVENUE RECOGNITION: The Company recognizes revenues from product sales
when goods are shipped or when ownership is assumed by the customer. Consistent
with recognized practice in the textile industry, the Company records revenues
on a bill and hold basis, invoicing goods that have been produced, packaged and
made ready for shipment. The goods are effectively segregated from inventory
which is available for sale. The risk of ownership of the goods has passed to
the customer and remittance terms are consistent with all other sales by the
Company. During fiscal 1999, 1998 and 1997, invoices issued under these terms
represent 20%, 19% and 22% of revenue, respectively.
NET INCOME PER COMMON SHARE: Net income per common share data is computed
based on the average number of shares of Common Stock and Common Stock
equivalents outstanding during the period. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings Per Share", ("FAS
128") which was adopted by the Company on December 27, 1997. At that time, the
Company was required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the requirements for calculating
basic earnings per share, the dilutive effect of stock options is excluded.
Under the new requirements for calculating diluted earnings per share, the
dilutive effect of certain target stock price performance options was excluded.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
RECLASSIFICATION: Certain prior period amounts have been reclassified to
conform to current year presentation. These amounts include $9.0 million for the
year ended October 3, 1998 which has been reclassified from selling, general and
administrative expense 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.
FISCAL YEAR: The Company uses a 52-53 week fiscal year. The years ended
October 2, 1999 and September 27, 1997 were 52-week years. The year ended
October 3, 1998 was a 53-week year.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income", which was adopted
by the Company during its December quarter 1998. FAS 130 requires that the
Company report comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income represents the change
in stockholders' equity during the period from nonowner sources. Currently,
changes from nonowner sources consist of net income and foreign currency
translation adjustments.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of
an Enterprise and Related Information", which was adopted by the Company during
its September quarter 1999. FAS 131 requires that a public company report
financial and descriptive information about its reportable operating segments
pursuant to criteria that differ from prior 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
38
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 adoption of FAS 131 had
no effect on the consolidated results or financial position but did result in a
change to the Company's segment disclosures (see Note N - Segment Information
below).
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999. The effective date has been delayed to June 15, 2000, the Company's
fiscal year 2001, as a result of the FASB's issuance in August 1999 of FAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective date of FASB Statement No. 133". FAS 133 requires that all derivatives
be recorded on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are 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 will be immediately 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.
NOTE B - 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 approximately $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 Note D - Long-term Debt 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. In
connection with the Acquisition, which has been accounted for as a purchase
transaction, the Company acquired assets with a fair value of approximately
$585.6 million and assumed liabilities of approximately $191.6 million. The
Company has finalized the allocation of the fixed portion of the purchase price
and has recorded goodwill of approximately $72.9 million for the excess of
purchase price (including assumed liabilities) over the fair market value of the
assets acquired. As of October 2, 1999, the Company and Polymer have not
completed the final cash settlement related to the Acquisition. The Company
expects to finalize the cash settlement during fiscal 2000. Any adjustments
related to final cash settlement will be reflected in goodwill. Goodwill is
being amortized over a 40-year period. 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 had occurred at the beginning of fiscal 1998 and fiscal 1997,
respectively. 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.
For the Years Ended
-------------------
October 3, 1998 September 27, 1997
--------------- ------------------
(in thousands except per share data)
Net sales $ 1,065,964 $ 1,103,583
Income (loss) before extraordinary item $ 2,927 $ (4,042)
Income (loss) before extraordinary item per share - diluted $ .24 $ (.34)
Net income (loss) $ 2,403 $ (4,042)
Net income (loss) per share - diluted $ .20 $ (.34)
39
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE C - INVENTORIES
Inventories at October 2, 1999 and October 3, 1998 are summarized as
follows (in thousands):
1999 1998
---- ----
Raw materials............................................................................ $ 7,503 $ 13,029
Stock in process......................................................................... 28,413 34,554
Produced goods........................................................................... 139,949 142,015
Dyes, chemicals and supplies............................................................. 11,050 13,011
---------- ----------
Total inventory at first-in, first-out (FIFO) cost....................................... 186,915 202,609
Less LIFO and other reserves............................................................. (11,814) (17,112)
---------- ----------
$ 175,101 $ 185,497
========== ==========
Inventories valued using the LIFO method comprised approximately 70% and
71% of domestic inventories at October 2, 1999 and October 3, 1998. Inventory
held at foreign locations was $39.0 million and $41.1 million at October 2, 1999
and October 3, 1998, respectively.
NOTE D - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
1999 1998
---- ----
Senior Credit Facility:
Revolving Credit Note............................................................... $ 115,100 $ 106,500
Term Loan B......................................................................... 132,601 154,225
Term Loan C......................................................................... 94,066 109,450
Senior Subordinated Notes................................................................ 298,737 298,587
Other borrowings with various rates and maturities........................................ 20,619 18,215
---------- ----------
661,123 686,977
Less Current portion..................................................................... (3,072) (4,051)
---------- --------
$ 658,051 $ 682,926
========== ==========
At October 2, 1999, the annual maturities of the principal amounts of
long-term debt were (in thousands):
2000.......................................................................................... $ 3,072
2001.......................................................................................... 3,074
2002.......................................................................................... 3,394
2003.......................................................................................... 3,430
2004.......................................................................................... 184,083
Thereafter.................................................................................... 464,070
SENIOR CREDIT FACILITY
On July 13, 1999, the Company amended its credit agreement, dated as of
January 29, 1998, as amended, with First Union National Bank ("FUNB"), as agent
and lender and its syndicate of lenders. The amendment 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.
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
40
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE D - LONG-TERM DEBT (Continued)
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 of 3.50% or (B) with respect to Term Loan C, either
(i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 2.50% or (ii) LIBOR plus a margin of 3.75%. In addition, the Company
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million. At
October 2, 1999, the Company's additional borrowing availability under its
revolving line of credit under the Senior Credit Facility was $73.0 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 incurred charges of $0.6 million principally related
to the real estate liens and legal fees.
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, three
quarterly payments of $32,820,773 and final amount of $27,854,048 on Term Loan
B's maturity on April 2, 2005 and (ii) Term Loan C is repayable in quarterly
payments of $247,687 until April 2, 2005, three quarterly payments of
$23,034,918 and a final amount of $19,511,595 on Term Loan C's maturity of April
1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998 and
July 13, 1999, the revolving line of credit borrowings bear interest at a per
annum rate, at the Company's option, of either (i) (a) the greater of the prime
rate or the federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%,
.75%, 1.00% or 1.25%, based on the Company achieving certain leverage ratios (as
defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 1.25%,
1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on the Company achieving certain
leverage ratios. Term Loan B and Term Loan C bear interest at a per annum rate,
at the Company's option, of (A) with respect to Term Loan B either (i) (a) the
greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of
1.00%, 1.25%, 1.50% or 1.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the
Company achieving certain leverage ratios or (B) with respect to Term Loan C,
either (i) (a) the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the Company
achieving certain leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%,
3.00% or 3.25%, based on the Company's achieving certain leverage ratios.
Pursuant to the amendment executed as of July 13, 1999, borrowings under the
Senior Credit Facility will bear interest in accordance with the foregoing
pricing options beginning on February 16, 2001.
At October 2, 1999, interest on the Company's term loan and revolving
credit borrowings were based on one and three-month market LIBOR rates averaging
5.87% and on a prime rate of 8.25%. The Company's weighted average borrowing
rate on these loans at October 2, 1999 was 9.32%, which includes spreads ranging
from 3.00% to 3.75% on the LIBOR borrowings and a spread of 1.75% on the prime
rate borrowings.
On January 29, 1998 the Company entered into a new credit agreement (as
amended, the "Senior Credit Facility") with FUNB, as agent and lender, and, as
of March 27, 1998, with a syndicate of lenders. The Senior Credit Facility
provides for (i) a revolving line of credit under which the Company may borrow
up to an amount (including letters of credit up to an aggregate of $30.0
million) equal to the lesser of $225.0 million (reduced to $200 million pursuant
to the Amendment) or a borrowing base (comprised of eligible accounts receivable
and eligible inventory, as defined in the Senior Credit Facility), (ii) a term
loan in the principal amount of $155.0 million ("Term Loan B") and (iii) a term
loan in the principal amount of $110.0 million ("Term Loan C"). Portions of Term
Loan B and Term Loan C were repaid pursuant to the Amendment.
The Company's obligations under the Senior Credit Facility, as amended
pursuant to the Amendment, are secured by all of the assets of the Company and
each of its domestic subsidiaries, a pledge by the Company and each of its
domestic subsidiaries of all the outstanding capital stock of its respective
domestic subsidiaries and a pledge of 65% of the outstanding voting capital
stock, and 100% of the outstanding non-voting capital stock, of certain of its
respective foreign subsidiaries. In addition, payment of all obligations under
the Senior Credit Facility is guaranteed by each of the Company's domestic
subsidiaries. Under the Senior Credit
41
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE D - LONG-TERM DEBT (Continued)
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.
SENIOR SUBORDINATED DEBT
On February 24, 1998, the Company closed its private offering of $300.0
million aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008
(the "Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of Bridge Financing (as defined herein)
borrowings under a Senior Subordinated Credit Agreement 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 April 22, 1998 and filed as part of a Registration
Statement on Form S-4 with the United States Securities and Exchange Commission
which was declared effective on April 22, 1998. The terms of the Notes are
identical in all material respects to those of the Initial Notes except that the
Notes are freely transferable by holders and are not subject to any covenant
regarding registration under the Securities Act of 1933, as amended. Interest on
the Notes will be paid March 1 and September 1 of each year. The first interest
payment on the Notes was made on September 1, 1998.
The Notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior indebtedness
of the Company and its subsidiaries and senior in right of payment to any
subordinated indebtedness of the Company. The Notes are unconditionally
guaranteed, on an unsecured senior subordinated basis, by Galey & Lord
Industries, Inc., Swift Denim Services, Inc., G&L Service Company North America,
Inc., Swift Textiles, Inc., Galey & Lord Properties, Inc., Swift Denim
Properties, Inc. and other future direct and indirect domestic subsidiaries of
the Company.
The Notes are subject to certain covenants, including, without
limitation, those limiting the Company and its subsidiaries' ability to incur
indebtedness, pay dividends, incur liens, transfer or sell assets, enter into
transactions with affiliates, issue or sell stock of restricted subsidiaries or
merge or consolidate the Company or its restricted subsidiaries.
PREVIOUS CREDIT AGREEMENTS
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") 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 were used to fund the Acquisition (including fees and
expenses). The Bridge Financing was repaid on February 24, 1998 when the Company
closed its private offering of $300.0 million aggregate principal amount of
Initial Notes.
On June 4, 1996, the Company amended its term loan and revolving credit
facility with a bank group led by First Union National Bank of North America, as
agent and lender. The amendment increased the Company's maximum allowable
borrowings
42
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE D - LONG-TERM DEBT (Continued)
under the revolving credit facility, which was to expire on April 30, 2000, from
$150 million to $170 million. The term loan was restated to the outstanding
balance of $48 million and continued to require equal quarterly principal
payments of $3 million through the term loan's expiration on March 31, 2000. The
amended term loan and revolving credit facility bore interest at a per annum
rate, at the Company's option, of either (i) the greater of the prime rate or
federal funds rate or (ii) LIBOR plus .5%, LIBOR plus .75%, LIBOR plus 1.0%,
LIBOR plus 1.25% or LIBOR plus 1.5%, in accordance with a pricing grid based on
certain financial ratios.
On May 13, 1997, the Company amended its term loan and revolving credit
facility with its bank group. The amendment modified the Company's covenants
related to debt service, eliminated the covenant limiting the amount of capital
expenditures to be made and permitted the Company to enter into a trade
receivables securitization.
The Company's obligations under the previous credit facility were
secured by all of the Company's inventory, equipment, accounts receivable and
general intangibles, and a pledge by the Company of all the outstanding capital
stock of its wholly-owned domestic subsidiaries and a pledge of 65% of the
outstanding capital stock of its foreign subsidiary.
NOTE E - FINANCIAL INSTRUMENTS
The Company utilizes the following methods in determining the fair value
of its financial instruments:
Cash and cash equivalents, trade receivables and trade payables - Due
to the short maturity of these instruments, the carrying value approximates fair
value.
Long-term debt - For the Company's publicly traded debt instruments,
fair value is determined based on quoted market prices of those instruments. For
the remaining debt instruments, management believes the carrying values
approximate fair value.
Interest rate swap agreements - The fair value of the Company's
interest rate swap agreements is determined by comparing the agreements'
anticipated cash flows based on current interest rates to the cash flows of a
similar interest rate swap agreement which could be obtained as of October 2,
1999.
Forward exchange contracts - The fair value of outstanding forward
exchange contracts is determined based on quotes obtained from public-trading
currency markets.
PUBLICLY TRADED DEBT
At October 2, 1999 and October 3, 1998, the fair value of the Company's 9
1/8% Senior Subordinated Notes Due 2008 was approximately $75.0 million and
$259.5 million, respectively, as compared to the carrying values of $298.7
million and $298.6 million, respectively.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate debt. The Company currently
has interest rate swap agreements on $25 million of its outstanding
floating-rate bank debt. The interest rate swaps assure that the Company will
pay a maximum LIBOR rate of 5.53% (excluding any applicable spread required by
the Senior Credit Facility) for a period ending December 2000. The amount paid
or received under the swap agreements is based on the changes in actual interest
rates and is recorded as an adjustment to interest expense. At October 2, 1999
and October 3, 1998, the fair value of the Company's interest rate swaps was
$151,000 and $(489,000), respectively.
43
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE E - FINANCIAL INSTRUMENTS (Continued)
FORWARD EXCHANGE CONTRACTS
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 related to accounts receivable and
trade payable positions and fixed asset purchase obligations.
The table below summarizes by currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars (in thousands). The
purchased amounts represent the net U.S. dollar equivalent of commitments to
purchase foreign currencies and the sold amounts represent the net U.S dollar
equivalent of commitments to sell foreign currencies. The foreign currency
amounts have been translated into a U.S. dollar equivalent value using the
exchange rate at the reporting date. Forward exchange contracts mature at the
anticipated cash requirement date of the hedged transaction, generally within
one year. All contracts are scheduled to be settled in fiscal year 2000.
1999 1998
-------------------------------------------- ------------------------------------------
Contractual Contractual Unrealized Contractual Contractual Unrealized
Currency Value Purchases Value Sold Gain/(loss) Value Purchases Value Sold Gain/(loss)
-------- --------------- ---------- ----------- --------------- ---------- -----------
Italian Lira $ - $1,500 $ (7) $ - $ 5,000 $ (252)
Japanese Yen - - - 139 - (20)
German Mark - - - - 1,825 6
NOTE F - INCOME TAXES
Income (loss) from continuing operations before the provision of income
taxes and the extraordinary item consisted of (in thousands):
1999 1998 1997
---- ---- ----
Domestic............................................ $ (38,544) $ 3,786 $ 20,448
Foreign............................................. 21,299 16,711 1,579
------------ --------- ---------
$ (17,245) $ 20,497 $ 22,027
========== ========= =========
The components of income tax expense (benefit) from continuing operations
before the extraordinary item are as follows (in thousands):
1999 1998 1997
---- ---- ----
Current tax provision:
Federal............................................. $ (2,174) $ (2,703) $ 4,861
State............................................... 51 (7) 731
Foreign............................................. 2,497 3,724 204
--------- --------- ---------
Total current tax provision.............................. 374 1,014 5,796
--------- --------- ---------
Deferred tax provision:
Federal ............................................ (9,999) 4,021 2,202
State............................................... (1,472) 1,213 352
Foreign............................................. 4,888 2,430 -
--------- --------- ---------
Total deferred tax provision............................. (6,583) 7,664 2,554
---------- --------- ---------
Total provision for income taxes......................... $ (6,209) $ 8,678 $ 8,350
========= ========= =========
44
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE F - INCOME TAXES (Continued)
Following is a reconciliation of the United States statutory tax rate to
the effective rate expressed as a percentage of income (loss) before income
taxes and extraordinary item:
1999 1998 1997
---- ---- ----
Federal statutory rate.............................. (35.0%) 35.0% 35.0%
State taxes, net of federal benefit................. (5.3) 3.8 3.2
Goodwill amortization............................... 4.7 3.8 0.7
Foreign sales corporation........................... - (2.7) -
Foreign taxes in excess of (less than) federal
statutory rate.................................. (0.3) 1.5 0.9
Other............................................... (0.1) 0.9 (1.9)
----- ----- -------
Effective rate...................................... (36.0%) 42.3% 37.9%
====== ====== =======
Deferred income taxes are provided for temporary differences between
the carrying amounts and the tax bases of assets and liabilities. At October 2,
1999 and October 3, 1998, the Company had $32.2 million and $31.3 million,
respectively, of deferred income tax assets and $81.4 million and $81.3 million,
respectively, of net deferred income tax liabilities which have been netted for
financial statement presentation purposes. The significant components of these
amounts as shown on the balance sheet are as follows (in thousands):
October 2, 1999 October 3, 1998
--------------------------- --------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
Inventory valuation.................................. $ 217 $ - $ (1,684) $ -
Accruals and allowances.............................. 8,488 - 13,054 1,750
Property, plant and equipment........................ - (60,335) - (67,030)
Intangibles.......................................... - (20,325) - (1,965)
Net operating loss carryforward...................... 3,071 10,919 - 10,792
Postretirement benefits.............................. - 3,717 - 3,505
Other................................................ - 5,816 - 2,186
Valuation allowance.................................. - (800) - (10,595)
--------- ---------- --------- -----------
Total.............................................. $ 11,776 $ (61,008) $ 11,370 $ (61,357)
========= ========== ========= ==========
During 1999, the Company incurred net operating losses for U.S. federal
and state income tax purposes of approximately $37.4 million. Of this amount,
approximately $13.4 million will be carried back for U.S. federal income tax
purposes to recover federal taxes paid in prior years. Approximately, $24.0
million will be carried forward to offset future taxable income and will expire
in 2019 if unused. All state net operating losses will be carried forward and
will expire in years 2004 - 2014.
During fiscal 1999, the Company finalized the fixed portion of the
purchase cost of the Acquired Business. In conjunction with the finalization,
the value of certain acquired trademarks was determined. Accordingly, a deferred
tax liability was recognized through an increase in recorded goodwill.
At October 2, 1999, the Company had foreign net operating loss
carryforwards of $8.4 million. These loss carryforwards principally relate to
the Company's operations in Italy and will expire in fiscal 2000, if unused.
During fiscal 1999, the Company reduced the valuation reserve for these foreign
loss carryforwards from $10.6 million to $0.8 million at October 2, 1999. The
decrease in the valuation reserve reflects the utilization of loss carryforwards
against foreign earnings in fiscal 1999 and the projection of additional foreign
earnings in fiscal 2000. The decrease in valuation allowance resulted in a
reduction of goodwill.
45
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE F - INCOME TAXES (Continued)
At October 2, 1999 and October 3, 1998, undistributed earnings of the
Company's foreign subsidiaries amounted to approximately $23.3 million and $10.6
million, respectively. The foreign undistributed earnings are either permanently
reinvested or distribution will not result in incremental U.S. taxes.
Accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. It is not practical to estimate the additional tax that would
be incurred, if any, if the permanently reinvested earnings were repatriated.
NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) for interest and income taxes is as follows (in
thousands):
1999 1998 1997
---- ---- ----
Interest............................. $57,723 $31,328 $11,213
Income taxes......................... $ 1,691 $ 1,044 $ 8,287
NOTE H - BENEFIT PLANS
DEFINED BENEFIT PENSION AND POSTRETIREMENT PLANS
The Company and its U.S. subsidiaries sponsor noncontributory defined
benefit pension plans covering substantially all domestic employees. The plans
provide retirement benefits for all qualified salaried employees and qualified
non-union wage employees based generally on years of service and average
compensation. Retirement benefits for qualified union wage employees are based
generally on a flat dollar amount for each year of service. The Company's
funding policy is to contribute annually the amount recommended by the plan's
actuary. Plan assets, which consist of common stocks, bonds and cash
equivalents, are maintained in trust accounts. The Company also has a
nonqualified, unfunded supplementary retirement plan under which the Company
will pay supplemental pension benefits to key executives in addition to the
amount participants will receive under the Company's retirement plan.
The Company provides health care and life insurance benefits to certain
retired employees and their dependents. The plans are unfunded and approved
claims are paid by the Company. The Company's cost is partially offset by
retiree premium contributions.
The following sets forth the projected benefit obligation, a
reconciliation of plan assets, the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets at October 2, 1999 and
October 3, 1998 (in thousands):
Defined Benefit Plan Supplemental Plan Postretirement Benefit
-------------------- ----------------- ----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit Obligation at Beginning of Year....... $ 60,496 $ 24,843 $ 1,783 $ 1,195 $ 9,023 $ -
Service Cost.................................. 5,428 4,683 290 158 283 227
Interest Cost................................. 4,086 3,217 145 98 627 415
Participant Contributions..................... - - - - 122 (86)
Actuarial (Gain) Loss......................... (5,193) (19) (19) 332 (356) (81)
Benefits Paid................................. (7,832) (2,869) - - (691) (345)
Acquisition................................... - 30,641 - - - 8,893
Plan Amendments............................... 3,853 - 164 - - -
--------- --------- --------- --------- --------- ---------
Benefit Obligation at End of Year............. $ 60,838 $ 60,496 $ 2,363 $ 1,783 $ 9,008 $ 9,023
========= ========= ========= ========= ========= =========
46
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE H - BENEFIT PLANS (Continued)
Defined Benefit Plan Supplemental Plan Postretirement Benefit
-------------------- ----------------- ----------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
CHANGE IN PLAN ASSETS:
Fair Value of Assets at Beginning of Year..... $ 56,699 $ 23,074 $ - $ - $ - $ -
Actual Return on Plan Assets.................. 11,016 674 - - - -
Employer Contributions........................ 6,137 7,515 - - 569 345
Participant Contributions..................... - - - - 122 86
Benefits Paid................................. (7,832) (2,869) - - (691) (431)
Acquisition................................... - 28,305 - - - -
--------- --------- --------- --------- --------- ---------
Fair Value of Assets at End of Year........... $ 66,020 $ 56,699 $ - $ - $ - $ -
========= ========= ========= ========= ========= =========
FUNDED STATUS:
Funded Status................................. $ 5,182 $ (3,797) $ (2,363) $ (1,783) $ (9,008) $ (9,023)
Unrecognized Prior Service Cost............... - - 291 165 - -
Unrecognized Net Actuarial (Gain) Loss........ (5,384) 6,111 560 632 (436) (81)
Plan Amendments............................... 2,806 (1,134) - - - -
--------- ---------- --------- --------- --------- ---------
Net Amount Recognized......................... $ 2,604 $ 1,180 $ (1,512) $ (986) $ (9,444) $ (9,104)
========= ========= ========= ========= ========= =========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET:
Prepaid Benefit Cost.......................... $ 2,604 $ 1,180 $ - $ - $ - $ -
Accrued Benefit Liability..................... - - (1,512) (986) (9,444) (9,104)
--------- --------- --------- -------- --------- ---------
Net Amount Recognized......................... $ 2,604 $ 1,180 $ (1,512) $ (986) $ (9,444) $ (9,104)
========= ========= ========= ======== ========= =========
Net pension cost for the plans for the years ended October 2, 1999,
October 3, 1998 and September 27, 1997 included the following components (in
thousands):
Defined Benefit Plan Supplemental Plan Postretirement Benefit
------------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service Cost......................... $5,428 $4,683 $3,086 $ 291 $ 158 $ 131 $ 283 $ 227 $ -
Interest Cost........................ 4,086 3,217 1,486 145 98 73 627 415 -
Expected Return on Plan Assets....... (4,944) (3,709) (1,644) - - - - - -
Amortization of Prior Service Cost... (87) (87) (87) 38 23 23 - - -
Recognized Net Actuarial (Gain) Loss. 230 40 82 51 28 14 - - -
------- ------- -------- ------- ------- ------- ------ ------- ------
Net Periodic Benefit Cost............ $4,713 $4,144 $2,923 $ 525 $ 307 $ 241 $ 910 $ 642 $ -
======= ======= ======== ======= ======= ======= ====== ======= ======
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount Rate........................ 7.40% 6.95% 7.50% 7.40% 6.95% 7.50% 7.40% 6.95% -%
Expected Return on Plan Assets....... 8.50 8.50 8.50 - - - - - -
Rate of Compensation Increase........ 5.00 5.50 5.50 - - - - - -
47
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE H - BENEFIT PLANS (Continued)
The assumed health care cost trend rate was 10% for 1998, decreasing to 5%
by the year 2003 and remaining at that level thereafter. A one-percentage point
change in assumed health care cost trend rates have the following effects on
1999:
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components.... $ 109 $ (93)
Effect on postretirement benefit obligation................ 820 (716)
Pursuant to an agreement with the Pension Benefit Guaranty Corporation ("PBGC"),
the Company has given the PBGC a first priority lien of $10 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 pension plans are terminated.
DEFINED CONTRIBUTION PLANS
The Company has various retirement savings and profit sharing plans
covering qualified U.S. employees. The plans include a provision which allows
employees to make pre-tax contributions under Section 401(k) of the Internal
Revenue Code. During fiscal year 1999, the plans were amended to provide for the
Company to make a guaranteed match of the employee's contributions and to
eliminate the discretionary profit-sharing contribution plan provision. The
Company contributions for 1999, 1998 and 1997 were approximately $2.9 million,
$3.1 million and $1.7 million, respectively.
In addition, the Company provides life and health benefits to
substantially all U.S. employees. Employees contribute a fixed amount weekly or
monthly as set forth in the plan with the balance paid by the Company. The
Company contributions for 1999, 1998 and 1997 were approximately $16.3 million,
$13.8 million and $6.3 million, respectively.
DEFERRED COMPENSATION PLAN
The Company has a nonqualified, unfunded deferred compensation plan which
provides certain key executives with a deferred compensation award which will
earn interest at the United States Treasury Bill rate. The award, which is based
on the year's operating results, was $0, $307,000, and $344,000 for 1999, 1998
and 1997, respectively. The plan participants will be vested in the awards upon
the completion of five years of service after the date of the award, upon normal
retirement, upon involuntary termination subject to certain limitations, upon
permanent and total disability or death, whichever occurs first. In the event of
retirement or disability, any unpaid deferred awards will be paid on the normal
five-year maturity schedule. Upon the death of a participant, the Company has
the option to either immediately pay the award to the participant's estate or
pay the award on the normal five-year maturity schedule.
FOREIGN EMPLOYEE PLANS
A significant number of the Company's European employees participate in a
government mandated deferred compensation plan. This plan provides benefits to
employees upon termination of service with the Company. Employees accrue
benefits under the plan based on compensation levels and length of service.
Accrued benefits are adjusted upward annually for interest earned on accumulated
balances and cost of living increases. Approximately $1.7 million and $1.5
million has been recognized as expense related to the plan in the accompanying
statements of operations for the years ended October 2, 1999 and October 3,
1998, respectively. A liability of approximately $10.1 million and $12.3 million
is included within other long-term liabilities in the Company's consolidated
balance sheets as of October 2, 1999 and October 3, 1998, respectively, to
provide for payment of accrued benefits under the plan. Employees are 100%
vested in the benefits accrued.
Many of the Company's European employees participate in government
sponsored healthcare and pension plans. Annually, the Company and its employees
contribute an amount equal to approximately 45% (35% by the Company; 10% by the
employees) of the Company's gross salaries and wages to the government for
administration of these plans and other social programs. For the years ended
October 2, 1999 and October 3, 1998, the Company's portion of the funding
totaled $6.5 million and $4.8 million, respectively.
48
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE H - BENEFIT PLANS (Continued)
The Company's Canadian employees participate in a government sponsored
pension plan. The plan requires contributions from the employer and the
employee. The Company's required contributions paid for the years ended October
2, 1999 and October 3, 1998, totaled approximately $0.5 million and $0.4
million, respectively. The Company's qualified Canadian employees also are
eligible to participate in various retirement savings plans. The plans provide
for voluntary pre-tax contributions from employees and guaranteed Company
contributions ranging from 2% to 10% of an employee's annual salary.
Contributions made to these plans for the years ended October 2, 1999 and
October 3, 1998 were $0.6 million and $0.4 million, respectively.
NOTE I - COMMITMENTS AND CONTINGENCIES
Future minimum commitments for operating leases at October 2, 1999 are as
follows (in thousands):
2000.................................................. $ 10,281
2001.................................................. 9,308
2002.................................................. 7,429
2003.................................................. 4,122
2004.................................................. 2,057
Thereafter............................................ 2,440
-----------
Total minimum lease payments.......................... $ 35,637
===========
Approximately 60.3% of minimum lease payments on operating leases
pertain to real estate as of October 2, 1999. The remainder covers a variety of
machinery and equipment. Rental expense for all operating leases was
approximately $11.7 million, $9.1 million and $5.5 million in 1999, 1998 and
1997, respectively.
The Company is involved in various litigation arising in the ordinary
course of business. Although the final outcome of these matters cannot be
determined, based on the facts presently known, it is Management's opinion that
the final resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
NOTE J - SEVERANCE CHARGE
During the third quarter of fiscal 1999, the Company recognized a $1.8
million charge associated with the termination of 46 salaried employees. The
charge was recorded as a component of selling, general and administrative
expenses. All affected employees have been terminated with cash payments
expected to be spread over a period not to exceed two years. At October 2, 1999
there remained a balance of $1.1 million which is equal to the expected future
cash expenditures to such terminated employees.
NOTE K - STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of (i) 25,000,000
shares of Common Stock, par value $.01 per share, of which 11,902,915 shares are
outstanding at October 2, 1999, (ii) 5,000,000 shares of Nonvoting Common Stock,
par value $.01 per share, none of which is issued or outstanding, and (iii)
5,000,000 shares of Preferred Stock, par value $.01 per share, none of which is
issued or outstanding.
On February 9, 1999, the Company's stockholders approved the 1999 Stock
Option Plan (the "Plan") which replaced the Company's previous 1989 Stock Option
Plan that expired on that date. The Plan authorizes the granting of qualified
and non-qualified stock options to officers, directors, consultants and key
employees of the Company. Options may be granted through the plan's expiration
in February 2009 at an exercise price of not less than fair market value. The
Plan provides for the issuance of up to 500,000 shares of the Company's common
stock, all of which were available for issuance at October 2, 1999. Currently,
the Company has both fixed stock options and target stock price performance
options outstanding under the Plan.
49
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE K - STOCKHOLDERS' EQUITY (Continued)
FIXED STOCK OPTIONS
The exercise price of each fixed option granted is equal to the market
price of the Company's Common Stock on the date of grant with a maximum term of
10 years. Options granted to directors vest 12 months from the date of grant
while options granted to certain management employees vest 20% each year over a
five-year period from the date of grant.
The fair value of each option granted after September 30, 1995 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 1999, 1998 and 1997: expected
dividend yield of 0% for all years; expected volatility of 34% for all years;
weighted average risk-free interest rate of 4.73%, 5.45% and 6.17%,
respectively; and expected lives of 5 years for all years.
A summary of the status of the Company's fixed stock options as of
October 2, 1999, October 3, 1998, and September 27, 1997 and changes during the
years are presented below:
1999 1998 1997
----------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year........ 503,249 $ 9.48 582,560 $ 9.22 682,210 $ 8.61
Granted............................... 11,350 7.71 6,500 18.12 4,500 16.46
Exercised............................. (37,200) .59 (80,611) 8.05 (84,800) 3.00
Forfeited or Canceled................. (20,800) 13.67 (5,200) 13.68 (19,350) 16.48
------- -------- -------- -------- ---------- ---------
Outstanding, end of year.............. 456,599 $ 9.96 503,249 $ 9.48 582,560 $ 9.22
======= ======== ======= ======== ========= =========
Options exercisable at year-end....... 432,449 450,349 496,060
======= ======= =========
Weighted average fair value of
options granted during the year
calculated using modified Black-
Scholes model..................... $2.92 $7.12 $5.75
The following table summarizes information about fixed stock options
outstanding at October 2, 1999:
Options Exercisable
-------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 10/2/99 Contractual Life Exercise Price at 10/2/99 Exercise Price
--------------- ---------- ---------------- -------------- ---------- --------------
$1.75 66,700 0.8 Yrs $1.75 66,700 $1.75
4.50 to 14.00 324,050 3.2 10.51 309,700 10.62
14.25 to 18.31 65,849 5.4 15.60 56,049 15.70
-------------- ------ --- ----- --------- ------
$1.75 to 18.31 456,599 3.2 $ 9.96 432,449 $ 9.91
50
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE K - STOCKHOLDERS' EQUITY (CONTINUED)
TARGET STOCK PRICE PERFORMANCE OPTIONS
The exercise price of each target stock price performance option granted
is equal to the market price of the Company's common stock on the date of grant
and vests as the Company's common stock price achieves certain pre-established
targets, ranging from $15 to $30, which were set on the date of grant. All
options which have not vested within five years of the date of grant will
expire. All options which have vested within such time expire ten years from the
date of grant.
The fair value of each option granted was estimated on the date of grant
using a modified Black-Scholes option-pricing model which, in addition to the
required inputs, takes into consideration the target stock price (or barrier)
which must be attained. There were no target stock price performance options
issued during 1999. The following assumptions were incorporated into the model
for options granted in 1998 and 1997: weighted average risk-free interest rate
of 5.53% and 5.84%, respectively; expected dividend yield of 0% for both years;
expected lives ranging from 1.42 months to 2.17 years and 2.25 to 4.25 years,
respectively; and volatility of 34% for both years.
A summary of the status of the Company's target stock price performance
options as of October 2, 1999, October 3, 1998 and September 27, 1997 and
changes during the year is presented below:
1999 1998 1997
----------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year....... 507,100 $ 11.27 522,334 $10.64 475,000 $10.38
Granted.............................. - - 71,000 16.38 48,000 13.25
Exercised............................ - - (85,400) 11.61 (666) 13.25
Forfeited or Canceled................ (7,500) 15.52 (834) 13.25 - -
------- -------- ------- ------ ------- -----
Outstanding, end of year............. 499,600 $ 11.21 507,100 $11.27 522,334 $10.64
======= ======== ======= ====== ======= ======
Options exercisable at year-end...... 484,600 492,100 221,654
======= ======= =======
Weighted average fair value of
options granted during the year
calculated using modified Black-
Scholes model.................... $ - $3.53 $4.00
As of October 2, 1999, the 499,600 target stock price performance options
outstanding under the Plan have a weighted average remaining contractual life of
6.7 years assuming all options vest.
51
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE L - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
1999 1998 1997
---- ---- ----
Numerator:
Income (loss) before extraordinary item................ $ (11,036) $ 11,819 $ 13,677
Extraordinary loss..................................... - 524 -
--------- --------- ----------
Net income (loss)...................................... $ (11,036) $ 11,295 $ 13,677
========= ========= ==========
Denominator:
Denominator for basic earnings per share -
Weighted average shares.............................. 11,881 11,743 11,610
Effect of dilutive securities:
Stock options........................................ - 430 376
--------- --------- --------
Diluted potential common shares denominator
For diluted earnings per share - adjusted
Weighted average shares and assumed exercises........ 11,881 12,173 11,986
========= ========= ========
NOTE M - CONCENTRATION OF CREDIT RISK
The Company manufactures and sells textile products to companies
located worldwide which are predominantly in the apparel and home fabrics
industries. The Company performs periodic credit evaluations of its customers'
financial condition and, although the Company does not generally require
collateral, it does require cash payments in advance when the assessment of
credit risk associated with a customer is substantially higher than normal. At
October 2, 1999, all trade accounts receivable are from customers in the apparel
and home furnishings industry. Receivables generally are due within 60 days, and
credit losses have consistently been within management's expectations, other
than credit losses resulting from one Home Fashion Fabrics customer which filed
for bankruptcy protection during the June quarter 1997. All credit losses are
provided for in the financial statements.
The Company had sales to Levi Strauss and its related companies which
comprised 22%, 19% and 22% of the Company's consolidated net sales for fiscal
1999, 1998 and 1997, respectively.
NOTE N - SEGMENT INFORMATION
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of
an Enterprise and Related Information", which was adopted by the Company during
its September quarter 1999. FAS 131 requires that a public company report
financial and descriptive information about its reportable operating segments
pursuant to criteria that differ from 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 is principally organized around
differences in products; however, one segment exists primarily due to geographic
location. The business segments are managed separately and distribute products
through different marketing channels.
The Company's operations are classified into four business segments:
Galey & Lord Apparel, Swift Denim, Klopman International and Home Fashion
Fabrics. Galey & Lord Apparel manufactures and sells woven cotton and cotton
blended apparel fabrics and garment packages. Swift Denim manufactures and
markets a wide variety of denim products for apparel and non-apparel uses.
Klopman International manufactures principally workwear and careerwear fabrics
as well as woven apparel fabrics primarily for consumption in Europe. Home
Fashion Fabrics manufactures and sells dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories as
well as greige fabrics (undyed and unfinished) which it sends to independent
contractors for dyeing and finishing.
52
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE N - SEGMENT INFORMATION (Continued)
The Company evaluates performance and allocates resources based on
operating income; therefore, certain expenses principally net interest expense
and income taxes are excluded from the chief operating decision makers'
assessment of segment performance. Accordingly, such expenses have not been
allocated to segment results. The accounting policies of the reportable segments
are the same as those described in the Summary of Significant Accounting
Policies (see Note A above). The corporate segment's operating income (loss)
represents principally the administrative expenses from the Company's various
holding companies. Additionally the corporate segment assets consist primarily
of corporate cash, deferred bank charges and investments in and advances to
associated companies.
Information about the Company's operations in its different industry
segments for the past three years is as follows (in thousands) (see Note A):
1999 1998 1997
---- ---- ----
Net Sales to External Customers
Galey & Lord Apparel $ 457,851 $ 481,422 $ 456,597
Swift Denim 324,661 277,313 -
Klopman International 140,838 97,812 -
Home Fashion Fabrics 29,766 46,104 36,765
------------ ----------- -----------
Consolidated $ 953,116 $ 902,651 $ 493,362
============ =========== ===========
Operating Income (Loss)
Galey & Lord Apparel $ 23,020 $ 26,649 $ 36,837
Swift Denim 5,223 37,608 -
Klopman International 11,600 5,552 -
Home Fashion Fabrics (243) 2,835 (2,484)
Corporate (150) (529) -
------------ ------------ ------------
39,450 72,115 34,353
Interest expense 60,935 47,566 12,326
Income from associated companies (4,240) (2,621) -
Bridge financing interest expense - 3,928 -
Loss on foreign currency hedges - 2,745 -
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary loss $ (17,245) $ 20,497 $ 22,027
============ ============ ============
Depreciation and Amortization
Galey & Lord Apparel $ 15,092 $ 12,932 $ 11,895
Swift Denim 22,205 14,719 -
Klopman International 6,199 4,299 -
Home Fashion Fabrics 3,300 3,342 -
Corporate 578 451 3,288
------------ ------------ ------------
$ 47,374 $ 35,743 $ 15,183
============ ============ ============
Other Non-cash Charges
Galey & Lord Apparel $ 11 $ 1,058 $ 507
Swift Denim 25 76 -
Klopman International - - -
Home Fashion Fabrics - - -
Corporate 33 46 43
------------ ------------ ------------
$ 69 $ 1,180 $ 550
============ ============ ============
53
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE N - SEGMENT INFORMATION (Continued)
1999 1998 1997
---- ---- ----
Assets(1)
Galey & Lord Apparel $ 324,291 $ 332,332 $ 307,181
Swift Denim 439,077 452,920 -
Klopman International 131,018 152,238 -
Home Fashion Fabrics 32,584 36,651 39,725
Corporate 51,746 64,152 2,285
------------ ------------ ------------
$ 978,716 $ 1,038,293 $ 349,191
============ ============ ============
Capital Expenditures
Galey & Lord Apparel $ 19,275 $ 19,992 $ 35,871
Swift Denim 4,940 10,551 -
Klopman International 2,848 2,715 -
Home Fashion Fabrics 122 526 755
------------ ------------ ------------
$ 27,185 $ 33,784 $ 36,626
============ ============ ============
Net Sales to External Customers (2)
United States $ 732,257 $ 756,762 $ 493,362
Europe 140,838 97,813 -
Canada 80,021 48,076 -
------------ ---------- ----------
Consolidated $ 953,116 $ 902,651 $ 493,362
============ ========== ==========
Long-lived Assets
United States $ 265,849 $ 282,951 $ 115,400
Europe (3) 69,119 86,385 -
Canada 31,559 32,628 -
Other Foreign Countries 17,174 15,601 14,045
------------ ------------ ------------
Consolidated $ 383,701 $ 417,565 $ 129,445
============ ============ ============
(1)Excludes intercompany balances and investments in subsidiaries which
are eliminated in consolidation.
(2)Revenues are attributed to countries based on geographic origin.
(3)Principally all of the European long-lived assets are located in Italy.
The Company has a single customer which exceeds 10% of consolidated net
sales. Galey & Lord Apparel net sales to this customer were $145.8 million,
$108.1 million and $107.0 million for 1999, 1998 and 1997, respectively. Swift
Denim net sales to this customer were $59.2 million and $66.8 million for 1999
and 1998, respectively. Klopman International's net sales to this customer were
$5.3 million and $1.2 million for 1999 and 1998, respectively.
54
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE O - INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
At October 2, 1999 and October 3, 1998, investments in and advances to
associated companies were $23.0 million and $26.3 million, respectively,
representing several 50% joint venture interests. Included in the investments in
and advances to associated companies are secured loans to Swift Europe of $4.7
million and $5.7 million, respectively. The secured loans outstanding at October
2, 1999 bear interest at a 5% rate and are payable in installments through 2009.
At October 2, 1999 and October 3, 1998, the excess of the Company's
investment over its equity in the underlying net assets of its joint venture
interests is approximately $11.6 million and $12.3 million, respectively, (net
of accumulated amortization of $1.1 million and $.4 million, respectively) and
is being amortized on a straight-line basis over 20 years as a component of the
equity in earnings of unconsolidated associated companies. The following table
presents condensed balance sheet and income statement information as of October
2, 1999 and October 3, 1998 and for the year ended October 2, 1999 and eight
months ended October 3, 1998. The financial information has been derived from
statutory financial statements and has been adjusted to conform to U.S.
generally accepted accounting principles.
1999 1998
---- ----
IN THOUSANDS
Selected Balance Sheet Data:
Current assets $ 24,159 $ 33,764
Noncurrent assets 10,970 11,998
Current liabilities 22,766 32,446
Noncurrent liabilities 8,965 10,668
Stockholders' equity 3,397 2,648
Selected Income Statement Data:
Net sales $ 59,080 $ 40,901
Gross profit 23,578 16,333
Operating income 11,303 6,880
Net income $ 9,778 $ 6,246
55
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's unaudited consolidated results of operations are presented
below (in thousands except per share data):
Fiscal 1999 Quarters
------------------------------------------------------------
December March June September
-------- ----- ---- ---------
Net sales...................................................... $ 246,035 $ 237,433 $ 249,476 $ 220,172
Cost of sales.................................................. 218,113 215,227 234,369 206,862
---------- ---------- ---------- ----------
Gross profit................................................... 27,922 22,206 15,107 13,310
Income tax expense (benefit)................................... 1,880 (1,012) (2,828) (4,249)
Net income (loss).............................................. $ 3,370 $ (1,106) $ (5,880) $ (7,420)
========== ========== ========== ==========
Per share data - basic:
Average common shares outstanding.............................. 11,841 11,875 11,903 11,903
Net income (loss) - basic...................................... $ .28 $ (.09) $ (.49) $ (.62)
========== ========== ========== ==========
Per share data - diluted:
Average common shares outstanding.............................. 11,968 11,875 11,903 11,903
Net income (loss) - diluted.................................... $ .28 $ (.09) $ (.49) $ (.62)
========== ========== ========== ==========
Fiscal 1998 Quarters
------------------------------------------------------------
December March June September
-------- ----- ---- ---------
Net sales...................................................... $ 127,147 $ 237,645 $275,296 $262,563
Cost of sales.................................................. 117,351 205,728 241,459 231,681
---------- ---------- ---------- ----------
Gross profit................................................... 9,796 31,917 33,837 30,882
Income tax expense (benefit)................................... (526) 3,199 3,457 2,548
Income (loss) before extraordinary loss........................ (110) 4,096 4,721 3,112
Extraordinary loss from debt refinancing....................... (524) - - -
Net income (loss).............................................. $ (634) $ 4,096 $ 4,721 $ 3,112
========== ========== ========== ==========
Per share data - basic:
Average common shares outstanding.............................. 11,664 11,682 11,781 11,833
Income (loss) before extraordinary loss........................ (.01) .35 .40 .26
Net income (loss) - basic...................................... $ (.05) $ .35 $ .40 $ .26
=========== ========== ========== ========
Per share data - diluted:
Average common shares outstanding.............................. 11,664 12,088 12,368 12,011
Income (loss) before extraordinary loss........................ (.01) .34 .38 .26
Net income (loss) - diluted.................................... $ (.05) $ .34 $ .38 $ .26
=========== ========== ========== =========
The quarter ended October 3, 1998 was a 14-week period. All other quarters
presented are 13-week periods.
56
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE Q - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following summarizes condensed consolidating financial information
for the Company, segregating Galey & Lord, Inc. (the "Parent") and subsidiaries
that are guarantors of the Notes ("Guarantor Subsidiaries") from subsidiaries
that are not guarantors of the Notes ("Non-Guarantor Subsidiaries"). The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company and
guarantees are full, unconditional and joint and several. Separate financial
statements of each of the Guarantor Subsidiaries are not presented because
Management believes that these financial statements would not be material to
investors.
October 2, 1999
-------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------ ------------ ------------ ------------ ------------
Current assets:
Trade accounts receivable $ - $ 133,969 $ 42,578 $ - $ 176,547
Inventories - 136,981 38,990 (870) 175,101
Other current assets 4,895 104,434 27,237 (88,137) 48,429
---------- ----------- ----------- -------------- -----------
Total current assets 4,895 375,384 108,805 (89,007) 400,077
Property, plant and equipment, net - 280,933 102,768 - 383,701
Intangibles, net - 154,144 - - 154,144
Investments in subsidiaries and other assets 840,617 12,385 106,261 (918,469) 40,794
----------- ----------- ----------- ------------ -----------
$ 845,512 $ 822,846 $ 317,834 $ (1,007,476) $ 978,716
========== =========== =========== ============ ===========
Current liabilities:
Trade accounts payable $ 80 $ 40,489 $ 22,719 $ - $ 63,288
Accrued liabilities 17,119 23,265 17,452 373 58,209
Other current liabilities 77,135 2,228 14,074 (85,575) 7,862
---------- ----------- ----------- ------------ -----------
Total current liabilities 94,334 65,982 54,245 (85,202) 129,359
Long-term debt 638,116 660,191 12,725 (652,981) 658,051
Other non-current liabilities 4,325 80,832 9,112 (11,700) 82,569
Stockholders' equity 108,737 15,841 241,752 (257,593) 108,737
---------- ----------- ----------- ------------ -----------
$ 845,512 $ 822,846 $ 317,834 $ (1,007,476) $ 978,716
========== =========== =========== ============ ===========
57
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE Q - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
October 3, 1998
-------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------ ------------ ------------ ------------ ------------
Current assets:
Trade accounts receivable $ - $ 137,220 $ 45,972 $ - $ 183,192
Inventories - 145,128 41,355 (986) 185,497
Other current assets 4,886 58,569 25,755 (37,041) 52,169
---------- ----------- ----------- -------------- -----------
Total current assets 4,886 340,917 113,082 (38,027) 420,858
Property, plant and equipment, net - 297,625 119,940 - 417,565
Intangibles, net - 155,295 - - 155,295
Investments in subsidiaries and other assets 831,769 1,376 39,188 (827,758) 44,575
---------- ----------- ----------- ------------ -----------
$ 836,655 $ 795,213 $ 272,210 $ (865,785) $ 1,038,293
========== =========== =========== ============ ===========
Current liabilities:
Trade accounts payable $ 675 $ 40,329 $ 25,094 $ - $ 66,098
Accrued liabilities 19,729 27,068 20,114 678 67,589
Other current liabilities 14,474 19,497 10,083 (38,255) 5,799
---------- ----------- ----------- ------------ -----------
Total current liabilities 34,878 86,894 55,291 (37,577) 139,486
Long-term debt 666,112 587,719 19,995 (590,900) 682,926
Other non-current liabilities 7,788 65,460 18,651 (3,895) 88,004
Stockholders' equity 127,877 55,140 178,273 (233,413) 127,877
---------- ----------- ----------- ------------ -----------
$ 836,655 $ 795,213 $ 272,210 $ (865,785) $ 1,038,293
========== =========== =========== ============ ===========
58
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE Q - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
For the year ended October 2, 1999
------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $ 757,420 $ 247,784 $ (52,088) $ 953,116
Gross profit 218 49,696 28,516 115 78,545
Operating income (loss) (181) 22,150 17,503 (22) 39,450
Interest expense, income taxes and other, net (6,491) 43,281 8,610 5,086 50,486
Net income (loss) $ 6,310 $ (21,131) $ 8,893 $ (5,108) $ (11,036)
For the year ended October 3, 1998
------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $ 766,641 $ 175,084 $ (39,074) $ 902,651
Gross profit - 83,725 22,697 10 106,432
Operating income (loss) (222) 58,470 13,944 (77) 72,115
Interest expense, income taxes and other, net 2,240 58,122 5,544 (5,086) 60,820
Net income (loss) $ (2,462) $ 348 $ 8,400 $ 5,009 $ 11,295
59
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999, OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
NOTE Q - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (Continued)
For the year ended October 2, 1999
(in thousands)
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 11,656 $ 14,596 $ 10,459 $ (105) $ 36,606
Cash provided by (used in) investing activities (47,192) (24,780) 58,039 (653) (14,586)
Cash provided by (used in) financing activities 35,422 7,984 (71,628) 758 (27,464)
Effect of exchange rate change on cash and
cash equivalents - - (202) - (202)
---------- ---------- ----------- ------------ ------------
Net change in cash and cash equivalents (114) (2,200) (3,332) - (5,646)
Cash and cash equivalents at beginning of period 114 8,326 11,506 - 19,946
---------- ------------ ---------- ------------ -----------
Cash and cash equivalents at end of period $ - $ 6,126 $ 8,174 $ - $ 14,300
========== ========== ========== ============ ===========
For the year ended October 3, 1998
------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Consolidated
- ---------- ------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 9,126 $ 3,704 $ 18,113 $ 30,943
Cash provided by (used in) investing activities (466,877) (26,780) 10,224 (483,433)
Cash provided by (used in) financing activities 457,863 29,180 (17,224) 469,819
Effect of exchange rate change on cash and cash
equivalents - - 340 340
-------------- -------------- -------------- --------------
Net change in cash and cash equivalents 112 6,104 11,453 17,669
Cash and cash equivalents at beginning of period 2 2,222 53 2,277
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 114 $ 8,326 $ 11,506 $ 19,946
============== ============== ============== ==============
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ----------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the headings "Proposal 1 - Election of
Directors," "Executive Officers" and "Security Ownership."
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------------
MANAGEMENT
----------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Security Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Related Transactions."
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ----------------------------------------------------------------------------
(a) 1. Financial Statements
--------------------
The following financial statements of Galey & Lord, Inc. are included
under Item 8. of this report:
Report of Independent Auditors.
Consolidated Balance Sheets as of October 2, 1999 and October 3,
1998.
Consolidated Statements of Operations for the fiscal years ended
October 2, 1999, October 3, 1998 and September 27, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended
October 2, 1999, October 3, 1998 and September 27, 1997.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended October 2, 1999, October 3, 1998 and September 27,
1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
-----------------------------
The following schedule is filed as a part of this Item 14:
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable
or are not required or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
--------
The exhibits listed in the accompanying Exhibit Index are filed as a
part of this Report.
(b) 1. Reports on Form 8-K Filed During the Last Quarter.
--------------------------------------------------
None.
63
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
3.1 - Form of Restated Certificate of Incorporation of the Company.(1)
3.2 - Form of Amended and Restated Bylaws of the Company.(1)
4.1 - Form of Common Stock Certificate.(1)
10.1 - Form of Registration Rights Agreement, by and among the Company,
Arthur C. Wiener, Burlington and Citicorp Venture Capital, Ltd.
("CVC").(1)
10.2 - Amended and Restated 1989 Stock Option Plan of the Company. (1)*
10.3 - Agreement, dated February 11, 1991, between Burlington and
Industries.(1)
10.4 - Service Agreement, dated as of March 2, 1991, between Burlington
and Industries.(1)
10.5 - Form of Voting Agreement, by and among the Company, Arthur C.
Wiener and CVC.(1)
10.6 - The Retirement Plan of Galey & Lord, Inc.(1)*
10.7 - The Retirement Plan of Galey & Lord Industries, Inc. as Amended
and Restated Effective April 1, 1992.(2)*
10.8 - The Savings and Profit Sharing Plan of Galey & Lord Industries,
Inc. as Amended and Restated April 1, 1992.(2)*
10.9 - Form of Purchase Agreement dated as of March 29, 1994 between
Burlington and Industries.(3)
10.10 - Assumption Agreement dated as of April 29, 1994 between
Burlington and Industries.(3)
10.11 - Amendment to Amended and Restated 1989 Stock Option Plan of the
Company dated August 25, 1994.(4)*
10.12 - Second Amendment to The Savings and Profit Sharing Plan of Galey
& Lord Industries, Inc. dated April 27, 1994.(5)*
10.13 - Loan Agreement dated as of May 1, 1994 between South Carolina
Jobs - Economic Development Authority and Industries.(5)
10.14 - Reimbursement and Security Agreement dated as of May 1, 1994
between Industries and Wachovia.(5)
10.15 - Guaranty Agreement dated as of May 1, 1994 from the Company to
Wachovia.(5)
10.16 - The Supplemental Executive Retirement Plan of Galey & Lord
Industries, Inc.(5)*
64
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
10.17 - The Deferred Compensation Plan of Galey & Lord Industries, Inc.
(5)*
10.18 - First Amendment to The Retirement Plan of Galey & Lord
Industries, Inc. dated April 27, 1994.(6)*
10.19 - Second Amendment to The Retirement Plan of Galey & Lord
Industries, Inc. dated April 25, 1995.(7)*
10.20 - Fourth Amendment to The Savings and Profit Sharing Plan of Galey
& Lord Industries, Inc. dated April 25, 1995.(7)*
10.21 - Letter of Intent dated September 22, 1995 between the Company and
Triarc Companies, Inc.(8)
10.22 - Fifth Amendment to The Savings and Profit Sharing Plan of Galey &
Lord Industries, Inc. dated August 29, 1995.(10)*
10.23 - Asset Purchase Agreement, dated as of May 20, 1996, among the
Company, Industries, Farah Incorporated, Farah U.S.A., Inc. and
Dimmit (excluding Schedules and Exhibits).(11)
10.24 - Amended and Restated Credit Agreement dated as of June 4, 1996
between Industries, the Company and certain subsidiaries and
First Union National Bank of North Carolina, as agent and lender
and the other lender's party thereto.(12)
10.25 - Third Amendment to The Retirement Plan of Galey & Lord
Industries, Inc. dated June 7, 1996.(13)*
10.26 - Sixth Amendment to The Savings and Profit Sharing Plan of Galey
& Lord Industries, Inc. dated June 7, 1996.(13)*
10.27 - Seventh Amendment to The Savings and Profit Sharing Plan of Galey
& Lord Industries, Inc. dated September 30, 1996.(13)*
10.28 - Amended and Restated Reimbursement and Security Agreement, dated
as of June 4, 1996, among Galey & Lord Industries, Inc., Galey &
Lord, Inc. and Wachovia Bank of North Carolina, N.A.(14)
10.29 - Amendment to Amended and Restated 1989 Stock Option Plan of the
Company dated February 7, 1995.(15)*
10.30 - Amendment to Amended and Restated 1989 Stock Option Plan of the
Company dated February 11, 1997.(15)*
10.31 - 1996 Restricted Stock Plan of the Company.(16)*
65
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
10.32 - First Amendment to the Amended and Restated Credit Agreement
dated May 13, 1997 between Galey & Lord Industries, Inc., the
Company and certain subsidiaries and First Union National Bank of
North Carolina, as agent and lender.(16)
10.33 - Agreement, dated October 27, 1997, between Polymer Group, Inc.
("Polymer"), DT Acquisition, Inc. ("DTA") and the Company.(17)
10.34 - Amendment to the Agreement between Polymer, DTA and the Company,
dated November 16, 1997.(17)
10.35 - Operating Agreement, dated December 19, 1997, between Polymer,
DTA and the Company.(17)
10.36 - Credit Agreement dated as of December 19, 1997 among Galey &
Lord Industries, Inc. ("Industries"), the Company, G&L Service
Company, North America, Inc. ("Service Company") and First Union
National Bank, as agent and lender, and the other lenders' party
thereto.(17)
10.37 - Security Agreement dated as of December 19, 1997, among
Industries, the Company, Service Company and First Union National
Bank, as Collateral Agent.(17)
10.38 - Pledge Agreement dated as of December 19, 1997, among Industries,
the Company, Service Company and First Union National Bank, as
Collateral Agent.(17)
10.39 - Senior Subordinated Credit Agreement dated as of December 19,
1997 among Industries, the Company and First Union Corporation,
as agent and lender.(17)
10.40 - Master Separation Agreement, dated January 29, 1998, among the
Company, Polymer, DTA, Dominion Textile, Inc. ("Dominion") and
certain other parties thereto.(18)
10.41 - Credit Agreement dated as of January 29, 1998 among the Company,
Industries, Service Company, Swift Textiles Inc. ("Textiles"),
Swift Denim Services Inc. ("Denim") and First Union National
Bank, as agent and lender, and the other lenders' party thereto.
(18)
10.42 - Security Agreement dated as of January 29, 1998, among the
Company, Industries, Service Company, Textiles, Denim and First
Union National Bank, as Collateral Agent.(18)
10.43 - Pledge Agreement dated as of January 29, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union
National bank, as Collateral Agent.(18)
66
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
10.44 - Foreign Subsidiary Pledge Agreement dated as of January 29, 1998,
among the Company, certain of its subsidiaries party thereto and
First Union National Bank, as Collateral Agent.(18)
10.45 - First Amendment to Senior Subordinated Credit Agreement dated as
of January 29, 1998 among Industries, the Company and First Union
Corporation, as agent and lender.(18)
10.46 - Second Amendment to Senior Subordinated Credit Agreement dated as
of January 29, 1998 among the Company, Industries, Service
Company, Textiles, Denim and First Union Corporation, as agent
and lender.(18)
10.47 - Waiver, Release and First Amendment to the Credit Agreement dated
March 19, 1998 among the Company, Industries, Service Company,
Textiles, Denim and First Union National Bank, as agent and
lender.(19)
10.48 - Second Amendment to the Credit Agreement dated March 27, 1998,
among the Company, Industries, Service Company, Textiles, Denim
and First Union Nation Bank, as agent and lender, and the other
lenders' party thereto.(19)
10.49 - Indenture, dated as of February 24, 1998 among the Company,
Industries, Service Company, Textiles, Denim and Suntrust
Bank, Atlanta.(20)
10.50 - Note Purchase Agreement, dated February 19, 1998 among the
Company, Industries, Service Company, Textiles, Denim and First
Union Capital Markets, a division of Wheat First Securities, Inc.
(20)
10.51 - Form of Initial Global Note.(20)
10.52 - Form of Initial Certificated Note.(20)
10.53 - Registration Rights Agreement, dated February 24, 1998, by and
among the Company, Industries, Service Company, Textiles, Denim
and First Union Capital Markets, a dviision of Wheat First
Securities, Inc.(21)
10.54 - Third Amendment, Consent and Release, to the Credit Agreement
dated September 15, 1998, among the Company, Industries, Service
Company, Textiles, Denim and First Union Nation Bank, as agent
and lender, and the other lenders' party thereto.(24)
10.55 - Fourth Amendment to the Credit Agreement dated December 23, 1998,
among the Company, Industries, Service Company, Textiles, Denim
and First Union Nation Bank, as agent and lender, and the other
lenders' party thereto.(24)
10.56 - Agreement dated April 29, 1996, between Dominion and John J.
Heldrich.(24)*
10.57 - Galey & Lord, Inc. 1999 Stock Option Plan.(22)*
67
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
10.58 - Fifth Amendment to the Credit Agreement dated July 3, 1999 among
the Company, Industries, Service Company, Textiles, Denim, Galey
& Lord Properties, Inc., Swift Denim Properties, Inc. and First
union National Bank, as agent and lender, and the other lenders'
party thereto.(23)
21 - Subsidiaries of the Company.(24)
23.1 - Consent of Ernst & Young LLP.
27 - Financial Data Schedule
(1) Filed as an Exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-45895) which was declared effective by the
Securities and Exchange Commission on April 30, 1992 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 2, 1993 and incorporated herein
by reference.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended April 2, 1994 and incorporated herein
by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 33-52248) dated August 25, 1994 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 1, 1994 and incorporated herein
by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1994 and incorporated
herein by reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended April 1, 1995 and incorporated herein
by reference.
(8) Filed as an Exhibit to the Company's Form 8K dated September 22,
1995 and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 and incorporated
herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended March 30, 1996 and incorporated herein
by reference.
68
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
(11) Filed as an Exhibit to the Company's Form 8K dated May 20, 1996
and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended June 29, 1996 and incorporated herein
by reference.
(13) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended September 28, 1996 and incorporated
herein by reference.
(14) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended December 28, 1996 and incorporated
herein by reference.
(15) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended March 29, 1997 and incorporated herein
by reference.
(16) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended June 28, 1997 and incorporated herein
by reference.
(17) Filed as an Exhibit to the Company's Form 8K dated December 19,
1997 and incorporated herein by reference.
(18) Filed as an Exhibit to the Company's Form 8K dated January 29,
1998 and incorporated herein by reference.
(19) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended March 28, 1998 and incorporated herein
by reference.
(20) Filed as an Exhibit to the Company's Form 8K dated February 24,
1998 and incorporated herein by reference.
(21) Filed as an Exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-49503) dated April 22, 1998 and
incorporated herein by reference.
(22) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-78809) dated May 19, 1999 and incorporated
herein by reference.
(23) Filed as an Exhibit to the Company's Form 8-K dated July 13, 1999
and incorporated herein by reference.
(24) Filed as an exhibit to the Company's Form 10-K for the fiscal
year ended October 3, 1998 and incorporated herein by reference.
* Management contract or compensatory plan or arrangement
identified pursuant to item 14(a)3 of this report.
69
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALEY & LORD, INC.
(IN THOUSANDS)
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
ADDITIONS
---------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS- END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DESCRIBE(1) PERIOD
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
YEAR ENDED OCTOBER 2, 1999
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $ 8,215 $ (320) $ (308) $ 1,056 $6,531
------- ------- -------- ------- ------
Totals.................................... $ 8,215 $ (320) $ (308) $ 1,056 $6,531
======= ======= ======== ======= ======
YEAR ENDED OCTOBER 3, 1998
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $4,687 $1,052 $5,433(2) $ 2,957 $8,215
------ ------ ------ ------- ------
Totals.................................... $ 4,687 $1,052 $ 5,433 $ 2,957 $8,215
======= ====== ======= ======= ======
YEAR ENDED SEPTEMBER 27, 1997
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $ 1,434 $3,478 $ - $ 225 $4,687
------- ------ ------- ------- ------
Totals.................................... $ 1,434 $3,478 $ - $ 225 $4,687
======= ====== ======= ======= ======
(1)Uncollectible accounts written off.
(2)Includes reserves for the Acquired Business as of the date of Acquisition.
70
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) 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.
December 30, 1999 /s/ Arthur C. Wiener
- ----------------- --------------------------
Date Arthur C. Wiener
Chairman of the Board
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Arthur C. Wiener December 30, 1999 /s/ Michael R. Harmon December 30, 1999
- ----------------------------------------------------- -------------------------------------------------------
Arthur C. Wiener Date Michael R. Harmon Date
Chairman of the Board Executive Vice President,
and President (Principal Executive Officer) Chief Financial Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary
/s/ Michael T. Bradley December 30, 1999 /s/ William M.R. Mapel December 30, 1999
- ----------------------------------------------------- -------------------------------------------------------
Michael T. Bradley Date William M.R. Mapel Date
Director Director
/s/ Paul G. Gillease December 30, 1999
- -----------------------------------------------------
Paul G. Gillease Date Stephen C. Sherrill Date
Director Director
/s/ William deR. Holt December 30, 1999 /s/ David F. Thomas December 30, 1999
- ----------------------------------------------------- -------------------------------------------------------
William deR. Holt Date David F. Thomas Date
Director Director
/s/ Howard S. Jacobs December 30, 1999
- -----------------------------------------------------
Howard S. Jacobs Date
Director
71