UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2000
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
____
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission File Number 0-20080
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GALEY & LORD, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 56-1593207
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) (Identification No.)
980 Avenue of the Americas
New York, New York 10018
- ---------------------------------------- -------------
(Address of principal executive offices) Zip Code
212/465-3000
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
- -------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __.
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 11,960,754 shares as of January 31, 2001.
Exhibit Index at page 32
1
INDEX
GALEY & LORD, INC.
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
December 30, 2000, January 1, 2001
and September 30, 2000
Consolidated Statements of Income -- 4
Three months ended December 30, 2000
and January 1, 2000
Consolidated Statements of Cash Flows -- 5
Three months ended December 30, 2000 and
January 1, 2000
Notes to Consolidated Financial Statements -- 6-18
December 30, 2000
Item 2. Management's Discussion and Analysis of 19-28
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 29
Market Risk
PART II. OTHER INFORMATION
- -----------------------------
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security 30
Holders
Item 5 Other Information 30
Item 6. Exhibits and Reports on Form 8 - K 30
SIGNATURES 31
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EXHIBIT INDEX 32
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2
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 30, January 1, September 30,
2000 2000 2000
(Unaudited) (Unaudited) *
------------ ----------- -------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 11,913 $ 13,717 $ 9,641
Trade accounts receivable 165,632 160,414 197,422
Sundry notes and accounts receivable 6,718 7,115 7,461
Inventories 173,450 200,041 166,522
Income taxes receivable 1,563 7,832 1,556
Deferred income taxes 13,402 10,810 12,902
Prepaid expenses and other current assets 3,979 4,182 3,957
------------ ----------- -------------
Total current assets 376,657 404,111 399,461
Property, plant and equipment, at cost 480,379 519,400 472,567
Less accumulated depreciation and
amortization (181,165) (146,132) (172,484)
------------ ----------- -------------
299,214 373,268 300,083
Investments in and advances to associated
companies 34,317 24,382 31,878
Deferred charges, net 12,917 14,787 13,571
Other non-current assets 1,794 2,077 1,735
Intangibles, net 148,188 152,952 149,376
------------ ----------- -------------
$ 873,087 $ 971,577 $ 896,104
============ =========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,914 $ 3,051 $ 3,072
Trade accounts payable 58,962 63,440 59,907
Accrued salaries and employee benefits 24,789 26,154 24,028
Accrued liabilities 38,731 29,007 45,583
Income taxes payable 4,258 2,521 1,507
------------ ----------- -------------
Total current liabilities 129,654 124,173 134,097
Long-term debt 630,018 665,027 648,505
Other long-term liabilities 20,023 20,265 22,813
Deferred income taxes 32,952 57,316 35,100
Stockholders' equity:
Common stock 124 123 124
Contributed capital in excess of par value 39,979 39,424 39,673
Retained earnings 32,607 69,934 32,537
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (10,023) (2,438) (14,498)
------------ ----------- -------------
Total stockholders' equity 60,440 104,796 55,589
------------ ----------- -------------
$ 873,087 $ 971,577 $ 896,104
============ =========== =============
*Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
3
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended
----------------------------
December 30, January 1,
2000 2000
----------- ----------
Net sales $ 221,685 $ 201,144
Cost of sales 199,901 178,435
---------- ----------
Gross profit 21,784 22,709
Selling, general and administrative expenses 8,920 9,270
Amortization of intangibles 1,188 1,192
Plant closing costs (445) -
Net gain on benefit plan curtailments (2,327) -
---------- ----------
Operating income 14,448 12,247
Interest expense 16,431 15,853
Income from associated companies (1,864) (1,777)
---------- ----------
Income (loss) before income taxes (119) (1,829)
Income tax expense (benefit):
Current 2,459 1,877
Deferred (2,648) (2,815)
---------- ----------
Net income (loss) $ 70 $ (891)
========== ==========
Net income (loss) per common share:
Basic:
Average common shares outstanding 11,961 11,903
Net income (loss) per common share - Basic $ .01 $ (.07)
========== ==========
Diluted:
Average common shares outstanding 11,984 11,903
Net income (loss) per common share - Diluted $ .01 $ (.07)
========== ==========
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Three Months Ended
--------------------------
December 30, January 1,
2000 2000
------------ ----------
Cash flows from operating activities:
Net income (loss) $ 70 $ (891)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 8,174 10,080
Amortization of intangible assets 1,188 1,192
Amortization of deferred charges 731 707
Deferred income taxes (2,648) (2,815)
Non-cash compensation 306 4
(Gain)/loss on disposals of property, plant
and equipment 17 8
Undistributed income from associated companies (1,864) (1,777)
Plant closing costs (445) -
Net gain on benefit plan curtailments (2,327) -
Other 32 -
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net 32,996 15,174
(Increase)/decrease in sundry notes & accounts
receivable 1,452 (362)
(Increase)/decrease in inventories (5,612) (26,165)
(Increase)/decrease in prepaid expenses and other
current assets 70 412
(Increase)/decrease in other non-current assets (42) 263
(Decrease)/increase in accounts payable - trade (2,097) 1,370
(Decrease)/increase in accrued liabilities (4,181) (2,317)
(Decrease)/increase in income taxes payable 2,106 680
(Decrease)/increase in other long-term liabilities (3,274) (683)
-------- --------
Net cash provided by (used in) operating activities 24,652 (5,120)
Cash flows from investing activities:
Property, plant and equipment expenditures (4,072) (3,271)
Proceeds from sale of property, plant and equipment 240 17
Distributions received from associated companies 1,142 -
Investment in affiliates (1,110) -
Other (47) 293
-------- --------
Net cash provided by (used in) investing activities (3,847) (2,961)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit (3,200) 6,500
Principal payments on long-term debt (16,221) (712)
Issuance of long-term debt 596 1,936
-------- --------
Net cash provided by (used in) financing activities (18,825) 7,724
Effect of exchange rate changes on cash and cash equivalents 292 (226)
-------- --------
Net increase/(decrease) in cash and cash equivalents 2,272 (583)
Cash and cash equivalents at beginning of period 9,641 14,300
-------- --------
Cash and cash equivalents at end of period $ 11,913 $ 13,717
======== ========
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE A - Basis of Presentation
The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly-owned subsidiaries. Investments in affiliates in
which the Company owns 20 to 50 percent of the voting stock are accounted for
using the equity method. Intercompany items have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position of the Company as of December 30, 2000 and the results of
operations and cash flows for the periods ended December 30, 2000 and January 1,
2000. Such adjustments consisted only of normal recurring items. Interim
results are not necessarily indicative of results for a full year. These
financial statements should be read in conjunction with the financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000.
NOTE B - Accounting Change
Effective October 1, 2000, the Company adopted Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
(FAS 133), which requires that all derivative instruments be reported on the
balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of October 1, 2000 was not material to the Company's financial
statements.
Cash Flow Hedging Strategy
The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency cash flows resulting from
sales or purchases denominated in other than the Company's functional currencies
over the next year, the Company has instituted a foreign currency hedging
program. The Company hedges portions of its forecasted sales and purchases
denominated in foreign currencies with forward contracts.
Foreign currency forward contracts that hedge forecasted sales and purchases are
designated as cash flow hedges. The amount of gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in the
spot exchange rates and forward contract rates. The net loss was not material
for the three months ended December 30, 2000 and is included in cost of sales in
the consolidated statement of income.
6
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE B - Accounting Change (Continued)
The majority of the Company's long-term debt bears interest at floating rates.
In order to reduce its exposure to changes in interest rates, the Company has
interest rate swap agreements that effectively convert a portion of its
floating-rate debt to a fixed-rate basis through January 2001. Approximately
21% ($25 million) of the Company's outstanding Term Loan B was hedged by
interest rate swap agreements at December 30, 2000. The gain recognized related
to the ineffective portion of the swap for the three months ended December 30,
2000 was immaterial and is included in interest expense in the consolidated
statement of income.
At December 30, 2000, the Company expects to reclassify $0.4 million of pre-tax
gains ($0.2 million after-tax) on derivative instruments from accumulated other
comprehensive income to earnings over the next twelve months. This
reclassification will be made when the forecasted transactions occur and the
payment of variable interest associated with the floating-rate debt is made.
Fair Value Hedging Strategy
The Company also maintains foreign currency forward contracts to hedge
receivables and payables denominated in foreign currencies. These contracts are
designated as fair value hedges. The gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in spot
exchange rates and forward contract rates. The net loss was not material for
the three months ended December 30, 2000 and is included in cost of sales in the
consolidated statement of income.
NOTE C - Inventories
The components of inventory at December 30, 2000, January 1, 2000, and September
30, 2000 consisted of the following (in thousands):
December 30, January 1, September 30,
2000 2000 2000
----------- ---------- ------------
Raw materials $ 4,611 $ 6,147 $ 5,009
Stock in process 30,180 29,087 32,502
Produced goods 134,828 164,740 126,348
Dyes, chemicals and supplies 12,198 11,715 11,536
---------- ---------- ----------
181,817 211,689 175,395
Less LIFO and other reserves (8,367) (11,648) (8,873)
---------- ---------- ----------
$ 173,450 $ 200,041 $ 166,522
========== ========== ==========
7
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE D - Long-Term Debt
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank ("FUNB"), as agent and
lender and its syndicate of lenders. The amendment became effective as of July
3, 1999 (the "Amendment"). Under the Amendment, for the period beginning July
4, 1999 through February 15, 2001, the revolving line of credit borrowings bear
interest at a per annum rate, at the Company's option, of either (i) (a) the
greater of the prime rate or the federal funds rate plus .50% plus (b) a margin
of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bear
interest at a per annum rate, at the Company's option, of (A) with respect to
Term Loan B either (i)(a) the greater of the prime rate or federal funds rate
plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% or
(B) with respect to Term Loan C, either (i)(a) the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR plus a
margin of 3.75%. In addition, the Company repaid $25 million principal amount
of its term loan balance using available borrowings under its revolving line of
credit and reduced the maximum amount of borrowings under the revolving line of
credit by $25 million to $200 million. The repayment of the Term Loan B and Term
Loan C principal balances ratably reduces the remaining quarterly principal
payments.
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. On December 19, 2000, the Company made an Excess Cash Flow
payment related to fiscal 2000 of $15.6 million.
NOTE E - Net Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Three Months Ended
------------------------------
December 30, January 1,
2000 2000
------------- -----------
Numerator:
Net income (loss) $ 70 $ (891)
============= ===========
Denominator:
Denominator for basic earnings per share 11,961 11,903
Effect of dilutive securities:
Stock options 23 -
------------- -----------
Diluted potential common shares denominator
for diluted earnings per share - adjusted
weighted average shares and assumed
exercises 11,984 11,903
============= ===========
8
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE E - Net Income (Loss) Per Common Share (Continued)
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 867,499 shares
and 874,499 shares of common stock were outstanding during the three months
ended December 30, 2000 and January 1, 2000, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares. Options
to purchase 105,000 shares and 15,000 shares of common stock were outstanding
during the three months ended December 30, 2000 and January 1, 2000,
respectively, but were not included in the computation of diluted earnings per
share pursuant to the contingent share provisions of Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share". Vesting of these
options is contingent upon the market price of common shares reaching certain
target prices, which were greater than the average market price of the common
shares.
NOTE F - Stockholders' Equity
Comprehensive income represents the change in stockholders' equity during the
period from non-owner sources. Currently, changes from non-owner sources
consist of net income, foreign currency translation adjustments and gains on
derivative instruments. Total comprehensive income (loss) for the three months
ended December 30, 2000 and January 1, 2000 was $4.5 million and $(3.9) million,
respectively.
Activity in Stockholders' Equity is as follows (in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income(Loss) Total
------------- ---------- ------------- ---------- ------------ ------------- -----------
Balance at
September 30, 2000 $ 124 $ 39,673 $ 32,537 $ (2,247) $ (14,498) $ 55,589
Compensation earned
related to stock
options - 306 - - - 306
Comprehensive
income(loss):
Net income for three
months ended
December 30, 2000 $ 70 - - 70 - - 70
Foreign currency
Translation
adjustment 4,292 - - - - 4,292 4,292
Gain on derivative
instruments 183 - - - - 183 183
------------- ---------- ------------- ---------- ------------ ------------- -----------
Total comprehensive
Income $ 4,545
=============
Balance at
December 30, 2000 $ 124 $ 39,979 $ 32,607 $ (2,247) $ (10,023) $ 60,440
========== ============= ========== ============ ============= ===========
9
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE F - Stockholders' Equity (Continued)
Included in Accumulated Other Comprehensive Income (Loss) at December 30, 2000
was a $10.2 million loss related to foreign currency translation adjustment and
a $0.2 million gain related to derivative instruments.
NOTE G - Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Three Months Ended
--------------------------
December 30, January 1,
2000 2000
------------ ----------
Current tax provision:
Federal $ 5 $ -
State 19 14
Foreign 2,435 1,863
------------ ----------
Total current tax provision 2,459 1,877
Deferred tax provision:
Federal (2,519) (4,071)
State (297) (215)
Foreign 168 1,471
------------ ----------
Total deferred tax provision (2,648) (2,815)
------------ ----------
Total provision for income taxes $ (189) $ (938)
============ ==========
The Company's overall tax rate for the three months ended December 30, 2000 was
approximately 158.8% as compared to 51.3% for the three months ended January 1,
2000. The difference from the statutory rate principally results from domestic
tax benefits being established at a higher effective rate than foreign tax
expense. The result is an overall tax benefit rate which is higher than the
statutory rate.
At December 30, 2000, the Company had outstanding net operating loss
carryforwards ("NOLs") for US federal and state tax purposes of approximately
$34.3 million. The federal NOLs will expire in years 2019-2020, and the state
NOLs will expire in years 2004-2015. 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 $13.4
million at December 30, 2000 will be realized. This review, along with the
timing of the reversal of the Company's temporary differences and the expiration
dates of the NOLs, were considered in reaching this conclusion. The Company's
ability to generate future taxable income is dependent on numerous factors,
including the state of the apparel industry, general economic conditions and
other factors beyond management's control. Accordingly, there can be no
assurance that the Company will meet its expectation of future taxable income.
10
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE H - Fiscal 2000 Strategic Initiatives
During the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives aimed at increasing the Company's competitiveness and
profitability by reducing costs. The initiatives include completing a joint
venture in Mexico, closing two of the Company's plants, consolidating some
operations, outsourcing certain yarn production and eliminating excess employees
in certain operations. The cost of these initiatives was reflected in a plant
closing and impairment charge totaling $63.6 million before taxes in the fourth
quarter of fiscal 2000. In the December quarter 2000, the Company recorded a
change in estimate that reduced the plant closing and impairment charge by $0.5
million. The components of the plant closing and impairment charge include
$49.3 million for fixed asset write-offs, $10.3 million for severance expense
and $3.5 million for the write-off of leases and other exit costs. All
production at the affected facilities ceased during the December quarter 2000.
Of the 1,370 employees to be terminated, 1,294 have terminated as of December
30, 2000. The remaining employees are expected to be terminated by the end of
fiscal 2001. Severance will be paid out in either a lump sum or over a maximum
period of up to eighteen months. The Company expects that the sale of the
related real estate and equipment could take 12 months or longer to complete.
The table below summarizes the activity related to the plant closing accruals
for the three months ended December 30, 2000 (in thousands):
Accrual Accrual
Balance at Balance at
September 30, Cash Change in December 30,
2000 Payments Estimate 2000
------------- -------- --------- ------------
Severance benefits $ 10,763 $ (3,902) $ (445) $ 6,416
Lease cancellation
and other 3,553 (230) - 3,323
------------- -------- --------- ------------
$ 14,316 $ (4,132) $ (445) $ 9,739
============= ======== ========= ============
The Company incurred run-out expenses totaling $4.7 million during the three
months ended December 30, 2000. These expenses, which include efficiency
losses, equipment relocation, losses on inventories of discontinued styles,
plant carrying costs and other costs, are included in cost of sales in the
consolidated statement of income.
In connection with the Fiscal 2000 Strategic Initiatives, the Company curtailed
the defined benefit pension and post-retirement medical plans. The financial
effect of the curtailment and settlement of these plans resulted in a $2.3
million net gain and was recorded during the three months ended December 30,
2000.
11
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(unaudited)
NOTE I - Fiscal 1999 Severance Charge
During the June quarter 1999, the Company recognized a $1.8 million charge
associated with the termination of 46 salaried employees. The charge was
recorded as a component of selling, general and administrative expenses. All
affected employees have been terminated with cash payments expected to be spread
over a period not to exceed two years. At December 30, 2000, there remained a
balance of $35 thousand which is equal to the expected future cash expenditures
to such terminated employees.
NOTE J - Segment Information
The Company's operations are classified into four business segments: Galey &
Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. 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.
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended
apparel fabrics and garment packages. Swift Denim manufactures and markets a
wide variety of denim products for apparel and non-apparel uses. Klopman
International manufactures principally workwear and careerwear fabrics as well
as woven sportswear apparel fabrics primarily for consumption in Europe. Home
Fashion Fabrics manufactures and sells dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories as
well as greige fabrics (undyed and unfinished) which it sends to independent
contractors for dyeing and finishing.
The Company evaluates performance and allocates resources based on operating
income; therefore, certain expenses, principally net interest expense and income
taxes, are excluded from the chief operating decision makers' assessment of
segment performance. Accordingly, such expenses have not been allocated to
segment results. The corporate segment's operating income (loss) represents
principally the administrative expenses from the Company's various holding
companies. Additionally, the corporate segment assets consist primarily of
corporate cash, deferred bank charges and investments in and advances to
associated companies.
12
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(unaudited)
NOTE J - Segment Information (Continued)
Information about the Company's operations in its different industry segments
for the three months ended December 30, 2000 and January 1, 2000 is as follows
(in thousands):
Three Months Ended
--------------------------
December 30, January 1,
2000 2000
---------- ----------
Net Sales to External Customers
Galey & Lord Apparel $ 107,556 $ 98,709
Swift Denim 78,604 63,665
Klopman International 31,824 33,191
Home Fashion Fabrics 3,701 5,579
---------- ----------
Consolidated $ 221,685 $ 201,144
========== ==========
Operating Income (Loss)/(1)/
Galey & Lord Apparel $ 6,381 $ 5,496
Swift Denim 7,433 4,069
Klopman International 2,003 3,921
Home Fashion Fabrics (1,109) (426)
Corporate (260) (813)
---------- ----------
14,448 12,247
Interest expense 16,431 15,853
Income from associated companies/(2)/ (1,864) (1,777)
---------- ----------
Income (loss) before income taxes $ (119) $ (1,829)
========== ==========
Assets/(3)/
Galey & Lord Apparel $ 286,414 $ 333,876
Swift Denim 357,004 426,918
Klopman International 116,209 128,456
Home Fashion Fabrics 54,620 32,389
Corporate 58,840 49,938
---------- ----------
$ 873,087 $ 971,577
========== ==========
/(1)/December quarter 2000 operating income (loss) includes run-out charges and
plant closing costs related to the Fiscal 2000 Strategic Initiatives of
$1.6 million for Galey & Lord Apparel and $0.3 million for Swift Denim.
/(2)/Net of amortization of $163 and $153, respectively.
/(3)/Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
13
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information
The following summarizes condensed consolidating financial information for the
Company, segregating Galey & Lord, Inc. (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and guarantees are full, unconditional
and joint and several. Separate financial statements of each of the guarantor
subsidiaries are not presented because management believes that these financial
statements would not be material to investors.
December 30, 2000
----------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 123,570 $ 42,062 $ - $165,632
Inventories - 134,832 38,618 - 173,450
Other current
assets 3,673 17,456 16,446 - 37,575
--------- --------- -------- --------- --------
Total current
assets 3,673 275,858 97,126 - 376,657
Property, plant and
equipment, net - 209,028 90,186 - 299,214
Intangibles - 148,188 - - 148,188
Other assets 205,799 7,517 33,226 (197,514) 49,028
--------- --------- -------- --------- --------
$ 209,472 $ 640,591 $220,538 $(197,514) $873,087
========= ========= ======== ========= ========
Current liabilities:
Trade accounts
payable $ 40 $ 36,322 $ 22,600 $ - $ 58,962
Accrued
liabilities 27,011 21,072 15,450 (13) 63,520
Other current
liabilities 5,692 (2,638) 4,118 - 7,172
--------- --------- -------- --------- --------
Total current
liabilities 32,743 54,756 42,168 (13) 129,654
Net intercompany balance
(506,087) 582,350 (76,263) - -
Long-term debt 621,413 6,421 2,184 - 630,018
Other non-current
liabilities 963 42,577 10,487 (1,052) 52,975
Stockholders' equity 60,440 (45,513) 241,962 (196,449) 60,440
--------- --------- -------- --------- --------
$ 209,472 $ 640,591 $220,538 $(197,514) $873,087
========= ========= ======== ========= ========
14
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
January 1, 2000
-----------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $ 119,080 $ 41,334 $ - $ 160,414
Inventories - 160,271 40,587 (817) 200,041
Other current
assets 3,191 19,598 20,557 310 43,656
----------- ------------- ------------ ------------- -------------
Total current
assets 3,191 298,949 102,478 (507) 404,111
Property, plant and
equipment, net - 275,946 97,322 - 373,268
Intangibles - 152,952 - - 152,952
Other assets 267,326 7,523 24,989 (258,592) 41,246
----------- ------------- ------------ ------------- -------------
$ 270,517 $ 735,370 $ 224,789 $ (259,099) $ 971,577
=========== ============= ============ ============= =============
Current liabilities:
Trade accounts
payable $ 25 $ 39,758 $ 23,657 $ - $ 63,440
Accrued
liabilities 24,481 17,021 12,953 706 55,161
Other current
liabilities 3,297 1,914 (1,277) 1,638 5,572
----------- ------------- ------------ ------------- -------------
Total current
liabilities 27,803 58,693 35,333 2,344 124,173
Net intercompany balance (508,190) 593,951 (85,761) - -
Long-term debt 644,056 7,116 13,855 - 665,027
Other non-current
liabilities 2,052 66,213 9,068 248 77,581
Stockholders' equity 104,796 9,397 252,294 (261,691) 104,796
----------- ------------- ------------ ------------- -------------
$ 270,517 $ 735,370 $ 224,789 $ (259,099) $ 971,577
=========== ============= ============ ============= =============
15
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information
(Continued)
Three Months Ended December 30, 2000
--------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ - $170,829 $63,781 $(12,925) $221,685
Gross profit - 12,320 9,464 - 21,784
Operating income (loss) (269) 7,714 7,003 - 14,448
Interest expense,
income taxes and
other, net 37 14,193 1,008 (860) 14,378
Net income (loss) $(306) $ (6,479) $ 5,995 $ 860 $ 70
Three Months Ended January 1, 2000
--------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ - $154,513 $56,758 $(10,127) $201,144
Gross profit - 15,024 7,625 60 22,709
Operating income (loss) (417) 7,869 4,764 31 12,247
Interest expense,
income taxes and
other, net (542) 13,443 368 (131) 13,138
Net income (loss) $ 125 $ (5,574) $ 4,396 $ 162 $ (891)
16
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information
(Continued)
Three Months Ended December 30, 2000
----------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 6,117 $ 17,276 $ 1,768 $ (509) $ 24,652
Cash provided by
(used in) investing
activities 2,731 (2,900) (4,340) 662 (3,847)
Cash provided by
(used in) financing
activities (8,848) (12,459) 2,635 (153) (18,825)
Effect of exchange
rate change on cash
and equivalents - - 292 - 292
-------- -------- -------- ------ --------
Net change in cash
and cash equivalents - 1,917 355 - 2,272
Cash and cash
equivalents at
beginning of period 10 4,194 5,437 - 9,641
-------- -------- -------- ------ --------
Cash and cash
equivalents at end
of period $ 10 $ 6,111 $ 5,792 $ - $ 11,913
======== ======== ======== ====== ========
17
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
December 30, 2000
(unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended January 1, 2000
----------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 8,060 $(16,752) $ 3,708 $ (136) $(5,120)
Cash provided by
(used in) investing
activities 2,126 (2,859) 687 (2,915) (2,961)
Cash provided by
(used in) financing
activities (10,134) 17,427 (2,620) 3,051 7,724
Effect of exchange
rate change on cash
and equivalents - - (226) - (226)
-------- -------- ------- ------- -------
Net change in cash
and cash equivalents 52 (2,184) 1,549 - (583)
Cash and cash
equivalents at
beginning of period - 6,089 8,211 - 14,300
-------- -------- ------- ------- -------
Cash and cash
equivalents at end
of period $ 52 $ 3,905 $ 9,760 $ - $13,717
======== ======== ======= ======= =======
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company's operations are primarily classified into four operating segments:
(1) Galey & Lord Apparel, (2) Swift Denim, (3) Klopman International and (4)
Home Fashion Fabrics. Results for the three months ended December 30, 2000 and
January 1, 2000 for each segment are shown below:
Three Months Ended
--------------------------------
December 30, January 1,
2000 2000
--------------------------------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $ 107,556 $ 98,709
Swift Denim 78,604 63,665
Klopman International 31,824 33,191
Home Fashion Fabrics 3,701 5,579
--------- ---------
Total $ 221,685 $ 201,144
========= =========
Operating Income (Loss) per Segment As Reported
Galey & Lord Apparel $ 6,381 $ 5,496
Swift Denim 7,433 4,069
Klopman International 2,003 3,921
Home Fashion Fabrics (1,109) (426)
Corporate (260) (813)
--------- ---------
$ 14,448 $ 12,247
========= =========
Operating Income (Loss) per Segment Excluding
Strategic Initiatives
Galey & Lord Apparel $ 7,997 $ 5,496
Swift Denim 7,767 4,069
Klopman International 2,003 3,921
Home Fashion Fabrics (1,109) (426)
Corporate (260) (813)
--------- ---------
$ 16,398 $ 12,247
========= =========
December Quarter 2000 Compared to December Quarter 1999
Net Sales
Net sales for the December quarter 2000 (first quarter of fiscal 2001) were
$221.7 million as compared to $201.1 million for the December quarter 1999
(first quarter of fiscal 2000).
Galey & Lord Apparel Galey & Lord Apparel's net sales for the December quarter
2000 were $107.6 million, an $8.9 million increase as compared to the December
quarter 1999 net sales of $98.7 million. The net sales improvement was
primarily attributable to a 7% increase in fabric sales volume and a 72%
increase in unit sales of garment packages. The increase in unit sales of
garment packages reflects the additional production capacity at the Company's
new Monclova, Mexico garment facility which is continuing to increase
production. Overall, average selling prices, inclusive of product mix changes,
declined
19
approximately 1.5%.
Swift Denim Swift Denim's net sales for the December quarter 2000 were $78.6
million as compared to $63.6 million in the December quarter 1999. The $15.0
million increase was primarily attributable to an 18% increase in sales volume
and by changes in product mix, partially offset by a 1% decline in the average
sales price of denim fabrics.
Klopman International Klopman International's net sales for the December
quarter 2000 were $31.8 million, a $1.4 million decline as compared to the
December quarter 1999 net sales of $33.2 million. The decline was primarily
attributable to an 18.4% decline in net sales due to exchange rate changes used
in translation and a 5.8% decline in selling prices, inclusive of product mix
changes, partially offset by a 15.7% increase in sales volume and $0.5 million
of foreign currency transaction exchange gains on sales not denominated in
Euros.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the December
quarter 2000 were $3.7 million compared to $5.6 million for the December quarter
1999. The $1.9 million decline in net sales primarily resulted from lower
selling prices and changes in product mix.
Operating Income
Operating income for the December quarter 2000 was $14.4 million as compared to
$12.2 million for the December quarter 1999. Excluding the charges related to
the Fiscal 2000 Strategic Initiatives, the December quarter 2000 operating
income would have been $16.4 million.
Galey & Lord Apparel Galey & Lord Apparel's operating income was $6.4 million
for the December quarter 2000 as compared to $5.5 million for the December
quarter 1999. Excluding the run-out costs associate with the Fiscal 2000
Strategic Initiatives, Galey & Lord Apparel's operating income would have been
$8.0 million. The increase principally reflects lower raw material prices, the
impact of $1.1 million related to increased sales volume and a $1.5 million
improvement in the Company's garment production facilities in Mexico, partially
offset by higher utility costs and $1.2 million in lower fabric selling prices.
While the Company's garment facilities have shown improvement in the current
quarter, the Company expects to continue to incur inefficiencies at the
Company's Monclova, Mexico garment facility until it reaches full production.
Additionally, the Company expects upcoming style changes at both of its Mexican
facilities will lower efficiencies during the March and June quarters of fiscal
2001.
Swift Denim December quarter 2000 operating income for Swift Denim was $7.4
million, a $3.3 million increase as compared to the December quarter 1999
operating income of $4.1 million. Excluding the run-out
20
costs associated with the Fiscal 2000 Strategic Initiatives, Swift Denim's
operating income would have been $7.8 million. The increase in Swift Denim's
operating income principally reflects $4.9 million related to the impact of
higher sales volume and changes in product mix and improvement in raw material
variances, partially offset by higher utility costs, $1.2 million related to
declines in selling prices and higher selling, general and administrative
expenses.
Klopman International Klopman International's operating income in the December
quarter 2000 decreased $1.9 million to $2.0 million as compared to the December
quarter 1999 operating income of $3.9 million. The decrease principally
reflects $3.2 million related to the impact of lower selling prices, changes in
product mix, higher raw material and utility costs and higher selling, general
and administrative costs, partially offset by $1.7 million related to increases
in sales volume and foreign exchange gains on sales not denominated in Euros.
In addition, Klopman International's results were negatively impacted $0.4
million by foreign currency translation due to the weakness of the Euro against
the US Dollar.
Home Fashion Fabrics Home Fashion Fabrics reported an operating loss for the
December quarter 2000 of $1.1 million as compared to an operating loss for the
December quarter 1999 of $0.4 million. The decrease in operating income was
principally due to changes in product mix and the lower selling prices discussed
above.
Corporate The corporate segment reported an operating loss for the December
quarter 2000 of $0.3 million as compared to an operating loss for the December
quarter 1999 of $0.8 million. The corporate segment's operating income (loss)
typically represents the administrative expenses from the Company's various
holding companies.
Income from Associated Companies
Income from associated companies was $1.9 million in the December quarter 2000
as compared to $1.8 million in the December quarter 1999. The income represents
amounts from several joint venture interests that manufacture and sell denim
products.
Interest Expense
Interest expense was $16.4 million for the December quarter 2000 compared to
$15.9 million for the December quarter 1999. The increase in interest expense
was primarily due to higher prime and LIBOR base rates in the December quarter
2000 as compared to the December quarter 1999, partially offset by lower average
debt balances in the December quarter 2000 as compared to the December quarter
1999. The average interest rate paid by the Company on its bank debt in the
December quarter 2000 was 9.6% per annum as compared to 9.3% per annum in the
December quarter 1999.
21
Income Taxes
The Company's overall tax rate for the December quarter 2000 was approximately
158.8% as compared to 51.3% for the December quarter 1999. The difference from
the statutory rate principally results from domestic tax benefits being
established at a higher effective rate than foreign tax expense. The result is
an overall tax benefit rate which is higher than the statutory rate.
Net Income (Loss) and Net Income (Loss) Per Share
Net income for the December quarter 2000 was $0.1 million or $.01 per common
share, compared to a net loss for the December quarter 1999 of $0.9 million or
$.07 per common share. Excluding the Fiscal 2000 Strategic Initiatives, the
Company's net income for the December quarter 2000 would have been $1.3 million
or $.11 per common share.
Order Backlog
The Company's order backlog at December 30, 2000 was $190.3 million, a 31%
increase from the January 1, 2000 backlog of $145.4 million. While the Company's
backlog has increased from the previous year, many apparel manufacturers,
including many of the Company's customers, have modified their purchasing
procedures and have shortened lead times from order to delivery. The Company
believes that order backlogs may not provide as meaningful information with
regard to the Company's future sales as order backlogs have in the past.
Liquidity and Capital Resources
The Company and its subsidiaries had cash and cash equivalents totaling $11.9
million and $13.7 million at December 30, 2000 and January 1, 2000,
respectively. The Company had a total of $66.5 million of revolving credit
borrowing availability under its Senior Credit Facility at December 30, 2000.
During the December quarter 2000, the Company primarily utilized its available
cash and revolving credit borrowings under its Senior Credit Facility (as
defined below) to fund the Company's operating and investing requirements.
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 July 1999 Amendment, as defined below) or a
22
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 July 1999 Amendment.
On July 13, 1999, the Company amended its Senior Credit Facility. The amendment,
which became effective as of July 3, 1999 (the "July 1999 Amendment"), replaced
the Adjusted Leverage Ratio covenant (as defined in the July 1999 Amendment)
with a minimum EBITDA covenant (as defined in the July 1999 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 July 1999
Amendment), waived compliance by the Company with the Adjusted Fixed Charge
Coverage Ratio (as defined in the Amendment) until the Company's December
quarter 2000 and modified the Company's covenant related to capital
expenditures.
On September 7, 2000, the Company amended the Senior Credit Facility to exclude
charges related to the Company's Fiscal 2000 Strategic Initiatives from the
computation of the covenants.
Under the Senior Credit Facility (as amended by the July 1999 Amendment), for
the period beginning July 4, 1999 through February 15, 2001, the revolving line
of credit borrowings bear interest at a per annum rate, at the Company's option,
of either (i) (a) the greater of the prime rate or the federal funds rate plus
.50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan
B and Term Loan C bear interest at a per annum rate, at the Company's option, of
(A) with respect to Term Loan B either (i)(a) the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a
margin of 3.50% and (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 July 1999
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. Beginning with the quarter ending December 30, 2000, the Company
was subject to leverage and fixed charge coverage ratios, as amended pursuant to
the July 1999 Amendment.
23
Under the Senior Credit Facility, the revolving line of credit expires on March
27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly
payments of $349,157 through March 27, 2004, three quarterly payments of
$32,820,773 and final amount of $27,854,048 on Term Loan B's maturity of April
2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $247,687
through April 2, 2005, three quarterly payments of $23,034,918 and a final
amount of $19,511,595 on Term Loan C's maturity of April 1, 2006. Under the
Senior Credit Facility, as amended on December 22, 1998 and July 3, 1999, the
revolving line of credit borrowings bear interest at a per annum rate, at the
Company's option, of either (i) (a) the greater of the prime rate or the federal
funds rate plus .50% plus (b) a margin of 0%, .25%, .50%, .75%, 1.00% or 1.25%,
based on the Company achieving certain leverage ratios (as defined in the Senior
Credit Facility) or (ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%, 2.00%,
2.25% or 2.50%, based on the Company achieving certain leverage ratios. Term
Loan B and Term Loan C bear interest at a per annum rate, at the Company's
option, of (A) with respect to Term Loan B either (i) (a) the greater of the
prime rate or federal funds rate plus .50%, plus (b) a margin of 1.00%, 1.25%,
1.50% or 1.75%, based on the Company achieving certain leverage ratios or (ii)
LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios and (B) with respect to Term Loan C, either
(i) (a)the greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 1.25%, 1.50%, 1.75% or 2.00%, based on the Company achieving certain
leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%, 3.00% or 3.25%,
based on the Company's achieving certain leverage ratios. Pursuant to the
Amendment, borrowings under the Senior Credit Facility will bear interest in
accordance with the foregoing pricing options beginning on February 16, 2001.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the July 1999 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. On December 19, 2000, the Company made an Excess Cash
Flow payment related to fiscal 2000 of $15.6 million.
24
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
The Company was in full compliance with all of its lenders' covenants as of
December 30, 2000.
Senior Subordinated Debt
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of bridge financing borrowings incurred to
partially finance the acquisition of the apparel fabrics business of Dominion
Textile, Inc. on January 29, 1998 and (ii) a portion of the outstanding amount
under a revolving line of credit provided for under the Senior Credit Facility
(as defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the
Notes will be paid March 1 and September 1 of each year. The first interest
payment on the Notes was made on September 1, 1998.
On August 18, 2000, the Company and its noteholders amended the indenture, dated
February 24, 1998 (the "Indenture), entered into in connection with the Notes to
amend the definition of "Permitted Investment" in the Indenture to allow the
Company and its Restricted Subsidiaries (as defined in the Indenture) to make
additional investments (as defined in the Indenture) totaling $15 million at any
time outstanding in one or more joint ventures which conduct manufacturing
operations primarily in Mexico. This amendment was completed to allow the
Company sufficient flexibility in structuring its investment in the Swift Denim-
Hidalgo joint venture.
25
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 December 30, 2000, the Company had outstanding net operating loss
carryforwards ("NOLs") for US federal and state tax purposes of approximately
$34.3 million. The federal NOLs will expire in years 2019-2020 if unused, and
the state NOLs will be carried forward and will expire in years 2004-2015 if
unused. 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 $13.4 million at December 30, 2000 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
The Company expects to spend approximately $24 million for capital expenditures
in fiscal 2001, of which $4.1 million was spent in the first three months of
fiscal 2001. The Company anticipates that approximately 60% of the forecasted
capital expenditures will be used to increase the Company's capacity while the
remaining 40% will be used to maintain existing capacity.
The Company anticipates that cash requirements, including working capital and
capital expenditure needs, will be met through funds generated from operations
and through revolving credit borrowings under the Company's Senior Credit
Facility. In addition, from time to time, the Company uses borrowings under
secured and unsecured bank loans, through capital leases or through operating
leases for various equipment purchases.
26
Accounting Change
Effective October 1, 2000, the Company adopted Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended (FAS 133), which requires that all derivative instruments be reported on
the balance sheet at fair value and establishes criteria for designation and
effectiveness of hedging relationships. The cumulative effect of adopting FAS
133 as of October 1, 2000 was not material to the Company's financial
statements.
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 reduced. In addition, the Company's principal competitors
are also located within the Participating Countries. The Company believes that
the conversion to the Euro will eliminate much of the advantage or disadvantage
coming from exchange rate fluctuation resulting from transactions involving
legacy currencies in Participating Countries. Accordingly, competitiveness will
be solely based on price, quality and service in the Participating Countries.
While the Company believes the increased competitiveness based on these factors
will provide the Company with a strategic advantage over smaller local
companies, it cannot assess the magnitude of this impact on its operations.
As contemplated by the Company's Euro conversion plan, invoicing of products in
both local currencies and Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems will be completed during
the Company's 2001 fiscal year. The Company's Euro conversion plan has been
delayed due to the unavailability of software upgrades. The upgrades are
expected to be available during the Company's 2001 fiscal year and the related
Euro conversion will be completed at that time. The costs related to the
27
conversion will not be material to the Company's operating results or liquidity
although no assurances can be made in this regard.
Forward Looking Statements
This Form 10-Q contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those
statements include statements regarding the intent, belief or current
expectations of the Company and its management team. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements. Such
risks and uncertainties include, among other things, competitive and economic
factors in the textile, apparel and home furnishings markets, successful
implementation of the Company's strategic initiatives announced September 20,
2000, raw materials and other costs, the level of the Company's indebtedness,
interest rate fluctuations, weather-related delays, general economic conditions,
governmental legislation and regulatory changes, the long-term implications of
regional trade blocs and the effect of quota phase-out and lowering of tariffs
under the WTO trade regulations and other risks and uncertainties that may be
detailed herein or in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2000.
28
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relative to the Company's market risk sensitive instruments by major
category at September 30, 2000 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 2000.
Foreign Currency Exposures
The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency sales and purchases and
accounts receivable and payable denominated in foreign currencies, the Company
uses natural offsets and forward contracts. As of December 30, 2000, the result
of a uniform 10% change in the value of the U.S. dollar relative to currencies
of countries in which the Company manufactures or sells its products would not
be material.
Cotton Commodity Exposures
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may
effect the fair value of cotton commodity purchase contracts. A 10% decline in
market price as of December 30, 2000 would have a negative impact of
approximately $7.7 million.
Interest Rate Exposures
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The 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 January 2001. The fair value of the
Company's interest rate swaps at December 30, 2000 was $20 thousand.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits to this Form 10-Q are listed in the
accompanying Exhibit Index
(b) Reports on Form 8-K - The Registrant filed a Form 8-K on January 12,
2001 announcing the resignation of the Company's Chief Financial
Officer and the appointment of the Company's new Chief Accounting
Officer.
30
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Galey & Lord, Inc.
------------------
(Registrant)
/s/ Arthur C. Wiener
--------------------
Arthur C. Wiener
Chief Executive Officer and
President
February 8, 2001
- ----------------
Date
31
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
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