UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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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
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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 - 11,996,966 shares as of July 20, 2001.
Exhibit Index at page 40
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
June 30, 2001, July 1, 2000
and September 30, 2000
Consolidated Statements of Income -- 4
Three months and nine months ended
June 30, 2001 and July 1, 2000
Consolidated Statements of Cash Flows -- 5
Nine months ended June 30, 2001 and
July 1, 2000
Notes to Consolidated Financial Statements -- 6-22
June 30, 2001
Item 2. Management's Discussion and Analysis of 23-36
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 37
Market Risk
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 38
Item 2. Changes in Securities and Use of Proceeds 38
Item 3. Defaults upon Senior Securities 38
Item 4. Submission of Matters to a Vote of Security 38
Holders
Item 5 Other Information 38
Item 6. Exhibits and Reports on Form 8 - K 38
SIGNATURES 39
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EXHIBIT INDEX 40
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2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 30, July 1, September 30,
2001 2000 2000
ASSETS (Unaudited) (Unaudited) *
- ------ ---------- ---------- -------------
Current assets:
Cash and cash equivalents $ 7,143 $ 19,302 $ 9,641
Trade accounts receivable 163,531 204,450 197,422
Sundry notes and accounts receivable 3,715 7,069 7,461
Inventories 164,854 177,046 166,522
Income taxes receivable 2,269 6,144 1,556
Deferred income taxes 9,776 12,710 12,902
Prepaid expenses and other current assets 4,432 4,147 3,957
--------- --------- ---------
Total current assets 355,720 430,868 399,461
Property, plant and equipment, at cost 480,041 521,506 472,567
Less accumulated depreciation and
amortization (191,052) (164,379) (172,484)
--------- --------- ---------
288,989 357,127 300,083
Investments in and advances to associated
companies 40,822 25,187 31,878
Deferred charges, net 11,891 13,599 13,571
Other non-current assets 1,662 1,675 1,735
Intangibles, net 145,784 150,568 149,376
--------- --------- ---------
$ 844,868 $ 979,024 $ 896,104
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 4,724 $ 3,064 $ 3,072
Trade accounts payable 60,713 61,971 59,907
Accrued salaries and employee benefits 25,124 24,452 24,028
Accrued liabilities 37,290 41,378 45,583
Income taxes payable 4,460 2,326 1,507
--------- --------- ---------
Total current liabilities 132,311 133,191 134,097
Long-term debt 617,029 665,993 648,505
Other long-term liabilities 17,163 19,799 22,813
Deferred income taxes 24,011 58,094 35,100
Stockholders' equity:
Common stock 124 124 124
Contributed capital in excess of par value 40,609 39,651 39,673
Retained earnings 33,648 72,642 32,537
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (17,780) (8,223) (14,498)
--------- --------- ---------
Total stockholders' equity 54,354 101,947 55,589
--------- --------- ---------
$ 844,868 $ 979,024 $ 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 Nine Months Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $220,161 $262,243 $673,553 $714,387
Cost of sales 198,572 231,731 606,933 636,718
-------- -------- -------- --------
Gross profit 21,589 30,512 66,620 77,669
Selling, general and administrative expenses 7,904 9,960 25,463 27,181
Amortization of intangibles 1,201 1,192 3,591 3,576
Plant closing costs - - (587) -
Net gain on benefit plan curtailments - - (2,327) -
-------- -------- -------- --------
Operating income 12,484 19,360 40,480 46,912
Interest expense 14,431 16,850 46,230 49,330
Equity in (income) loss from associated
companies (2,689) (1,549) (6,427) (5,014)
-------- -------- -------- --------
Income before income taxes 742 4,059 677 2,596
Income tax expense (benefit):
Current 2,095 3,066 7,529 4,046
Deferred (2,200) (1,513) (7,963) (3,267)
-------- -------- -------- --------
Net income $ 847 $ 2,506 1,111 $ 1,817
======== ======== ======== ========
Net income per common share:
Basic:
Average common shares outstanding 11,997 11,961 11,981 11,935
Net income per common share
- Basic $ .07 $ .21 $ .09 $ .15
======== ======== ======== ========
Diluted:
Average common shares outstanding 12,007 11,979 12,003 11,949
Net income per common share
- Diluted $ .07 $ .21 $ .09 $ .15
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Nine Months Ended
-------------------------------
June 30, July 1,
2001 2000
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Cash flows from operating activities:
Net income (loss) $ 1,111 $ 1,817
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 24,323 30,169
Amortization of intangible assets 3,591 3,576
Amortization of deferred charges 2,234 2,122
Deferred income taxes (7,963) (3,267)
Non-cash compensation 936 232
(Gain)/loss on disposals of property, plant
and equipment 78 293
Undistributed income from associated companies (6,427) (5,014)
Plant closing costs (587) -
Net gain on benefit plan curtailments (2,327) -
Other 165 -
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net 32,812 (30,601)
(Increase)/decrease in sundry notes & accounts
receivable 1,856 (198)
(Increase)/decrease in inventories 775 (5,216)
(Increase)/decrease in prepaid expenses and other
current assets (537) 309
(Increase)/decrease in other non-current assets 62 625
(Decrease)/increase in accounts payable - trade 1,540 761
(Decrease)/increase in accrued liabilities (4,739) 8,870
(Decrease)/increase in income taxes payable 3,695 1,692
(Decrease)/increase in other long-term liabilities (4,401) (665)
-------- --------
Net cash provided by (used in) operating activities 46,197 5,505
Cash flows from investing activities:
Property, plant and equipment expenditures (20,324) (11,775)
Proceeds from sale of property, plant and equipment 907 336
Distributions received from associated companies 3,076 1,808
Investment in affiliates (Note I) (750) -
Other (794) 362
-------- --------
Net cash provided by (used in) investing activities (17,885) (9,269)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit (11,105) 21,900
Principal payments on long-term debt (31,063) (12,559)
Issuance of long-term debt 12,094 -
Payment of bank fees and loan costs (540) (100)
-------- --------
Net cash provided by (used in) financing activities (30,614) 9,241
Effect of exchange rate changes on cash and cash equivalents (196) (475)
-------- --------
Net increase/(decrease) in cash and cash equivalents (2,498) 5,002
Cash and cash equivalents at beginning of period 9,641 14,300
-------- --------
Cash and cash equivalents at end of period $ 7,143 $ 19,302
======== ========
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(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 June 30, 2001 and the results of
operations and cash flows for the periods ended June 30, 2001 and July 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 and nine months ended June 30, 2001 and is included in cost
of sales in the consolidated statement of income.
6
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE B - Accounting Change (Continued)
At June 30, 2001, the Company expects to reclassify $0.1 million of pre-tax
gains ($0.05 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.
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 and nine months ended June 30, 2001 and is included in cost of
sales in the consolidated statement of income.
NOTE C - Inventories
The components of inventory at June 30, 2001, July 1, 2000, and September 30,
2000 consisted of the following (in thousands):
June 30, July 1, September 30,
2001 2000 2000
--------- --------- -------------
Raw materials $ 4,627 $ 5,610 $ 5,009
Stock in process 29,750 33,467 32,502
Produced goods 123,037 136,295 126,348
Dyes, chemicals and supplies 12,751 11,403 11,536
-------- -------- --------
170,165 186,775 175,395
Less LIFO and other reserves (5,311) (9,729) (8,873)
-------- -------- --------
$164,854 $177,046 $166,522
======== ======== ========
7
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(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 2.0% 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 reduced the remaining quarterly principal
payments.
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 July
1999 Amendment, borrowings under the Senior Credit Facility will bear interest
in accordance with the foregoing pricing options beginning on February 16, 2001.
8
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE D - Long-Term Debt (Continued)
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.
As a result of the February 2001 funding of the Company's Canadian Loan
Agreement (as defined below), the Company repaid $12.7 million principal amount
of its U.S. term loan balance and reduced the maximum amount of borrowings under
its U.S. revolving line of credit by $12.3 million to $187.7 million. The
repayment of the Term Loan B and Term Loan C principal balances ratably reduced
the remaining quarterly principal payments. The reduction in the U.S. revolving
line of credit facility resulted in a write-off of $0.1 million of deferred debt
charges which is included in selling, general and administrative expenses in the
March quarter 2001.
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million, which was
originally borrowed and denominated in Canadian dollars.
Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable in equal
monthly installments of $229,500 CDN with the unpaid balance repayable in
February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially is fixed through the second quarter
of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's
option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for
borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings
in Canadian dollars). Thereafter, borrowings will bear interest at a per annum
9
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE D - Long-Term Debt (Continued)
rate,at Drummondville's option, of either (i) the U.S. prime rate plus 0%, .25%,
.50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime
rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian
dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for
borrowings in US dollar), all based on Drummondville maintaining certain
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving certain fixed charge coverage ratio levels (as
set forth in the Canadian Loan Agreement).
Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).
The Company was in full compliance with all of its lenders' covenants as of June
30, 2001. However, due to the poor retail environment, the Company expects to
report a loss for the September 2001 quarter. Accordingly, the Company
anticipates that it will not be in compliance with certain of the financial
covenants in the Senior Credit Facility as of September 29, 2001. The Company
has initiated discussions with its Senior Credit Facility Lenders and
anticipates being able to obtain the necessary amendments to its Senior Credit
Facility. The Company expects that an amendment to its Senior Credit Facility
would result in an increase in the stated interest rates under this Facility.
While the Company believes its relationships with its Senior Credit Facility
lenders are good, it cannot make any assurances that it will be able to obtain
waivers of any future covenant violations. If the Company violates the financial
or other covenants contained in its Senior Credit Facility or in the indenture
governing the outstanding Notes, the Company will be in default under the Senior
Credit Facility and/or the indenture. If a default occurs and is not waived by
the lenders, the lenders could seek remedies against the Company, including: (1)
penalty rates of interest; (2) immediate repayment of the debt; and/or (3) the
foreclosure on any assets securing the debt.
10
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
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 Nine Months Ended
------------------ -----------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Net income (loss) $ 847 $ 2,506 $ 1,111 $ 1,817
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share 11,997 11,961 11,981 11,935
Effect of dilutive securities:
stock options 10 18 22 14
------- ------- ------- -------
Diluted potential common shares denominator for
diluted earnings per share - adjusted weighted
average shares and assumed exercises exercises 12,007 11,979 12,003 11,949
======= ======= ======= =======
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 87,450 shares
and 874,499 shares of common stock were outstanding during the three months and
nine months ended June 30, 2001 and July 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 798,150 shares and 105,000 shares of common stock were
outstanding during the three months and nine months ended June 30, 2001 and July
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.
On February 13, 2001, the Company's stockholders approved an amendment to the
Company's 1999 Stock Option Plan to increase the number of shares of Common
Stock available under the Stock Option Plan by an aggregate of 800,000 shares.
The approved increase in shares available for grant allowed the Company to
cancel and exchange its' employees outstanding options (which were granted under
the Company's Amended and Restated 1989 Stock Option Plan which is no longer in
effect) with an exercise price equal to or in excess of $10.00 per share for an
amount granted under the 1999 Stock Option Plan equal to the same number of
options cancelled (the "New Options") with an exercise price of $4.1875 per
share. The New Options will vest and become exercisable when the common stock
equals or exceeds $12 per share for a 90 consecutive trading day period. The
Company, as required under Financial Accounting Standard 123, has determined the
fair value of the options granted and is expensing this over the expected
vesting period.
11
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
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 and
nine months ended June 30, 2001 was $(0.1) million and $(3.0) million,
respectively, and for the three and nine months ended July 1, 2000 was $1.0
million and $(7.0) million, respectively.
Activity in Stockholders' Equity is as follows (in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income (Loss) Stock Capital Earnings Stock Income(Loss) Total
-------------- ------ ----------- -------- --------- -------------- ---------
Balance at
September 30, 2000 $ 124 $39,673 $ 32,537 $(2,247) $ (14,498) $ 55,589
Issuance of 36,212
shares of Restricted
Common Stock - 102 - - - 102
Compensation earned
related to stock
options - 834 - - - 834
Comprehensive
income(loss):
Net income for nine
months ended
June 30, 2001 $ 264 - - 1,111 - - 1,111
Foreign currency
translation
adjustment (3,233) - - - - (3,233) (3,233)
Gain on derivative
instruments (49) - - - - (49) (49)
------- ----- ------- --------- ------- ----------- --------
Total comprehensive
income (loss) $ (3,018)
========
Balance at
June 30, 2001 $ 124 $40,609 $ 33,648 $(2,247) $ (17,780) $ 54,354
===== ======= ========= ======= =========== ========
Included in Accumulated Other Comprehensive Income (Loss) at June 30, 2001 was a
$(17.7) million loss related to foreign currency translation adjustment and a
$(0.1) million loss related to derivative instruments.
12
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE G - Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Three Months Ended Nine Months Ended
-------------------- -------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
------- ------- ------- -------
Current tax provision:
Federal $ - $ - $ 5 $ -
State 22 253 68 307
Foreign 2,073 2,813 7,456 3,739
--------- ------- ------- -------
Total current tax provision 2,095 3,066 7,529 4,046
Deferred tax provision:
Federal (2,275) (3,573) (7,576) (7,857)
State (219) (622) (598) (898)
Foreign 294 2,682 211 5,488
--------- ------- ------- -------
Total deferred tax provision (2,200) (1,513) (7,963) (3,267)
--------- ------- ------- -------
Total provision for income taxes $ (105) $ 1,553 $ (434) $ 779
========= ======= ======= =======
The Company's overall tax rate differed from the statutory rate principally due
to the impact of 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 June 30, 2001, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $35.9 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 $9.8 million at June 30, 2001
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.
13
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(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. The original components of the plant closing and
impairment charge included $49.3 million for fixed asset write-offs, $10.8
million for severance expense and $3.5 million for the write-off of leases and
other exit costs. In the first nine months of fiscal 2001, the Company recorded
a change in estimate for severance benefits that reduced the plant closing
charge by $0.6 million. All production at the affected facilities ceased during
the December quarter 2000. Of the 1,370 employees to be terminated, 1,350 have
been terminated as of June 30, 2001. 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 nine months ended June 30, 2001 (in thousands):
Accrual Accrual
Balance at Balance at
September 30, Cash Change in June 30,
2000 Payments Estimate 2001
------------- -------- -------- --------
Severance benefits $10,763 $(7,463) $(588) $2,712
Lease cancellation
and other 3,553 (760) - 2,793
------- ------- ----- ------
$14,316 $(8,223) $(588) $5,505
======= ======= ===== ======
The Company incurred run-out expenses totaling $1.3 million and $8.4 million
during the three and nine months ended June 30, 2001, respectively. 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.
14
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE H - Fiscal 2000 Strategic Initiatives (Continued)
In connection with the Fiscal 2000 Strategic Initiatives, the Company curtailed
certain 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.
NOTE I - Noncash Investing Activities
On August 18, 2000, the Company formed the Swift Denim-Hidalgo joint venture
with Grupo Dioral to manufacture denim in Mexico. As part of the initial
investment in this joint venture, the Company agreed to contribute equipment
from the closure of its Erwin facility as well as cash and inventory. During
fiscal 2001, the Company has contributed approximately $3.5 million of
equipment.
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.
15
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE J - Segment Information (Continued)
Information about the Company's operations in its different industry segments
for the three and nine months ended June 30, 2001 and July 1, 2000 is as follows
(in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net Sales to External Customers
Galey & Lord Apparel $103,258 $124,060 $322,931 $339,939
Swift Denim 78,103 99,182 234,450 254,725
Klopman International 35,351 34,357 106,123 103,046
Home Fashion Fabrics 3,449 4,644 10,049 16,677
-------- -------- -------- --------
Consolidated $220,161 $262,243 $673,553 $714,387
======== ======== ======== ========
Operating Income (Loss)/(1)/
Galey & Lord Apparel $ 4,289 $ 11,847 $ 19,901 $ 27,939
Swift Denim 6,640 5,576 16,825 11,096
Klopman International 3,425 2,935 8,876 10,363
Home Fashion Fabrics (1,489) (728) (3,862) (1,241)
Corporate (381) (270) (1,260) (1,245)
-------- -------- -------- --------
12,484 19,360 40,480 46,912
Interest expense 14,431 16,850 46,230 49,330
Income from associated companies/(2)/ (2,689) (1,549) (6,427) (5,014)
-------- -------- -------- --------
Income (loss) before income taxes $ 742 $ 4,059 $ 677 $ 2,596
======== ======== ======== ========
June 30, July 1,
2001 2000
-------- --------
Assets/(3)/
Galey & Lord Apparel $ 280,971 $ 314,104
Swift Denim 341,324 443,814
Klopman International 106,588 117,998
Home Fashion Fabrics 53,914 55,759
Corporate 62,071 47,349
------------ -----------
$ 844,868 $ 979,024
============ ===========
/(1)/Operating income (loss) for the three and nine months ended June 30, 2001
includes run-out charges and plant closing costs related to the Fiscal 2000
Strategic Initiatives of $0.1 million and $2.1 million for Galey & Lord
Apparel, respectively, $1.1 million and $3.4 million for Swift Denim,
respectively, and $0.0 million and $0.1 million for Corporate,
respectively.
/(2)/Net of amortization of $163, $138, $489 and $436, respectively.
/(3)/Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
16
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(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.
June 30, 2001
---------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------- ------------- ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $117,025 $ 46,506 $ - $163,531
Inventories - 129,806 35,048 - 164,854
Other current
assets 3,668 12,490 11,177 - 27,335
--------- -------- -------- --------- --------
Total current
assets 3,668 259,321 92,731 - 355,720
Property, plant and
equipment, net - 207,995 80,994 - 288,989
Intangibles - 145,784 - - 145,784
Other assets 176,273 5,723 38,916 (166,537) 54,375
--------- -------- -------- --------- --------
$ 179,941 $618,823 $212,641 $(166,537) $844,868
========= ======== ======== ========= ========
Current liabilities:
Trade accounts
payable $ - $ 39,480 $ 21,233 $ - $ 60,713
Accrued
liabilities 25,626 18,658 18,144 (14) 62,414
Other current
liabilities 2,203 1,296 5,685 - 9,184
--------- -------- -------- --------- --------
Total current
liabilities 27,829 59,434 45,062 (14) 132,311
Net intercompany balance (496,314) 582,092 (85,778) - -
Long-term debt 591,641 5,912 19,476 - 617,029
Other non-current
liabilities 2,431 29,329 9,819 (405) 41,174
Stockholders' equity 54,354 (57,944) 224,062 (166,118) 54,354
--------- -------- -------- --------- --------
$ 179,941 $618,823 $212,641 $(166,537) $844,868
========= ======== ======== ========= ========
17
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
July 1, 2000
--------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------- ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ - $157,681 $ 46,769 $ - $204,450
Inventories - 140,479 36,567 - 177,046
Other current
assets 635 25,200 24,168 (631) 49,372
--------- -------- -------- --------- --------
Total current
assets 635 323,360 107,504 (631) 430,868
Property, plant and
equipment, net - 265,913 91,214 - 357,127
Intangibles - 150,568 - - 150,568
Other assets 262,295 7,619 25,501 (254,954) 40,461
--------- -------- -------- --------- --------
$ 262,930 $747,460 $224,219 $(255,585) $979,024
========= ======== ======== ========= ========
Current liabilities:
Trade accounts
payable $ 325 $ 39,158 $ 22,488 $ - $ 61,971
Accrued
liabilities 27,506 18,981 19,355 (12) 65,830
Other current
liabilities 2,497 679 2,214 - 5,390
--------- -------- -------- --------- --------
Total current
liabilities 30,328 58,818 44,057 (12) 133,191
Net intercompany
balance (528,267) 612,526 (84,259) - -
Long-term debt 658,096 6,623 1,274 - 665,993
Other non-current
liabilities 826 68,192 9,698 (823) 77,893
Stockholders' equity 101,947 1,301 253,449 (254,750) 101,947
--------- -------- -------- --------- --------
$ 262,930 $747,460 $224,219 $(255,585) $979,024
========= ======== ======== ========= ========
18
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended June 30, 2001
------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------- ------------ ------------- ------------
Results of Operations
- ---------------------
Net sales $ - $161,115 $70,934 $(11,888) $220,161
Gross profit - 11,871 9,718 - 21,589
Operating income (loss) (282) 5,329 7,437 - 12,484
Interest expense,
income taxes and
other, net (1,781) 12,898 419 101 11,637
Net income (loss) $ 1,499 $ (7,569) $ 7,018 $ (101) $ 847
Nine Months Ended June 30, 2001
------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------- ------------ ------------- ------------
Results of Operations
- ---------------------
Net sales $ - $503,939 $203,844 $(34,230) $673,553
Gross profit - 39,074 27,546 - 66,620
Operating income (loss) (973) 21,176 20,277 - 40,480
Interest expense,
income taxes and
other, net (3,014) 40,593 2,003 (213) 39,369
Net income (loss) $ 2,041 $(19,417) $ 18,274 $ 213 $ 1,111
19
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended July 1, 2000
-----------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------- ------------ ------------- ------------
Results of Operations
- ---------------------
Net sales $ - $205,181 $69,112 $(12,050) $262,243
Gross profit - 22,312 8,200 - 30,512
Operating income (loss) (371) 14,017 5,714 - 19,360
Interest expense,
income taxes and
other, net (671) 16,872 3,030 (2,377) 16,854
Net income (loss) $ 300 $ (2,855) $ 2,684 $ 2,377 $ 2,506
Nine Months Ended July 1, 2000
------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------- ------------ ------------- ------------
Results of Operations
- ---------------------------
Net sales $ - $554,670 $194,075 $(34,358) $714,387
Gross profit - 53,988 23,650 31 77,669
Operating income (loss) (886) 32,163 15,604 31 46,912
Interest expense,
income taxes and
other, net (2,116) 45,326 3,784 (1,899) 45,095
Net income (loss) $ 1,230 $(13,163) $ 11,820 $ 1,930 $ 1,817
20
GALEY & LORD, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
Nine Months Ended June 30, 2001
---------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------- ------------- -------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 7,344 $ 28,672 $ 10,843 $ (662) $ 46,197
Cash provided by
(used in) investing
activities 21,748 (15,014) (25,281) 662 (17,885)
Cash provided by
(used in) financing
activities (29,094) (13,150) 11,630 - (30,614)
Effect of exchange
rate change on cash
and equivalents - - (196) - (196)
-------- -------- -------- -------- --------
Net change in cash
and cash equivalents (2) 508 (3,004) - (2,498)
Cash and cash
equivalents at
beginning of period 10 4,194 5,437 - 9,641
-------- -------- -------- -------- --------
Cash and cash
equivalents at end
of period $ 8 $ 4,702 $ 2,433 $ - $ 7,143
======== ======== ======== ======== ========
21
GALEY & LORD, INC.
Notes to consolidated Financial Statements
June 30, 2001
(Unaudited)
NOTE K - Supplemental Condensed Consolidating Financial Information (Continued)
Nine Months Ended July 1, 2000
---------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------- ------------- ------------- -------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 14,860 $ (26,764) $ 18,202 $ (793) $ 5,505
Cash provided by
(used in) investing
activities 7,316 (8,477) (166) (7,942) (9,269)
Cash provided by
(used in) financing
activities (22,133) 35,618 (12,979) 8,735 9,241
Effect of exchange
rate change on cash
and equivalents - - (475) - (475)
-------- ---------- -------- ------- -------
Net change in cash
and cash equivalents 43 377 4,582 - 5,002
Cash and cash
equivalents at
beginning of period - 6,126 8,174 - 14,300
-------- ---------- -------- ------- -------
Cash and cash
equivalents at end
of period $ 43 $ 6,503 $ 12,756 $ - $19,302
======== ========== ======== ======= =======
22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The Company believes this is a most difficult environment for textiles. The
relative strength of the US dollar, combined with a difficult domestic retail
environment continues to put price and volume pressure upon the Company's
products. The Company has indicated that it will take appropriate long-term
actions to adjust to what it believes is a permanent change in the marketplace.
The Company's management continues to evaluate alternatives, including if
necessary the potential rationalization and sale of assets, that it believes
will position the Company for future profitability and it expects to conclude
such evaluation during the September quarter.
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 and nine months ended June 30, 2001
and July 1, 2000 for each segment are shown below:
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $103,258 $124,060 $322,931 $339,939
Swift Denim 78,103 99,182 234,450 254,725
Klopman International 35,351 34,357 106,123 103,046
Home Fashion Fabrics 3,449 4,644 10,049 16,677
-------- -------- -------- --------
Total $220,161 $262,243 $673,553 $714,387
======== ======== ======== ========
Operating Income (Loss) per Segment
As Reported
Galey & Lord Apparel $ 4,289 $ 11,847 $ 19,901 $ 27,939
Swift Denim 6,640 5,576 16,825 11,096
Klopman International 3,425 2,935 8,876 10,363
Home Fashion Fabrics (1,489) (728) (3,862) (1,241)
Corporate (381) (270) (1,260) (1,245)
-------- -------- -------- --------
$ 12,484 $ 19,360 $ 40,480 $ 46,912
======== ======== ======== ========
Operating Income (Loss) per Segment
Excluding Strategic Initiatives
Galey & Lord Apparel $ 4,426 $ 11,847 $ 22,044 $ 27,939
Swift Denim 7,777 5,576 20,185 11,096
Klopman International 3,425 2,935 8,876 10,363
Home Fashion Fabrics (1,489) (728) (3,862) (1,241)
Corporate (381) (270) (1,129) (1,245)
-------- -------- -------- --------
$ 13,758 $ 19,360 $ 46,114 $ 46,912
======== ======== ======== ========
23
June Quarter 2001 Compared to June Quarter 2000
Net Sales
Net sales for the June quarter 2001 (third quarter of fiscal 2001) were $220.2
million as compared to $262.2 million for the June quarter 2000 (third quarter
of fiscal 2000).
Galey & Lord Apparel Galey & Lord Apparel's net sales for the June quarter 2001
were $103.3 million, a $20.8 million decrease as compared to the June quarter
2000 net sales of $124.1 million. The decline in net sales was primarily
attributable to a decline in fabric volume of approximately 20.7% due to the
difficult domestic retail environment. The volume decline was partially offset
by a 20% increase in unit sales of garment packages. The increase in unit sales
of garment packages reflects the additional production capacity at the Company's
Monclova, Mexico garment facility.
Swift Denim Swift Denim's net sales for the June quarter 2001 were $78.1
million as compared to $99.2 million in the June quarter 2000. The $21.1
million decrease was primarily attributable to the reduction in manufacturing
capacity resulting from the closure of the Erwin facility in December quarter
2000, partially offset by changes in product mix as customer orders were
comprised of more value-added styles.
Klopman International Klopman International's net sales for the June quarter
2001 were $35.4 million, a $1.0 million increase as compared to the June quarter
2000 net sales of $34.4 million. The increase in net sales was primarily
attributable to a 9.2% increase in sales volume, partially offset by an 7.1%
decline in net sales due to exchange rate changes used in translation.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the June quarter
2001 were $3.4 million compared to $4.6 million for the June quarter 2000. The
$1.2 million decline in net sales primarily resulted from changes in product mix
and lower selling prices.
Operating Income
Operating income for the June quarter 2001 was $12.5 million as compared to
$19.4 million for the June quarter 2000. Excluding the runout costs related to
the Fiscal 2000 Strategic Initiatives, the June quarter 2001 operating income
would have been $13.8 million.
24
Galey & Lord Apparel Galey & Lord Apparel's operating income was $4.3 million
for the June quarter 2001 as compared to $11.8 million for the June quarter
2000. Excluding the run-out costs associated with the Fiscal 2000 Strategic
Initiatives, Galey & Lord Apparel's operating income would have been $4.4
million. The decrease principally reflects lower fabric volume and selling
prices and higher manufacturing costs due to lower fabric production volume and
higher utility costs. Operating income decreases were offset partially by
reductions in selling and administrative costs of $0.9 million.
Swift Denim June quarter 2001 operating income for Swift Denim was $6.6
million, a $1.0 million increase as compared to the June quarter 2000 operating
income of $5.6 million. Excluding the run-out 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
changes in product mix partially offset by higher utility costs and higher raw
material expenses. Decreases in selling and administrative expenses of $0.8
million also contributed to the increase in operating income.
Klopman International Klopman International's operating income in the June
quarter 2001 increased $0.5 million to $3.4 million as compared to the June
quarter 2000 operating income of $2.9 million. The increase principally
reflects increases in sales volume partially offset by lower selling prices and
changes in product mix. 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
June quarter 2001 of $1.5 million as compared to an operating loss for the June
quarter 2000 of $0.7 million. The increase in operating loss was principally
due to changes in product mix and the lower selling prices discussed above.
Corporate Corporate reported an operating loss for the June quarter 2001 of
$0.4 million as compared to an operating loss for the June quarter 2000 of $0.3
million. This operating income (loss) typically represents the administrative
expenses from the Company's various holding companies.
Income from Associated Companies
Income from associated companies was $2.7 million in the June quarter 2001 as
compared to $1.5 million in the June quarter 2000. The income represents
amounts from several joint venture interests that manufacture and sell denim
products.
25
Interest Expense
Interest expense was $14.4 million for the June quarter 2001 compared to $16.9
million for the June quarter 2000. The decrease in interest expense was
primarily due to lower average outstanding debt balances in the June quarter
2001 as compared to the June quarter 2000 and lower prime and LIBOR base rates
in the June quarter 2001 as compared to the June quarter 2000. The average
interest rate paid by the Company on its bank debt in the June quarter 2001 was
8.3% per annum as compared to 9.4% per annum in the June quarter 2000.
Income Taxes
The Company's overall tax rate differed from the statutory rate principally due
to the impact of 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 June quarter 2001 was $0.8 million or $.07 per common share
compared to the June quarter 2000 of $2.5 million or $.21 per common share.
Excluding the Fiscal 2000 Strategic Initiatives, the Company's net income for
the June quarter 2001 would have been $1.7 million or $.14 per common share.
As a result of the poor conditions for the Khaki products in the Galey & Lord
Apparel segment, the Company expects to report a net loss in the September 2001
quarter.
First Nine Months of Fiscal 2001 Compared to First Nine Months of Fiscal 2000
Net Sales
Net sales for the first nine months of fiscal 2001 were $673.6 million as
compared to $714.4 million for the first nine months of fiscal 2000.
Galey & Lord Apparel Galey & Lord Apparel's net sales for the first nine months
of fiscal 2001 were $322.9 million compared to $339.9 million for the nine
months of fiscal 2000. The net sales decrease was primarily attributable to an
8% decrease in fabric sales volume due to the difficult domestic retail
environment, offset partially by a 17% increase in unit sales of garment
packages. The increase in unit sales of garment packages reflects the
additional production capacity at the Company's Monclova, Mexico garment
facility. Overall, average selling prices decreased 1%.
26
Swift Denim Swift Denim's net sales for the first nine months of fiscal 2001
were $234.5 million as compared to $254.7 million in the first nine months of
fiscal 2000. The $20.2 million decrease was primarily attributable to the
reduction in manufacturing capacity resulting from the closure of the Erwin
facility in December quarter 2000, partially offset by an improvement in product
mix.
Klopman International Klopman International's net sales for the first nine
months of fiscal 2001 were $106.1 million, a $3.1 million increase as compared
to the first nine months of fiscal 2000 net sales of $103.0 million. The
increase was primarily attributable to a 15.5% increase in sales volume,
partially offset by a 10.9% decline in net sales due to exchange rate changes
used in translation and a 4.3% decline in selling prices, inclusive of product
mix changes.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the first nine
months of fiscal 2001 were $10.0 million compared to $16.7 million for the first
nine months of fiscal 2000. The $6.7 million decline in net sales primarily
resulted from changes in product mix and lower selling prices.
Operating Income
Operating income for the first nine months of fiscal 2001 was $40.5 million as
compared to $46.9 million for the first nine months of fiscal 2000. Excluding
the charges related to the Fiscal 2000 Strategic Initiatives, the first nine
months operating income would have been $46.1 million.
Galey & Lord Apparel Galey & Lord Apparel's operating income was $19.9 million
for the first nine months of fiscal 2001 as compared to $27.9 million for the
first nine months of fiscal 2000. Excluding the run-out costs associated with
the Fiscal 2000 Strategic Initiatives, Galey & Lord Apparel's operating income
would have been $22.0 million. The decrease, excluding the Fiscal 2000
Strategic Initiatives, principally reflects lower sales prices, volume and mix
of $2.1 million, higher utility costs of $3.5 million and higher manufacturing
costs. Operating income decreases were offset partially by $0.7 million
reductions in selling and administrative costs.
Swift Denim Operating income for the first nine months of fiscal 2001 for Swift
Denim was $16.8 million, a $5.7 million increase as compared to the first nine
months of fiscal 2000 operating income of $11.1 million. Excluding the run-out
costs associated with the Fiscal 2000 Strategic Initiatives, Swift Denim's
operating income would have been $20.2 million. The increase in Swift Denim's
operating income principally reflects positive changes in product mix and
improvement in raw material costs, partially offset by $2.4 million of higher
utility costs and $0.5 million of higher selling, general and administrative
expenses.
27
Klopman International Klopman International's operating income in the first
nine months of fiscal 2001 decreased $1.5 million to $8.9 million as compared to
the first nine months of fiscal 2000 operating income of $10.4 million. The
decrease principally reflects $4.5 million related to the impact of lower
selling prices and changes in product mix, partially offset by $3.6 million
related to increases in sales volume. In addition, Klopman International's
results were negatively impacted $0.9 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
first nine months of fiscal 2001 of $3.9 million as compared to an operating
loss for the first nine months of fiscal 2000 of $1.2 million. The decrease in
operating income was principally due to changes in product mix and the lower
selling prices discussed above.
Corporate Corporate reported an operating loss for the first nine months of
fiscal 2001 of $1.3 million as compared to an operating loss for the first nine
months of fiscal 2000 of $1.2 million. This operating income (loss) typically
represents the administrative expenses from the Company's various holding
companies.
Income from Associated Companies
Income from associated companies was $6.4 million in the first nine months of
fiscal 2001 as compared to $5.0 million in the first nine months of fiscal 2000.
The income represents amounts from several joint venture interests that
manufacture and sell denim products.
Interest Expense
Interest expense was $46.2 million for the first nine months of fiscal 2001
compared to $49.3 million for the first nine months of fiscal 2000. The
decrease in interest expense was primarily due to lower average debt balances in
the first nine months of fiscal 2001 as compared to the first nine months of
fiscal 2000, as well as lower prime and LIBOR base rates in the first nine
months of fiscal 2001 as compared to the first nine months of fiscal 2000. The
average interest rate paid by the Company on its bank debt in the first nine
months of fiscal 2001 was 9.0% per annum as compared to 9.3% per annum in the
first nine months of fiscal 2000.
Income Taxes
The Company's overall tax rate differed from the statutory rate principally due
to the impact of 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.
28
Net Income (Loss) and Net Income (Loss) Per Share
Net income for the first nine months of fiscal 2001 was $1.1 million or $.09 per
common share, compared to net income for the first nine months of fiscal 2000 of
$1.8 million or $.15 per common share. Excluding the Fiscal 2000 Strategic
Initiatives, the Company's net income for the first nine months of fiscal 2001
would have been $4.6 million or $.39 per common share.
Order Backlog
The Company's order backlog at June 30, 2001 was $129.5 million, a 39.8%
decrease from the July 1, 2000 backlog of $215.0 million. The Company's backlog
has decreased from the previous year, and the Company has noted that 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 $7.1
million and $19.3 million at June 30, 2001 and July 1, 2000, respectively. As
of June 30, 2001, the Company had a total of $58.0 million of revolving credit
borrowing availability under its Senior Credit Facility (as discussed below) and
a total of U.S. $6.2 million of revolving credit borrowing availability under
the Canadian Loan Agreement (as defined below).
During the June quarter 2001, the Company primarily utilized its available cash
and revolving credit borrowings under its Senior Credit Facility 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 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"). In July 1999, the Company amended its Senior
Credit Facility (the "July 1999 Amendment") pursuant to which the Company, among
other things, repaid $25 million principal amount of its term loan balance using
available borrowings under its revolving line of credit and reduced
29
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 reduced the remaining quarterly principal payments.
In September 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. In March 2001, the Company further amended the
Senior Credit Facility to allow for a more tax efficient European corporate
structure.
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%.
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 $304,645 through March 27, 2004, three quarterly payments of
$28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April
2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111
through April 2, 2005, three quarterly payments of $20,098,295 and a final
amount of $17,024,140 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
30
of 2.50%, 2.75%, 3.00% or 3.25%, based on the Company's achieving certain
leverage ratios. Pursuant to the July 1999 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 substantially all of the assets of
the Company and each of its domestic subsidiaries (including a lien on all real
property owned in the United States), 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.
As a result of the February 2001 funding of the Company's Canadian Loan
Agreement (as defined below), the Company repaid $12.7 million principal amount
of its U.S. term loan balance and reduced the maximum amount of borrowings under
its U.S. revolving line of credit by $12.3 million to $187.7 million. The
repayment of the Term Loan B and Term Loan C principal balances ratably reduced
the remaining quarterly principal payments. The reduction in the U.S. revolving
line of credit facility resulted in a write-off of $0.1 million of deferred debt
charges which is included in selling, general and administrative expenses in the
March quarter 2001.
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.
31
The Company was in full compliance with all of its lenders' covenants as of June
30, 2001. However, due to the poor retail environment, the Company expects to
report a loss for the September 2001 quarter. Accordingly, the Company
anticipates that it will not be in compliance with certain of the financial
covenants in the Senior Credit Facility as of September 29, 2001. The Company
has initiated discussions with its Senior Credit Facility Lenders and
anticipates being able to obtain the necessary amendments to its Senior Credit
Facility. The Company expects that an amendment to its Senior Credit Facility
would result in an increase in the stated interest rates under this Facility.
While the Company believes its relationships with its Senior Credit Facility
lenders are good, it cannot make any assurances that it will be able to obtain
waivers of any future covenant violations. If the Company violates the financial
or other covenants contained in its Senior Credit Facility or in the indenture
governing the outstanding Notes, the Company will be in default under the Senior
Credit Facility and/or the indenture. If a default occurs and is not waived by
the lenders, the lenders could seek remedies against the Company, including: (1)
penalty rates of interest; (2) immediate repayment of the debt; and/or (3) the
foreclosure on any assets securing the debt.
Senior Subordinated Debt
In February 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes"). In May 1998, the Notes were exchanged for freely transferable
identical Notes registered under the Securities Act of 1933. 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). Interest on the Notes
is payable on March 1 and September 1 of each year.
In August 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.
32
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.
Canadian Loan Agreement
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million.
Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable in equal
monthly installments of $229,500 CDN with the unpaid balance repayable in
February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially is fixed through the second quarter
of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's
option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for
borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings
in Canadian dollars). Thereafter, borrowings will bear interest at a per annum
rate, at Drummondville's option, of either (i) the U.S. prime rate plus 0%,
.25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian
prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian
dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00%, all based on
Drummondville maintaining certain
33
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving certain fixed charge coverage ratio levels (as
set forth in the Canadian Loan Agreement).
Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).
Tax Matters
At June 30, 2001, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $35.9 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 $9.8 million at June 30, 2001 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
In the September quarter 2001, the Company expects to incur approximately a $5.0
million income tax charge related to realigning the Company's legal ownership
structure of its European subsidiaries and joint ventures. This charge will not
result in any current cash tax payments, as the Company will utilize existing
NOLs to completely offset any taxes which otherwise would have been payable.
The Company also expects to incur run-out costs related to the Fiscal 2000
Strategic Initiatives in the September quarter 2001 of $0.8 million.
The Company expects to spend approximately $25 million for capital expenditures
in fiscal 2001, of which $20.3 million was spent in the first nine 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.
34
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 and the Company's Canadian Loan Agreement. 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.
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.
35
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
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, 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.
36
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 June 30, 2001, 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 June 30, 2001 would have a negative impact of approximately
$4.3 million.
37
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 - None.
38
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/ Leonard F. Ferro
--------------------
Leonard F. Ferro
Vice President
July 23, 2001
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Date
39
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
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40