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 March 30, 2002
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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.
------------------------------------------------------
(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 - 11,996,966 shares as of May 10, 2002.
Exhibit Index at page 54
1
INDEX
GALEY & LORD, INC.
Page
PART I. FINANCIAL INFORMATION ----
- ------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
March 30, 2002, March 31, 2001
and September 29, 2001
Consolidated Statements of Operations -- 4
Three months and six months ended
March 30, 2002 and March 31, 2001
Consolidated Statements of Cash Flows -- 5
Six months ended March 30, 2002 and
March 31, 2001
Notes to Consolidated Financial Statements -- 6-29
March 30, 2002
Item 2. Management's Discussion and Analysis of 30-49
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 50-51
Market Risk
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 52
Item 2. Changes in Securities and Use of Proceeds 52
Item 3. Defaults upon Senior Securities 52
Item 4. Submission of Matters to a Vote of Security 52
Holders
Item 5. Other Information 52
Item 6. Exhibits and Reports on Form 8 - K 52
SIGNATURES 53
- ----------
EXHIBIT INDEX 54
- -------------
2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 30, March 31, September 29,
2002 2001 2001
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- -----------
Current assets:
Cash and cash equivalents $ 28,401 $ 14,246 $ 9,157
Trade accounts receivable 141,105 178,493 145,366
Sundry notes and accounts receivable 4,990 4,573 4,802
Inventories 175,827 167,327 166,820
Income taxes receivable 3,589 2,346 2,945
Deferred income taxes -- 13,402 --
Prepaid expenses and other current assets 8,170 3,110 4,371
----------- ----------- -----------
Total current assets 362,082 383,497 333,461
Property, plant and equipment, at cost 421,093 479,412 455,909
Less accumulated depreciation and amortization (178,819) (185,276) (191,471)
----------- ----------- -----------
242,274 294,136 264,438
Investments in and advances to associated companies 39,169 35,316 38,897
Deferred charges, net 6,901 12,512 12,039
Other non-current assets 1,636 1,632 1,506
Intangibles, net 113,015 146,985 114,374
----------- ----------- -----------
$ 765,077 $ 874,078 $ 764,715
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Liabilities not subject to compromise:
Current liabilities:
Long-term debt - current $ 334,648 $ 4,787 $ 4,670
Trade accounts payable 33,273 63,252 53,503
Accrued salaries and employee benefits 21,330 27,220 22,759
Accrued liabilities 26,651 30,377 35,529
Income taxes payable 6,473 5,234 5,600
----------- ----------- -----------
Total current liabilities 422,375 130,870 122,061
Long-term liabilities:
Long-term debt 35,278 640,475 634,821
Other long-term liabilities 12,845 18,723 17,814
----------- ----------- -----------
Total long-term liabilities 48,123 659,198 652,635
Deferred income taxes 3,251 29,837 3,003
----------- ----------- -----------
Total liabilities not subject to compromise 473,749 819,905 777,699
Liabilities subject to compromise 328,568 -- --
Stockholders' equity (deficit):
Common stock 124 124 124
Contributed capital in excess of par value 41,419 40,337 40,878
Retained Earnings (Accumulated deficit) (58,712) 32,801 (37,609)
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (loss) (17,824) (16,842) (14,130)
----------- ----------- -----------
Total stockholders' equity (deficit) (37,240) 54,173 (12,984)
----------- ----------- -----------
$ 765,077 $ 874,078 $ 764,715
=========== =========== ===========
*Condensed from audited financial statements
See accompanying notes to consolidated financial statements.
3
GALEY & LORD, INC.
(DEBTORS-IN-POSSESION)
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended Six Months Ended
---------------------- ----------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 167,982 $ 231,707 $ 304,428 $ 453,392
Cost of sales 156,936 208,460 281,816 408,361
--------- --------- --------- ---------
Gross profit 11,046 23,247 22,612 45,031
Selling, general and administrative
expenses 7,952 8,639 16,640 17,559
Amortization of intangibles 823 1,202 1,639 2,390
Plant closing costs 706 (142) (440) (587)
Net gain on benefit plan
curtailments -- -- (3,375) (2,327)
--------- --------- --------- ---------
Operating income 1,565 13,548 8,148 27,996
Interest expense (contractual
interest of $12,718 and $25,918 for
the three and six months ended
March 30, 2002, respectively) 9,372 15,368 22,572 31,799
Equity in (income) loss from
associated companies (1,914) (1,874) (4,240) (3,738)
--------- --------- --------- ---------
Income (loss) before reorganization
items and income taxes (5,893) 54 (10,184) (65)
Reorganization items 9,881 -- 9,881 --
Income tax expense (benefit):
Current (36) 2,975 791 5,434
Deferred 132 (3,115) 247 (5,763)
--------- --------- --------- ---------
Net income (loss) $ (15,870) $ 194 $ (21,103) $ 264
========= ========= ========= =========
Net income (loss) per common share:
Basic:
Average common shares outstanding 11,997 11,984 11,997 11,973
Net income (loss) per common share
- Basic $ (1.32) $ .02 $ (1.76) $ .02
========= ========= ========= =========
Diluted:
Average common shares outstanding 11,997 12,015 11,997 12,000
Net income (loss) per common share
- Diluted $ (1.32) $ .02 $ (1.76) $ .02
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
Six Months Ended
---------------------
March 30, March 31,
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (21,103) $ 264
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 14,844 16,341
Amortization of intangible assets 1,642 2,391
Amortization of deferred charges 1,827 1,477
Deferred income taxes 248 (5,763)
Non-cash compensation 541 664
(Gain)/loss on disposals of property, plant
and equipment 46 41
Undistributed income from associated companies (4,240) (3,738)
Impairment of fixed assets 898 --
Plant closing costs -- (587)
Net gain on benefit plan curtailments (3,459) (2,327)
Non-cash reorganization write-offs 7,690 --
Other -- 166
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net 2,979 18,014
(Increase)/decrease in sundry notes & accounts
receivable 69 1,283
(Increase)/decrease in inventories (10,133) (1,265)
(Increase)/decrease in prepaid expenses and other
current assets (3,923) 835
(Increase)/decrease in other non-current assets (140) 101
(Decrease)/increase in accounts payable - trade (5,480) 3,522
(Decrease)/increase in accrued liabilities 10,290 (3,693)
(Decrease)/increase in income taxes payable 276 4,176
(Decrease)/increase in other long-term liabilities (131) (2,561)
(Decrease)/increase in plant closing costs (6,690) (6,821)
--------- ---------
Net cash provided by (used in) operating activities (13,949) 22,520
Cash flows from investing activities:
Property, plant and equipment expenditures (3,689) (13,250)
Proceeds from sale of property, plant and equipment 5,805 1,301
Distributions received from associated companies 2,537 2,742
Investment in affiliates -- (1,148)
Other 2,213 (942)
--------- ---------
Net cash provided by (used in) investing activities 6,866 (11,297)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit 14,313 14,490
Principal payments on long-term debt (1,713) (29,603)
Issuance of long-term debt 17,303 9,000
Payment of bank fees and loan costs (3,418) (473)
--------- ---------
Net cash provided by (used in) financing activities 26,485 (6,586)
Effect of exchange rate changes on cash and cash equivalents (158) (32)
--------- ---------
Net increase/(decrease) in cash and cash equivalents 19,244 4,605
Cash and cash equivalents at beginning of period 9,157 9,641
--------- ---------
Cash and cash equivalents at end of period $ 28,401 $ 14,246
========= =========
See accompanying notes to consolidated financial statements.
5
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing
On February 19, 2002 (the "Filing Date"), Galey & Lord, Inc. (the "Company") and
each of its domestic subsidiaries (together with the Company, the "Debtors")
filed voluntary petitions for reorganization (the "Chapter 11 Filings" or the
"Filings") under Chapter 11 of Title 11, United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Southern District of New
York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending
for the Debtors are being jointly administered for procedural purposes only. The
Debtors' direct and indirect foreign subsidiaries and foreign joint venture
entities did not file petitions under Chapter 11 and are not the subject of any
bankruptcy proceedings.
During the pendency of the Filings, the Debtors remain in possession of their
properties and assets and management continues to operate the businesses of the
Debtors as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate
their businesses, but may not engage in transactions outside of the ordinary
course of business without the approval of the Bankruptcy Court, after notice
and the opportunity for a hearing.
On February 19, 2002, the Debtors filed a motion seeking authority for the
Company to enter into a credit facility of up to $100 million in
debtor-in-possession ("DIP") financing with First Union National Bank (the
"Agent") and Wachovia Securities, Inc. On February 21, 2002, the Bankruptcy
Court entered an interim order approving the credit facility and authorizing
immediate access to $30 million. On March 19, 2002, the Bankruptcy Court entered
a final order approving the entire $100 million DIP financing.
Under the terms of the final DIP financing agreement (the "DIP Financing
Agreement"), the Company, as borrower, may make revolving credit borrowings
(including up to $15 million for post-petition letters of credit) in an amount
not exceeding the lesser of $100 million or the Borrowing Base (as defined in
the DIP Financing Agreement). The DIP Financing Agreement will terminate and the
borrowings thereunder will be due and payable upon the earliest of (i) August
19, 2003, (ii) the date of the substantial consummation of a plan of
reorganization that is confirmed pursuant to an order by the Bankruptcy Court
and (iii) the acceleration of the revolving credit loans made by any of the
banks who are a party to the DIP Financing Agreement and the termination of the
total commitment under the DIP Financing Agreement. Amounts borrowed under the
DIP Financing Agreement bear interest at the rate per annum at the Company's
option, of either (i) (a) the higher of the prime rate or the federal funds rate
plus .50% plus (b) a margin of 2.00% or (ii) LIBOR
6
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing (Continued)
plus a margin of 3.25%. There is an unused commitment fee of either (A) at such
time as First Union National Bank is no longer the sole bank, at the rate of (i)
...75% per annum on the average daily unused total commitment at all times during
which the average total commitment usage is less than 25% of the total
commitment and (ii) .5% per annum on the average daily unused total commitment
at all times during which the average total commitment usage is more than or
equal to 25% of the total commitment; or (B) at all times that First Union
National Bank is the sole bank, at a rate of .50% per annum on the average daily
unused total commitment. There are letter of credit fees payable to the Agent
equal to LIBOR plus 3.25% on the daily average letters of credit outstanding and
to a fronting bank, its customary fees plus .25% for each letter of credit
issued by such fronting bank.
Borrowings under the DIP Financing Agreement are guaranteed by each of the
Debtor subsidiaries. In general, such borrowings constitute allowed
super-priority administrative expense claims, and are secured by (i) a perfected
first priority lien pursuant to Section 364(c)(2) of the Bankruptcy Code, upon
all property of the Company and the Debtor subsidiaries that was not subject to
a valid, perfected and non-avoidable lien on the Filing Date, (ii) a perfected
junior lien, pursuant to Section 364(c)(3) of the Bankruptcy Code upon all
property of the Company and the Debtor subsidiaries already subject to valid,
perfected, non-avoidable liens, and (iii) a perfected first priority senior
priming lien, pursuant to Section 364(d)(1) of the Bankruptcy Code, upon all
property of the Company and the Debtor subsidiaries already subject to a lien
that presently secures the Company's and the Debtor subsidiaries' pre-petition
indebtedness under the existing pre-petition credit agreement, whether created
prior to or after the Filing Date (subject to certain specific existing or
subsequently perfected liens). This security interest is subject to certain
explicit exceptions.
The DIP Financing Agreement contains covenants restricting the Company and the
Debtor subsidiaries from consolidating or merging with and into another person,
disposing of assets, incurring additional indebtedness and guarantees, creating
liens and encumbrances on properties, modifying its or their business, making
capital expenditures in excess of $22.5 million through the maturity date or
$15.2 million during any 12 month period, declaring and paying dividends, making
investments, loans or advances, and creating super-priority claims. There are
certain limitations on affiliate transactions and on costs and expenses incurred
in connection with the closing of production facilities. The DIP Financing
Agreement also requires the Company and the Debtor subsidiaries to achieve
certain levels of EBITDA (as defined) as specified therein. The DIP Financing
Agreement also provides for the mandatory prepayment of
7
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing (Continued)
all or a portion of outstanding borrowings upon repatriation of funds from
foreign subsidiaries or the sale of assets, or in the event outstanding loans
exceed the Borrowing Base.
The Bankruptcy Court has approved payment of certain of the Debtors'
pre-petition obligations, including, among other things, employee wages,
salaries, and benefits, and certain critical vendor and other business-related
payments necessary to maintain the operation of their businesses. The Debtors
have retained, with Bankruptcy Court approval, legal and financial professionals
to advise the Debtors in the bankruptcy proceedings and the restructuring of
their businesses, and certain other "ordinary course" professionals. From time
to time the Debtors may seek Bankruptcy Court approval for the retention of
additional professionals.
The Debtors must, subject to Bankruptcy Court approval and certain other
limitations, assume, assume and assign, or reject each of their executory
contracts and unexpired leases. In this context, "assumption" means, among other
things, re-affirming their obligations under the relevant lease or contract and
curing all monetary defaults thereunder. In this context, "rejection" means
breaching the relevant contract or lease as of the Filing Date, being relieved
of on-going obligations to perform under the contract or lease, and being liable
for damages, if any, for the breach thereof. Such damages, if any, are deemed to
have accrued prior to the Filing Date by operation of the Bankruptcy Code. The
Bankruptcy Court has approved the rejection of one executory contract and
several unexpired leases, and the Debtors are in the process of reviewing their
remaining executory contracts and unexpired leases to determine which, if any,
they will reject. At this time the Debtors cannot reasonably estimate the
ultimate liability, if any, that may result from rejecting and/or assuming
executory contracts or unexpired leases, and no provisions have yet been made
for these items.
The consummation of a plan or plans of reorganization (a "Plan") is the
principal objective of the Chapter 11 Filings. A Plan would, among other things,
set forth the means for satisfying claims against and interests in the Company
and its Debtor subsidiaries, including setting forth the potential distributions
on account of such claims and interests, if any. Pursuant to the Bankruptcy
Code, the Debtors have the exclusive right for 120 days from the Filing Date
(through and including June 18, 2002) to file a Plan, and for 180 days from the
Filing Date (through and including August 17, 2002) to solicit and receive the
votes necessary to confirm a Plan. Both of these exclusivity periods may be
extended by the Bankruptcy Court for cause. If the Debtors fail to file a Plan
during the exclusive filing period or if the Debtors fail to obtain the
requisite acceptance of such Plan during the exclusive solicitation
8
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing (Continued)
period, any party-in-interest, including a creditor, an equity holder, a
committee of creditors or equity holders, or an indenture trustee, may file its
own Plan for the Debtors. Confirmation of a Plan is subject to certain statutory
findings by the Bankruptcy Court. Subject to certain exceptions as set forth in
the Bankruptcy Code, confirmation of a Plan requires, among other things, a vote
on the Plan by certain classes of creditors and equity holders whose rights or
interests are impaired under the Plan. If any impaired class of creditors or
equity holders does not vote to accept the Plan, but all of the other
requirements of the Bankruptcy Code are met, the proponent of the Plan may seek
confirmation of the Plan pursuant to the "cram down" provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may still confirm
a Plan notwithstanding the non-acceptance of the Plan by an impaired class,
among other things, no junior claim or interest receive or retain any property
under the Plan until each holder of a senior claim or interest has been paid in
full. As a result of the amount of pre-petition indebtedness and the
availability of the "cram down" provisions, the holders of the Company's capital
stock may receive no value for their interests under any Plan. Because of such
possibility, the value of the Company's outstanding capital stock and unsecured
instruments are highly speculative. In addition, there can be no assurance that
a Plan will be proposed by the Debtors or confirmed by the Bankruptcy Court, or
that any such Plan will be consummated.
It is not possible to predict the length of time the Company will operate under
the protection of Chapter 11 and the supervision of the Bankruptcy Court, the
outcome of the bankruptcy proceedings in general, or the effect of the
proceedings on the business of the Company or on the interest of the various
creditors and stakeholders. Since the Filing Date, the Debtors have conducted
business in the ordinary course. Management is in the process of evaluating
their operations as part of the development of a Plan. During the pendency of
the Chapter 11 Filings, the Debtors may, with Bankruptcy Court approval, sell
assets and settle liabilities, including for amounts other than those reflected
in the financial statements. The administrative and reorganization expenses
resulting from the Chapter 11 Filings will unfavorably affect the Debtors'
results of operations. In addition, under the priority scheme established by the
Bankruptcy Code, most, if not all, post-petition liabilities must be satisfied
before most other creditors or interest holders, including stockholders, can
receive any distribution on account of such claim or interest.
9
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing (Continued)
The accompanying consolidated financial statements are presented in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"), assuming that the Company will continue as a going concern.
The Company is currently operating under the jurisdiction of Chapter 11 of the
Bankruptcy Code and the Bankruptcy Court, and continuation of the company as a
going concern is contingent upon, among other things, its ability to formulate a
Plan which will gain approval of the requisite parties under the Bankruptcy Code
and confirmation by the Bankruptcy Court, its ability to comply with the DIP
Financing Agreement, and its ability to return to profitability, generate
sufficient cash flows from operations, and obtain financing sources to meet
future obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of these uncertainties.
In the Chapter 11 Filings, substantially all unsecured liabilities as of the
Filing Date are subject to compromise or other treatment under a Plan which
must be confirmed by the Bankruptcy Court after submission to any required vote
by affected parties. Generally, all actions to enforce or otherwise effect
repayment of prepetition liabilities, as well as all pending litigation against
the Debtors, are stayed while the Debtors continue their business operations as
debtors-in-possession. The ultimate amount of and settlement terms for
liabilities subject to compromise are subject to an approved Plan and
accordingly are not presently determinable. The principal categories of
obligations classified as liabilities subject to compromise under the Chapter 11
Filings as of March 30, 2002 are identified below (in thousands):
9 1/8% Senior Subordinated Notes $ 300,000
Interest accrued on above debt 12,775
Accounts payable 14,155
Accrued expenses 1,638
-----------
$ 328,568
===========
Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Filings
are expensed as incurred and reported as reorganization items. Interest expense
is reported only to the extent that it will be paid
10
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE A - Bankruptcy Filing (Continued)
during the Chapter 11 Filings or that it is probable that it will be an allowed
claim. During the March quarter 2002, the Company recognized a charge of $9.9
million associated with the Chapter 11 Filings. Approximately $7.7 million of
this charge related to the non-cash write-off of the unamortized discount on the
9 1/8% Senior Subordinated Notes and the non-cash write-off of related deferred
financing fees. In addition, the Company incurred $2.2 million for fees payable
to professionals retained to assist with the Chapter 11 Filings.
NOTE B - Basis of Presentation
The consolidated financial statements include the accounts of 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.
Certain prior period amounts have been reclassified to conform to current year
presentation.
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the consolidated financial position of the Company as of March 30, 2002 and the
consolidated results of operations and cash flows for the periods ended March
30, 2002 and March 31, 2001. 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 29, 2001.
11
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE C - Inventories
The components of inventory at March 30, 2002, March 31, 2001, and September 29,
2001 consisted of the following (in thousands):
March 30, March 31, September 29,
2002 2001 2001
--------- --------- ---------
Raw materials $ 4,050 $ 3,695 $ 4,760
Stock in process 16,734 30,154 19,015
Produced goods 147,183 127,810 140,742
Dyes, chemicals and supplies 12,126 13,342 11,152
--------- --------- ---------
180,093 175,001 175,669
Adjust to LIFO cost 8,461 248 757
Lower-of-cost-or-market reserves (12,727) (7,922) (9,606)
--------- --------- ---------
$ 175,827 $ 167,327 $ 166,820
========= ========= =========
On September 30, 2001, the Company changed its method of accounting for
inventories to last-in, first-out (LIFO) for its Swift Denim business which was
acquired on January 28, 1998. The Company believes that utilizing LIFO for the
Swift Denim business will result in a better matching of costs with revenues and
provide consistency in accounting for inventory among the Company's North
American operations. The Company also believes the utilization of LIFO is
consistent with industry practice. Approximately $2.0 million of
lower-of-cost-or-market (LCM) reserves were reversed in the six months ended
March 30, 2002 ($1.0 million in the first quarter of fiscal 2002) due to the
change from FIFO to LIFO. In implementing the change in inventory method for
Swift Denim, the opening fiscal 2002 inventory value under LIFO is the same as
the year ending FIFO inventory value at September 29, 2001. The cumulative
effect of implementing LIFO on prior periods and the pro forma effects of
retroactive application is not determinable.
12
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE D - Long-Term Debt
Long-term debt consists of the following (in thousands):
March 30, March 31, September 29,
2002 2001 2001
---- ---- ----
Long-term debt not subject to compromise:
Long-term debt - current
Debtor-in-possession financing ................... $ 9,800 $ - $ -
Senior Credit Facility:
Revolving Credit Note .......................... 124,500 - -
Term Loan B .................................... 112,955 1,298 1,219
Term Loan C .................................... 80,128 921 864
Other borrowings with various rates and
maturities ................................... 7,265 2,568 2,587
--------- --------- ---------
334,648 4,787 4,670
--------- --------- ---------
Long-term debt
Senior Credit Facility:
Revolving Credit Note .......................... - 125,000 123,100
Term Loan B .................................... - 112,570 112,041
Term Loan C .................................... - 79,856 79,480
9 1/8% Senior Subordinated Notes ................. - 298,962 299,037
Canadian Loan:
Revolving Credit Note .......................... 8,798 9,467 5,849
Term Loan ...................................... 5,185 6,984 6,105
Italian Credit Agreements ........................ 20,515 1,318 3,406
Other borrowings with various rates and
maturities ................................... 780 6,318 5,803
--------- --------- ---------
35,278 640,475 634,821
--------- --------- ---------
Total long-term debt not subject to compromise 369,926 645,262 639,491
--------- --------- ---------
Long-term debt subject to compromise:
9 1/8% Senior Subordinated Notes ................. 300,000 - -
--------- --------- ---------
$ 669,926 $ 645,262 $ 639,491
========= ========= =========
Debtor-in-Possession Agreement
As discussed in Note A above, the Company and the Debtor subsidiaries entered
into the DIP Financing Agreement pursuant to which the Company, as borrower, may
make revolving credit borrowings (including up to $15 million for post-petition
letters of credit) in an amount not exceeding the lesser of $100 million or the
Borrowing Base (as defined in the DIP Financing Agreement). See Note A above for
a description of the DIP Financing Agreement.
Pre-Petition Senior Credit Facility
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended (the "Senior Credit Facility"), with First Union National
Bank, as agent and lender and its syndicate of lenders. The amendment became
effective as of July 3, 1999 (the "July 1999 Amendment"). In August 2001, the
Company amended the Senior Credit Facility (the "August 2001 Amendment") which,
among other things, replaced the Adjusted Leverage Ratio covenant (as defined in
the August 2001 Amendment) with a minimum EBITDA covenant (as defined in the
August 2001 Amendment) until the Company's December quarter 2002, waived
compliance by the Company with the Adjusted Fixed Charge Coverage Ratio (as
defined in the August 2001 Amendment) until the Company's December quarter 2002
and modified the Company's covenant related to capital expenditures. The August
2001 Amendment also excludes, for covenant purposes, charges related to closure
of facilities announced on July 26, 2001. The August 2001 Amendment also
increased the interest rate spread on all borrowings under the Company's
revolving line of credit and term loans by 100 basis points for the remainder of
the term of its Senior Credit Facility. On January 24, 2002, the Company amended
its Senior Credit Facility to provide for an overadvance of $10 million, none of
which was drawn prior to the overadvance expiration on February 23, 2002.
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. Based on fiscal 2001 results, the Company was not required to
make an Excess Cash Flow payment with respect to fiscal 2001.
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
13
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE D - Long-Term Debt (Continued)
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.
As a result of the Chapter 11 Filings, the Company and each of the Debtor
subsidiaries are currently in default of the Senior Credit Facility. (See - Note
A - Bankruptcy Filing)
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, 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
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 U.S. dollars ), all based on Drummondville maintaining certain
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving
14
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
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). At March 30, 2002, the
Company was in compliance with the covenants of the Canadian Loan agreement.
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 Six Months Ended
-------------------- --------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Net income (loss) $(15,870) $ 194 $(21,103) $ 264
======== ======== ======== ========
Denominator:
Denominator for basic earnings 11,997 11,984 11,997 11,973
per share
Effect of dilutive securities:
stock options -- 31 -- 27
-------- -------- -------- --------
Diluted potential common shares
denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed exercises 11,997 12,015 11,997 12,000
======== ======== ======== ========
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 161,149 shares
and 85,450 shares of common stock were outstanding during the three months and
six months ended March 30, 2002 and March 31, 2001, 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 798,150 shares of common stock were
outstanding during the three months and six months ended March 30, 2002 and
March 31, 2001, 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.
15
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE F - Benefit Plans
The Company and its U.S. subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all domestic employees. The plans provide
retirement benefits for all qualified salaried employees and qualified non-union
wage employees based generally on years of service and average compensation.
Retirement benefits for qualified union wage employees are based generally on a
flat dollar amount for each year of service. The Company's funding policy is to
contribute annually the amount recommended by the plan's actuary. Plan assets,
which consist of common stocks, bonds and cash equivalents, are maintained in
trust accounts.
On September 20, 2001, the Company froze the accrual of future retirement
benefits under its U.S. defined benefit plans effective December 31, 2001. The
resulting curtailment gain was offset by unamortized actuarial losses.
The Company provides health care and life insurance benefits to certain retired
employees and their dependents. The plans are unfunded and approved claims are
paid by the Company. The Company's cost is partially offset by retiree premium
contributions. Effective December 31, 2001, the Company curtailed benefits to
employees who were not retired as of December 31, 2001 and, accordingly, a net
benefit curtailment gain of $3.4 million was recognized in the first quarter of
fiscal 2002.
16
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE G - 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 six months
ended March 30, 2002 was $(16.8) million and $(24.8) million, respectively, and
for the three and six months ended March 31, 2001 was $(6.6) million and $(2.1)
million, respectively.
Activity in Stockholders' Equity is as follows (in thousands):
Accumulated
Current Year Other
Comprehensive Common Contributed Accumulated Treasury Comprehensive
Income (Loss) Stock Capital Deficit Stock Income(Loss) Total
------------- -------- -------- -------- -------- ------------ --------
Balance at
September 29, 2001 $ 124 $ 40,878 $(37,609) $ (2,247) $(14,130) $(12,984)
Compensation earned
related to stock
options -- 541 -- -- -- 541
Comprehensive
income(loss):
Net income (loss) for
six months ended
March 30, 2002 $(21,103) -- -- (21,103) -- -- (21,203)
Foreign currency
translation
adjustment (3,669) -- -- -- -- (3,669) (3,669)
Gain (loss) on
derivative instruments (25) -- -- -- -- (25) (25)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive
income (loss) $(24,797)
========
Balance at
March 30, 2002 $ 124 $ 41,419 $(58,712) $ (2,247) $(17,824) $(37,340)
======== ======== ======== ======== ======== ========
Included in Accumulated Other Comprehensive Income (Loss) at March 30, 2002 was
a $17.8 million loss related to foreign currency translation adjustment and a
$1,000 loss related to derivative instruments.
17
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE H - Income Taxes
The components of income tax expense (benefit) are as follows (in thousands):
Three Months Ended Six Months Ended
--------------------- ---------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Current tax provision:
Federal $ (1,200) $ -- $ (1,200) $ 5
State -- 27 13 46
Foreign 1,164 2,948 1,978 5,383
--------- --------- --------- ---------
Total current tax provision (36) 2,975 791 5,434
Deferred tax provision:
Federal -- (2,782) -- (5,301)
State -- (82) -- (379)
Foreign 132 (251) 247 (83)
--------- --------- --------- ---------
Total deferred tax provision 132 (3,115) 247 (5,763)
--------- --------- --------- ---------
Total provision for income
taxes $ 96 $ (140) $ 1,038 $ (329)
========= ========= ========= =========
The Company's overall tax rate differed from the statutory rate principally due
to the nonrecognition of the U.S. tax benefits on the domestic net operating
loss carryforwards. The result is an overall tax expense rate which is higher
than the statutory rate.
At March 30, 2002, the Company had outstanding net operating loss carryforwards
("NOLs") for U.S. federal tax purposes of approximately $138 million and state
tax purposes of approximately $121 million. The federal NOLs will expire in
years 2018-2021, and the state NOLs will expire in years 2003-2021. In
accordance with the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," a valuation allowance of $28.2 million related to
domestic operating income losses has been established since it is more likely
than not that some portion of the deferred tax assets will not 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 Job Creation and Worker Compensation Act of 2002 became effective on March
9, 2002 and provided a 5 year carryback for net operating losses incurred in tax
years ending in 2001 and 2002. As a result the Company carried back net
operating losses from the year ended September 29, 2001 and recovered $1.2
million in federal income taxes.
18
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
In the fourth quarter of fiscal 2001, the Company announced additional actions
(the "Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives") taken as a
result of the very difficult business environment which the Company continued to
operate in throughout fiscal 2001. The Company's goal in taking these actions
was future loss avoidance, cost reduction, production capacity rationalization
and increased cash flow. The principal manufacturing initiatives included
discontinuation of G&L Service Company, the Company's garment making operations
in Mexico, and the consolidation of its greige fabrics operations. The
discontinuation of G&L Service Company included the closure of the Dimmit
facilities in Piedras Negras, Mexico, the Alta Loma facilities in Monclova,
Mexico and the Eagle Pass Warehouse in Eagle Pass, Texas. The consolidation of
its greige fabrics operations included the closure of its Asheboro, North
Carolina weaving facility and Caroleen, North Carolina spinning facility. In
addition to the principal manufacturing initiatives above, the Company also
provided for the reduction of approximately 5% of its salaried overhead
employees.
In the fourth quarter of fiscal 2001, the Company recorded $63.4 million before
taxes of plant closing and impairment charges and $4.9 million before taxes of
losses related to completing garment customer orders all related to the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives. The components of the plant
closing and impairment charges included $30.4 million for goodwill impairments,
$20.3 million for fixed asset impairments, $7.5 million for severance expense
and $5.2 million for the write-off of leases and other exit costs. In the
December quarter 2001, the Company recorded a change in estimate that increased
the fixed asset impairment charge by $0.2 million and decreased the plant
closing costs by $1.3 million. The Company recorded an additional change in
estimate in the March quarter 2002 that increased the fixed asset impairment
charge by $0.7 million.
Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as
a result of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. All
production at the affected facilities ceased in early September 2001 by which
time substantially all the affected employees were terminated. During the first
quarter of fiscal 2002, the Company sold its Asheboro, North Carolina facility
and related equipment as well as a portion of the G&L Service Company equipment.
The Company disposed of the remainder of the G&L Service Company equipment in
the March quarter 2002. The Company expects that the sale of the remainder of
the real estate and equipment in connection with the Fiscal 2001 Cost Reduction
and Loss Avoidance Initiatives could take 12 months or longer to complete.
19
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives (Continued)
The table below summarizes the activity related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives plant closing accruals for the six
months ended March 30, 2002 (in thousands):
Accrual Accrual
Balance at Balance at
September 29, Cash Change in March 30,
2001 Payments Estimate 2002
--------- --------- --------- ---------
Severance benefits $ 1,992 $ (1,136) $ -- $ 856
Lease cancellation
and other 5,027 (2,510) (1,338) 1,179
--------- --------- --------- ---------
$ 7,019 $ (3,646) $ (1,338) $ 2,035
========= ========= ========= =========
The Company incurred run-out expenses totaling $0.2 million and $2.4 million for
the three and six months ended March 30, 2002, respectively. These expenses,
which include efficiency losses, equipment relocation, losses on inventories of
discontinued styles, plant carrying costs and other costs, are included
primarily in cost of sales in the consolidated statement of operations.
NOTE J - Fiscal 2000 Strategic Initiatives
During the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives (the "Fiscal 2000 Strategic Initiatives") aimed at
increasing the Company's competitiveness and profitability by reducing costs.
The initiatives included 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. During 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 of fiscal 2000 and substantially
all of the 1,370 employees have been terminated. Severance payments were made in
either a lump sum or over a maximum period of up to
20
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE J - Fiscal 2000 Strategic Initiatives (Continued)
eighteen months. During fiscal 2001, the Company sold a portion of the Erwin
facility as well as substantially all of the equipment at the Erwin facility and
the Brighton facility. The Company expects that the sale of the remaining real
estate and equipment related to the Fiscal 2000 Strategic Initiatives could take
12 months or longer to complete.
The table below summarizes the activity related to the plant closing accruals
for the six months ended March 30, 2002 (in thousands):
Accrual Accrual
Balance at Balance at
September 29, Cash March 30,
2001 Payments 2002
--------- --------- ---------
Severance benefits $ 1,817 $ (1,238) $ 579
Lease cancellation
and other 2,402 (468) 1,934
--------- --------- ---------
$ 4,219 $ (1,706) $ 2,513
========= ========= =========
As a result of the employees terminated due to the Fiscal 2000 Strategic
Initiatives, the Company recognized a net curtailment gain of $2.4 million in
fiscal 2001 related to its defined benefit pension and post-retirement medical
plans.
NOTE K - 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. 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 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
21
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE K - Segment Information (Continued)
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.
Information about the Company's operations in its different industry segments
for the three and six months ended March 30, 2002 and March 31, 2001 is as
follows (in thousands):
Three Months Ended Six Months Ended
---------------------- ----------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales to External Customers
Galey & Lord Apparel $ 68,252 $ 112,117 $ 127,224 $ 219,673
Swift Denim 65,561 77,743 109,522 156,347
Klopman International 31,567 38,948 61,311 70,772
Home Fashion Fabrics 2,602 2,899 6,371 6,600
--------- --------- --------- ---------
Consolidated $ 167,982 $ 231,707 $ 304,428 $ 453,392
========= ========= ========= =========
Operating Income (Loss)/1/
Galey & Lord Apparel $ (1,829) $ 9,231 $ (3,845) $ 15,612
Swift Denim 2,881 2,752 13,378 10,185
Klopman International 1,312 3,448 2,002 5,451
Home Fashion Fabrics (333) (1,264) (1,414) (2,373)
Corporate (466) (619) (1,973) (879)
--------- --------- --------- ---------
1,565 13,548 8,148 27,996
Interest expense 9,372 15,368 22,572 31,799
Income from associated companies/2/ (1,914) (1,874) (4,240) (3,738)
Reorganization items/3/ 9,881 -- 9,881 --
--------- --------- --------- ---------
Income (loss) before income taxes $ (15,774) $ 54 $ (20,065) $ (65)
========= ========= ========= =========
March 30, March 31,
2002 2001
--------- ---------
Assets/4/
Galey & Lord Apparel $ 244,623 $ 299,346
Swift Denim 337,668 348,788
Klopman International 104,294 111,815
Home Fashion Fabrics 6,682 53,475
Corporate 71,810 60,654
--------- ---------
$ 765,077 $ 874,078
========= =========
/1/ Operating income (loss) for the three and six months ended March 30, 2002
includes run-out charges and plant closing and impairment costs related to
the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives of $0.8
million and $1.1 million for Galey & Lord Apparel, respectively, $0.2
million and $0.9 million for Home Fashion Fabrics, respectively. In
addition, Swift Denim's operating income includes run-out charges related to
the Fiscal 2000 Strategic Initiatives of
22
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE K - Segment Information (Continued)
$0.8 million for both the three and six months ended March 30, 2002.
/2/ Net of amortization of $163, $163, $326 and $326, respectively.
/3/ Reorganization items for the three months and six months ended March 30,
2002 includes $7.7 million for the non-cash write-off of the unamortized
discount on the 9 1/8% Senior Subordinated Notes and the non-cash write-off
of the related deferred financing fees and $2.2 million of professional fees
associated with the Chapter 11 Filings.
/4/ Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
23
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - 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.
March 30, 2002
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------------ ------------ ------------ ------------ ------------
Current assets:
Trade accounts
receivable $ -- $ 98,167 $ 42,938 $ -- $ 141,105
Inventories -- 137,222 38,605 -- 175,827
Other current
assets 2,163 10,052 34,220 (1,285) 45,150
------------ ------------ ------------ ------------ ------------
Total current
assets 2,163 245,441 115,763 (1,285) 362,082
Property, plant and
equipment, net -- 167,501 74,773 -- 242,274
Intangibles -- 113,015 -- -- 113,015
Other assets 16,609 5,655 36,293 (10,851) 47,706
------------ ------------ ------------ ------------ ------------
$ 18,772 $ 531,612 $ 226,829 $ (12,136) $ 765,077
============ ============ ============ ============ ============
Liabilities subject to compromise:
Current liabilities:
Long-term debt -
current $ 327,383 $ 5,537 $ 1,728 $ -- $ 334,648
Trade accounts
payable -- 15,312 17,961 -- 33,273
Accrued
liabilities 12,575 23,257 12,164 (15) 47,981
Other current
liabilities -- 1,025 5,448 -- 6,473
------------ ------------ ------------ ------------ ------------
Total current
liabilities 339,958 45,131 37,301 (15) 422,375
Long-term debt -- 780 34,498 -- 35,278
Other non-current
liabilities (1,489) 7,103 11,767 (1,285) 16,096
------------ ------------ ------------ ------------ ------------
Total liabilities not
subject to compromise 338,469 53,014 83,566 (1,300) 473,749
Net intercompany
balance (595,232) 621,433 (26,201) -- --
Liabilities subject to
compromise 312,775 15,793 -- -- 328,568
Stockholders' equity (deficit) (37,240) (158,628) 169,464 (10,836) (37,240)
------------ ------------ ------------ ------------ ------------
$ 18,772 $ 531,612 $ 226,829 $ (12,136) $ 765,077
============ ============ ============ ============ ============
24
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - Supplemental Condensed Consolidating Financial Information (Continued)
March 31, 2001
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
Current assets:
Trade accounts
receivable $ -- $ 132,669 $ 45,824 $ -- $ 178,493
Inventories -- 131,414 35,913 -- 167,327
Other current
assets 3,679 17,349 16,649 -- 37,677
------------ ------------ ------------ ------------ ------------
Total current
assets 3,679 281,432 98,386 -- 383,497
Property, plant and
equipment, net -- 210,787 83,349 -- 294,136
Intangibles -- 146,985 -- -- 146,985
Other assets 182,338 5,788 33,529 (172,195) 49,460
------------ ------------ ------------ ------------ ------------
$ 186,017 $ 644,992 $ 215,264 $ (172,195) $ 874,078
============ ============ ============ ============ ============
Current liabilities:
Trade accounts
payable $ -- $ 41,142 $ 22,110 $ -- $ 63,252
Accrued
liabilities 20,470 20,774 16,392 (39) 57,597
Other current
liabilities 2,219 1,528 6,274 -- 10,021
------------ ------------ ------------ ------------ ------------
Total current
liabilities 22,689 63,444 44,776 (39) 130,870
Net intercompany
balance (508,912) 588,350 (79,438) -- --
Long-term debt 616,388 6,318 17,769 -- 640,475
Other non-current
liabilities 1,679 37,648 9,738 (505) 48,560
Stockholders' equity 54,173 (50,768) 222,419 (171,651) 54,173
------------ ------------ ------------ ------------ ------------
$ 186,017 $ 644,992 $ 215,264 $ (172,195) $ 874,078
============ ============ ============ ============ ============
25
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended March 30, 2002
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ -- $ 116,124 $ 52,666 $ (808) $ 167,982
Gross profit -- 4,460 6,586 -- 11,046
Operating income (loss) (284) (2,194) 4,043 -- 1,565
Reorganization items (9,881) -- -- -- (9,881)
Interest expense,
income taxes and
other, net (7,914) 15,512 (44) -- 7,554
Net income (loss) $ (2,251) $ (17,706) $ 4,087 $ -- $ (15,870)
Six Months Ended March 30, 2002
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ -- $ 211,822 $ 94,653 $ (2,047) $ 304,428
Gross profit -- 11,768 10,844 -- 22,612
Operating income (loss) (1,598) 2,566 7,180 -- 8,148
Reorganization items (9,881) -- -- -- (9,881)
Interest expense,
income taxes and
other, net (13,287) 33,402 (745) -- 19,370
Net income (loss) $ 1,808 $ (30,836) $ 7,925 $ -- $ (21,103)
26
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - Supplemental Condensed Consolidating Financial Information (Continued)
Three Months Ended March 31, 2001
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ -- $ 171,995 $ 69,129 $ (9,417) $ 231,707
Gross profit -- 14,883 8,364 -- 23,247
Operating income (loss) (422) 8,133 5,837 -- 13,548
Interest expense,
income taxes and
other, net (1,270) 13,502 576 546 13,354
Net income (loss) $ 848 $ (5,369) $ 5,261 $ (546) $ 194
Six Months Ended March 31, 2001
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Net sales $ -- $ 342,824 $ 132,910 $ (22,342) $ 453,392
Gross profit -- 27,203 17,828 -- 45,031
Operating income (loss) (691) 15,847 12,840 -- 27,996
Interest expense,
income taxes and
other, net (1,233) 27,695 1,584 (314) 27,732
Net income (loss) $ 542 $ (11,848) $ 11,256 $ 314 $ 264
27
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended March 30, 2002
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ 10,881 $ (29,640) $ 4,807 $ 3 $ (13,949)
Cash provided by
(used in) investing
activities (650) 3,744 12,066 (8,294) 6,866
Cash provided by
(used in) financing
activities (10,221) 23,280 5,135 8,291 26,485
Effect of exchange
rate change on cash
and equivalents -- -- (158) -- (158)
------------ ------------ ------------ ------------ ------------
Net change in cash
and cash equivalents 10 (2,616) 21,850 -- 19,244
Cash and cash
equivalents at
beginning of period 5 4,623 4,529 -- 9,157
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end
of period $ 15 $ 2,007 $ 26,379 $ -- $ 28,401
============ ============ ============ ============ ============
28
GALEY & LORD, INC.
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
March 30, 2002
(Unaudited)
NOTE L - Supplemental Condensed Consolidating Financial Information (Continued)
Six Months Ended March 31, 2001
------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
Cash provided by
(used in) operating
activities $ (1,182) $ 16,809 $ 7,565 $ (672) $ 22,520
Cash provided by
(used in) investing
activities 17,886 (8,812) (21,034) 663 (11,297)
Cash provided by
(used in) financing
activities (16,705) (6,573) 16,683 9 (6,586)
Effect of exchange
rate change on cash
and equivalents -- -- (32) -- (32)
------------ ------------ ------------ ------------ ------------
Net change in cash
and cash equivalents (1) 1,424 3,182 -- 4,605
Cash and cash
equivalents at
beginning of period 10 4,194 5,437 -- 9,641
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end
of period $ 9 $ 5,618 $ 8,619 $ -- $ 14,246
============ ============ ============ ============ ============
29
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Bankruptcy Filing
On February 19, 2002 (the "Filing Date"), Galey & Lord, Inc. (the "Company") and
each of its domestic subsidiaries (together with the Company, the "Debtors")
filed voluntary petitions for reorganization (the "Chapter 11 Filings" or the
"Filings") under Chapter 11 of Title 11, United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Southern District of New
York (Case Nos. 02-40445 through 02-40456 (ALG)). The Chapter 11 Filings pending
for the Debtors are being jointly administered for procedural purposes only. The
Debtors' direct and indirect foreign subsidiaries and foreign joint venture
entities did not file petitions under Chapter 11 and are not the subject of any
bankruptcy proceedings.
During the pendency of the Filings, the Debtors remain in possession of their
properties and assets and management continues to operate the businesses of the
Debtors as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code. As debtors-in-possession, the Debtors are authorized to operate
their businesses, but may not engage in transactions outside of the ordinary
course of business without the approval of the Bankruptcy Court, after notice
and the opportunity for a hearing.
On February 19, 2002, the Debtors filed a motion seeking authority for the
Company to enter into a credit facility of up to $100 million in
debtor-in-possession ("DIP") financing with First Union National Bank (the
"Agent") and Wachovia Securities, Inc. On February 21, 2002, the Bankruptcy
Court entered an interim order approving the credit facility and authorizing
immediate access to $30 million. On March 19, 2002, the Bankruptcy Court entered
a final order approving the entire $100 million DIP financing. For a description
of the DIP Financing Agreement, see "Liquidity and Capital Resources".
The Bankruptcy Court has approved payment of certain of the Debtors'
pre-petition obligations, including, among other things, employee wages,
salaries, and benefits, and certain critical vendor and other business-related
payments necessary to maintain the operation of their businesses. The Debtors
have retained, with Bankruptcy Court approval, legal and financial professionals
to advise the Debtors in the bankruptcy proceedings and the restructuring of
their businesses, and certain other "ordinary course" professionals. From time
to time the Debtors may seek Bankruptcy Court approval for the retention of
additional professionals.
The Debtors must, subject to Bankruptcy Court approval and certain other
limitations, assume, assume and assign, or reject each of their executory
contracts and unexpired leases. In this context, "assumption" means, among other
things, re-affirming their obligations
30
under the relevant lease or contract and curing all monetary defaults
thereunder. In this context, "rejection" means breaching the relevant contract
or lease as of the Filing Date, being relieved of on-going obligations to
perform under the contract or lease, and being liable for damages, if any, for
the breach thereof. Such damages, if any, are deemed to have accrued prior to
the Filing Date by operation of the Bankruptcy Code. The Bankruptcy Court has
approved the rejection of one executory contract and several unexpired leases,
and the Debtors are in the process of reviewing their remaining executory
contracts and unexpired leases to determine which, if any, they will reject. At
this time the Debtors cannot reasonably estimate the ultimate liability, if any,
that may result from rejecting and/or assuming executory contracts or unexpired
leases, and no provisions have yet been made for these items.
The consummation of a plan or plans of reorganization (a "Plan") is the
principal objective of the Chapter 11 Filings. A Plan would, among other things,
set forth the means for satisfying claims against and interests in the Company
and its Debtor subsidiaries, including setting forth the potential distributions
on account of such claims and interests, if any. Pursuant to the Bankruptcy
Code, the Debtors have the exclusive right for 120 days from the Filing Date
(through and including June 18, 2002) to file a Plan, and for 180 days from the
Filing Date (through and including August 17, 2002) to solicit and receive the
votes necessary to confirm a Plan. Both of these exclusivity periods may be
extended by the Bankruptcy Court for cause. If the Debtors fail to file a Plan
during the exclusive filing period or if the Debtors fail to obtain the
requisite acceptance of such Plan during the exclusive period, any
party-in-interest, including a creditor, an equity holder, a committee of
creditors or equity holders, or an indenture trustee, may file its own Plan for
the Debtors. Confirmation of a Plan is subject to certain statutory findings by
the Bankruptcy Court. Subject to certain exceptions as set forth in the
Bankruptcy Code, confirmation of a Plan requires, among other things, a vote on
the Plan by certain classes of creditors and equity holders whose rights or
interests are impaired under the Plan. If any impaired class of creditors or
equity holders does not vote to accept the Plan, but all of the other
requirements of the Bankruptcy Code are met, the proponent of the Plan may seek
confirmation of the Plan pursuant to the "cram down" provisions of the
Bankruptcy Code. Under these provisions, the Bankruptcy Court may still confirm
a Plan notwithstanding the non-acceptance of the Plan by an impaired class,
among other things, no junior claim or interest receive or retain any property
under the Plan until each holder of a senior claim or interest has been paid in
full. As a result of the amount of pre-petition indebtedness and the
availability of the "cram down" provisions, the holders of the Company's capital
stock may receive no value for their interests under any Plan. Because of such
possibility, the value of the Company's outstanding capital stock and unsecured
instruments are highly speculative. In addition, there can
31
be no assurance that a Plan will be proposed by the Debtors or confirmed by the
Bankruptcy Court, or that any such Plan will be consummated.
It is not possible to predict the length of time the Company will operate under
the protection of Chapter 11 and the supervision of the Bankruptcy Court, the
outcome of the bankruptcy proceedings in general, or the effect of the
proceedings on the business of the Company or on the interest of the various
creditors and stakeholders. Since the Filing Date, the Debtors have conducted
business in the ordinary course. Management is in the process of [stabilizing
the business of the Debtors and] evaluating their operations as part of the
development of a Plan. During the pendency of the Chapter 11 Filings, the
Debtors may, with Bankruptcy Court approval, sell assets and settle liabilities,
including for amounts other than those reflected in the financial statements.
[The Debtors are in the process of reviewing their operations and identifying
assets for disposition, if any.] The administrative and reorganization expenses
resulting from the Chapter 11 Filings will unfavorably affect the Debtors'
results of operations. [IS THIS NECESSARY? In addition, under the priority
scheme established by the Bankruptcy Code, most, if not all, post-petition
liabilities must be satisfied before most other creditors or interest holders,
including stockholders, can receive any distribution on account of such claim or
interest.]
The Company's consolidated financial statements are presented in accordance with
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"), assuming that the Company will continue as a going concern. The
Company is currently operating under the jurisdiction of Chapter 11 of the
Bankruptcy Code and the Bankruptcy Court, and continuation of the Company as a
going concern is contingent upon, among other things, its ability to formulate a
Plan which will gain approval of the requisite parties under the Bankruptcy Code
and confirmation by the Bankruptcy Court, its ability to comply with the DIP
Financing Agreement, and its ability to return to profitability, generate
sufficient cash flows from operations, and obtain financing sources to meet
future obligations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company's consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of these uncertainties.
In the Chapter 11 Filings, substantially all unsecured liabilities as of the
Filing Date are subject to compromise or other treatment under a Plan which must
be confirmed by the Bankruptcy Court after submission to any required vote by
affected parties. Generally, all actions to enforce or otherwise effect
repayment of prepetition
32
liabilities, as well as all pending litigation against the Debtors, are stayed
while the Debtors continue their business operations as debtors-in-possession.
The ultimate amount of and settlement terms for liabilities subject to
compromise are subject to an approved Plan and accordingly are not presently
determinable. The principal categories of obligations classified as liabilities
subject to compromise under the Chapter 11 Filings as of March 30, 2002 are
identified below (in thousands):
9 1/8% Senior Subordinated Notes $ 300,000
Interest accrued on above debt 12,775
Accounts payable 14,155
Accrued expenses 1,638
Intercompany payable 85,925
-----------
$ 414,493
===========
Pursuant to SOP 90-7, professional fees associated with the Chapter 11 Filings
are expensed as incurred and reported as reorganization items. Interest expense
is reported only to the extent that it will be paid during the Chapter 11
Filings or that it is probable that it will be an allowed claim. During the
March quarter 2002, the Company recognized a charge of $9.9 million associated
with the Chapter 11 Filings. Approximately $7.7 million of this charge related
to the non-cash write-off of the unamortized discount on the 9 1/8% Senior
Subordinated Notes and the non-cash write-off of related deferred financing
fees. In addition, the Company incurred $2.2 million for fees payable to
professionals retained to assist with the Chapter 11 Filings.
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 and six months ended March 30, 2002
and March 31, 2001 for each segment are shown below:
Three Months Ended Six Months Ended
----------------------- -----------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $ 68,252 $ 112,117 $ 127,224 $ 219,673
Swift Denim 65,561 77,743 109,522 156,347
Klopman International 31,567 38,948 61,311 70,772
Home Fashion Fabrics 2,602 2,899 6,371 6,600
---------- ---------- ---------- ----------
Total $ 167,982 $ 231,707 $ 304,428 $ 453,392
========== ========== ========== ==========
33
Three Months Ended Six Months Ended
----------------------- -----------------------
March 30, March 31, March 30, March 31,
2002 2001 2002 2001
---------- ---------- ---------- ----------
(Amounts in thousands)
Galey & Lord Apparel $ (1,829) $ 9,231 $ (3,845) $ 15,612
Swift Denim 2,881 2,752 13,378 10,185
Klopman International 1,312 3,448 2,002 5,451
Home Fashion Fabrics (333) (1,264) (1,414) (2,373)
Corporate (466) (619) (1,973) (879)
---------- ---------- ---------- ----------
$ 1,565 $ 13,548 $ 8,148 $ 27,996
========== ========== ========== ==========
Operating Income (Loss) per
Segment Excluding
Strategic Initiatives/1/
Galey & Lord Apparel $ (1,074) $ 9,621 $ (2,782) $ 17,618
Swift Denim 3,633 4,641 14,130 12,408
Klopman International 1,312 3,448 2,002 5,451
Home Fashion Fabrics (177) (1,264) (537) (2,373)
Corporate (466) (488) (1,973) (748)
---------- ---------- ---------- ----------
$ 3,228 $ 15,958 $ 10,840 $ 32,356
========== ========== ========== ==========
/1/ For a description of the Company's Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives, see Note I to the Consolidated Financial Statements.
For a description of the Company's Fiscal 2000 Strategic Initiatives, see
Note J to the Consolidated Financial Statements.
March Quarter 2002 Compared to March Quarter 2001
Net Sales
Net sales for the March quarter 2002 (second quarter of fiscal 2002) were $168.0
million as compared to $231.7 million for the March quarter 2001 (second quarter
of fiscal 2001).
Galey & Lord Apparel Galey & Lord Apparel's net sales for the March quarter
2002 were $68.2 million, a $43.9 million decrease as compared to the March
quarter 2001 net sales of $112.1 million. The decrease in net sales was
primarily attributable to a 25% decrease in fabric sales volume. Approximately
$10.0 million of the decrease was due to the discontinuation in September 2001
of the Company's garment making operations announced as part of the Fiscal 2001
Cost Reduction and Loss Avoidance Initiatives. Overall, average selling prices,
inclusive of product mix changes, declined approximately 10.0%.
Swift Denim Swift Denim's net sales for the March quarter 2002 were $65.6
million as compared to $77.7 million in the March quarter 2001. The $12.1
million decrease was primarily attributable to a 10.9% decrease in volume and a
4.5% decline in selling prices. Approximately $6.9 million of the volume
decrease was due to the reduction in manufacturing capacity resulting from the
closure of the Erwin, North Carolina Facility in December 2000. The remainder of
the decrease was due to the decline in demand at retail.
34
Klopman International Klopman International's net sales for the March quarter
2002 were $31.6 million, a $7.4 million decline as compared to the March quarter
2001 net sales of $39.0 million. The decline was primarily attributable to a
13.9% decrease in sales volume as well as a 5.0% decline in net sales due to
exchange rate changes used in translation.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the March quarter
2002 were $2.6 million compared to $2.9 million for the March quarter 2001. The
$0.3 million decrease in net sales primarily resulted from lower selling prices
and volume partially offset by changes in product mix.
Operating Income (Loss)
Operating income for the March quarter 2002 was $1.6 million as compared to
$13.5 million for the March quarter 2001. Excluding the charges related to the
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000
Strategic Initiatives, the March quarter 2002 operating income would have been
$3.2 million. Excluding the charges related to the Fiscal 2000 Strategic
Initiatives, the March quarter 2001 operating income would have been $16.0
million.
Galey & Lord Apparel Galey & Lord Apparel's operating loss was $1.8 million for
the March quarter 2002 as compared to an operating income of $9.2 million for
the March quarter 2001. Excluding the run-out costs associated with the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives, Galey & Lord Apparel's
operating loss for the March quarter 2002 would have been $1.1 million as
compared to an operating income of $9.6 million for the March quarter 2001
excluding the Fiscal 2000 Strategic Initiatives. The decrease is principally a
result of reduced sales and manufacturing volume due to a continuing decline in
the market and foreign price competition, lower selling prices and change in
product mix.
Swift Denim Swift Denim's operating income was $2.9 million for the March
quarter 2002 compared to $2.8 million for the March quarter 2001. Excluding the
run-out costs related to the Fiscal 2000 Strategic Initiatives, operating income
for the March quarter 2002 and March quarter 2001 would have been $3.6 million
and $4.6 million, respectively. The decrease in Swift Denim's operating income
is principally due to lower sales volume, a decline in selling prices and
curtailment in the manufacturing schedule. These declines were the direct result
of a reduction in retail demand impacted by overall economic conditions. This
decline was partially offset by positive changes in product mix, lower raw
material costs, lower energy costs and reduced lower-of-cost-or-market (LCM)
reserves due to the change in method of accounting for inventories to the
last-in-first-out (LIFO) inventory method.
Klopman International Klopman International's operating income in the March
quarter 2002 decreased $2.1 million to $1.3 million as compared to the March
quarter 2001 operating income of $3.4 million. The
35
decrease principally reflects the impact of lower volume and curtailment in the
manufacturing schedule.
Home Fashion Fabrics Home Fashion Fabrics reported an operating loss of $0.3
million for the March quarter 2002 as compared to an operating loss of $1.3
million for the March quarter 2001. Excluding the costs associated with the
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, Home Fashion Fabrics'
operating loss for the March quarter 2002 would have been $0.2 million. The
decrease in operating loss is due to lower fixed costs as a result of the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives.
Corporate The corporate segment reported an operating loss for the March
quarter 2002 of $0.5 million as compared to an operating loss for the March
quarter 2001 of $0.6 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 both the March quarter 2002
and the March quarter 2001. The income represents amounts from several joint
venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $9.4 million for the March quarter 2002 compared to $15.4
million for the March quarter 2001. The decrease in interest expense was
primarily due to the discontinuation of the 9 1/8% Senior Subordinated Notes
("Subordinated Notes") interest accrual as of the Filing Date and lower prime
and LIBOR base rates in the March quarter 2002 as compared to the March quarter
2001. The average interest rate paid by the Company on its bank debt, excluding
the Subordinated Notes, in the March quarter 2002 was 5.74% per annum as
compared to 9.0% per annum in the March quarter 2001.
Income Taxes
The Company's overall tax rate for the March quarter 2002 differed from the
statutory rate principally due to the nonrecognition of the U.S. tax benefits on
the domestic net operating loss caryforwards. The result is an overall tax
expense rate which is higher than the statutory rate.
The Job Creation and Worker Compensation Act of 2002 became effective on March
9, 2002 and provided a 5 year carryback for net operating losses incurred in tax
years ending in 2001 and 2002. As a result the Company carried back net
operating losses from the year ended September 29, 2001 and recovered $1.2
million in federal income taxes.
36
Net Income (Loss) and Net Income (Loss) Per Share
Net loss for the March quarter 2002 was $15.9 million or $1.32 per common share,
compared to net income for the March quarter 2001 of $0.2 million or $.02 per
common share. Excluding the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives, Fiscal 2000 Strategic Initiatives, and reorganization items as a
result of the Chapter 11 Filings (see "Bankruptcy Filing" above), the Company's
net loss for the March quarter 2002 would have been $4.3 million or $.36 per
common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's net
income for the March quarter 2001 would have been $1.7 million or $.14 per
share.
First Six Months of Fiscal 2002 Compared to First Six Months of Fiscal 2001
Net Sales
Net sales for the first six months of fiscal 2002 were $304.4 million as
compared to $453.4 million for the first six months of fiscal 2001.
Galey & Lord Apparel Galey & Lord Apparel's net sales for the first six months
of fiscal 2002 were $127.2 million, a $92.5 million decrease as compared to the
first six months of fiscal 2001's net sales of $219.7 million. The decrease in
net sales was primarily attributable to a 27.4% decrease in fabric sales volume.
Approximately $22.2 million of the decrease was due to the discontinuation in
September 2001 of the Company's garment making operations announced as part of
the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The remainder of
the decrease was due to the continuing difficult domestic retail environment and
a reduction in average selling prices. Overall, average selling prices,
inclusive of product mix changes, declined approximately 9.4%.
Swift Denim Swift Denim's net sales for the first six months of fiscal 2002
were $109.5 million as compared to $156.3 million in the first six months of
fiscal 2001. The $46.8 million decrease was primarily attributable to a 27.2%
decrease in volume and a 2.9% decline in selling prices. Approximately $17.3
million of the volume decrease was due to the reduction in manufacturing
capacity resulting from the closure of the Erwin, North Carolina Facility in
December 2000. The remainder of the decrease was due to the decline in demand at
retail.
Klopman International Klopman International's net sales for the first six
months of fiscal 2002 were $61.3 million, a $9.5 million decrease as compared to
the first six months of fiscal 2001 net sales of $70.8 million. The decrease was
primarily attributable to an 8.9% decline in sales volume and a 2.9% decline in
selling prices, inclusive of product mix changes, as well as a 1.3% decline in
net sales due to exchange rate changes used in translation.
37
Home Fashion Fabrics Net sales for Home Fashion Fabrics for the first six
months of fiscal 2002 were $6.4 million compared to $6.6 million for the first
six months of fiscal 2001. The $0.2 million decline in net sales primarily
resulted from lower selling prices and volume partially offset by changes in
product mix.
Operating Income (Loss)
Operating income for the first six months of fiscal 2002 was $8.1 million as
compared to $28.0 million for the first six months of fiscal 2001. Excluding the
run-out costs associated with the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives and Fiscal 2000 Strategic Initiatives, operating income for the
first six months of fiscal 2002 would have been $10.8 million. Excluding the
charges related to the Fiscal 2000 Strategic Initiatives, the first six months
of fiscal 2001 operating income would have been $32.4 million.
Galey & Lord Apparel Galey & Lord Apparel's operating loss was $3.8 million for
the first six months of fiscal 2002 as compared to operating income of $15.6
million for the first six months of fiscal 2001. Excluding the run-out costs
associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives,
Galey & Lord Apparel's operating loss for the first six months of fiscal 2002
would have been $2.8 million as compared to operating income of $17.6 million
for the first six months of fiscal 2001 excluding the Fiscal 2000 Strategic
Initiatives. The decrease was principally a result of reduced sales due to a
continuing decline in the market and foreign price competition, lower selling
prices and change in product mix.
Swift Denim Operating income for the first six months of fiscal 2002 for Swift
Denim was $13.4 million, a $3.2 million increase as compared to the first six
months of fiscal 2001 operating income of $10.2 million. Excluding the run-out
costs related to the Fiscal 2000 Strategic Initiatives, operating income for the
first six months of fiscal 2002 and the first six months of fiscal 2001 would
have been $14.1 million and $12.4 million, respectively. The increase in Swift
Denim's operating income principally reflected positive changes in product mix,
lower utility costs, reduction of lower-of-cost-or-market (LCM) reserves due to
the change in method of accounting for inventories to the last-in, first-out
(LIFO) inventory method and lower fixed manufacturing costs due to the closure
of the Erwin facility in December 2000. These improvements were partially offset
by the impact of lower sales volume, a reduction in selling prices and some
curtailment of manufacturing schedules. Swift also recognized a benefit
curtailment gain of $3.4 million in the current quarter related to the
curtailment of postretirement benefits for employees not retired as of December
31, 2001 compared to a gain of $2.4 million recognized in December 2000 quarter
related to benefit curtailment at the Erwin facility.
38
Klopman International Klopman International's operating income in the first six
months of fiscal 2002 decreased $3.5 million to $2.0 million as compared to the
first six months of fiscal 2001 operating income of $5.5 million. The decrease
principally reflects $2.1 million related to the impact of lower selling prices
and changes in product mix and $1.2 million related to the decrease in sales
volume.
Home Fashion Fabrics Home Fashion Fabrics reported an operating loss for the
first six months of fiscal 2002 of $1.4 million as compared to an operating loss
for the first six months of fiscal 2001 of $2.4 million. Excluding the costs
associated with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives,
Home Fashion Fabrics' operating loss for the first six months of fiscal 2002
would have been $0.5 million. The decrease in operating loss was due to lower
fixed costs as a result of the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives.
Corporate The corporate segment reported an operating loss for the first six
months of fiscal 2002 of $2.0 million as compared to an operating loss for the
first six months of fiscal 2001 of $0.9 million. The increase in the operating
loss is primarily due to financial consultant expenses incurred in the first
quarter of fiscal 2002 prior to the bankruptcy filing. 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 $4.2 million in the first six months of
fiscal 2002 as compared to $3.7 million in the first six months of fiscal 2001.
The income represents amounts from several joint venture interests that
manufacture and sell denim products.
Interest Expense
Interest expense was $22.6 million for the first six months of fiscal 2002
compared to $31.8 million for the first six months of fiscal 2001. The decrease
in interest expense was primarily due to the discontinuation of the Subordinated
Notes interest accrual as of the Filing Date as well as lower prime and LIBOR
base rates in the first six months of fiscal 2002 as compared to the first six
months of 2001. The average interest rate paid by the Company on its bank debt,
excluding the Subordinated Notes, in the first six months of fiscal 2002 was
6.0% per annum as compared to 9.4% per annum in the first six months of fiscal
2001.
Income Taxes
The Company's overall tax rate differed from the statutory rate principally due
to the nonrecognition of the U.S. tax benefits on the domestic net operating
loss caryforwards. The result is an overall
39
tax expense rate which is higher than the statutory rate.
The Job Creation and Worker Compensation Act of 2002 became effective on March
9, 2002 and provided a 5 year carryback for net operating losses incurred in tax
years ending in 2001 and 2002. As a result the Company carried back net
operating losses from the year ended September 29, 2001 and recovered $1.2
million in federal income taxes.
Net Income (Loss) and Net Income (Loss) Per Share
The net loss for the first six months of fiscal 2002 was $21.1 million or $1.76
per common share compared to a net loss for the first six months of fiscal 2001
of $0.3 million or $.02 per common share. Excluding the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives, the Fiscal 2000 Strategic Initiatives,
and reorganization items as a result of the Chapter 11 Filings (see "Bankruptcy
Filing" above), the Company's net loss for the first six months of fiscal 2002
would have been $8.5 million or $.71 per common share. Excluding the Fiscal 2000
Strategic Initiatives, the Company's net income for the first six months of
fiscal 2001 would have been $3.0 million or $.25 per common share.
Order Backlog
The Company's order backlog at March 30, 2002 was $138.3 million, a 23.8%
decrease from the March 31, 2001 backlog of $181.5 million. The decline in order
backlog was due to lower demand as a result of the difficult domestic retail
environment, as well as decreased visibility due to shortened lead times. Over
the past several years, many apparel manufacturers, including many of the
Company's customers, have modified their purchasing procedures and have
shortened lead times from order to delivery. Accordingly, the Company believes
that order backlogs may not be as meaningful as they have in the past with
regard to the Company's future sales.
Liquidity and Capital Resources
As previously discussed, the Company and each of its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of Title 11 of the
Bankruptcy Code. The matters described under this caption "Liquidity and Capital
Resources," to the extent that they relate to future events or expectations, may
be significantly affected by the Chapter 11 Filings. Such proceedings will
involve, or result in, various restrictions on the Debtors' activities,
limitations on financing, the need to obtain Bankruptcy Court approval for
various matters and uncertainty as to relationships with vendors, suppliers,
customers and others with whom the Debtors may conduct or seek to conduct
business.
The Company and its subsidiaries had cash and cash equivalents totaling $28.4
million and $14.2 million at March 30, 2002 and March
40
31, 2001, respectively. As a result of the Chapter 11 Filings, the Company's
ability to borrow under its Senior Credit Facility (as defined below) was frozen
and replaced with the Company's DIP Financing Agreement (as defined below). As
of March 30, 2002, the Company's borrowing availability under its DIP Financing
Agreement was $90.2 million. As of March 30, 2002, the Company's Canadian
operations also had a total of U.S. $6.4 million of revolving credit borrowing
availability under the Canadian Loan Agreement (as defined below).
During the March quarter 2002, the Company primarily utilized its available cash
and revolving credit borrowings under its Senior Credit Facility until the
Chapter 11 Filings and under its DIP Financing Agreement thereafter to fund the
Company's operating and investing requirements.
During the March quarter 2002, Klopman International used existing cash balances
and borrowings under its credit agreements to complete a capital reduction of
$20.2 million with its European parent holding company. In April 2002, $19.5
million was transferred from the Company's European holding company to the
Company in the United States. The Company then utilized the cash to repay its
$7.4 million outstanding balance under its DIP Financing Agreement (as defined
below) as well as repay $5.0 million, $4.2 million, and $2.9 million of the
Company's pre-petition revolving line of credit, Term Loan B, and Term Loan C
borrowings, respectively under the pre-petition Senior Credit Facility (as
defined below).
Debtor-in-Possession Financing Agreement
Under the terms of the final DIP financing agreement (the "DIP Financing
Agreement") among the company and the Debtor subsidiaries and First Union
National Bank (the "Agent") and Wachovia Securities, Inc., the Company, as
borrower, may make revolving credit borrowings (including up to $15 million for
post-petition letters of credit) in an amount not exceeding the lesser of $100
million or the Borrowing Base (as defined in the DIP Financing Agreement). The
DIP Financing Agreement will terminate and the borrowings thereunder will be due
and payable upon the earliest of (i) August 19, 2003, (ii) the date of the
substantial consummation of a plan of reorganization that is confirmed pursuant
to an order by the Bankruptcy Court and (iii) the acceleration of the revolving
credit loans made by any of the banks who are a party to the DIP Financing
Agreement and the termination of the total commitment under the DIP Financing
Agreement. Amounts borrowed under the DIP Financing Agreement bear interest at
the rate per annum at the Company's option, of either (i) (a) the higher of the
prime rate or the federal funds rate plus .50% plus (b) a margin of 2.00% or
(ii) LIBOR plus a margin of 3.25%. There is an unused commitment fee of (A) at
such time as First Union National Bank is no longer the sole bank, at the rate
of (i) .75% per annum on the average daily unused total commitment at all times
during which the average total commitment usage is less than 25% of the total
commitment and (ii) .5% per annum on the average daily unused total commitment
at all
41
times during which the average total commitment usage is more than or equal to
25% of the total commitment; or (B) at all times that First Union National Bank
is the sole bank, at a rate of .50% per annum on the average daily unused total
commitment. There are letter of credit fees payable to the Agent equal to LIBOR
plus 3.25% on the daily average letters of credit outstanding and to a fronting
bank, its customary fees plus .25% for each letter of credit issued by such
fronting bank.
Borrowings under the DIP Financing Agreement are guaranteed by each of the
Debtor subsidiaries. In general, such borrowings constitute allowed
super-priority administrative expense claims, and are secured by (i) a perfected
first priority lien pursuant to Section 364(c)(2) of the Code, upon all property
of the Company and the Debtor subsidiaries that was not subject to a valid,
perfected and non-avoidable lien on the Filing Date, (ii) a perfected junior
lien, pursuant to Section 364(c)(3) of the Code upon all property of the Company
and the Debotr subsidiaries already subject to valid, perfected, non-avoidable
liens, and (iii) a perfected first priority senior priming lien, pursuant to
Section 364(d)(1) of the Code, upon all property of the Company and the Debtor
subsidiaries already subject to a lien that presently secures the Company's and
the Debtor subsidiaries' pre-petition indebtedness under the existing
pre-petition credit agreement , whether created prior to or after the Filing
Date (subject to certain specific existing or subsequently perfected liens).
This security interest is subject to certain explicit exceptions.
The DIP Financing Agreement contains covenants restricting the Company and the
Guarantors from consolidating or merging with and into another person, disposing
of assets, incurring additional indebtedness and guarantees, creating liens and
encumbrances on properties, modifying its or their business, making capital
expenditures in excess of $22.5 million through the maturity date or $15.2
million during any 12 month period, declaring and paying dividends, making
investments, loans or advances, and creating super-priority claims. There are
certain limitations on affiliate transactions and on costs and expenses incurred
in connection with the closing of production facilities. The DIP Financing
Agreement also requires the Company and the Debtor subsidiaries to achieve
certain levels of EBITDA (as defined) as specified therein. The DIP Financing
Agreement also provides for the mandatory prepayment of all or a portion of
outstanding borrowings upon repatriation of funds from foreign subsidiaries or
the sale of assets, or in the event outstanding loans exceed the Borrowing Base.
Pre-Petition 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, as agent and
lender, and, as of March 27, 1998, with a syndicate of lenders. The Senior
Credit Facility provides for (i) a
42
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 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, 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.
The Company's obligations under the Senior Credit Facility 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.
Based on fiscal 2001 results, the Company was not required to make Excess Cash
Flow payment with respect to fiscal 2001.
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
43
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.
As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries
are currently in default under the Senior Credit Facility. (See "Bankruptcy
Filing" above)
Pre-Petition 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.
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
44
restricted subsidiaries.
As a result of the Chapter 11 Filings, the Company and the Debtor subsidiaries
are currently in default under the Notes and the Indenture. As of the Filing
Date, the Company discontinued its interest accrual on the Notes and wrote off
$7.7 million of deferred debt fees and the remaining discount on the Notes.
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 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
45
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).
Tax Matters
At March 30, 2002, the Company had outstanding net operating loss carryforwards
("NOLs") for U.S. federal tax purposes of approximately $138 million and state
tax purposes of approximately $121 million. The federal NOLs will expire in
years 2018-2021 if unused, and the state NOLs will expire in years 2003-2021 if
unused. In accordance with the Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," a valuation allowance of $28.2 million
related to domestic operating income losses has been established since it is
more likely than not that some portion of the deferred tax asset will not 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 Job Creation and Worker Compensation Act of 2002 became effective on March
9, 2002 and provided a 5 year carryback for net operating losses incurred in tax
years ending in 2001 and 2002. As a result the Company carried back net
operating losses from the year ended September 29, 2001 and recovered $1.2
million in federal income taxes.
Adequacy of Capital Resources
As discussed above, the Company and the Debtor subsidiaries are operating their
businesses as debtors-in-possession under Chapter 11 of the Bankruptcy Code. In
addition to the cash requirements necessary to fund ongoing operations, the
Company anticipates that it will incur significant professional fees and other
restructuring costs in connection with the Chapter 11 Filings and the
restructuring of its business operations. As a result of the uncertainty
surrounding the Company's current circumstances, it is difficult to predict the
Company's actual liquidity needs and sources at this time. However, based on
current and anticipated levels of operations, and efforts to effectively manage
working capital, the Company anticipates that its cash flow from operations
together with cash on hand, cash generated from asset sales, and amounts
available under the DIP Financing Agreements, the Canadian Loan Agreement and
certain other foreign bank loans (entered into by the non-Debtor subsidiaries),
will be adequate to meet its anticipated cash requirements during the pendency
of the Chapter 11 Filings.
In the event that cash flows and available borrowings under the DIP Financing
Agreement, the Canadian Loan Agreement and other foreign bank loans are not
sufficient to meet future cash requirements, the Company may be required to
reduce planned capital expenditures, sell assets or seek additional financing.
The Company can provide no assurance that reductions in planned capital
expenditures or proceeds from asset sales would be sufficient to cover
shortfalls in available cash or that additional financing would be
46
available or, if available, offered on acceptable terms.
As a result of the Chapter 11 Filings, the Company's access to additional
financing is, and for the foreseeable future will likely continue to be, very
limited. The Company's long-term liquidity requirements and the adequacy of the
Company's capital resources are difficult to predict at this time, and
ultimately cannot be determined until a plan of reorganization has been
developed and confirmed by the Bankruptcy Court in connection with the Chapter
11 Filings.
Other
The Company expects to spend approximately $10.1 million for capital
expenditures in fiscal 2002, of which $3.7 million was spent in the first six
months of fiscal 2002. The Company anticipates that approximately 15% of the
forecasted capital expenditures will be used to increase the Company's capacity
while the remaining 85% will be used to maintain existing capacity.
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 was used solely for non-cash
transactions. During that time period, the Euro traded on currency exchanges and
was the basis of valuing legacy currencies which continued to be legal tender.
Beginning January 1, 2002, the participating countries began issuing new
Euro-denominated bills and coins for use in cash transactions, and no later than
July 1, 2002, will withdraw all bills and coins denominated in the legacy
currencies. The legacy currencies will then no longer be legal tender for any
transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the Participating Countries. The Company
believes that the conversion to the Euro will eliminate much of the advantage or
disadvantage coming from exchange rate fluctuation resulting from transactions
involving legacy currencies in Participating Countries. Accordingly,
competitiveness will be solely based on price, quality and service. While the
Company believes the increased competitiveness based on these factors will
provide the Company with a strategic advantage over smaller local companies, it
cannot assess the magnitude of this impact on its operations.
47
As contemplated by the Company's Euro conversion plan, invoicing of products in
both local currencies and the Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems was completed during the
Company's 2001 fiscal year. The costs related to the conversion were not
material to the Company's operating results or liquidity.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). For all business
combinations initiated after June 30, 2001, FAS 141 eliminates the
pooling-of-interests method of accounting and requires the purchase method of
accounting, including revised recognition criteria for intangible assets other
than goodwill. Under FAS 142, which is effective for years beginning after
December 15, 2001, the Company's fiscal year 2003, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually, or more
frequently if impairment indicators arise, for impairment. Intangible assets
that have finite lives will continue to be amortized over their useful lives and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," ("FAS 121"). The Company has not yet
determined what the effect of FAS 142 will be on the earnings and financial
position of the Company.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"), which is effective for years beginning after June 15,
2002, the Company's fiscal year 2003. FAS 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The Company has not yet
determined what the effect of FAS 143 will be on the earnings and financial
position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which is effective for fiscal years
beginning after December 15, 2001, the Company's fiscal year 2003. FAS 144
clarifies accounting and reporting for assets held for sale, scheduled for
abandonment or other disposal, and recognition of impairment loss related to the
carrying value of long-lived assets. The Company has not yet determined what
48
the effect of FAS 144 will be on earnings and financial position of the Company.
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 and belief of 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 29,
2001. In addition, such risks and uncertainties include those related to the
Chapter 11 Filings, including, without limitation, those detailed herein.
49
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relative to the Company's market risk sensitive instruments by major
category at September 29, 2001 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended September 29, 2001.
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 March 30, 2002, 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 March 30, 2002 would have a negative impact of approximately $1.3
million.
Derivative Financial Instruments
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on sales, purchases, short-term assets and commitments. These
short-term assets and commitments principally related to accounts receivable and
trade payable positions and fixed asset purchase obligations. The Company does
not utilize derivative financial instruments for trading or other speculative
purposes. The Company actively evaluates the creditworthiness of the financial
institutions that are counterparties to derivative financial instruments, and it
does not expect any counterparties to fail to meet their obligations.
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.
50
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments (Continued)
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 and six months ended March 30, 2002 and is included in cost of
sales in the consolidated statement of income.
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 and six months ended March 30, 2002 and is included in cost of sales in
the consolidated statement of income.
51
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
The commencement of the Chapter 11 Filings constitutes an event of
default under the Senior Credit Facility, the 9 1/8% Senior
Subordinated Notes and the Indenture related thereto, and the Company's
South Carolina Job and Economic Development Authority Bonds ("JEDA
Bonds"). The payment of interest accruing under the 9 1/8% Senior
Subordinated Notes and the JEDA Bonds after February 19, 2002 is stayed
in connection with the Chapter 11 Filings.
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) The Registrant filed a Form 8-K on March 6, 2002 announcing that on
February 19, 2002 the Company and its domestic subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York.
(c) The Registrant filed a Form 8-K on April 4, 2002 to report that the
United States Bankruptcy Court entered a final order approving the $100
million debtor-in-possession financing with First Union National Bank
and Wachovia Securities, Inc.
52
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
May 14, 2002
- ------------
Date
53
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- ----------
10.75 First Amendment, dated as of March 13, 2002, to the
Revolving Credit and Guaranty Agreement, dated as of
February 20, 2002, among Galey & Lord, Inc., a
debtor and debtor-in-possession under Chapter 11 of
the Bankruptcy Code, First Union National Bank, a
national banking corporation, each of the other
financial institutions from time to time party
thereto (together with FUNB, the "Banks") and First
Union National Bank, as Agent for the Banks.
10.76 Second Amendment, dated as of March 22, 2002, to the
Revolving Credit and Guaranty Agreement, dated as of
February 20, 2002, among Galey & Lord, Inc., a
debtor and debtor-in-possession under Chapter 11 of
the Bankruptcy Code, First Union National Bank, a
national banking corporation, each of the other
financial institutions from time to time party
thereto (together with FUNB, the "Banks") and First
Union National Bank, as Agent for the Banks.
54