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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
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OF 1934
For the fiscal year ended Commission File Number 0-20080
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September 30, 2000
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GALEY & LORD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 56-1593207
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(State of Incorporation) (I.R.S. Employer Identification No.)
980 Avenue of the Americas
New York, New York 10018
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(Address of principal executive offices) (Zip Code)
212/465-3000
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on December 15, 2000, was approximately
$14,052,799.
The number of shares outstanding of Common Stock, as of December 15, 2000, was
11,960,754 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for the 2001 annual meeting of
stockholders of the Company are incorporated by reference into Part III.
Exhibit Index at Pages 65 - 71
PART I
Item 1. BUSINESS
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This 2000 Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Those statements include statements regarding the intent, belief or
current expectations of the Company and its management team. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among other things,
competitive and economic factors in the textile, apparel and home furnishings
markets, successful implementation of the Company's strategic initiatives
announced September 20, 2000, raw materials and other costs, the level of the
Company's indebtedness, interest rate fluctuations, weather-related delays,
general economic conditions, governmental legislation and regulatory changes,
the long-term implications of regional trade blocs and the effect of quota
phase-out and lowering of tariffs under the WTO trade regulations and other
risks and uncertainties that may be detailed herein.
General
Galey & Lord, Inc. (the "Company" or the "Registrant") was incorporated in
Delaware in 1987 for the purpose of acquiring, in February 1988, substantially
all of the assets of the Blends Apparel and Prints divisions of Burlington
Industries, Inc. ("Burlington"). The Company acquired these businesses through
its wholly-owned subsidiary Galey & Lord Industries, Inc. ("Industries"). Prior
to April 1992, the Company was known as Galey & Lord Holdings, Inc., and
Industries operating subsidiary was known as Galey & Lord, Inc. In June 1996,
the Company, through a subsidiary of Industries, G&L Service Company, North
America, Inc. ("G&L Service Company"), acquired the capital stock of Dimmit
Industries, S.A. de C.V. ("Dimmit") and certain related assets from Farah
Incorporated. In January 1998, the Company acquired the apparel fabrics business
of Dominion Textile, Inc. ("Dominion"), which primarily consists of subsidiaries
and joint venture interests, which comprise the Swift Denim Group ("Swift"), the
Klopman International Group ("Klopman") and Swift Textiles Europe, Ltd. ("Swift
Europe"). The Company conducts all of its operations through its subsidiaries
and joint venture interests. Unless otherwise specified herein, all references
to the Company or the Registrant include the Company, Industries, G&L Service
Company, Dimmit, Swift and Klopman.
The Company is a leading global manufacturer of textiles for sportswear,
including cotton casuals, denim and corduroy, as well as a major international
manufacturer of workwear fabrics. The Company also is a manufacturer of dyed
and printed fabrics for use in home fashions. In order to offer customers a
complete package of fabrics and garments from one source, the Company has
established garment manufacturing operations, which the Company believes
provides a competitive advantage over other fabric manufacturing companies.
The Company believes that it is the market leader in producing innovative
woven sportswear fabrics as a result of its expertise in sophisticated and
diversified finishing. Fabrics are designed in close partnership with customers
to capture a large share of the middle and high end of the bottomweight woven
market. The Company sells its woven sportswear products to a diversified
customer base.
2
In April 1994, the Company, through Industries, acquired the Decorative
Prints Division of Burlington. This business, which was renamed Galey & Lord
Home Fashion Fabrics, sells greige, dyed and printed fabrics to the home
furnishings trade for use in bedspreads, comforters and curtains. During fiscal
1999, the Company began selling fabric for use in upholstery applications.
On September 19, 1995, the Company closed its printed apparel fabrics
businesses, made up of Galey & Lord Prints and Galey & Lord Group II, due to
declining business conditions that the printed apparel fabrics businesses had
experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and laid off approximately 450
employees located primarily in Society Hill, South Carolina and New York City.
On June 7, 1996, the Company, through its subsidiary, G&L Service Company,
acquired the capital stock of Dimmit and certain related assets from Farah
Incorporated for approximately $22.8 million in cash including certain costs
related to the acquisition (the "Mexico Acquisition"). Dimmit is composed of six
manufacturing facilities located in Piedras Negras, Mexico and sews and finishes
pants and shorts for the casual wear market. Funding for the Mexico Acquisition
was provided through funds generated by operations, working capital reductions
and through borrowings under the Company's term loan and revolving credit
facility existing at that time. The results of operations of G&L Service Company
and Dimmit have been included in the consolidated financial statements from the
date of acquisition.
On January 29, 1998, the Company entered into a Master Separation Agreement
with Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary
of Polymer, Dominion and certain other parties, pursuant to which the Company
acquired (the "Acquisition") the apparel fabrics business (the "Acquired
Business") of Dominion from DTA for a cash purchase price of approximately
$466.9 million including certain costs related to the Acquisition. The Acquired
Business primarily consists of subsidiaries and joint venture interests, which
comprise the Swift Denim Group, the Klopman Group and Swift Europe. Swift Denim
is one of the largest producers of denim in the world, Klopman is one of the
largest suppliers of uniform fabrics in Europe and Swift Europe is a major
international supplier of denim to Europe, North Africa and Asia. The total
purchase price of the Acquisition was funded with borrowings under the Company's
Senior Credit Facility (as defined herein) and the Bridge Financing Facility (as
defined herein). The Company used the net proceeds from the private placement on
February 24, 1998 of $300.0 million aggregate principal amount of 9 1/8% Senior
Subordinated Notes Due 2008 to repay the Bridge Financing Facility and a portion
of the Senior Credit Facility. The results of operations of the Acquired
Business have been included in the consolidated financial statements from the
date of the Acquisition.
The Company on August 18, 2000 completed a transaction which formed a 50/50
joint venture (the "Joint Venture") in Mexico, Swift Denim-Hidalgo, pursuant to
which the Company received an equity interest in a newly formed Mexican entity
which simultaneously acquired an existing denim manufacturing business (the
"Existing Business") from a group which included the Company's partner in the
Joint Venture. The Existing Business is a "state-of-the-art" denim fabric
factory built within the past three years. The Company has contributed cash and
inventory. In addition, equipment from the closure of the Company's Erwin
facility (see discussion below) will be transferred to the joint venture as part
of an expansion. The Company's investment including the above equipment will
total $14.0 million.
3
In the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives aimed at increasing the Company's competitiveness and
profitability by reducing costs. The principal manufacturing initiatives include
(1) the completion of the Swift Denim-Hidalgo joint venture (discussed above),
(2) the closing of the Company's denim manufacturing facility in Erwin, North
Carolina in December 2000 and (3) the closing the Company's yarn spinning
operation at its Brighton Plant in Shannon, Georgia in December 2000. In
addition, the Company provided for the elimination of duplicate personnel at the
Company's Klopman International operation in Italy. Approximately 1,370
employees will be terminated as a result of the initiatives, including
production workers, administrative support and management. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Events"
Strategy
The Company's strategy is (i) to be either first or second in each of the
product categories it offers, (ii) to make products that can be distinguished
from those made by its competitors, (iii) to continue to modernize its
facilities in order to maintain its competitive position, and (iv) to further
integrate the manufacture of garments with the manufacture of fabrics in order
to increase strategic relationships with customers and increase market share.
Key tactics of the Company's strategy include:
Emphasizing Innovative Products and Services. Historically, product
development was split between fabric and garment manufacturers. Through its
state-of-the-art facilities, the Company is able to combine these two steps into
one. This permits the Company to present fully developed commercially made
sample garments which assists the Company's customers in reducing their product
development cycle times and allows the Company to develop more innovative
products.
Emphasizing Customer Service. The Company is committed to being an industry
leader in providing superior customer service. The key elements of this tactic
include (i) providing timely and complete order delivery, (ii) building
partnerships with customers, (iii) providing electronic data information
services, and (iv) providing inventory management support.
Capitalizing on the Changing Manufacturing Chain. The Company believes that
a significant change is occurring in the apparel manufacturing chain. Many of
the Company's customers are either dependent on, or increasing their dependency
on, outsourcing their garment manufacturing requirements. The Company's ability
to provide customers with a "package" utilizing Company fabrics and finished
garments allows customers to avoid dealing with multiple contractors to bring
their products to market. By reducing the number of vendors with which its
customers are required to enter into commercial relationships, the Company has
simplified the customers' sourcing process. The Company believes that this
method will be the manufacturing chain of the future and believes that it is on
the cutting edge in supplying these services from its owned and operated garment
facilities located in Mexico.
Expanding International Operations. Through the expansion of international
manufacturing capabilities and sales offices, the Company is better able to
service both local markets in various parts of the world, as well as its U.S.
customers as they expand globally. As a result of the Acquisition, the Company
acquired manufacturing facilities in the U.S., Canada and Italy and through a
joint venture has an interest in a facility in Tunisia, as well as sales offices
in Eastern and Western Europe, South America
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and Asia, to complement its previously existing manufacturing facilities in the
U.S. and Mexico. During fiscal 1999, the Company began operations through a
leased facility in Tunisia and continues to build production in its Monclova,
Mexico garment facility that began production during the fourth quarter of
fiscal 1998. During fiscal 2000, the Company closed a transaction which formed a
50/50 joint venture in Mexico, Swift Denim-Hidalgo, which acquired an existing
"state-of-the-art" denim factory from a group which included the Company's
partner in the Joint Venture. As of September 30, 2000, approximately 34% of the
Company's long lived assets were located outside of the United States.
Increasing Manufacturing Efficiencies. The Company has made significant
investments in its manufacturing operations to provide for the flexible
production of its broad line of value-added fabrics and to reduce production
costs.
Products and Customers
The following chart sets forth the Company's net sales for Galey & Lord
Apparel, Swift Denim, Klopman International and Home Fashion Fabrics, for each
of the last three fiscal years.
Fiscal Year
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2000 1999 1998(1)
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(dollar amounts in thousands)
Galey & Lord Apparel........... $459,410 48.0% $457,851 48.0% $481,422 53.3%
Swift Denim.................... 348,540 36.4% 324,661 34.1% 277,313 30.7%
Klopman International.......... 128,923 13.4% 140,838 14.8% 97,812 10.8%
Home Fashion Fabrics........... 20,887 2.2% 29,766 3.1% 46,104 5.2%
-------- ----- -------- ----- -------- -----
Totals........................ $957,760 100.0% $953,116 100.0% $902,651 100.0%
======== ===== ======== ===== ======== =====
(1) Sales in 1998 include the Acquired Business since January 29, 1998, the
date of the Acquisition.
For additional financial information with respect to the four segments and
for geographical segment data, see Note O to the Company's consolidated
financial statements contained herein.
Galey & Lord Apparel
Galey & Lord Apparel manufacturers and sells woven cotton and cotton
blended apparel fabrics, corduroy fabrics, uniform fabrics and garment packages.
The Company is the largest domestic producer by capacity of cotton and
cotton blended fabrics used in apparel, with approximately 35% of U.S.
production. These fabrics are primarily used for the production of men's and
women's pants and shorts. Because of its capital investment in sophisticated
dyeing and finishing equipment, the Company is able to weave a limited number of
substrates and to finish each of them into a variety of esthetics. This enables
the Company to work with its customers to provide new products for the
marketplace that are unique. The Company's cotton casual fabrics are often
presented to customers in the form of commercially made sample garments rather
than in the traditional method of just showing fabrics. The Company believes
that by presenting fabrics in this manner customers are able to make purchasing
decisions earlier, thereby enabling them to bring products to market quicker and
more efficiently.
5
The Company is the only vertically integrated manufacturer of corduroy in
the U.S. and is the largest domestic manufacturer. It manufactures fabrics in a
variety of wales and weights. In addition to the traditional corduroy fabrics,
the Company uses its finishing expertise to differentiate its products and
produce new corduroy fabrics, including corduroy that stretches.
The Company's uniform fabrics are distributed to the industrial laundry
market, the hospitality market and to the healthcare market. Durability of
fabric, compliance with strict standards for fitness for use, continuity of
color and customer service are the factors most important to the Company's
customers.
In June 1996, the Company acquired garment manufacturing facilities located
in Piedras Negras, Mexico where employees cut, sew and finish men's and women's
pants and shorts. G&L Service Company allows the Company to offer its customers
a finished package of fabric and garments from one source. This provides
customers with logistical and quality benefits that result in goods reaching the
market in a more timely manner.
The Company maintains rigorous quality control throughout each production
process. Testing and inspection occur at various stages in the spinning,
weaving, dyeing, finishing, sewing and laundering processes. The Company's
plants employ computers to monitor and control manufacturing processes and the
flow of products.
The Company is a vertically integrated manufacturer of woven cotton and
cotton blended apparel fabrics with various plants involved in spinning, weaving
and dyeing and finishing. The spun yarn is woven into greige fabric using high-
speed air-jet looms. The Company dyes and finishes all of its woven cotton
casual and uniform fabrics at its Society Hill, South Carolina manufacturing
facility. The Company has significant assets devoted to creating value-added
fabrics, including an extensive range of suede finished fabrics. The finishing
process used by the Company depends upon the type and style of fabrics being
produced in accordance with customer specifications. Fabrics are woven by the
Company based on projected sales but are dyed and finished according to customer
purchase orders. In order to operate its dyeing and finishing facility at
optimum capacity, the Company purchases a portion of its greige fabric
requirements from outside sources. During periods of lower demand for dyed and
finished fabrics, the Company reduces its purchases of greige fabrics from
outside sources and uses its internal capacity to supply market demands.
The Company is the only vertically integrated manufacturer of corduroy in
the U.S. The Company's weaving and dyeing and finishing equipment and processes
may be used to produce both corduroy and other woven cotton casual apparel and
uniform fabrics. The ability to produce both types of fabric using
substantially the same equipment and processes allows the Company to schedule
its production to both economically and efficiently meet changes in demand which
varies seasonally (corduroy for the fall/winter selling season and cotton casual
for the spring/summer selling season), and to maintain consistent levels of
production throughout the entire year.
Through its garment manufacturing facilities in Piedras Negras, Mexico, the
Company cuts, sews and finishes garments for its apparel customers. The
location of the Company's garment manufacturing facilities in Mexico allows the
Company to respond quickly to the needs of its U.S. apparel customers and to
compete effectively with competitors in the Far East who have longer lead times
for delivery of
6
goods to the U.S. To meet increasing demand, the Company recently opened an
additional garment manufacturing facility in Monclova, Mexico during the fourth
quarter of fiscal 1998.
The Company's cotton and cotton blended fabrics are sold principally to
manufacturers of men's and women's wear. Fabrics produced for these markets are
predominately 100% cotton. The Company's customers include brand name and
private label manufacturers and chain stores. They include Levi's, Haggar,
Savane and Tropical Sportswear Int'l Corporation, Polo Ralph Lauren, Calvin
Klein, Gap, Inc., Tommy Hilfiger Corporation, Polo Jeans Co., Liz Claiborne and
Eddie Bauer. In addition, the Company sells to suppliers of mail order
catalogs.
Major corduroy customers are Levi's, Haggar, Tommy Hilfiger, H.D. Lee Co.
Inc., as well as Aalfs, Oxford Industries, Inc., and Tropical Sportswear Int'l
who are private label and mail order suppliers.
Domestic customers for uniform fabrics include Riverside Manufacturing Co.,
Garment Corporation of America, Superior Surgical Mfg. Co., Inc., Landau
Uniforms Corp., Cintas Corporation and Kellwood Company.
The Company currently provides garment packages to cutomers such as Levi's,
Liz Claiborne and Calvin Klein.
Swift Denim
The Company is one of the world's largest producers of denim, operating
under the tradename Swift Denim. Swift manufactures and markets a wide variety
of denim products for apparel and non-apparel uses, such as home furnishings.
These products are manufactured in a full range of colors, weights and finishes.
In manufacturing denim, yarn is spun in its natural state, and then dyed prior
to being woven into fabric. The woven fabric is then finished in variety of
ways.
Swift, recognized in the industry for product innovation, concentrates on
product development on high value-added products that are developed primarily
for the mid and upper ranges of distribution as determined by retail selling
prices. The Company believes that Swift is the world's largest producer of
value-added denim. Swift has established leadership in developing
differentiated denim products such as black denim, ring spun denim, eco denim
and rebel ring products. The Company believes that domestically most of its
products are in the mid to upper range of the market and that over 50% of its
products are in the upper range of the market.
Through its recently formed joint venture, Swift Denim-Hidalgo, the Company
will produce some basic denim fabric in Mexico, which is unprofitable to produce
in our U.S. manufacturing facilities. Due to the lower cost of production in
Mexico, the Company believes the joint venture will enable it to maintain its
market share in all price points of denim fabric.
Swift enjoys a wide distribution, and its major customers include Levi's,
Polo Jeans Co., Tommy Hilfiger Corporation, Gap, Old Navy, Nautica, Guess, Inc.,
Abercrombie and Fitch, American Eagle Outfitters, Eddie Bauer, H.D. Lee Co. Inc.
and Wrangler. It also is a supplier to private label programs through major
apparel contractors including Aalfs Manufacturing Inc., PL Industries, Kentucky
Apparel and Border Corp. and sells to mail order suppliers including Land's End,
Inc., L.L. Bean Inc., J. Crew
7
Group Inc. and Eddie Bauer, Inc. Swift's international customers include Levi's,
Revelacion En El Vestir S.A., Western Glove, Jack Spratt, Hoi Kosher Garment
Fty. Ltd. and Luen Fung (Hop Kee) Garment.
Klopman International
The Company is a leading supplier of workwear and careerwear fabrics in
Europe. The Company produces high performance workwear fabrics that retain their
comfort, appearance and performance over an extended wear life. Klopman
International produces two high performance workwear fabrics, Superbandmaster
2000 and Indestructible 2000. These fabrics significantly extend the wear life
of the garment while maintaining comfort and appearance. The workwear and
careerwear fabrics are distributed primarily to the industrial laundry,
hospitality and healthcare markets. In the last two fiscal years, Klopman has
expanded its production and marketing of woven casual wear fabric. As part of
these efforts, the Company is continuing to expand into the cotton casual
apparel fabrics market in Europe.
Klopman operates a spinning, weaving and dyeing and finishing plant in
Frosinone, Italy and and a spinning and weaving facility in Tunisia. The
Company's European operations have executed a strategy to purchase greige fabric
worldwide in order to achieve more competitive costs.
Klopman International's customers include the Kansas Group, Alexandra
Workwear plc., CCM Limited, Alsico NV, Mulliez Freres, Amuco International SpA,
Dickies, Haniel/Eurodress, Van Moer, Levi's, Carhartt and G-Star.
Home Fashion Fabrics
The Home Fashion Fabrics Division manufactures dyed and printed fabrics to
the home furnishing trade for use in bedspreads, comforters, curtains,
accessories and certain upholstery applications. The Company also manufactures
greige fabrics (undyed and unfinished) which it sends to independent contractors
for dyeing and finishing.
The Company operates its own yarn and greige manufacturing facilities to
produce fabrics for the home furnishings trade. The Home Fashion Fabrics
division's weaving facility operates wide Sulzer looms, which allow it to
manufacture fabrics ranging from 48" to 127" in width. The Company believes
that having wide weaving capability is key to being able to offer the fabrics
required by the home furnishing trade for comforters and bedspreads. The
Company distinguishes itself by producing weave effects that simulate jacquard
loom fabrics which can be sold at lower prices. The Company purchases outside
dyeing and printing services from various suppliers to dye and print fabrics
according to customers' specifications.
Home Fashion Fabrics' major customers include Regency Home Fashions Inc.,
Arley Corp., Burlington Industries, Inc., and Guilford Mills, Inc.
Sales and Marketing
The Company's personnel work continually with customers to develop product
lines well in advance of actual shipment. Sales personnel often present fabrics
to customers in the form of
8
commercially made sample garments rather than the traditional method of just
showing fabrics. The Company believes this enables customers to bring products
to market more quickly and efficiently.
The Company has separate sales and marketing groups for Galey & Lord
Apparel, Swift Denim, Klopman International and Swift Europe (which markets
denim in Europe). The Company believes in training individuals to sell and
market specific products as opposed to marketing fabrics generally.
Sales for fiscal 2000 and fiscal 1999 to various divisions of Levi Strauss
& Co., Inc. accounted for approximately 22% of the Company's total net sales for
both years. These divisions of Levi Strauss & Co. Inc. purchase fabrics from
the Company independently of each other, and the loss of business from any one
division would not necessarily affect the Company's orders from other divisions.
No other customer accounts for more than 10% of the Company's total net sales.
At September 30, 2000, the Company had approximately 2,800 customer
accounts.
Raw Materials and Services
The Company's principal raw materials are cotton and polyester. Cotton is
available from a large number of suppliers. The quantity of plantings, crop and
weather conditions, agricultural policies, domestic uses, exports and market
conditions can significantly affect the cost and availability of cotton, but, to
date, the Company has experienced no difficulty obtaining adequate supplies of
cotton. The Company enters into contracts for cotton several months in advance
of expected delivery to ensure availability. The prices associated with these
contracts may be either fixed at the time the contract is signed or at a later
date.
In order to make the price of domestic cotton competitive with prices
quoted in the world market, the United States Department of Agriculture had
adopted a program under which it pays rebates to users of domestically produced
cotton according to a formula based on relative world and domestic cotton prices
when domestic prices exceed world prices, based upon a formula. The domestic
price for cotton did not begin to exceed the world price for cotton until July
1997. From July 1997 until the initial program's funding was exhausted in
December 1998, the criteria for receiving rebates was met and the Company
received the related rebates. In October 1999, the U.S. Congress approved
funding to reestablish the rebate program effective October 1, 1999. The
Company is currently receiving rebates under the criteria established in the
program. The Company believes that any future discontinuance of the program
will not adversely impact its financial position since the Company will be able
to purchase cotton on the world market at comparable prices.
The price of polyester is determined by supply and demand and other uses of
the petroleum used to produce polyester. While the Company currently purchases
polyester from two principal suppliers, polyester is readily available from
other suppliers. The Company has not experienced any difficulty in obtaining
sufficient quantities of polyester, and although no assurances can be made, does
not anticipate any difficulty in meeting its needs in the future.
The Company purchases spun yarn and greige fabric to supplement its own
production. These products are available from a number of suppliers. As part
of the Fiscal 2000 Strategic Initiatives, the Company has entered into a long-
term strategic partnership with Parkdale Mills, Inc. Parkdale is a
9
highly modernized, state of the art yarn spinner who has the capability to
supply the Company with high quality, cost competitive, ring and open end yarns.
The Company purchases its dyes and chemicals from several suppliers. Dyes
and chemicals are available from a large number of suppliers, and the Company
has not experienced any difficulty in obtaining sufficient quantities.
The Company in its Home Fashions business employs the services of several
outside processors to dye or print greige fabric in accordance with customers'
specifications. The Company has established strong relationships with the
outside processors and has not experienced any difficulty in meeting customer
delivery dates. These services are also available from other providers.
Trademarks and Patents
The Company owns, or has the right to use under license various patents,
trademarks and service marks. The Company's "Galey & Lord", "Swift Denim" and
"Swift Textiles" trademarks are registered with many countries worldwide,
including the United States Patent and Trademark Office. In addition, the
Company's "Klopman" trademarks are registered with many European countries.
Other than the "Galey & Lord", "Swift Denim", "Swift Textiles" and "Klopman"
trademarks, the Company does not consider any of its patents, licensed
technology, trademarks or service marks to be material to the conduct of its
business.
Backlog
The Company's order backlog at September 30, 2000 was $178.4 million, a 44%
increase from the October 2, 1999 backlog of $124.2 million. While the
Company's backlog has increased from the previous year, many apparel
manufacturers, including many of the Company's customers, have modified their
purchasing procedures and have shortened lead times from order to delivery.
Accordingly, the Company believes that order backlogs may not provide as
meaningful information with regard to the Company's future sales as order
backlogs have in the past.
Seasonality
The Company's business is not highly seasonal. Galey & Lord Apparel's
product mix varies seasonally (with demand for corduroy fabric primarily in the
fall/winter selling season and sportswear in the spring/summer selling season).
Galey & Lord Apparel's weaving, dyeing and finishing equipment and processes are
configured to produce both corduroy and other woven fabrics, allowing the
Company to adapt to seasonal demand and to maintain consistent levels of
production throughout the entire year. Swift Denim's sales, consistent with the
denim industry, are historically lower in the March quarter; however, to meet
June and September customer demand, production is generally unaffected. Klopman
International's sales are historically lower in the September quarter due to the
European vacation period in August. The Home Fashion Fabrics Division
experiences a very minimal fluctuation in the demand for the products it
produces.
Competition
General. The Company has numerous competitors in each of the categories in
which it competes.
10
Purchasing decisions by the Company's customers are influenced by a number
of factors, including quality, price, manufacturing flexibility, delivery time,
customer service, product styling and differentiation. Competition among U.S.
and foreign manufacturers is affected by changing relative labor and raw
material costs, lead times, political instability and infrastructure
deficiencies of newly industrializing countries, ecological concerns, human
resource laws, fluctuating currency exchange rates, individual government
policies and international agreements regarding textile and apparel trade.
U.S. government policy has been favorable to the U.S. textile industry. The
Company's customers receive favorable duty and, in certain instances, quota
treatment by taking advantage of the U.S. "807" and "807A" tariff programs, as
well as NAFTA. Under tariff program "807," garment textile components cut in the
U.S. and assembled offshore can be brought back into the U.S. subject to
existing quotas, with duty only imposed on the value added offshore.
Under the Caribbean Basin Initiatives (CBI) the U.S. Congress has
established several incentives that provide favorable treatment to the U.S.
textile industry. Under the provisions of CBI, garments manufactured in the
Caribbean can be imported into the U.S. with favorable quota and duty treatment
as long as the fabric is made in the U.S. beginning with U.S. yarn. While the
Company to date has not experienced any increased fabric sales related to CBI it
expects that the initiatives will positively impact its future sales. CBI
however, will have a negative impact on the Company's garment facilities as low
labor cost facilities in the Caribbean will compete with Mexican garment
production on substantially the same quota and duty basis.
The Company believes that it has benefited, and will continue to benefit,
from the 1994 implementation of NAFTA, which phase out duties and quotas on
certain textiles and apparel shipped between Mexico, the U.S. and Canada.
NAFTA's yarn forward rule of origin assures that only those textiles produced in
NAFTA countries benefit from the phasing out of duties and quotas.
The Company believes that GATT and the ATC will, for the most part, have a
negative effect on the domestic textile and apparel industry. The ten-year
phaseout of quotas under the ATC, which replaces the existing system of
bilateral import restrictions imposed under the Multifiber Arrangement, will
gradually allow more imports to enter the country. The Company, however, also
believes that there may be some benefits from GATT and the ATC, as they will
open foreign markets to the Company's customers which the Company believes will
allow it to supply customers in such foreign markets.
Galey & Lord Apparel. There are several major competitors in the finished
cotton casual apparel fabrics business, none of which dominates the market. The
Company's major competitors include Delta Woodside Industries, Inc.,
Graniteville Company, a division of Avondale Mills, Inc. and Milliken & Company
Inc. The Company's technical expertise in finishing enables it to provide a
number of value-added fabrics to differentiate itself from its competitors,
including an extensive range of suede finished fabrics. The Company is the only
vertically integrated domestic producer of corduroy fabrics. Competition to the
Company's corduroy business is mostly from imported garments and, to a lesser
extent, a domestic converter of fabrics. As previously discussed, the Company
produces garment packages for its fabric customers thereby allowing its
customers to avoid dealing with multiple suppliers to bring products to market.
11
The Company's major domestic competitors in the workwear and careerwear
business are Graniteville Company, Riegel Textile Corp., a division of Mount
Vernon Mills, Inc., Milliken & Company Inc. and Springs Industries, Inc.
Swift Denim. The U.S. denim market is highly concentrated, with four denim
manufacturers supplying approximately 70% of the market. Cone Mills
Corporation, Avondale Mills, Inc. and Burlington are Swift's major competitors.
Klopman International. Klopman is the leading pan-European manufacturer and
distributor of workwear and careerwear fabrics. It competes with domestic
suppliers in each country it serves. Its major competitors in its principal
markets are Lauffenmuhle GmbH, Carrington Career and Workwear Fabrics and Royal
Ten-Cate NV.
Home Fashion Fabrics. The Company's Home Fashion Fabrics division competes
with a number of printers and dyers offering similar services, including Raytex
Finishing Company, Santee Print Works, Inc. and Slater Screen Print Works.
Other. In Europe, the Company believes that its joint venture, Swift
Europe, is the leader in the value-added denim market with a rich mix of
differentiated products. Its principal competitors include Kaihara in Japan,
Hellenic Fabrics S.A. in Greece, Orta Anadolu in Turkey, Atlantic Mills Ltd. in
Ireland and Tavex Alogodoner, S.A. in Spain.
Employees
At September 30, 2000, the Company had approximately 5,700 U.S. employees,
approximately 600 of whom were covered by a collective bargaining agreement. Of
these U.S. employees, approximately 5,450 were employed in manufacturing and 250
in administration and sales. As a result of the Fiscal 2000 Strategic
Initiatives, 1,336 of the above U.S. employees will be terminated in December
quarter 2000, including all the employees discussed above covered by a
collective bargaining agreement. The collective bargaining agreement covering
these employees was scheduled to expire in January 2001. At September 30, 2000,
G&L Service Company had approximately 3,750 employees in Mexico. Approximately
48% of these employees are covered by a collective bargaining agreement which
expires in January 2001. The Company is currently in negotiations with
representatives of the employees. Management believes that a new collective
bargaining agreement will be signed in January 2001. Also, at September 30,
2000, the Company had approximately 800 Canadian employees and 810 employees in
operations elsewhere in the world, mainly in Europe. The majority of these
employees are covered by collective bargaining agreements. As a result of the
Fiscal 2000 Strategic Initiatives, 34 of the European employees will be
terminated in fiscal 2001. Substantially all of the Company's employees are
full-time. The Company believes that its employee relations are satisfactory.
12
Government Regulation
The Company is subject to various environmental laws and regulations in its
operations governing the discharge, storage, handling and disposal of a variety
of substances in the North American and European countries in which it operates.
In particular, such laws include (i) in the United States, the Federal Water
Pollution Control Act, the Federal Clean Air Act, the Resource Conservation
Recovery Act (including amendments relating to underground tanks) and the
Federal "Superfund" program, and (ii) in Canada, the Canadian Environmental
Protection Act, the Hazardous Products Act, the Hazardous Material Information
Review Act, the Fisheries Act, the Environmental Protection Act (Ontario), the
Water Resources Act (Ontario) and the Environmental Quality Act (Quebec). In
addition, the Company's operations are governed by laws and regulations relating
to workplace safety and worker health in the North American and European
countries in which it operates. In particular in the United States, the
Occupational, Safety and Health Act and regulations thereunder, among other
things, establish cotton dust, formaldehyde, asbestos and noise standards, and
regulate the use of hazardous chemicals in the workplace. Additionally, in
Canada the Occupational Health and Safety Act (Ontario), the Act Respecting
Occupational Health and Safety (Quebec) and their respective regulations
establish standards for dust, noise and substances including, among others,
asbestos and formaldehyde and regulate the use of hazardous chemicals in the
workplace.
13
Item 2. PROPERTIES
- -------------------
The following table sets forth the general location, principal uses and
approximate size of the Company's principal properties and whether such
properties are leased or owned:
Approximate Leased
Area In Or
Facility Name Location Use Square Feet Owned
- ------------- -------- --- ----------- -----
Flint.................... Gastonia, NC Spinning 250,000 Owned
Brighton/(1)/............ Shannon, GA Spinning and weaving 877,000 Owned
McDowell................. Marion, NC Weaving 222,000 Owned
Society Hill............. Society Hill, SC Dyeing and finishing 527,000 Owned
Society Hill II.......... Society Hill, SC Dyeing, finishing and warehousing 250,000 Owned
Asheboro................. Asheboro, NC Weaving and greige cloth storage 386,000 Owned
Caroleen................. Caroleen, NC Spinning 375,000 Owned
Corporate Offices........ Greensboro, NC Corporate 24,000 Leased
Executive Offices........ New York, NY Executive and sales office 22,000 Leased
Blue Warehouse........... Society Hill, SC Greige and finished cloth storage 100,000 Owned
Hermitage Warehouse...... Rome, GA Cotton and yarn storage 45,000 Leased
Riverside Warehouse...... Rome, GA Cotton and yarn storage 20,000 Leased
Red Warehouse............ Marion, NC Yarn storage 33,000 Owned
Elm Street Warehouse..... Greensboro, NC Finished cloth storage 108,000 Owned
Dimmit Industries........ Piedras Negras, Mexico 6 sewing & garment finishing facilities 228,000 Leased
Alta Loma................ Monclova, Mexico Sewing and warehousing facility 200,000 Leased
Eagle Pass Facilities.... Eagle Pass, TX 1 cutting and 1 warehousing facility 16,000 Leased
Swift Executive Offices.. Atlanta, GA Executive offices 14,000 Leased
Swift Operations Offices. Columbus, GA Operations and sales 27,000 Leased
Erwin Plant/(1)/......... Erwin, NC Spinning 1,325,000 Owned
Erwin Plant/(1)/......... Erwin, NC Weaving, dyeing and finishing 343,000 Owned
6th Avenue Plant......... Columbus, GA Spinning 963,000 Owned
Boland Plant............. Columbus, GA Weaving, dyeing and finishing 480,000 Owned
Drummondville Plant...... Drummondville, Quebec Spinning, weaving, dyeing and finishing 523,000 Owned
Klopman Plant............ Frosinone, Italy Spinning, weaving, dyeing and finishing 861,000 Owned
Tunisia Plant............ Monastir, Tunisia Spinning and weaving 79,500 Leased
/(1)/ As a result of the Fiscal 2000 Strategic Initiatives, operations at the
Erwin plant and at the yarn spinning facility at the Brighton Plant will cease.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations -Significant Events".
The Company believes that its facilities are suitable to service its
current level of sales and have additional capacity to satisfy its foreseeable
needs.
14
Item 3. LEGAL PROCEEDINGS
- --------------------------
The Company is involved in various lawsuits incidental to its business
operations, as well as product liability litigation. In the opinion of the
Company, none of such litigation in which it is currently involved will have a
material effect on the Company's financial condition or its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
15
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK
- ----------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
The Company's common stock, $.01 par value, (the "Common Stock") is traded
on the New York Stock Exchange under the symbol "GNL". As of November 30, 2000,
the Company had approximately 2,050 stockholders of record. The following table
sets forth the high and low sales prices for the Common Stock for the periods
indicated.
2000 1999
---------------------------- ---------------------------
High Low High Low
-------- -------- -------- --------
First Quarter................... $2 15/16 $1 1/4 $13 3/4 $8
Second Quarter.................. $2 11/16 $1 5/8 $8 15/16 $3 1/2
Third Quarter................... $3 1/8 $1 13/16 $5 3/16 $3 1/16
Fourth Quarter.................. $4 5/8 $2 1/16 $5 1/2 $2 1/2
No dividend or other distribution with respect to the Common Stock has ever
been paid by the Company. Any payment of future dividends and the amounts
thereof will be dependent upon the Company's earnings, financial requirements
and other factors deemed relevant by the Company's Board of Directors. The
Company currently does not intend to pay any cash dividends in the foreseeable
future; rather, the Company intends to retain earnings to provide for the
operation and expansion of its business. Certain restrictive covenants contained
in the agreement governing the Company's term loan and revolving credit line
currently limit its ability to make dividend and other payments.
16
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
FISCAL YEAR
----------------------------------------------------------
Statements of Operations Data/(1)/: 2000/(2)/ 1999 1998/(3)/ 1997/(4)/ 1996/(5)/
--------- -------- ---------- -------- ---------
Net sales................................................... $957,760 $953,116 $ 902,651 $493,362 $411,455
Cost of sales............................................... 855,045 874,571 796,219 439,207 367,992
Gross profit................................................ 102,715 78,545 106,432 54,155 43,463
Selling, general and administrative expenses................ 33,408 34,269 30,524 18,123 13,526
Amortization of intangible assets........................... 4,768 4,826 3,793 1,679 1,298
Impairment of fixed assets.................................. 49,251 - - - -
Plant closing costs......................................... 14,316 - - - -
Operating income............................................ 972 39,450 72,115 34,353 28,639
Interest expense............................................ 66,081 60,935 47,566 12,326 11,579
Income from associated companies............................ (6,258) (4,240) (2,621) - -
Bridge financing interest expense........................... - - 3,928 - -
Loss on foreign currency hedges............................. - - 2,745 - -
Write-off of merger costs................................... - - - - 1,600
Income (loss) before income taxes and extraordinary items... (58,851) (17,245) 20,497 22,027 15,460
Income tax expense (benefit)................................ (20,563) (6,209) 8,678 8,350 5,982
Income (loss) before extraordinary items.................... (38,288) (11,036) 11,819 13,677 9,478
Extraordinary items......................................... - - (524) - -
Net income (loss)........................................... $(38,288) $(11,036) $ 11,295 $ 13,677 $ 9,478
Weighted average number of shares outstanding............... 11,942 11,881 12,173 11,986 11,910
Net income (loss) per common share - diluted:
Income (loss) before extraordinary items.................... $ (3.21) $ (.93) $ .97 $ 1.14 $ .80
Extraordinary items......................................... - - (.04) - -
Net income (loss) - diluted................................. $ (3.21) $ (.93) $ .93 $ 1.14 $ .80
Cash dividends per common share............................. $ - $ - $ - $ - $ -
Balance Sheet Data:
Total assets............................................. $896,104 $978,716 $1,038,293 $349,191 $304,876
Long-term debt........................................... 648,505 658,051 682,926 176,755 149,265
Stockholders' equity..................................... 55,589 108,737 127,877 104,317 89,645
/(1)/ The Company uses a 52-53 week fiscal year. Fiscal 1998 was a 53-week year.
All other fiscal years presented were 52-week years.
/(2)/ Includes $63.7 million (pre-tax) of charges related to the Company's
Fiscal 2000 Strategic Initiatives announced in September 2000. Excluding
charges related to the strategic initiatives, net income would have been
$3.2 million or $.27 per common share. See Note J to the Company's
consolidated financial statements.
/(3)/ Includes the acquisition of the apparel fabrics business of Dominion
Textile, Inc. which occurred on January 29, 1998.
/(4)/ Selling, general and administrative expenses include a $3.0 million pre-
tax charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
/(5)/ Includes the write-off of merger costs associated with the termination of
the previously announced merger of the Company and the Graniteville
Company.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
SIGNIFICANT EVENTS
Fiscal 2000 Strategic Initiatives
The Company operates in an extremely competitive environment. Imports of
foreign-made textile and apparel products are a significant source of
competition and have increased significantly over the last few years. This
surge of lower price imports have made it necessary for the Company to
permanently reduce its cost of goods sold to remain competitive and
profitable. In the September quarter 2000, the Company announced a series
of strategic initiatives aimed at increasing the Company's competitiveness
and profitability by reducing the cost of products manufactured. The
principal manufacturing initiatives include:
(1) Completion of a joint venture, Swift Denim-Hidalgo, in Mexico to
produce denim (see further discussion below). This operation will
be expanded over the next 12 months to accommodate the growing
demand for denim produced in the Western Hemisphere, particularly
Mexico.
(2) Closing the Company's denim manufacturing facility in Erwin,
North Carolina in December 2000. Value added denim produced by
this plant will be transferred to the Company's Columbus, Georgia
plant which will also be expanded. The remaining volume, mostly
basic denim, will be produced in Mexico by the Company's new
joint venture, Swift Denim-Hidalgo, beginning in fiscal 2001.
(3) Closing the Company's yarn spinning operation at its Brighton
Plant in Shannon, Georgia in December 2000. The weaving operation
at this plant will continue and will be modernized over the next
three years with approximately $25-$30 million of planned capital
expenditures. The yarn requirements for this plant will be
outsourced to Parkdale Mills, Inc., the world's largest supplier
of sales yarn.
In addition to the principal manufacturing initiatives above, the Company
also provided for the elimination of duplicate personnel in its Klopman
International operation in Italy that impacted 34 positions.
The total of all of the above initiatives resulted in plant closing and
impairment charges totaling $63.6 million before taxes in the fourth
quarter of fiscal 2000. The components of the plant closing and impairment
charge include $49.3 million for fixed asset impairments, $10.8 million for
severance expense and $3.5 million for the write-off of leases and other
exit costs. Approximately 1,370 employees will be terminated as a result of
the initiatives and are principally production workers, administrative
support and management. All production at the effected facilities will
cease during the December quarter 2000 at which time substantially all of
the effected employees will be terminated. Severance will be paid out
either in a lump sum or over a maximum period of up to eighteen months. As
of September 30, 2000, no employees were terminated and no plant closing
costs were paid with respect to the initiatives. The Company expects that
the sale of real estate and equipment could take 12 months or longer to
complete.
18
The Company expects to incur run-out expenses related to the plant closings of
$6-$9 million before taxes. Run-out expenses include efficiency losses,
equipment relocation, losses on inventories of discontinued styles, plant
carrying costs and other costs. These expenses will be charged to operations as
incurred primarily in the December quarter 2000 and continuing to a lesser
extent in March quarter 2001. Of the total closing and run-out costs,
approximately $21 million will be cash costs and are expected to be
substantially offset by cash receipts from asset sales and lower working capital
needs.
The Company will also curtail defined benefit pension and post-retirement
medical plan benefits for employees terminated under the strategic initiatives.
The financial effect of curtailment and settlement of the benefit plans will
result in a $2.3 million net curtailment gain. The Company expects to recognize
this gain in the December quarter 2000, when the related employees are
terminated.
As part of its strategic initiatives, the Company amended its credit agreement
to allow for the creation of foreign secured senior indebtedness under certain
conditions. The placement of senior secured indebtedness would result in a
better utilization of foreign cash flow and reduce cash taxes in foreign
locations.
Swift Denim-Hidalgo Joint Venture
The Company on August 18, 2000 completed a transaction which formed Swift Denim-
Hidalgo, a 50/50 joint venture (the "Joint Venture") in Mexico, pursuant to
which the Company received a 50% equity interest in a newly formed Mexican
entity which simultaneously acquired an existing denim manufacturing business
(the "Existing Business") from a group which included the Company's partner in
the Joint Venture. The Existing Business is a "state-of-the-art" denim fabric
factory built within the past three years. The Company has contributed cash and
inventory. In addition, equipment from the closure of the Company's Erwin
facility (see discussion above) will be transferred to the joint venture as part
of an expansion. The Company's investment including the above equipment will
total $14.0 million.
Since the North American Free Trade Agreement was enacted in 1994, some U.S.
denim fabric producers as well as many jeans sewing factories have established
operations in Mexico.
The Company believes the Joint Venture will enable it to:
. Lower Its Risk of Entering Mexico. The Joint Venture has enabled the Company
to enter Mexico to manufacture denim, with a partner with an existing denim
manufacturing business, who has local expertise in everything from hiring and
communication with the work force to dealing with legal, governmental and
regulatory issues of Mexico. In addition, the Company's joint venture partner
was already operating its modern manufacturing facilities profitably, which
eliminates a major risk inherent in building a new manufacturing facility.
. Accelerate Its Move into Mexico at a Lower Capital Cost. The Joint Venture
has provided the Company with a two-year head start in establishing a denim
manufacturing facility in Mexico. It would take the Company two years to
build a new manufacturing facility in Mexico. Also, building a new facility
would require capital expenditures and interest expense all during the two-
year construction period as well as significant start-up
19
costs in the first year of operations. With the Joint Venture, the Company
has invested in and started with a business that was already profitable.
. Lower Fabric Cost per Yard. The Joint Venture will enable the Company to
produce some basic denim fabric in Mexico, which is unprofitable in its U.S.
manufacturing facilities. Due to the lower cost of production in Mexico, the
Company believes the Joint Venture will enable it to maintain its market
share in all price points of denim fabric.
Dominion Textile, Inc. Acquisition
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary of
Polymer, Dominion Textile, Inc. ("Dominion") and certain other parties pursuant
to which the Company acquired (the "Acquisition") the apparel fabrics business
(the "Acquired Business") of Dominion from DTA for a cash purchase price of
approximately $466.9 million including certain costs related to the Acquisition.
The Acquired Business primarily consists of subsidiaries and joint venture
interests, which comprise the Swift Denim Group, the Klopman Group and Swift
Europe. Swift Denim is one of the largest producers of denim in the world,
Klopman is one of the largest suppliers of uniform fabrics in Europe and Swift
Europe is a major international supplier of denim to Europe, North Africa and
Asia. The total purchase price of the Acquisition was funded with borrowings
under the Company's credit facilities (see "Liquidity and Capital Resources"
below). The Company used the net proceeds from the private placement on
February 24, 1998 of $300.0 million aggregate principal amount of 9 1/8% Senior
Subordinated Notes Due 2008 to repay portions of such credit facilities that was
replaced by publicly registered 9 1/8% Senior Subordinated Notes Due 2008 in May
1998.
RESULTS OF OPERATIONS
The Company's operations are classified into four operating segments: (1) Galey
& Lord Apparel, (2) Swift Denim, (3) Klopman International and (4) Home Fashion
Fabrics. Results for fiscal 2000, 1999 and 1998 for each segment are shown
below:
Fiscal Year Ended
September 30, October 2, October 3,
2000 1999 1998*
------ ------ ------
Net Sales Per Segment
Galey & Lord Apparel $459.4 $457.9 $481.5
Swift Denim 348.6 324.7 277.3
Klopman International 128.9 140.8 97.8
Home Fashion Fabrics 20.9 29.7 46.1
------ ------ ------
Total $957.8 $953.1 $902.7
====== ====== ======
Operating Income (Loss) Per Segment As
Reported
Galey & Lord Apparel $ 25.9 $ 23.0 $ 26.7
Swift Denim (33.6) 5.2 37.6
Klopman International 11.2 11.6 5.5
Home Fashion Fabrics (2.2) (.2) 2.8
Corporate** (0.3) (.2) (.5)
------ ------ ------
Total $ 1.0 $ 39.4 $ 72.1
====== ====== ======
20
Fiscal Year Ended
September 30, October 2, October 3,
2000 1999 1998*
------ ------ ------
Operating Income (Loss) Per Segment
Excluding Strategic Initiatives
Galey & Lord Apparel $ 37.3 $ 23.0 $ 26.7
Swift Denim 18.0 5.2 37.6
Klopman International 11.9 11.6 5.5
Home Fashion Fabrics (2.2) (.2) 2.8
Corporate** (0.3) (.2) (.5)
------ ------ ------
Total $ 64.7 $ 39.4 $ 72.1
====== ====== ======
* Includes the results for the Acquired Business from January 29, 1998, the
date the acquisition was completed.
** Corporate operating income (loss) consists principally of administrative
expenses from the Company's various holding companies.
The Company's order backlog at September 30, 2000 was $178.4 million, a 44%
increase from the October 2, 1999 backlog of $124.2 million. While the
Company's backlog has increased from the previous year, many apparel
manufacturers, including many of the Company's customers, have modified their
purchasing procedures and have shortened lead times from order to delivery.
Accordingly, the Company believes that order backlogs may not provide as
meaningful information with regard to the Company's future sales as order
backlogs have in the past.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
- ---------
Net sales for fiscal 2000 were $957.8 million as compared to $953.1 million for
fiscal 1999. The $4.7 million increase in net sales primarily resulted from
improved sales volume partially offset by lower selling prices.
Galey & Lord Apparel Galey & Lord Apparel's net sales for fiscal 2000 were
$459.4 million, a $1.5 million increase over fiscal 1999's net sales of $457.9
million. The net sales increase is primarily attributable to a 1% increase in
fabric sales volume and a 35% increase in unit sales of garment packages. The
increase in unit sales of garment packages reflects the additional production
capacity at the Company's Monclova, Mexico garment facility which is continuing
to increase production. Overall, average selling prices, inclusive of product
mix changes, declined approximately 1.9%.
Swift Denim Swift Denim's net sales for fiscal 2000 were $348.6 million as
compared to $324.7 million in fiscal 1999. The $23.9 million increase in net
sales is primarily due to a 12% increase in volume, partially offset by a 4%
decline in selling prices with the remainder due to changes in product mix.
Klopman International Klopman International's net sales for fiscal 2000 were
$128.9 million, an $11.9 million decline compared to fiscal 1999's net sales of
$140.8 million. The weakening of the Euro resulted in a 13% decline in net
sales. The remainder of the decline was due to a 3% decline in selling prices,
partially offset by a 5% increase in sales volume.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for fiscal 2000 were
$20.9 million compared to $29.7 million in fiscal 1999. The $8.8 million
decline in net sales has principally resulted from a 22% decline in volume and a
3% decline in average selling prices.
21
Operating Income
Fiscal 2000 operating income was $1.0 million compared to $39.4 million in
fiscal 1999. Excluding the charges related to the Fiscal 2000 Strategic
Initiatives, fiscal 2000 operating income would have been $64.7 million.
Included in consolidated operating income in fiscal 1999 was a $1.8 million
charge related to severance.
Galey & Lord Apparel Galey & Lord Apparel's operating income for fiscal 2000
was $25.9 million as compared to $23.0 million for fiscal 1999. Excluding the
charges related to the Fiscal 2000 Strategic Initiatives, Galey & Lord Apparel's
operating income would have been $37.3 million. The operating income increase,
excluding the Fiscal 2000 Strategic Initiatives, principally reflects the impact
of $17.5 million related to lower raw material prices and improved manufacturing
efficiencies, a $0.4 million charge related to severance in fiscal 1999 and a
$3.0 million improvement in the Company's garment production facilities in
Mexico, partially offset by $14.3 million of lower fabric selling prices. While
the Company's garment facilities have shown improvement in fiscal 2000, the
Company expects to continue to incur inefficiencies at the Company's Monclova,
Mexico garment facility until it reaches full production.
In addition, during fiscal 2000 the Company received a $1.9 million recovery
from the arbitration settlement of a claim with a supplier. The claim resulted
from the delivery of defective chemicals which rendered inventory produced
unsuitable for the intended customer's use.
Swift Denim Swift Denim's operating loss for fiscal 2000 was $33.6 million
compared to fiscal 1999 operating income of $5.2 million. Excluding the
charges related to the Fiscal 2000 Strategic Initiatives, Swift Denim's
operating income would have been $18.0 million. The increase in Swift Denim's
operating income, excluding the Fiscal 2000 Strategic Initiatives, principally
reflects a $15.0 million improvement in raw material variances and a $7.8
million improvement in fixed cost spending and absorption, partially offset by a
$13.0 million decline in selling prices.
Klopman International Klopman International's operating income in fiscal 2000
was $11.2 million as compared to $11.6 million in fiscal 1999. Excluding the
charges related to the Fiscal 2000 Strategic Initiatives, Klopman
International's operating income would have been $11.9 million. The operating
income increase, excluding the Fiscal 2000 Strategic Initiatives, principally
reflects a $7.0 million improvement related to manufacturing efficiencies,
changes in product mix, lower selling, general and administrative expense and
foreign exchange gains on sales not denominated in Euros, partially offset by
$4.6 million related to the impact of lower selling prices. In addition,
Klopman's results were negatively impacted by $1.8 million by foreign currency
translation due to the weakness of the Euro to the US Dollar.
Home Fashion Fabrics Home Fashion Fabrics reported an operating loss for fiscal
2000 of $2.2 million as compared to an operating loss for fiscal 1999 of $0.2
million. The decrease in operating income was principally due to the lower
sales volume and selling prices discussed above, partially offset by favorable
manufacturing variances.
Income from Associated Companies
Income from associated companies was $6.3 million in fiscal 2000 as compared to
$4.2 million in fiscal 1999. The income represents amounts from several joint
venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $66.1 million in fiscal 2000 compared to $60.9 million in
fiscal 1999. The increase in interest expense was primarily due to higher
interest rates paid by the Company as a result of increased spreads over LIBOR
due to the July 13, 1999 amendment of the Senior Credit Facility (as defined
herein), higher prime
22
and LIBOR base rates and higher average debt balances in fiscal 2000 as compared
to fiscal 1999. The average interest rate paid by the Company on its bank debt
in fiscal 2000 was 8.9% per annum as compared to 8.5% per annum in fiscal 1999.
Income Taxes
The Company's overall tax rate for fiscal 2000 was approximately 34.9% as
compared to 36.0% for fiscal 1999. The difference from the statutory rate
resulted primarily from changes in the relative amounts of domestic and foreign
earnings in fiscal 2000 as compared to fiscal 1999. In fiscal 2000, domestic
losses were partially offset by higher foreign earnings.
Net Income (Loss) and Net Income (Loss) Per Share
The Company reported a net loss for fiscal 2000 of $38.3 million or $3.21 per
common share compared to a net loss for fiscal 1999 of $11.0 million or $.93 per
common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's
net income for fiscal 2000 would have been $3.2 million or $.27 per common
share.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales for fiscal 1999 were $953.1 million as compared to $902.7 million for
fiscal 1998. The $50.4 million increase in net sales primarily resulted from
four additional months of net sales in fiscal 1999 from the Acquired Business,
due to the timing of the Acquisition on January 29, 1998, partially offset by a
$23.6 million decline in Galey & Lord Apparel net sales and a $16.4 million
decline in Home Fashion Fabrics net sales. Fiscal 1999 was also a 52-week year
compared to a 53-week year in fiscal 1998.
Galey & Lord Apparel Galey & Lord Apparel's net sales for fiscal 1999 were
$457.9 million, a $23.6 million decline over fiscal 1998 net sales of $481.5
million. Fabric sales volume declined 5% primarily due to lower volume in
corduroy and uniform fabrics partially offset by an increase in woven
sportswear. In garments, which represents approximately 10% of the segment's
sales, volume increased 38% due principally to the addition of the Monclova,
Mexico facility that began production at the end of fiscal 1998. Overall, the
segment's average selling prices declined slightly principally due to reduced
volume of corduroy which has higher average selling prices than other fabrics.
Swift Denim Swift Denim's net sales for fiscal 1999 were $324.7 million as
compared to $277.3 million in fiscal 1998. Of the $47.4 million increase in net
sales, an increase of $99.0 million is attributable to an additional four months
of net sales in fiscal 1999, due to the timing of the acquisition on January 29,
1998. The increase was partially offset by a 12% decline in volume and a 4%
decline in selling prices with the remainder due to changes in product mix.
Klopman International Klopman International's net sales for fiscal 1999 were
$140.8 million, a $43.0 million increase over fiscal 1998 net sales of $97.8
million. Of the $43.0 million increase in net sales, an increase of $54.1
million is attributable to an additional four months of net sales in fiscal
1999, due to the timing of the Acquisition. The increase was partially offset by
a 5% decline in volume and a 5% decline in sales due to exchange rate changes
with the remainder due to sales price declines.
Home Fashion Fabrics Net sales for Home Fashion Fabrics for fiscal 1999 were
$29.7 million compared to $46.1 million for fiscal 1998. The $16.4 million
decline in net sales has principally resulted from a 21% decline in volume and a
17% decline in average selling price, inclusive of product mix changes.
23
Operating Income
Operating income for fiscal 1999 was $39.4 million compared to $72.1 million in
fiscal 1998. Included in consolidated operating income in fiscal 1999 is a $1.8
million charge related to severance in connection with management's goal of
reducing ongoing costs. Each of the segments' results below reflect the impact
of the severance charge for that segments' affected employees. All the employees
affected were terminated prior to the end of fiscal 1999. Cash expenditures
related to the affected employees will be made over the next two fiscal years.
Galey & Lord Apparel Galey & Lord Apparel's operating income was $23.0 million
for fiscal 1999 as compared to $26.7 million for fiscal 1998. The $3.7 million
decline principally reflects the impact of $5.2 million related to lower volume
in fabric sales, $6.6 million for changes in price and product mix, $2.6 million
related to manufacturing inefficiencies in garment manufacturing principally
related to start up costs at the Monclova, Mexico garment operation that began
production in the September quarter of fiscal 1998 and a $0.4 million charge
related to severance in connection with the management's goal of reducing
ongoing costs. These declines were partially offset by improvement of $10.1
million in raw material prices, manufacturing efficiencies and higher first
quality yields in woven sportswear fabric production. In addition, selling,
general and administrative expenses declined $1.2 million.
During fiscal 1999, the Company's garment operations continued to experience
lower efficiencies and profitability than management's expectations.
Accordingly, the Company, as discussed previously, initiated a change in product
mix in its garment operations during the fourth quarter of fiscal 1999. The
change was designed to improve productivity and profitability by reducing the
number of garment styles produced thereby reducing the number of style changes
that generally result in lower efficiencies.
Swift Denim Fiscal 1999 operating income for Swift Denim was $5.2 million, a
$32.4 million decline from the fiscal 1998 operating income of $37.6 million.
The decline in Swift Denim's operating income principally reflects the impact of
$25.3 million related to lower volume including the related impacts on
manufacturing efficiencies, $11.1 million in selling prices and a charge of $1.4
million related to severance in connection with the management's goal of
reducing ongoing costs. These declines were partially offset by $4.7 million for
the impact of four additional months of results in fiscal 1999.
Klopman International Klopman International's operating income in fiscal 1999
increased $6.1 million to $11.6 million as compared to fiscal 1998 operating
income of $5.5 million. The increase was primarily due to $3.6 million related
to four additional months of results in fiscal 1999, due to the timing of the
Acquisition and $6.7 million in manufacturing efficiencies partially offset by
$3.9 million related to the impact of volume and pricing changes discussed above
and $.5 million related to the effect of foreign currency translation.
Home Fashion Fabrics Home Fashion Fabrics reported an operating loss for fiscal
1999 of $0.2 million as compared to operating income for fiscal 1998 of $2.8
million. The decrease in the operating income for fiscal 1999 is principally
due to $3.2 million in lower margins resulting from the lower volumes and the
decline in average sales prices. This decrease was partially offset by lower
selling, general and administrative expenses of $0.2 million.
24
Income from Associated Companies
Income from associated companies was $4.2 million in fiscal 1999 as compared to
$2.6 million in fiscal 1998. The income represents amounts from several joint
venture interests that were acquired in the Acquisition. The increase of $1.6
million is attributable to an additional four months of ownership of the
Acquired Business in fiscal 1999. The joint ventures manufacture and sell denim
products.
Interest Expense
Interest expense was $60.9 million in fiscal 1999 compared to $51.5 million in
fiscal 1998 which included a $1.8 million pre-tax charge related to borrowings
under the Bridge Financing (as defined herein) and a charge of $2.1 million pre-
tax of loan costs related to the Bridge Financing. The increase in interest
expense in fiscal 1999 compared to fiscal 1998 was due to indebtedness incurred
to fund the Acquisition being outstanding for the full fiscal year as compared
to the eight months in the 1998 fiscal year. In addition to the higher overall
average outstanding balances, interest expense also increased due to higher
spreads over LIBOR due to the amendments of the Senior Credit Facility (as
defined herein) during the 1999 fiscal year. The average interest rate paid by
the Company on its bank debt in fiscal 1999 was 8.5% as compared to 8.6% in
fiscal 1998.
Income Taxes
The Company's overall tax rate for fiscal 1999 was approximately 36.0% as
compared to 42.3% for fiscal 1998. The difference from the statutory rate
reflects the offset of state tax benefits with the effect on pre-tax income of
nondeductible goodwill associated with the Acquisition.
Net Income (Loss) and Net Income (Loss) Per Share
The Company reported a net loss of $11.0 million or $.93 per common share on a
diluted basis as compared to net income of $11.3 million or $.93 per common
share on a diluted basis for fiscal 1998. Fiscal 1998 net income included
charges of $7.5 million pre-tax or $.38 per common share related to the
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries had cash and cash equivalents totaling $9.6
million and $14.3 million at September 30, 2000 and October 2, 1999,
respectively. The Company had a total of $69.9 million of borrowing availability
under its Senior Credit Facility at September 30, 2000.
During fiscal 2000, the Company primarily utilized its available cash and
revolving credit borrowings under its Senior Credit Facility to fund the
Company's operating and investing requirements.
Senior Credit Facility
On January 29, 1998 the Company entered into a new credit agreement, as amended,
(the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent
and lender, and its syndicate of lenders. The Senior Credit Facility provides
for (i) a revolving line of credit under which the Company may borrow up to an
amount (including letters of credit up to an aggregate of $30.0 million) equal
to the lesser of $225.0 million (reduced to $200 million pursuant to the July
1999 Amendment, as defined below) or a borrowing base (comprised of eligible
accounts receivable and eligible inventory, as defined in the Senior Credit
Facility), (ii) a term loan in the principal amount of $155.0 million ("Term
Loan B") and (iii) a term loan in the principal amount of $110.0 million ("Term
Loan C"). Portions of Term Loan B and Term Loan C were repaid pursuant to the
July 1999 Amendment.
25
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with FUNB, as agent and lender, and its syndicate of
lenders. The amendment, which became effective as of July 3, 1999 (the "July
1999 Amendment"), replaced the Adjusted Leverage Ratio covenant (as defined in
the July 1999 Amendment) with a minimum EBITDA covenant (as defined in the July
1999 Amendment) until the Company's December quarter 2000, replaced the
Consolidated Net Worth covenant with a Consolidated Retained Earnings covenant
(both as defined in the July 1999 Amendment), waived compliance by the Company
with the Adjusted Fixed Charge Coverage Ratio until the Company's December
quarter 2000 and modified the Company's covenant related to capital
expenditures.
On September 7, 2000, the Company amended the Senior Credit Facility to exclude
charges related to the Company's Fiscal 2000 Strategic Initiatives from the
computation of the covenants. For additional information regarding the
Company's Fiscal 2000 Strategic Initiatives, see "Significant Events" above.
Under the Senior Credit Facility (as amended by the July 1999 Amendment), for
the period beginning July 4, 1999 through February 15, 2001 the revolving line
of credit borrowings bear interest at a per annum rate, at the Company's option,
of either (i) (a) the greater of the prime rate or the federal funds rate plus
.50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan
B and Term Loan C bear interest at a per annum rate, at the Company's option, of
(A) with respect to Term Loan B either (i)(a) the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a
margin of 3.75% and (B) with respect to Term Loan C, either (i)(a) greater of
the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or
(ii) LIBOR plus a margin of 3.75%. In addition, pursuant to the July 1999
Amendment, the Company repaid $25 million principal amount of its term loan
balance using available borrowings under its revolving line of credit and
reduced the maximum amount of borrowings under the revolving line of credit by
$25 million to $200 million. The repayment of the Term Loan B and Term Loan C
principal balances ratably reduced the remaining quarterly principal payments.
In addition, the Company and each of its domestic subsidiaries granted the
lenders, as additional collateral, a lien on all real property owned in the
United States. In connection with the July 1999 Amendment, the Company incurred
charges of $0.6 million during fiscal 1999 principally related to the real
estate liens and legal fees.
Beginning with the quarter ending December 30, 2000, the Company will be subject
to leverage and fixed charge coverage ratios, as amended pursuant to the July
1999 Amendment. In addition, under the Senior Credit Facility, the revolving
line of credit expires on March 27, 2004 and the principal amount of (i) Term
Loan B is repayable in quarterly payments of $349,157 through March 27, 2004,
three quarterly payments of $32,820,773 and final amount of $27,854,048 on Term
Loan B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in
quarterly payments of $247,687 through April 2, 2005, three quarterly payments
of $23,034,918 and a final amount of $19,511,595 on Term Loan C's maturity of
April 1, 2006. Pursuant to the July 1999 Amendment, borrowings under the Senior
Credit Facility will bear interest in accordance with the following pricing
options beginning on February 16, 2001. Under the Senior Credit Facility, as
amended on December 22, 1998 and July 3, 1999, the revolving line of credit
borrowings bear interest at a per annum rate, at the Company's option, of either
(i) (a) the greater of the prime rate or the federal funds rate plus .50% plus
(b) a margin of 0%, .25%, .50%, .75%, 1.00% or 1.25%, based on the Company
achieving certain leverage ratios (as defined in the Senior Credit Facility) or
(ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on
the Company achieving certain leverage ratios. Term Loan B and Term Loan C bear
interest at a per annum rate, at the Company's option, of (A) with respect to
Term Loan B either (i) (a) the greater of the prime rate or federal funds rate
plus .50%, plus (b) a margin of 1.00%, 1.25%, 1.50% or 1.75%, based on the
Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios
and (B) with respect to Term Loan C, either (i) (a)the greater of the prime rate
or federal funds rate plus .50%, plus (b) a margin of 1.25%, 1.50%, 1.75% or
2.00%, based on the Company achieving certain leverage ratios, or (ii) LIBOR
plus a margin of 2.50%, 2.75%, 3.00% or 3.25%, based on the Company's achieving
certain leverage ratios.
26
At September 30, 2000, interest on the Company's term loan and revolving credit
borrowings were based on one and three-month market LIBOR rates averaging 6.62%
and on a prime rate of 9.5%. The Company's weighted average borrowing rate on
these loans at September 30, 2000 was 10.13%, which includes spreads ranging
from 3.00% to 3.75% on the LIBOR borrowings and a spread of 1.75% on the prime
rate borrowings.
The Company's obligations under the Senior Credit Facility are secured by all of
the assets of the Company and each of its domestic subsidiaries, a pledge by the
Company and each of its domestic subsidiaries of all the outstanding capital
stock of its respective domestic subsidiaries and a pledge of 65% of the
outstanding voting capital stock, and 100% of the outstanding non-voting capital
stock, of certain of its respective foreign subsidiaries. In addition, payment
of all obligations under the Senior Credit Facility is guaranteed by each of the
Company's domestic subsidiaries. Under the Senior Credit Facility, the Company
is required to make mandatory prepayments of principal annually in an amount
equal to 50% of Excess Cash Flow (as defined in the Senior Credit Facility), and
also in the event of certain dispositions of assets or debt or equity issuances
(all subject to certain exceptions) in an amount equal to 100% of the net
proceeds received by the Company therefrom. For fiscal 2000, the Company's
Excess Cash Flow payment, which was made on December 19, 2000, was $15.6
million.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
The Company expects to spend approximately $24 million for capital expenditures
in fiscal 2001. The Company anticipates that approximately 60% of the
forecasted capital expenditures will be used to increase the Company's capacity
while the remaining 40% will be used to maintain existing capacity.
The Company anticipates that cash requirements, including working capital and
capital expenditures, will be met through funds generated from operations and
through borrowings under the Company's revolving line of credit under the Senior
Credit Facility. In addition, from time to time, the Company uses borrowings
under secured bank loans, through capital leases or through operating leases for
various equipment purchases.
Senior Subordinated Debt
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of Bridge Financing (as defined herein)
borrowings under a Senior Subordinated Credit Agreement incurred to partially
finance the Acquisition and (ii) a portion of the outstanding amount under a
revolving line of credit provided for under the Senior Credit Facility (as
defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
will be paid March 1 and September 1 of each year. The first interest payment on
the Notes was made on September 1, 1998.
27
On August 18, 2000, the Company and its noteholders amended the indenture, dated
February 24, 1998 ("the Indenture"), entered into in connection with the Notes
to amend the definition of "Permitted Investment" in the Indenture to allow the
Company and its Restricted Subsidiaries (as defined in the Indenture) to make
additional investments (as defined in the Indenture) totaling $15 million at any
time outstanding in one or more joint ventures which conduct manufacturing
operations primarily in Mexico. This amendment was completed to allow the
Company sufficient flexibility in structuring its investment in the Swift Denim-
Hidalgo joint venture discussed above.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
Tax Matters
At September 30, 2000, the Company had outstanding net operating loss
carryforwards ("NOLs") for US federal and state tax purposes of approximately
$34.3 million, which will be carried forward to offset future taxable income and
will expire in 2019-2020 if unused. Management has reviewed the Company's
operating results for recent years as well as the outlook for its businesses in
concluding it is more likely than not that the deferred tax assets of $53.1
million at September 30, 2000 will be realized. This review, along with the
timing of the reversal of its temporary differences and the expiration dates of
the NOLs, were also considered in reaching this conclusion. The Company's
ability to generate future taxable income is dependent on numerous factors,
including the state of the apparel industry, general economic conditions and
other factors beyond management's control. Accordingly, there can be no
assurance that the Company will meet its expectation of future taxable income.
Other
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company was
required to provide $5.0 million additional funding to three defined benefit
pension plans previously sponsored by Dominion, $3.0 million of which was paid
at the closing of the Acquisition, $1.0 million was paid during the March
quarter 1999 and the remaining $1.0 million was paid in the March quarter 2000.
The Pension Funding Agreement also gives the PBGC a priority lien of $10.0
million on certain land and building assets of the Company to secure payment of
any liability to the PBGC that might arise if one or more of the pension plans
were terminated. The Company's obligations under the Pension Funding Agreement
terminate upon the earlier to occur of (a) the termination of the pension plans
and (b) on or after January 30, 2003, if (i) the pension plans are fully funded
for two consecutive years and (ii) the Company receives an investment grade
rating on its debt.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash
28
transactions. During this time period, the Euro will be traded on currency
exchanges and will be the basis of valuing legacy currencies. The legacy
currencies will continue to be legal tender. Beginning January 1, 2002, the
participating countries will issue new Euro-denominated bills and coins for use
in cash transactions, and no later than July 1, 2002, will withdraw all bills
and coins denominated in the legacy currencies. The legacy currencies will then
no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the 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.
As contemplated by the Company's Euro conversion plan, invoicing of products in
both local currencies and Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems will be completed during
the Company's 2001 fiscal year. The Company's Euro conversion plan has been
delayed due to the unavailability of software upgrades. The upgrades are
expected to be available during the Company's 2001 fiscal year and the related
Euro conversion will be completed at that time. The costs related to the
conversion will not be material to the Company's operating results or liquidity
although no assurances can be made in this regard.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended ("FAS
133"), which is required to be adopted in years beginning after June 15, 2000.
The Company is required to adopt FAS 133 effective October 1, 2000. Under FAS
133, the Company will be required to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at September 30, 2000, the Company
has calculated that the adoption will not have a material impact on the
Company's results of operations or statement of financial position.
29
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. The result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which the Company manufactures or sells
its products would not be material. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. In addition
to the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. The Company's analysis of
the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
Cotton Commodity Exposures
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. As of September 30, 2000,
a 10% decline in market price would have a negative impact of approximately $8.0
million on the value of the contracts.
Interest Rate Exposures
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The Company currently has
interest rate swap agreements on $25.0 million of its outstanding floating-rate
bank debt. The interest rate swaps assure that the Company will pay a maximum
LIBOR rate of 5.53% (excluding any applicable spread required by the Senior
Credit Facility) for the period ending January 2001. The following table
provides information about the Company's interest rate swap agreements that are
sensitive to changes in interest rates. The table presents notional amounts and
interest rates by contractual maturity date. Notional amounts are used to
calculate the contractual payments to be made under the contracts.
Notional
Amount
Maturing in
Fiscal Year 2000
2001 Fair Value
---- ----------
Interest Rate Swaps (Dollar amounts in 000's)
Notional amount $13,000 $ 51
$12,000 $ 47
Average receive rate 6.08%
Average pay rate 5.53%
30
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 following
table provides information about the Company's foreign currency forward exchange
contracts. The information is provided in U.S. dollar equivalent amounts, as
presented in the Company's financial statements. The table presents the notional
amounts at the current exchange rate and contractual foreign currency exchange
rates by contractual maturity dates. The tables do not include firmly committed
transactions that have not been hedged or transactions that are not firmly
committed even though the probability of certain transactions occurring is high.
Maturity 2000 Maturity 1999
in Unrealized In Unrealized
2001 Gain/(loss) 2000 Gain/(loss)
---- ----------- ---- -----------
(Dollar amounts in 000's)
Forward contracts to sell British Pounds
Notional amount $8,579 $ (74) $ - $ -
Average contract rate in Lira 3,211 -
Forward contracts to purchase U.S. Dollars
Notional amount $ - $ - $1,500 $ (7)
Average contract rate in Lira - 1,815
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Galey & Lord, Inc.
We have audited the accompanying consolidated balance sheets of Galey &
Lord, Inc. as of September 30, 2000 and October 2, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Galey & Lord, Inc. at September 30, 2000 and October 2, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Greensboro, North Carolina
October 30, 2000
32
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share and share data)
ASSETS
September 30, October 2,
2000 1999
------------- ----------
Current assets:
Cash and cash equivalents..................................................................... $ 9,641 $ 14,300
Trade accounts receivable, less deductions for doubtful receivables, discounts, returns and
allowances of $6,911 in 2000 and $6,531 in 1999............................................. 197,422 176,547
Sundry notes and accounts receivable.......................................................... 7,461 6,994
Inventories................................................................................... 166,522 175,101
Income taxes receivable....................................................................... 1,556 10,586
Deferred income taxes......................................................................... 12,902 11,776
Prepaid expenses and other current assets..................................................... 3,957 4,773
--------- ---------
Total current assets.................................................................... 399,461 400,077
Property, plant and equipment, at cost:
Land.......................................................................................... 11,489 15,946
Buildings..................................................................................... 121,775 142,476
Machinery, fixtures and equipment............................................................. 339,303 361,961
--------- ---------
472,567 520,383
Less accumulated depreciation and amortization................................................ (172,484) (136,682)
--------- ---------
300,083 383,701
Investment in and advances to associated companies.............................................. 31,878 22,966
Deferred charges, net........................................................................... 13,571 15,437
Other non-current assets........................................................................ 1,735 2,391
Intangibles, net................................................................................ 149,376 154,144
--------- ---------
$ 896,104 $ 978,716
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................................. $ 3,072 $ 3,072
Trade accounts payable........................................................................ 59,907 63,288
Accrued salaries and employee benefits........................................................ 24,028 25,278
Accrued liabilities........................................................................... 45,583 32,931
Income taxes payable.......................................................................... 1,507 4,790
--------- ---------
Total current liabilities............................................................... 134,097 129,359
Long-term debt.................................................................................. 648,505 658,051
Other long-term liabilities..................................................................... 22,813 21,561
Deferred income taxes........................................................................... 35,100 61,008
Stockholders' equity:
Common Stock-$.01 par value, authorized 25,000,000 shares; issued
12,349,960 shares in 2000 and 12,292,121 shares in 1999,
Outstanding 11,960,754 shares in 2000 and 11,902,915 shares in 1999......................... 124 123
Contributed capital in excess of par value.................................................... 39,673 39,420
Retained earnings............................................................................. 32,537 70,825
Less 389,206 Common Stock shares in 2000 and 1999 in treasury, at cost........................ (2,247) (2,247)
Accumulated other comprehensive income (loss)................................................. (14,498) 616
--------- ---------
Total stockholders' equity.............................................................. 55,589 108,737
--------- ---------
$ 896,104 $ 978,716
========= =========
See accompanying notes to consolidated financial statements.
33
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
For the Years Ended
----------------------------------------
September 30, October 2, October 3,
2000 1999 1998
-------- -------- --------
Net sales............................................................................ $957,760 $953,116 $902,651
Cost of sales........................................................................ 855,045 874,571 796,219
-------- -------- --------
Gross profit......................................................................... 102,715 78,545 106,432
Selling, general and administrative expenses......................................... 33,408 34,269 30,524
Amortization of intangible assets.................................................... 4,768 4,826 3,793
Impairment of fixed assets........................................................... 49,251 - -
Plant closing costs.................................................................. 14,316 - -
-------- -------- --------
Operating income..................................................................... 972 39,450 72,115
Interest expense..................................................................... 66,081 60,935 47,566
Income from associated companies..................................................... (6,258) (4,240) (2,621)
Bridge financing interest expense.................................................... - - 3,928
Loss on foreign currency hedges...................................................... - - 2,745
-------- -------- --------
Income (loss) before income taxes and extraordinary item............................. (58,851) (17,245) 20,497
Income tax expense (benefit):
Current........................................................................... 3,738 374 1,014
Deferred.......................................................................... (24,301) (6,583) 7,664
-------- -------- --------
(20,563) (6,209) 8,678
-------- -------- --------
Income (loss) before extraordinary item.............................................. (38,288) (11,036) 11,819
Extraordinary loss from debt refinancing (net of income tax benefit of $332)......... - - 524
-------- -------- --------
Net income (loss).................................................................... $(38,288) $(11,036) $ 11,295
======== ======== ========
Net income (loss) per common share:
Basic:
Average common shares outstanding................................................. 11,942 11,881 11,743
Income (loss) per share before extraordinary item................................. $ (3.21) $ (.93) $ 1.01
Extraordinary item................................................................ - - (.05)
-------- -------- --------
Net income (loss) per common share - basic........................................ $ (3.21) $ (.93) $ .96
======== ======== ========
Diluted:
Average common shares outstanding................................................. 11,942 11,881 12,173
Income (loss) per share before extraordinary item................................. $ (3.21) $ (.93) $ .97
Extraordinary item................................................................ - - (.04)
-------- -------- --------
Net income (loss) per common share - diluted...................................... $ (3.21) $ (.93) $ .93
======== ======== ========
See accompanying notes to consolidated financial statements.
34
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the Years Ended
---------------------------------------
September 30, October 2, October 3,
2000 1999 1998
------------- ---------- ----------
Cash flows from operating activities:
Net income (loss)................................................................ $(38,288) $(11,036) $ 11,295
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment................................ 40,028 41,819 31,528
Amortization of intangible assets 549 4,768 4,826 3,793
Amortization of deferred charges............................................. 2,844 2,548 3,622
Deferred income taxes........................................................ (24,301) (6,582) 7,664
Non-cash compensation............................................................. 254 207 1,180
(Gain)/loss on disposals of property, plant and equipment.................... 500 (132) 115
Undistributed income from associated companies............................... (6,258) (4,240) (2,621)
Impairment of fixed assets................................................... 49,251 - -
Plant closing costs.......................................................... 14,316 - -
Extraordinary loss from debt refinancing - - - 524
Other........................................................................ - - 688
Changes in assets and liabilities (net of acquisition):
Accounts receivable - net........................................................ (25,314) 4,509 (25,959)
Sundry notes and accounts receivable............................................. (1,242) 4,351 4,788
Inventories (2,584) 3,611 9,192 (11,690)
Prepaid expenses and other current assets........................................ 309 (628) 3,445
Other non-current assets......................................................... 511 (1,039) (848)
Trade accounts payable........................................................... 210 (1,509) (1,248)
Accrued liabilities.............................................................. 860 (2,325) 6,192
Income taxes payable............................................................. 5,568 (3,510) (2,542)
Other long-term liabilities...................................................... (327) 155 1,017
-------- -------- ----------
Total adjustments.............................................................. 65,588 47,642 19,648
-------- -------- ----------
Net cash provided by (used in) operating activities............................... 27,300 36,606 30,943
-------- -------- ----------
Cash flows from investing activities:
Acquisition of business - net of cash acquired..................................... - - (457,078)
Property, plant and equipment expenditures......................................... (19,001) (27,185) (33,784)
Proceeds from sale of property, plant and equipment................................ 339 5,014 5,812
Distributions received from associated companies................................... 5,142 6,519 3,662
Investment in affiliates........................................................... (7,821) - -
Other.............................................................................. (942) 1,066 (2,045)
-------- -------- ----------
Net cash provided by (used in) investing activities............................... (22,283) (14,586) (483,433)
-------- -------- ----------
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit.................................... 4,900 8,600 (22,900)
Principal payments on long-term debt............................................... (12,959) (51,604) (813,983)
Issuance of long-term debt......................................................... - 18,000 1,323,490
Net proceeds from issuance of common stock......................................... - 22 1,779
Tax benefit from exercise of stock options......................................... - 205 152
Payment of bank fees and loan costs................................................ (828) (2,687) (18,719)
-------- -------- ----------
Net cash provided by (used in) financing activities............................... (8,887) (27,464) 469,819
Effect of exchange rate changes on cash and cash equivalents....................... (789) (202) 340
-------- -------- ----------
Net increase (decrease) in cash and cash equivalents............................... (4,659) (5,646) 17,669
Cash and cash equivalents at beginning of period................................... 14,300 19,946 2,277
-------- -------- ----------
Cash and cash equivalents at end of period......................................... $ 9,641 $ 14,300 $ 19,946
======== ======== ==========
See accompanying notes to consolidated financial statements.
35
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
Accumulated
Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income (Loss) Stock Capital Earnings Stock Income (Loss) Total
------------- ------ ----------- --------- --------- --------------- ----------
Balance at September 27, 1997......... $121 $35,877 $ 70,566 $(2,247) $ - $104,317
Issuance of 166,011 shares of Common
Stock upon exercise of options....... 1 1,638 - - - 1,639
Issuance of 7,686 shares of
Restricted Common Stock.............. - 140 - - - 140
Tax benefit from exercise of stock
options.............................. - 152 - - - 152
Compensation earned related to
issuance of stock options............ - 1,180 - - - 1,180
Comprehensive income:
Foreign currency translation
adjustment.......................... $ 9,154 - - - - 9,154 9,154
Net income for fiscal 1998......... 11,295 - - 11,295 - - 11,295
-------- ---- ------- -------- -------- --------------- --------
Total comprehensive income............ $ 20,449
========
Balance at October 3, 1998............ $122 $38,987 $ 81,861 $(2,247) $ 9,154 $127,877
Issuance of 37,200 shares of Common
Stock upon exercise of options....... 1 21 - - - 22
Issuance of 27,530 shares of
Restricted Common Stock.............. - 138 - - - 138
Tax benefit from exercise of stock
options.............................. - 205 - - - 205
Compensation earned related to
issuance of stock options............ - 69 - - - 69
Purchase of 2 shares of Treasury Stock - - - - - -
Comprehensive income (loss):
Foreign currency translation
adjustment.......................... $ (8,538) - - - - (8,538) (8,538)
Net income (loss) for fiscal 1999.... (11,036) - - (11,036) - - (11,036)
-------- ---- ------- -------- -------- --------------- --------
Total comprehensive income (loss)..... $(19,574)
========
Balance at October 2, 1999............ $123 $39,420 $ 70,825 $(2,247) $ 616 $108,737
Issuance of 57,839 shares of
Restricted Common Stock.............. 1 119 - - - 120
Compensation earned related to
issuance of stock options............ - 134 - - - 134
Comprehensive income (loss):
Foreign currency translation
adjustment.......................... $(15,114) - - - - (15,114) (15,114)
Net income (loss) for fiscal 2000.... (38,288) - - (38,288) - - (38,288)
-------- ---- ------- -------- -------- --------------- --------
Total comprehensive income (loss)..... $(53,402)
========
Balance at September 30, 2000......... $124 $39,673 $ 32,537 $(2,247) $ (14,498) $ 55,589
==== ======= ======== ======== =============== ========
See accompanying notes to consolidated financial statements.
36
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE A - Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the
accounts of Galey & Lord, Inc. (the "Company") and its wholly-owned
subsidiaries. Investments in affiliates in which the Company owns 20 to 50
percent of the voting stock are accounted for using the equity method.
Intercompany items have been eliminated in consolidation.
Cash Equivalents: The Company considers investments in marketable securities
with an original maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) method is used to cost the majority of domestic
inventories. The cost of other inventories is determined by the first-in,
first-out (FIFO) method.
Income Taxes: The Company uses the liability method of accounting for
deferred income taxes which requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
Property, Plant and Equipment: Depreciation is provided over the estimated
useful lives of the respective assets using the straight-line method. Estimated
useful lives are 40 years for buildings and 5 to 15 years for machinery,
fixtures and equipment.
Deferred Charges: Deferred debt charges are being amortized over the lives
of related debt as an adjustment to interest expense. Accumulated amortization
at September 30, 2000 and October 2, 1999 was $6.3 million and $3.6 million,
respectively.
Goodwill: The excess of the purchase cost over the fair value of assets
acquired is being amortized over 20 to 40 years. Accumulated amortization at
September 30, 2000 and October 2, 1999 was $15.4 million and $11.9 million,
respectively. The Company evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining life to determine whether goodwill is recoverable.
The Company believes that no impairment of goodwill existed at September 30,
2000.
Other Intangibles: The Company has $48.6 million and $49.9 million of other
intangibles at September 30, 2000 and October 2, 1999, respectively. The other
intangibles represent the value of certain trademarks acquired in the January
1998 acquisition of the apparel assets of Dominion Textile, Inc. These
trademarks are amortized over 40 years. Accumulated amortization at September
30, 2000 and October 2, 1999 was $3.4 million and $2.1 million, respectively.
Accounting for Stock-Based Compensation: The Company follows the accounting
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," which require that the Company recognize expense
for the fair value of stock-based compensation awarded during the year.
Foreign Currency Translation: The assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses are translated at
average monthly exchange rates established during the year. Resulting
translation adjustments are reflected as a separate component of stockholders'
equity. Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency,
except those transactions which operate effectively as a hedge of an
identifiable foreign currency commitment or as a hedge of a foreign currency
investment position, are included in the consolidated statements of operations.
Foreign currency transaction losses included in the consolidated statement of
operations are not material.
37
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE A - Summary of Significant Accounting Policies (Continued)
Derivative Financial Instruments: The Company utilizes derivative financial
instruments principally to manage market risks and reduce its exposure resulting
from fluctuations in foreign currency exchange rates, interest rates and raw
material cotton prices. Derivative instruments include swap agreements, forward
exchange and purchase contracts. Gains and losses relating to qualifying hedges
are deferred and are recognized in income or as an adjustment to carrying
amounts when the hedged transaction occurs. To the extent that a qualifying
hedge is terminated or ceases to be effective as a hedge, any deferred gains and
losses up to that point continue to be deferred and are included in the basis of
the underlying transaction. To the extent that the anticipated transactions are
no longer likely to occur, the related hedges are closed with gains or losses
charged to earnings on a current basis. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company
actively evaluates the creditworthiness of the financial institutions that are
counterparties to derivative financial instruments, and it does not expect any
counterparties to fail to meet their obligations.
Revenue Recognition: The Company recognizes revenues from product sales when
goods are shipped or when ownership is assumed by the customer. Consistent with
recognized practice in the textile industry, the Company records revenues on a
bill and hold basis, invoicing goods that have been produced, packaged and made
ready for shipment. The goods are effectively segregated from inventory which
is available for sale. The risk of ownership of the goods has passed to the
customer and remittance terms are consistent with all other sales by the
Company. During fiscal 2000, 1999 and 1998, invoices issued under these terms
represent 14%, 20% and 19% of revenue, respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Reclassification: Certain prior period amounts have been reclassified to
conform to current year presentation.
Fiscal Year: The Company uses a 52-53 week fiscal year. The years ended
September 30, 2000 and October 2, 1999 were 52-week years. The year ended
October 3, 1998 was a 53-week year.
Recently Issued Accounting Pronouncements: In June 1998, the Financial
Accounting Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("FAS 133"), which is required to
be adopted in years beginning after June 15, 2000. The Company is required to
adopt FAS 133 effective October 1, 2000. Under FAS 133, the Company will be
required to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings.
Based on the Company's derivative positions at September 30, 2000, the Company
has calculated that the adoption will not have a material impact on the
Company's results of operations or statement of financial position.
38
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE B - Business Acquisitions
On January 29, 1998, the Company entered into a Master Separation Agreement
with Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary
of Polymer, Dominion Textile, Inc. ("Dominion") and certain other parties,
pursuant to which the Company acquired (the "Acquisition") the apparel fabrics
business (the "Acquired Business") of Dominion from DTA for a cash purchase
price of approximately $466.9 million including certain costs related to the
Acquisition. The Acquired Business primarily consists of subsidiaries and joint
venture interests, which comprise the Swift Denim Group, the Klopman Group and
Swift Europe. Swift Denim is the second largest supplier of denim in the world,
Klopman is one of the largest suppliers of uniform fabrics in Europe and Swift
Europe is a major international supplier of denim to Europe, North Africa and
Asia. The total purchase price of the Acquisition was funded with borrowings
under the Company's credit facilities (see Note D - Long-term Debt below). The
Company used the net proceeds from the private placement closed on February 24,
1998 of $300.0 million aggregate principal amount of 9 1/8% Senior Subordinated
Notes Due 2008 to repay portions of such credit facilities. In connection with
the Acquisition, which has been accounted for as a purchase transaction, the
Company acquired assets with a fair value of approximately $585.6 million and
assumed liabilities of approximately $191.6 million. During fiscal 1999, the
Company finalized the allocation of the fixed portion of the purchase price and
has recorded goodwill of approximately $72.9 million for the excess of purchase
price (including assumed liabilities) over the fair market value of the assets
acquired. During fiscal 2000, the Company and Polymer finalized the cash
settlement. Goodwill is being amortized over a 40-year period. The results of
operations of the Acquired Business have been included in the consolidated
financial statements from the date of the Acquisition.
The following unaudited pro forma results of operations assumes that the
Acquisition had occurred at the beginning of fiscal 1998. These pro forma
results give effect to certain adjustments, including depreciation of property,
plant and equipment, amortization of the cost of the Acquisition in excess of
net assets acquired and interest expense resulting from the acquisition and
related financing. The pro forma results have been prepared for comparative
purposes only and do not purport to indicate the results of operations that
would actually have occurred had the combination been in effect on the dates
indicated or which may occur in the future.
For the Year Ended
------------------
October 3, 1998
---------------
(in thousands except per share data)
Net sales.................................................... $ 1,065,964
Income before extraordinary item............................. $ 2,927
Income before extraordinary item per share - diluted......... $ .24
Net income................................................... $ 2,403
Net income per share - diluted............................... $ .20
39
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE C - Inventories
Inventories at September 30, 2000 and October 2, 1999 are summarized as
follows (in thousands):
2000 1999
---- ----
Raw materials............................................. $ 5,009 $ 7,503
Stock in process.......................................... 32,502 28,413
Produced goods............................................ 126,348 139,949
Dyes, chemicals and supplies.............................. 11,536 11,050
-------- --------
Total inventory at first-in, first-out (FIFO) cost........ 175,395 186,915
Less LIFO and other reserves.............................. (8,873) (11,814)
-------- --------
$166,522 $175,101
======== ========
Inventories valued using the LIFO method comprised approximately 67% and 70%
of domestic inventories at September 30, 2000 and October 2, 1999, respectively.
Inventory held at foreign locations was $33.8 million and $39.0 million at
September 30, 2000 and October 2, 1999, respectively.
During fiscal 2000, the Company's inventory quantities were reduced. This
reduction resulted in a liquidation of LIFO inventory quantities carried at
higher costs prevailing in prior years as compared with fiscal 2000 costs, the
effect of which increased cost of sales by approximately $247,000 and decreased
net income by $164,000 or $.01 per common share.
NOTE D - Long-term Debt
Long-term debt consists of the following (in thousands):
2000 1999
---- ----
Senior Credit Facility:
Revolving Credit Note........................... $120,000 $115,100
Term Loan B..................................... 131,062 132,601
Term Loan C..................................... 92,973 94,066
Senior Subordinated Notes.............................. 298,887 298,737
Other borrowings with various rates and maturities..... 8,655 20,619
-------- --------
651,577 661,123
Less Current portion................................... (3,072) (3,072)
-------- --------
$648,505 $658,051
======== ========
At September 30, 2000, the annual maturities of the principal amounts of
long-term debt were as follows (in thousands):
2001.............................. $ 3,072
2002.............................. 3,105
2003.............................. 3,141
2004.............................. 188,158
2005.............................. 107,589
Thereafter........................ 346,512
Senior Credit Facility
The Company's principal credit facility, dated as of January 29, 1998, as
amended (the "Senior Credit Facility"), is with First Union National Bank
("FUNB"), as agent and lender, and its syndicate of lenders. On September 7,
2000, the Senior Credit Facility was amended to exclude charges related to the
Company's Fiscal 2000 Strategic Initiatives from the computation of the
covenants and permitted senior secured indebtedness under certain conditions.
For additional information regarding the Company's Fiscal 2000 Strategic
Initiatives, see Note J.
40
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE D - Long-term Debt (Continued)
The Senior Credit Facility provides for (i) a revolving line of credit under
which the Company may borrow up to an amount (including letters of credit up to
an aggregate of $30.0 million) equal to the lesser of $225.0 million (reduced
to $200 million pursuant to the July 1999 Amendment) or a borrowing base
(comprised of eligible accounts receivable and eligible inventory, as defined in
the Senior Credit Facility), (ii) a term loan in the principal amount of $155.0
million ("Term Loan B") and (iii) a term loan in the principal amount of $110.0
million ("Term Loan C"). Portions of Term Loan B and Term Loan C were repaid
pursuant to the July 1999 Amendment (as defined below).
In an amendment to the Senior Credit Facility which became effective as of
July 3, 1999 (the "July 1999 Amendment"), the Adjusted Leverage Ratio covenant
(as defined in the July 1999 Amendment) was replaced with a minimum EBITDA
covenant (as defined in the July 1999 Amendment) until the Company's December
quarter 2000, the Consolidated Net Worth covenant was replaced with a
Consolidated Retained Earnings covenant (both as defined in the July 1999
Amendment), compliance by the Company with the Adjusted Fixed Charge Coverage
Ratio was waived until the Company's December quarter 2000 and the Company's
covenant related to capital expenditures was modified.
Under the Senior Credit Facility, for the period beginning July 4, 1999
through February 15, 2001 the revolving line of credit borrowings bear interest
at a per annum rate, at the Company's option, of either (i) (a) the greater of
the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.75% or
(ii) LIBOR plus a margin 3.00%. Term Loan B and Term Loan C bear interest at a
per annum rate, at the Company's option, of (A) with respect to Term Loan B
either (i)(a) the greater of the prime rate or federal funds rate plus .50%,
plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% and (B) with
respect to Term Loan C, either (i)(a) greater of the prime rate or federal funds
rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR plus a margin of 3.75%.
In addition, in connection with the July 1999 Amendment the Company repaid $25
million principal amount of its term loan balance using available borrowings
under its revolving line of credit and reduced the maximum amount of borrowings
under the revolving line of credit by $25 million to $200 million. The
repayment of the Term Loan B and Term Loan C principal balances ratably reduced
the remaining quarterly principal payments. In addition, the Company and each
of its domestic subsidiaries granted the lenders, as additional collateral, a
lien on all real property owned in the United States. In connection with the
July 1999 Amendment, the Company incurred charges of $0.6 million principally
related to the real estate liens and legal fees.
Beginning with the quarter ending December 30, 2000, the Company will be
subject to leverage and fixed charge coverage ratios under the Senior Credit
Facility, as amended by the July 1999 Amendment. In addition, under the Senior
Credit Facility, the revolving line of credit expires on March 27, 2004 and the
principal amount of (i) Term Loan B is repayable in quarterly payments of
$349,157 until March 27, 2004, three quarterly payments of $32,820,773 and final
amount of $27,854,048 on Term Loan B's maturity on April 2, 2005 and (ii) Term
Loan C is repayable in quarterly payments of $247,687 until April 2, 2005, three
quarterly payments of $23,034,918 and a final amount of $19,511,595 on Term Loan
C's maturity of April 1, 2006. Pursuant to the July 1999 Amendment, borrowings
under the Senior Credit Facility will bear interest in accordance with the
following pricing options beginning on February 16, 2001. The revolving line of
credit borrowings bear interest at a per annum rate, at the Company's option, of
either (i) (a) the greater of the prime rate or the federal funds rate plus .50%
plus (b) a margin of 0%, .25%, .50%, .75%, 1.00% or 1.25%, based on the Company
achieving certain leverage ratios (as defined in the Senior Credit Facility) or
(ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%, 2.00%, 2.25% or 2.50%, based on
the Company achieving certain leverage ratios. Term Loan B and Term Loan C bear
interest at a per annum rate, at the Company's option, of (A) with respect to
Term Loan B either (i) (a) the greater of the prime rate or federal funds rate
plus .50%, plus (b) a margin of 1.00%, 1.25%, 1.50% or 1.75%, based on the
Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios
and (B) with respect to Term Loan C, either (i) (a) the greater of the prime
rate or federal funds rate plus .50%, plus (b) a margin of 1.25%, 1.50%, 1.75%
or 2.00%, based on the Company achieving certain leverage ratios, or (ii) LIBOR
plus a margin of 2.50%, 2.75%, 3.00% or 3.25%, based on the Company's achieving
certain leverage ratios.
At September 30, 2000, the Company's availability under its revolving line of
credit under the Senior Credit Facility was $69.9 million. At September 30,
2000, interest on the Company's term loan and revolving credit borrowings were
based on one and three-month market LIBOR rates averaging 6.62% and on a prime
rate of 9.5%. The Company's weighted average borrowing rate on these loans at
September 30, 2000 was 10.13%, which includes spreads ranging from 3.0% to 3.75%
on the LIBOR borrowings and a spread of 1.75% on the prime rate borrowings.
41
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE D - Long-term Debt (Continued)
The Company's obligations under the Senior Credit Facility, as amended
pursuant to the July 1999 Amendment, are secured by all of the assets of the
Company and each of its domestic subsidiaries, a pledge by the Company and each
of its domestic subsidiaries of all the outstanding capital stock of its
respective domestic subsidiaries and a pledge of 65% of the outstanding voting
capital stock, and 100% of the outstanding non-voting capital stock, of certain
of its respective foreign subsidiaries. In addition, payment of all obligations
under the Senior Credit Facility is guaranteed by each of the Company's domestic
subsidiaries. Under the Senior Credit Facility, the Company is required to make
mandatory prepayments of principal annually in an amount equal to 50% of Excess
Cash Flow (as defined in the Senior Credit Facility), and also in the event of
certain dispositions of assets or debt or equity issuances (all subject to
certain exceptions) in an amount equal to 100% of the net proceeds received by
the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
Senior Subordinated Debt
On February 24, 1998, the Company closed a private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of Bridge Financing (as defined herein)
borrowings under a Senior Subordinated Credit Agreement incurred to partially
finance the Acquisition and (ii) a portion of the outstanding amount under a
revolving line of credit provided for under the Senior Credit Facility.
On May 21, 1998, the Company completed an exchange offer pursuant to which
it exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the
Notes will be paid March 1 and September 1 of each year. The first interest
payment on the Notes was made on September 1, 1998.
On August 18, 2000, the Company and its noteholders amended the indenture,
dated February 24, 1998 (the "Indenture") entered into in connection with the
Notes to amend the definition of "Permitted Investment" in the Indenture to
allow the Company and its Restricted Subsidiaries (as defined in the Indenture)
to make additional Investments (as defined in the Indenture) totaling $15
million at any time outstanding in one or more joint ventures which conduct
manufacturing operations primarily in Mexico.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation,
those limiting the Company and its subsidiaries' ability to incur indebtedness,
pay dividends, incur liens, transfer or sell assets, enter into transactions
with affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
Previous Credit Agreements
On December 19, 1997, the Company entered into a $470.0 million credit
agreement (the "Interim Credit Agreement") with FUNB, as agent and lender.
Initial revolving credit line borrowings under the Interim Credit Agreement were
used to refinance the existing term loan and revolving credit facility. The
Interim Credit Agreement was replaced on January 29, 1998 when the Company
entered into the Senior Credit Facility.
42
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE D - Long-term Debt (Continued)
On December 19, 1997, the Company entered into a Senior Subordinated Credit
Agreement (the "Bridge Financing") with First Union Corporation, as agent and
lender, which was amended on January 29, 1998 and provided for borrowings of
$275.0 million, of which $145.6 million was initially borrowed on December 19,
1997 and the remainder of which was borrowed on January 29, 1998. All
borrowings under the Bridge Financing were used to fund the Acquisition
(including fees and expenses). The Bridge Financing was repaid on February 24,
1998 when the Company closed its private offering of $300.0 million aggregate
principal amount of Initial Notes.
NOTE E - Financial Instruments
The Company utilizes the following methods in determining the fair value of
its financial instruments:
Cash and cash equivalents, trade receivables and trade payables - Due to the
short maturity of these instruments, the carrying value approximates fair value.
Long-term debt - For the Company's publicly traded debt instruments, fair
value is determined based on quoted market prices of those instruments. For the
remaining debt instruments, management believes the carrying values approximate
fair value.
Interest rate swap agreements - The fair value of the Company's interest rate
swap agreements is determined by comparing the agreements' anticipated cash
flows based on current interest rates to the cash flows of a similar interest
rate swap agreement which could be obtained as of September 30, 2000.
Forward exchange contracts - The fair value of outstanding forward exchange
contracts is determined based on quotes obtained from public-trading currency
markets.
Publicly Traded Debt
At September 30, 2000 and October 2, 1999, the fair value of the Company's 9
1/8% Senior Subordinated Notes Due 2008 was approximately $64.0 million and
$75.0 million, respectively, as compared to the carrying values of $298.9
million and $298.7 million, respectively.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The Company currently has
interest rate swap agreements on $25 million of its outstanding floating-rate
bank debt. The interest rate swaps assure that the Company will pay a maximum
LIBOR rate of 5.53% (excluding any applicable spread required by the Senior
Credit Facility) for the period ending January 2001. The amount paid or
received under the swap agreements is based on the changes in actual interest
rates and is recorded as an adjustment to interest expense. At September 30,
2000 and October 2, 1999, the fair value of the Company's interest rate swaps
was $98,300 and $162,300 respectively.
Forward Exchange Contracts
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.
43
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE E - Financial Instruments (Continued)
The table (in thousands) below summarizes by currency the contractual
amounts of the Company's forward exchange contracts in U.S. dollars. The
purchased amounts represent the net U.S. dollar equivalent of commitments to
purchase foreign currencies and the sold amounts represent the net U.S dollar
equivalent of commitments to sell foreign currencies. The foreign currency
amounts have been translated into a U.S. dollar equivalent value using the
exchange rate at the reporting date. Forward exchange contracts mature at the
anticipated cash requirement date of the hedged transaction, generally within
one year. All contracts are scheduled to be settled in fiscal year 2001.
2000 1999
-------------------------------------------- ---------------------------------------------
Contractual Contractual Unrealized Contractual Contractual Unrealized
Currency Value Purchases Value Sold Gain/(Loss) Value Purchases Value Sold Gain/(Loss)
-------- --------------- ---------- ----------- --------------- ---------- -----------
U.S. Dollar $ - $ - $ - $ 1,500 $ - $ (7)
British Pound - 8,579 (74) - - -
NOTE F - Income Taxes
Income (loss) from continuing operations before the provision of income taxes
and the extraordinary item consisted of (in thousands):
2000 1999 1998
---- ---- ----
Domestic......................................................... $(83,537) $(38,544) $ 3,786
Foreign.......................................................... 24,686 21,299 16,711
-------- -------- -------
$(58,851) $(17,245) $20,497
======== ======== =======
The components of income tax expense (benefit) from continuing operations
before the extraordinary item are as follows (in thousands):
2000 1999 1998
---- ---- ----
Current tax provision:
Federal.......................................................... $ - $(2,174) $(2,703)
State............................................................ 70 51 (7)
Foreign.......................................................... 3,668 2,497 3,724
-------- ------- -------
Total current tax provision......................................... 3,738 374 1,014
-------- ------- -------
Deferred tax provision:
Federal.......................................................... (27,051) (9,999) 4,021
State............................................................ (3,980) (1,472) 1,213
Foreign.......................................................... 6,730 4,888 2,430
-------- ------- -------
Total deferred tax provision........................................ (24,301) (6,583) 7,664
-------- ------- -------
Total provision for income taxes.................................... $(20,563) $(6,209) $ 8,678
======== ======= =======
44
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE F - Income Taxes (Continued)
The following is a reconciliation of the United States statutory tax rate to
the effective rate expressed as a percentage of income (loss) before income
taxes and extraordinary item:
2000 1999 1998
---- ---- ----
Federal statutory rate................................... (35.0)% (35.0)% 35.0%
Distribution of Canadian limited partnership earnings
subject to U.S. tax..................................... 3.7 - -
Undistributed foreign earnings subject to U.S. tax....... 1.7 - -
State taxes, net of federal benefit...................... (4.8) (5.3) 3.8
Goodwill amortization.................................... 1.1 4.7 3.8
Foreign sales corporation................................ - - (2.7)
Foreign taxes in excess of (less than) federal
statutory rate.......................................... (2.3) (0.3) 1.5
Other.................................................... 0.7 (0.1) 0.9
------ ------ ----
Effective rate........................................... (34.9)% (36.0)% 42.3%
====== ====== ====
Deferred income taxes are provided for temporary differences between the
carrying amounts and the tax bases of assets and liabilities. At September 30,
2000 and October 2, 1999, the Company had $53.1 million and $32.2 million,
respectively, of deferred income tax assets and $75.3 million and $81.4 million,
respectively, of net deferred income tax liabilities which have been netted for
financial statement presentation purposes. The significant components of these
amounts as shown on the balance sheet are as follows (in thousands):
September 30, 2000 October 2, 1999
------------------------ ------------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
Inventory valuation.................................... $ (491) $ - $ 217 $ -
Accruals and allowances................................ 9,210 - 8,488 -
Property, plant and equipment.......................... - (53,783) - (60,335)
Intangibles............................................ - (20,210) - (20,325)
Net operating loss carryforward........................ - 14,753 3,071 10,919
Postretirement benefits................................ - 4,565 - 3,717
Impairment of fixed assets and plant closing costs..... 4,183 20,409 - -
Other.................................................. - (34) - 5,816
Valuation allowance.................................... - (800) - (800)
------- -------- ------- --------
Total............................................... $12,902 $(35,100) $11,776 $(61,008)
======= ======== ======= ========
During fiscal 2000, the Company incurred net operating losses for U.S.
federal and state income tax purposes of approximately $10.9 million which will
be carried forward for U.S. federal income tax purposes to offset future taxable
income. At September 30, 2000, the Company has a total of approximately $34.3
million U.S. federal net operating loss carryforwards which will expire in years
2019-2020. All state net operating loss carryforwards will be carried forward
and will expire in years 2004-2015. Management has reviewed the Company's
operating results for recent years as well as the outlook for its businesses in
concluding it is more likely than not that the deferred tax assets of $53.1
million at September 30, 2000 will be realized.
During fiscal 1999, the Company finalized the fixed portion of the purchase
cost of the Acquired Business. In conjunction with the finalization, the value
of certain trademarks was determined. Accordingly, a deferred tax liability was
recognized through an increase in recorded goodwill.
45
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE F - Income Taxes (Continued)
At October 2, 1999, the Company had foreign net operating loss
carryforwards of $8.4 million. These loss carryforwards, which principally
relate to the Company's operations in Italy, were fully utilized in fiscal 2000.
During fiscal 1999, the Company reduced the valuation reserve for these foreign
loss carryforwards from $10.6 million to $0.8 million at October 2, 1999. The
decrease in the valuation reserve reflects the utilization of loss carryforwards
against foreign earnings in fiscal 1999 and the projected foreign earnings of
fiscal 2000. The decrease in valuation allowance resulted in a reduction of
goodwill. During fiscal 2000, the valuation allowance remained at $0.8 million
and related to Irish net operating loss carryforwards which existed at the time
of the Acquisition.
At September 30, 2000 and October 2, 1999, undistributed earnings of the
Company's foreign subsidiaries amounted to approximately $36.3 million and $23.3
million, respectively. The foreign undistributed earnings are either permanently
reinvested or distribution will not result in incremental U.S. taxes.
Accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. It is not practical to estimate the additional tax that would
be incurred, if any, if the permanently reinvested earnings were repatriated.
During fiscal 2000, the Company, as part of its intent to place debt in foreign
operations, incurred additional tax expense to facilitate the repatriation of
existing cash and potential loan proceeds from its Canadian operations.
NOTE G - Supplemental Cash Flow Information
Cash paid (received) for interest and income taxes is as follows (in
thousands):
2000 1999 1998
------- ------- -------
Interest................................................................... $63,033 $57,723 $31,328
Income taxes............................................................... $(2,010) $ 1,691 $ 1,044
NOTE H - Benefit Plans
Defined Benefit Pension and Postretirement Plans
The Company and its U.S. subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all domestic employees. The plans provide
retirement benefits for all qualified salaried employees and qualified non-union
wage employees based generally on years of service and average compensation.
Retirement benefits for qualified union wage employees are based generally on a
flat dollar amount for each year of service. The Company's funding policy is to
contribute annually the amount recommended by the plan's actuary. Plan assets,
which consist of common stocks, bonds and cash equivalents, are maintained in
trust accounts. The Company also has a nonqualified, unfunded supplementary
retirement plan under which the Company will pay supplemental pension benefits
to key executives in addition to the amount participants will receive under the
Company's retirement plan.
The Company provides health care and life insurance benefits to certain
retired employees and their dependents. The plans are unfunded and approved
claims are paid by the Company. The Company's cost is partially offset by
retiree premium contributions.
46
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE H - Benefit Plans (Continued)
The following sets forth the projected benefit obligation, a reconciliation
of plan assets, the funded status of the plans and amounts recognized in the
Company's consolidated balance sheets at September 30, 2000 and October 2, 1999
(in thousands):
Defined Benefit Plans Supplemental Plan Postretirement Benefit
--------------------- ----------------- ----------------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year.................. $60,838 $60,496 $ 2,363 $ 1,783 $ 9,008 $ 9,023
Service cost............................................. 5,475 5,428 269 290 264 283
Interest cost............................................ 4,212 4,086 165 145 645 627
Participant contributions................................ - - - - 140 122
Actuarial (gain) loss.................................... 919 (5,193) (276) (19) (641) (356)
Benefits paid............................................ (6,093) (7,832) - - (678) (691)
Plan amendments.......................................... - 3,853 - 164 - -
------- ------- ------- ------- ------- -------
Benefit obligation at end of year........................ $65,351 $60,838 $ 2,521 $ 2,363 $ 8,738 $ 9,008
======= ======= ======= ======= ======= =======
Change in plan assets:
Fair value of assets at beginning of year................ $66,020 $56,699 $ - $ - $ - $ -
Actual return on plan assets............................. 8,889 11,016 - - - -
Employer contributions................................... 4,301 6,137 - - 538 569
Participant contributions................................ - - - - 140 122
Benefits paid............................................ (6,093) (7,832) - - (678) (691)
------- ------- ------- ------- ------- -------
Fair value of assets at end of year...................... $73,117 $66,020 $ - $ - $ - $ -
======= ======= ======= ======= ======= =======
Funded status:
Funded status............................................ $ 7,766 $ 5,182 $(2,521) $(2,363) $(8,738) $(9,008)
Unrecognized prior service cost.......................... - - 253 291 - -
Unrecognized net actuarial (gain) loss................... (7,609) (5,384) 267 560 (1,056) (436)
Plan amendments.......................................... 2,667 2,806 - - - -
------- ------- ------- ------- ------- -------
Net amount recognized.................................... $ 2,824 $ 2,604 $(2,001) $(1,512) $(9,794) $(9,444)
======= ======= ======= ======= ======= =======
Amounts recognized in the consolidated
balance sheet:
Prepaid benefit cost..................................... $ 2,824 $ 2,604 $ - $ - $ - $ -
Accrued benefit liability................................ - - (2,001) (1,512) (9,794) (9,444)
------- ------- ------- ------- ------- -------
Net amount recognized.................................... $ 2,824 $ 2,604 $(2,001) $(1,512) $(9,794) $(9,444)
======= ======= ======= ======= ======= =======
47
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE H - Benefit Plans (Continued)
Net pension cost for the plans for the years ended September 30, 2000, October
2, 1999 and October 3, 1998 included the following components (in thousands):
Defined Benefit Plans Supplemental Plan Postretirement Benefit
--------------------- ----------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Components of net periodic benefit cost:
Service cost................................. $ 5,475 $ 5,428 $ 4,683 $ 269 $ 291 $ 158 $ 264 $ 283 $ 227
Interest cost................................ 4,212 4,086 3,217 165 145 98 645 627 415
Expected return on plan assets............... (5,535) (4,944) (3,709) - - - - - -
Amortization of prior service cost........... 139 (87) (87) 38 38 23 - - -
Recognized net actuarial (gain) loss......... (210) 230 40 18 51 28 (22) - -
------- ------- ------- ----- ----- ----- ----- ----- -----
Net periodic benefit cost.................... $ 4,081 $ 4,713 $ 4,144 $ 490 $ 525 $ 307 $ 887 $ 910 $ 642
======= ======= ======= ===== ===== ===== ===== ===== =====
Weighted-average assumptions:
Discount rate................................ 7.80% 7.40% 6.95% 7.80% 7.40% 6.95% 7.80% 7.40% 6.95%
Expected return on plan assets............... 8.50 8.50 8.50 - - - - - -
Rate of compensation increase................ 5.00 5.00 5.50 - - - - - -
The assumed health care cost trend rate was 8% for fiscal 2000, decreasing to
5% by the year 2003 and remaining at that level thereafter. A one-percentage
point change in assumed health care cost trend rates have the following effects
on fiscal 2000:
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components.......................... $109 $ (94)
Effect on postretirement benefit obligation...................................... 781 (684)
Pursuant to an agreement with the Pension Benefit Guaranty Corporation ("PBGC"),
the Company has given the PBGC a first priority lien of $10 million on certain
land and building assets of the Company to secure payment of any liability to
the PBGC that might arise if one or more pension plans are terminated.
Defined Contribution Plans
The Company has various defined contribution plans covering qualified U.S.
employees. The plans include a provision which allows employees to make pre-tax
contributions under Section 401(k) of the Internal Revenue Code. During fiscal
1999, the plans were amended to provide for the Company to make a guaranteed
match of the employee's contributions and to eliminate the discretionary profit-
sharing contribution plan provision. The Company contributions for fiscal 2000,
1999 and 1998 were approximately $3.5 million, $2.9 million and $3.1 million,
respectively.
In addition, the Company provides life and health benefits to substantially
all U.S. employees. Employees contribute a fixed amount weekly or monthly as set
forth in the plan with the balance paid by the Company. The Company
contributions for fiscal 2000, 1999 and 1998 were approximately $17.3 million,
$16.3 million and $13.8 million, respectively.
Deferred Compensation Plan
The Company has a nonqualified, unfunded deferred compensation plan which
provides certain key executives with a deferred compensation award which will
earn interest at the United States Treasury Bill rate. The award, which is based
on the year's operating results, was $792,000, $0 and $307,000 for fiscal 2000,
1999 and 1998, respectively. The plan participants will be vested in the awards
upon the completion of five years of service after the date of the award, upon
normal retirement, upon involuntary
48
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE H - Benefit Plans (Continued)
termination subject to certain limitations, upon permanent and total disability
or death, whichever occurs first. In the event of retirement or disability, any
unpaid deferred awards will be paid on the normal five-year maturity schedule.
Upon the death of a participant, the Company has the option to either
immediately pay the award to the participant's estate or pay the award on the
normal five-year maturity schedule.
Foreign Employee Plans
A significant number of the Company's European employees participate in a
government mandated deferred compensation plan. This plan provides benefits to
employees upon termination of service with the Company. Employees accrue
benefits under the plan based on compensation levels and length of service.
Accrued benefits are adjusted upward annually for interest earned on accumulated
balances and cost of living increases. Approximately $1.4 million, $1.7 million
and $1.5 million has been recognized as expense related to the plan in the
accompanying statements of operations for fiscal 2000, 1999 and 1998,
respectively. A liability of approximately $7.8 million and $10.1 million is
included within other long-term liabilities in the Company's consolidated
balance sheets as of September 30, 2000 and October 2, 1999, respectively, to
provide for payment of accrued benefits under the plan. Employees are 100%
vested in the benefits accrued.
Many of the Company's European employees participate in government sponsored
healthcare and pension plans. Annually, the Company and its employees contribute
an amount equal to approximately 45% (35% by the Company; 10% by the employees)
of the Company's gross salaries and wages to the government for administration
of these plans and other social programs. For fiscal 2000, 1999 and 1998, the
Company's portion of the funding totaled $5.7 million, $6.5 million and $4.8
million, respectively.
The Company's Canadian employees participate in government sponsored
healthcare and pension plans. The pension plan requires contributions from the
employer and the employee while the healthcare plan requires only employer
contributions. The Company's required contributions paid for these plans for
fiscal 2000, 1999 and 1998 were approximately $1.4 million, $1.3 million and
$0.9 million, respectively. In addition, the Company provides supplemental
health and life insurance benefits with contributions for fiscal 2000, 1999 and
1998 totaling $0.4 million, $0.3 million and $0.2 million, respectively. The
Company's qualified Canadian employees are also eligible to participate in
various retirement savings plans. The plans provide for voluntary pre-tax
contributions from employees and guaranteed Company contributions ranging from
2% to 10% of an employee's annual salary. Contributions made to these plans for
fiscal 2000, 1999 and 1998 were $0.6 million, $0.6 million and $0.4 million,
respectively.
NOTE I - Commitments and Contingencies
Future minimum commitments for operating leases at September 30, 2000 are as
follows (in thousands):
2001................................................... $12,489
2002................................................... 8,835
2003................................................... 4,313
2004................................................... 2,184
2005................................................... 1,728
Thereafter............................................. 919
-------
Total minimum lease payments........................... $30,468
=======
Approximately 56% of minimum lease payments on operating leases pertain to
real estate as of September 30, 2000. The remainder covers a variety of
machinery and equipment. Rental expense for all operating leases was
approximately $12.9 million, $11.7 million and $9.1 million in fiscal 2000, 1999
and 1998, respectively.
The Company is involved in various litigation arising in the ordinary
course of business. Although the final outcome of these matters cannot be
determined, based on the facts presently known, it is management's opinion that
the final resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
49
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE J - Fiscal 2000 Strategic Initiatives
In the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives aimed at increasing the Company's competitiveness and
profitability by reducing costs. The initiatives include completing a joint
venture in Mexico, closing two of the Company's plants, consolidating some
operations, outsourcing certain yarn production and eliminating excess employees
in certain operations. The cost of these initiatives was reflected in a plant
closing and impairment charge totaling $63.6 million before taxes in the fourth
quarter of fiscal 2000. The components of the plant closing and impairment
charge include $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. Approximately 1,370 employees will be terminated as a result of the
initiatives and are principally production workers, administrative support and
management. All production at the effected facilities will cease during December
quarter 2000 at which time substantially all of the effected employees will be
terminated. Severance will be paid out in either a lump sum or over a maximum
period of up to eighteen months. As of September 30, 2000, no employees were
terminated and no plant closing costs were paid in connection with the strategic
initiatives. The Company expects that the sale of the related real estate and
equipment could take 12 months or longer to complete.
The table below summarizes the plant closing costs (excluding impairment
charges), the amounts paid and the accrual balance as of September 30, 2000:
Accrual Balance
Total Charges Cash Payments at 9/30/00
------------- ------------- ----------
Severance benefits $ 10,763 $ - $ 10,763
Lease cancellation and other 3,553 3,553
---------- ------------- -----------
$ 14,316 $ - $ 14,316
========== ============= ===========
The Company expects to incur run-out expenses related to the plant closings.
Run-out expenses include efficiency losses, equipment relocation, losses on
inventories of discontinued styles, plant carrying costs and other costs. These
expenses will be charged to operations as incurred primarily in the December
quarter of fiscal 2001 and continuing to a lesser extent in March quarter 2001.
The Company will also curtail defined benefit pension and post-retirement
medical plan benefits for employees terminated under the strategic initiatives.
The financial effect of curtailment and settlement of the benefit plans will
result in a net curtailment gain which will be recognized when the related
employees terminate during fiscal 2001.
NOTE K - Severance Charge
During the third quarter of fiscal 1999, the Company recognized a $1.8
million charge associated with the termination of 46 salaried employees. The
charge was recorded as a component of selling, general and administrative
expenses. All affected employees have been terminated with cash payments
expected to be spread over a period not to exceed two years from termination. At
September 30, 2000, accrued severance was $0.1 million which is equal to the
expected future cash expenditures to such terminated employees.
NOTE L - Stockholders' Equity
The authorized capital stock of the Company consists of (i) 25,000,000 shares
of Common Stock, par value $.01 per share, of which 11,960,754 shares are
outstanding at September 30, 2000, (ii) 5,000,000 shares of Nonvoting Common
Stock, par value $.01 per share, none of which is issued or outstanding, and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per share, none of
which is issued or outstanding.
On February 9, 1999, the Company's stockholders approved the 1999 Stock
Option Plan (the "Plan") which replaced the Company's previous 1989 Stock Option
Plan that expired on that date. The Plan authorizes the granting of qualified
and non-qualified stock options to officers, directors, consultants and key
employees of the Company. Options may be granted through the Plan's expiration
in February 2009 at an exercise price of not less than fair market value. The
Plan provides for the issuance of up to 500,000 shares of the Company's Common
Stock, 405,500 of which were available for issuance at September 30, 2000.
Currently, the Company has both fixed stock options and target stock price
performance stock options outstanding under the Plan.
50
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE L - Stockholders' Equity (Continued)
Fixed Stock Options
The exercise price of each fixed stock option granted is equal to the
market price of the Company's Common Stock on the date of grant with a maximum
term of 10 years. Options granted to directors vest 12 months from the date of
grant while options granted to certain management employees vest 20% each year
over a five-year period from the date of grant.
The fair value of each option granted after September 30, 1995 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 2000, 1999 and 1998: expected
dividend yield of 0% for all years; expected volatility of 130.4%, 34% and 34%,
respectively; weighted average risk-free interest rate of 6.62%, 4.73% and
5.45%, respectively; and expected lives of 5 years for all years.
During fiscal 2000, 66,700 options due to expire were extended. In
connection with the extended options, the Company incurred a non-cash charge of
approximately $85,000.
A summary of the status of the Company's fixed stock options as of
September 30, 2000, October 2, 1999 and October 3, 1998, and changes during the
years are presented below:
2000 1999 1998
-------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- --------------- --------- --------------- ---------- --------------
Outstanding, beginning of year... 456,599 $ 9.96 503,249 $ 9.48 582,560 $ 9.22
Granted.......................... 4,500 2.02 11,350 7.71 6,500 18.12
Exercised........................ - - (37,200) .59 (80,611) 8.05
Forfeited or canceled............ - - (20,800) 13.67 (5,200) 13.68
-------- ------- -------- -------- --------- --------
Outstanding, end of year......... 461,099 $ 9.89 456,599 $ 9.96 503,249 $ 9.48
======== ======= ======== ======== ========= ========
Options exercisable at year-end.. 455,599 432,449 450,349
======== ======== =========
Weighted average fair value of
options granted during the
year calculated using
modified Black-Scholes model.. $ 1.77 $ 2.92 $ 7.12
The following table summarizes information about fixed stock options
outstanding at September 30, 2000:
Options Exercisable
---------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 9/30/00 Contractual Life Exercise Price at 9/30/00 Exercise Price
- ------------------- ----------- ---------------- -------------- ----------- --------------
$1.75 to 2.13 71,200 5.0 Yrs $ 1.77 66,700 $ 1.75
4.50 to 14.00 324,050 2.2 10.51 323,050 10.51
14.25 to 18.31 65,849 4.4 15.60 65,849 15.60
- ------------------- ------- --- ------ ------- ------
$1.75 to 18.31 461,099 3.0 $ 9.89 455,599 $ 9.96
51
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE L - Stockholders' Equity (Continued)
Target Stock Price Performance Stock Options
The exercise price of each target stock price performance stock option
granted is equal to the market price of the Company's Common Stock on the date
of grant and vests as the Company's Common Stock price achieves certain pre-
established targets, ranging from $6 to $30, which were set on the date of
grant. All options which have not vested within five years of the date of grant
will expire. All options which have vested within such time expire ten years
from the date of grant.
The fair value of each option granted was estimated on the date of grant
using a modified Black-Scholes option-pricing model which, in addition to the
required inputs, takes into consideration the target stock price (or barrier)
which must be attained. The following assumptions were incorporated into the
model for options granted in 2000 and 1998: weighted average risk-free interest
rate of 6.86% and 5.53%, respectively; expected dividend yield of 0% for both
years; expected lives ranging from 2.0 to 3.0 years and 1.42 to 2.17 years,
respectively; and volatility of 108% and 34%, respectively. There were no target
stock price performance stock options issued during 1999.
A summary of the status of the Company's target stock price performance
stock options as of September 30, 2000, October 2, 1999 and October 3, 1998 and
changes during the year is presented below:
2000 1999 1998
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- --------------- --------- ---------------- --------- ----------------
Outstanding, beginning of year... 499,600 $11.21 507,100 $ 11.27 522,334 $ 10.64
Granted.......................... 90,000 2.00 - - 71,000 16.38
Exercised........................ - - - - (85,400) 11.61
Forfeited or canceled............ - - (7,500) 15.52 (834) 13.25
-------- ------ -------- -------- -------- --------
Outstanding, end of year......... 589,600 $ 9.80 499,600 $ 11.21 507,100 $ 11.27
======== ====== ======== ======== ======== ========
Options exercisable at year-end.. 484,600 484,600 492,100
======== ======== ========
Weighted average fair value of
options granted during the
year calculated using
modified Black-Scholes model.. $ 1.19 $ - $ 3.53
As of September 30, 2000, the 589,600 target stock price performance options
outstanding under the Plan have a weighted average remaining contractual life of
6.51 years assuming all options vest.
52
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE M - Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share (in thousands):
2000 1999 1998
---- ---- ----
Numerator:
Income (loss) before extraordinary item.................. $(38,288) $(11,036) $11,819
Extraordinary loss....................................... - - 524
-------- -------- -------
Net income (loss)........................................ $(38,288) $(11,036) $11,295
======== ======== =======
Denominator:
Denominator for basic earnings per share -
Weighted average shares................................ 11,942 11,881 11,743
Effect of dilutive securities:
Stock options.......................................... - - 430
-------- -------- -------
Diluted potential common shares denominator
For diluted earnings per share - adjusted
Weighted average shares and assumed exercises.......... 11,942 11,881 12,173
======== ======== =======
NOTE N - Concentration of Credit Risk
The Company manufactures and sells textile products to companies located
worldwide which are predominantly in the apparel and home fabrics industries.
The Company performs periodic credit evaluations of its customers' financial
condition and, although the Company does not generally require collateral, it
does require cash payments in advance when the assessment of credit risk
associated with a customer is substantially higher than normal. At September
30, 2000, all trade accounts receivable are from customers in the apparel and
home furnishings industry. Receivables generally are due within 60 days, and
credit losses have consistently been within management's expectations. All
credit losses are provided for in the financial statements.
The Company had sales to Levi Strauss and its related companies which
comprised 22%, 22% and 19% of the Company's consolidated net sales for fiscal
2000, 1999 and 1998, respectively.
NOTE O - Segment Information
The Company's operations are classified into four business segments: Galey
& Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. The
Company is principally organized around differences in products; however, one
segment exists primarily due to geographic location. The business segments are
managed separately and distribute products through different marketing channels.
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended
apparel fabrics and garment packages. Swift Denim manufactures and markets a
wide variety of denim products for apparel and non-apparel uses. Klopman
International manufactures principally workwear and careerwear fabrics as well
as woven apparel fabrics primarily for consumption in Europe. Home Fashion
Fabrics manufactures and sells dyed and printed fabrics to the home furnishing
trade for use in bedspreads, comforters, curtains and accessories as well as
greige fabrics (undyed and unfinished) which it sends to independent contractors
for dyeing and finishing.
53
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE O - Segment Information (Continued)
The Company evaluates performance and allocates resources based on
operating income; therefore, certain expenses, principally net interest expense
and income taxes, are excluded from the chief operating decision makers'
assessment of segment performance. Accordingly, such expenses have not been
allocated to segment results. The accounting policies of the reportable segments
are the same as those described in the Summary of Significant Accounting
Policies (see Note A above). The corporate segment's operating income (loss)
represents principally the administrative expenses from the Company's various
holding companies. Additionally the corporate segment's assets consist primarily
of corporate cash, deferred bank charges and investments in and advances to
associated companies.
Information about the Company's operations in its different industry
segments for the past three years is as follows (in thousands) (see Note A):
2000 1999 1998
---- ---- ----
Net Sales to External Customers
Galey & Lord Apparel $459,410 $457,851 $481,422
Swift Denim 348,540 324,661 277,313
Klopman International 128,923 140,838 97,812
Home Fashion Fabrics 20,887 29,766 46,104
-------- -------- --------
Consolidated $957,760 $953,116 $902,651
======== ======== ========
Operating Income (Loss)/(1)/
Galey & Lord Apparel $ 25,897 $ 23,020 $ 26,649
Swift Denim (33,600) 5,223 37,608
Klopman International 11,198 11,600 5,552
Home Fashion Fabrics (2,198) (243) 2,835
Corporate (325) (150) (529)
-------- -------- --------
972 39,450 72,115
Interest expense 66,081 60,935 47,566
Income from associated companies (6,258) (4,240) (2,621)
Bridge financing interest expense - - 3,928
Loss on foreign currency hedges - - 2,745
-------- -------- --------
Income (loss) before income taxes and
extraordinary loss $(58,851) $(17,245) $ 20,497
======== ======== ========
Depreciation and Amortization
Galey & Lord Apparel $ 14,062 $ 15,092 $ 12,932
Swift Denim 22,056 22,205 14,719
Klopman International 5,598 6,199 4,299
Home Fashion Fabrics 3,293 3,300 3,342
Corporate 598 578 451
-------- -------- --------
$ 45,607 $ 47,374 $ 35,743
======== ======== ========
Other Non-cash Charges
Galey & Lord Apparel $ 218 $ 11 $ 1,058
Swift Denim 36 25 76
Klopman International 466 - -
Home Fashion Fabrics - - -
Corporate - 33 46
-------- -------- --------
$ 720 $ 69 $ 1,180
======== ======== ========
54
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE O - Segment Information (Continued)
2000 1999 1998
---- ---- ----
Assets/(2,3)/
Galey & Lord Apparel $306,846 $300,422 $ 307,517
Swift Denim 373,881 440,068 459,734
Klopman International 105,992 131,018 152,238
Home Fashion Fabrics 55,165 56,447 61,466
Corporate 54,220 50,761 57,338
-------- -------- ----------
$896,104 $978,716 $1,038,293
======== ======== ==========
Capital Expenditures
Galey & Lord Apparel $ 7,038 $ 19,275 $ 19,992
Swift Denim 9,108 4,940 10,551
Klopman International 2,594 2,848 2,715
Home Fashion Fabrics 261 122 526
-------- -------- ----------
$ 19,001 $ 27,185 $ 33,784
======== ======== ==========
Net Sales to External Customers/(4)/
United States $738,741 $732,257 $ 756,762
Europe 128,923 140,838 97,813
Canada 83,589 80,021 48,076
Mexico 6,507 - -
-------- -------- ----------
Consolidated $957,760 $953,116 $ 902,651
======== ======== ==========
Long-lived Assets
United States $197,520 $265,849 $ 282,951
Europe/(5)/ 53,790 69,119 86,385
Canada 31,411 31,559 32,628
Other Foreign Countries 17,362 17,174 15,601
-------- -------- ----------
Consolidated $300,083 $383,701 $ 417,565
======== ======== ==========
/(1)/ Fiscal 2000 operating income (loss) includes plant closing and impairment
charges related to the Fiscal 2000 Strategic Initiatives of $11.4
million, $51.6 million and $0.7 million for Galey & Lord Apparel, Swift
Denim and Klopman International, respectively.
/(2)/ Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
/(3)/ Assets include long-lived assets to be disposed of in connection with the
Fiscal 2000 Strategic Initiatives of $0.8 million and $12.5million for
Galey & Lord Apparel and Swift Denim, respectively.
/(4)/ Revenues are attributed to countries based on geographic origin.
/(5)/ Principally all of the European long-lived assets are located in Italy.
The Company has a single customer which exceeds 10% of consolidated net
sales. Galey & Lord Apparel net sales to this customer were $171.8 million,
$145.8 million and $108.1 million for fiscal 2000, 1999 and 1998, respectively.
Swift Denim net sales to this customer were $33.8 million, $59.2 million and
$66.8 million for fiscal 2000, 1999 and 1998, respectively. Klopman
International's net sales to this customer were $1.5 million, $5.3 million and
$1.2 million for fiscal 2000, 1999 and 1998, respectively.
55
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE P - Investments in and Advances to Associated Companies
In the consolidated balance sheets, investments in and advances to
associated companies represent several 50% joint venture interests, including
the Company's most recently formed joint venture, Swift Denim-Hidalgo. This
joint venture was formed on August 18, 2000 with Grupo Dioral to manufacture
denim in Mexico. In exchange for a 50% interest in the ownership of the joint
venture, the Company has contributed cash and inventory. In addition, equipment
from the closure of the Company's Erwin facility will be transferred to the
joint venture. The Company's initial investment including the above equipment
will total $14.0 million. As of September 30, 2000, the Company had contributed
$7.8 million in cash and inventory. The remaining assets will be transferred
during fiscal 2001. The joint venture is accounted for under the equity method
and the results of operations are reported on a one-month lag.
The Company has advanced $1.2 million to Swift Denim-Hidalgo to fund
working capital needs. These loans are included in investments in and advances
to associated companies at September 30, 2000. The loans are unsecured, bear
interest at the prime rate plus 1% and the principal is payable in a balloon
payment due August 2002. Also included in investments in and advances to
associated companies are secured loans to Swift Europe of $3.7 million at
September 30, 2000 and $4.7 million at October 2, 1999. These loans bear
interest at 5% and are payable in installments through 2009.
At September 30, 2000 and October 2, 1999, the excess of the Company's
investment over its equity in the underlying net assets of its joint venture
interests is approximately $11.0 million and $11.6 million, respectively, (net
of accumulated amortization of $1.7 million and $1.1 million, respectively) and
is being amortized on a straight-line basis over 20 years as a component of the
equity in earnings of the unconsolidated associated companies.
The following table presents condensed balance sheet and income
statement information as of September 30, 2000 and October 2, 1999 and for the
years ended September 30, 2000 and October 2, 1999. The financial information
has been derived from statutory financial statements and has been adjusted to
conform to U.S. generally accepted accounting principles.
2000 1999
---- ----
(In thousands)
Selected Balance Sheet Data:
Current assets $ 44,589 $ 24,158
Noncurrent assets 48,615 10,970
Current liabilities 37,749 22,766
Noncurrent liabilities 21,462 8,965
Stockholders' equity 33,993 3,397
Selected Income Statement Data:
Net sales $ 74,955 $ 58,726
Gross profit 21,624 17,740
Operating income 15,147 10,948
Net income $ 13,708 $ 9,778
56
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE Q - Quarterly Results of Operations (Unaudited)
The Company's unaudited consolidated results of operations are presented
below (in thousands, except per share data):
Fiscal 2000 Quarters
----------------------------------------------
December March June September/(1)/
---------- --------- --------- ------------
Net sales................................................... $201,144 $ 251,000 $262,243 $ 243,373
Cost of sales............................................... 178,435 226,552 231,731 218,327
-------- --------- -------- ---------
Gross profit................................................ 22,709 24,448 30,512 25,046
Income tax expense (benefit)................................ (938) 164 1,553 (21,342)
Net income (loss)........................................... $ (891) $ 202 $ 2,506 $ (40,105)
======== ========= ======== =========
Per share data - basic:
Average common shares outstanding........................... 11,903 11,942 11,961 11,961
Net income (loss) - basic................................... $ (.07) $ .02 $ .21 $ (3.35)
======== ========= ======== =========
Per share data - diluted:
Average common shares outstanding........................... 11,903 11,952 11,979 11,961
Net income (loss) - diluted................................. $ (.07) $ .02 $ .21 $ (3.35)
======== ========= ======== =========
Fiscal 1999 Quarters
---------------------------------------------
December March June September
--------- ---------- ---------- ----------
Net sales................................................... $246,035 $237,433 $249,476 $220,172
Cost of sales............................................... 218,113 215,227 234,369 206,862
-------- -------- -------- --------
Gross profit................................................ 27,922 22,206 15,107 13,310
Income tax expense (benefit)................................ 1,880 (1,012) (2,828) (4,249)
Net income (loss)........................................... $ 3,370 $ (1,106) $ (5,880) $ (7,420)
======== ======== ======== ========
Per share data - basic:
Average common shares outstanding........................... 11,841 11,875 11,903 11,903
Net income (loss) - basic................................... $ .28 $ (.09) $ (.49) $ (.62)
======== ======== ======== ========
Per share data - diluted:
Average common shares outstanding........................... 11,968 11,875 11,903 11,903
Net income (loss) - diluted................................. $ .28 $ (.09) $ (.49) $ (.62)
======== ======== ======== ========
All quarters presented are 13-week periods.
(1) September quarter 2000 includes $63.7 million (pre-tax) of charges related
to the Company's Fiscal 2000 Strategic Initiatives.
57
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE R - Supplemental Condensed Consolidating Financial Information
The following summarizes condensed consolidating financial information for
the Company, segregating Galey & Lord, Inc. (the "Parent") and subsidiaries that
are guarantors of the Notes ("Guarantor Subsidiaries") from subsidiaries that
are not guarantors of the Notes ("Non-Guarantor Subsidiaries"). The Guarantor
Subsidiaries are wholly-owned subsidiaries of the Company and guarantees are
full, unconditional and joint and several. Separate financial statements of
each of the Guarantor Subsidiaries are not presented because management believes
that these financial statements would not be material to investors.
September 30, 2000
---------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ---------- ------------ ------------ ------------- ------------
Current assets:
Trade accounts receivable $ - $157,707 $ 39,715 $ - $197,422
Inventories - 133,375 33,809 (662) 166,522
Other current assets 3,658 15,803 16,056 - 35,517
--------- -------- -------- ------------ --------
Total current assets 3,658 306,885 89,580 (662) 399,461
Property, plant and equipment, net - 212,485 87,598 - 300,083
Intangibles, net - 149,376 - - 149,376
Investments in subsidiaries and other assets 204,891 6,298 31,064 (195,069) 47,184
--------- -------- -------- ------------ --------
$ 208,549 $675,044 $208,242 $ (195,731) $896,104
========= ======== ======== ============ ========
Current liabilities:
Trade accounts payable $ 46 $ 38,243 $ 21,618 $ - $ 59,907
Accrued liabilities 23,085 29,841 16,698 (13) 69,611
Other current liabilities 5,850 (2,696) 1,425 - 4,579
--------- -------- -------- ------------ --------
Total current liabilities 28,981 65,388 39,741 (13) 134,097
Net intercompany balance (516,566) 594,709 (78,143) - -
Long-term debt 640,537 6,523 1,445 - 648,505
Other non-current liabilities 8 48,445 9,652 (192) 57,913
Stockholders' equity 55,589 (40,021) 235,547 (195,526) 55,589
--------- -------- -------- ------------ --------
$ 208,549 $675,044 $208,242 $ (195,731) $896,104
========= ======== ======== ============ ========
58
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE R - Supplemental Condensed Consolidating Financial Information (Continued)
October 2, 1999
--------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ---------- ------------ ------------ ------------- ------------
Current assets:
Trade accounts receivable $ - $133,969 $ 42,578 $ - $176,547
Inventories - 136,804 38,990 (693) 175,101
Other current assets 4,895 27,644 24,513 (8,623) 48,429
--------- -------- -------- --------- --------
Total current assets 4,895 298,417 106,081 (9,316) 400,077
Property, plant and equipment, net - 280,933 102,768 - 383,701
Intangibles, net - 154,144 - - 154,144
Investments in subsidiaries and other assets 271,134 10,913 23,832 (265,085) 40,794
--------- -------- -------- --------- --------
$ 276,029 $744,407 $232,681 $(274,401) $978,716
========= ======== ======== ========= ========
Current liabilities:
Trade accounts payable $ 80 $ 40,489 $ 22,719 $ - $ 63,288
Accrued liabilities 17,119 23,255 17,452 383 58,209
Other current liabilities 2,859 2,010 1,998 995 7,862
--------- -------- -------- --------- --------
Total current liabilities 20,058 65,754 42,169 1,378 129,359
Net intercompany balance (495,207) 576,419 (81,212) - -
Long-term debt 638,116 7,210 12,725 - 658,051
Other non-current liabilities 4,325 80,832 9,112 (11,700) 82,569
Stockholders' equity 108,737 14,192 249,887 (264,079) 108,737
--------- -------- -------- --------- --------
$ 276,029 $744,407 $232,681 $(274,401) $978,716
========= ======== ======== ========= ========
59
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, October 2, 1999 and October 3, 1998
NOTE R - Supplemental Condensed Consolidating Financial Information (Continued)
For the year ended September 30, 2000
-----------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $754,007 $251,704 $(47,951) $ 957,760
Gross profit - 73,050 29,634 31 102,715
Operating income (loss) (99) (17,696) 18,736 31 972
Interest expense, income taxes and other, net (175) 37,700 3,634 (1,899) 39,260
Net income (loss) $ 76 $(55,396) $ 15,102 $ 1,930 $ (38,288)
For the year ended October 2, 1999
-------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $735,804 $247,784 $(30,472) $953,116
Gross profit 218 49,596 28,516 215 78,545
Operating income (loss) (181) 22,050 17,503 78 39,450
Interest expense, income taxes and other, net (1,669) 43,281 3,788 5,086 50,486
Net income (loss) $ 1,488 $(21,231) $ 13,715 $ (5,008) $(11,036)
60
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 October 2, 1999 and October 3, 1998
NOTE R - Supplemental Condensed Consolidating Financial Information (Continued)
For the year ended September 30, 2000
-----------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 8,775 $ (9,142) $ 28,404 $(737) $ 27,300
Cash provided by (used in) investing activities 11,153 (10,411) (23,778) 753 (22,283)
Cash provided by (used in) financing activities (19,918) 17,621 (6,574) (16) (8,887)
Effect of exchange rate change on cash and cash
equivalents - - (789) - (789)
-------- -------- -------- ------------ --------
Net change in cash and cash equivalents 10 (1,932) (2,737) - (4,659)
Cash and cash equivalents at beginning of period
- 6,126 8,174 - 14,300
-------- -------- -------- ------------ --------
Cash and cash equivalents at end of period $ 10 $ 4,194 $ 5,437 $ - $ 9,641
======== ======== ======== ============ ========
For the year ended October 2, 1999
--------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 6,834 $ 14,596 $ 15,281 $ (105) $ 36,606
Cash provided by (used in) investing activities (48,102) (24,881) 59,050 (653) (14,586)
Cash provided by (used in) financing activities 41,154 8,085 (77,461) 758 (27,464)
Effect of exchange rate change on cash and cash
equivalents - - (202) - (202)
-------- -------- -------- ------- --------
Net change in cash and cash equivalents (114) (2,200) (3,332) - (5,646)
Cash and cash equivalents at beginning of period
114 8,326 11,506 - 19,946
-------- -------- -------- ------- --------
Cash and cash equivalents at end of period $ - $ 6,126 $ 8,174 $ - $ 14,300
======== ======== ======== ======= ========
61
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
62
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the headings "Proposal 1 - Election of
Directors," "Executive Officers" and "Security Ownership."
Item 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Security Ownership."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Related Transactions."
63
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements
--------------------
The following financial statements of Galey & Lord, Inc. are included
under Item 8. of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets as of September 30, 2000 and October 2,
1999.
Consolidated Statements of Operations for the fiscal years ended
September 30, 2000, October 2, 1999 and October 3, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2000, October 2, 1999 and October 3, 1998.
Consolidated Statements of Stockholders' Equity for the fiscal years
ended September 30, 2000, October 2, 1999 and October 3, 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
-----------------------------
The following schedule is filed as a part of this Item 14:
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable
or are not required or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
--------
The exhibits listed in the accompanying Exhibit Index are filed as a
part of this Report.
(b) 1. Reports on Form 8-K Filed During the Last Quarter.
-------------------------------------------------
The Registrant filed a Form 8-K on September 21, 2000 to report, among
other things, a series of strategic initiatives aimed at increasing the
Company's competitiveness and profitability by reducing costs.
64
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
----- ----------- --------
3.1 - Form of Restated Certificate of Incorporation of the Company./(1)/
3.2 - Form of Amended and Restated Bylaws of the Company./(1)/
4.1 - Form of Common Stock Certificate./(1)/
10.1 - Form of Registration Rights Agreement, by and among the Company, Arthur C. Wiener,
Burlington and Citicorp Venture Capital, Ltd. ("CVC")./(1)/
10.2 - Amended and Restated 1989 Stock Option Plan of the Company./(1)/*
10.3 - Agreement, dated February 11, 1991, between Burlington and Industries./(1)/
10.4 - Service Agreement, dated as of March 2, 1991, between Burlington and Industries./(1)/
10.5 - Form of Voting Agreement, by and among the Company, Arthur C. Wiener and CVC./(1)/
10.6 - The Retirement Plan of Galey & Lord, Inc./(1)/*
10.7 - The Retirement Plan of Galey & Lord Industries, Inc. as Amended and Restated
Effective April 1, 1992./(2)/*
10.8 - The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc. as Amended and
Restated April 1, 1992./(2)/*
10.9 - Form of Purchase Agreement dated as of March 29, 1994 between Burlington and
Industries./(3)/
10.10 - Assumption Agreement dated as of April 29, 1994 between Burlington and
Industries./(3)/
10.11 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated
August 25, 1994./(4)/*
10.12 - Second Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries,
Inc. dated April 27, 1994./(5)/*
10.13 - Loan Agreement dated as of May 1, 1994 between South Carolina Jobs - Economic
Development Authority and Industries./(5)/
10.14 - Reimbursement and Security Agreement dated as of May 1, 1994 between Industries and
Wachovia./(5)/
10.15 - Guaranty Agreement dated as of May 1, 1994 from the Company to Wachovia./(5)/
10.16 - The Supplemental Executive Retirement Plan of Galey & Lord Industries, Inc./(5)/*
65
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
10.17 - The Deferred Compensation Plan of Galey & Lord Industries, Inc./5)/*
10.18 - First Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated April
27, 1994./(6)/*
10.19 - Second Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated
April 25, 1995./(7)/*
10.20 - Fourth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries,
Inc. dated April 25, 1995./(7)/*
10.21 - Letter of Intent dated September 22, 1995 between the Company and Triarc Companies,
Inc./(8)/
10.22 - Fifth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries,
Inc. dated August 29, 1995./(10)/*
10.23 - Asset Purchase Agreement, dated as of May 20, 1996, among the Company, Industries,
Farah Incorporated, Farah U.S.A., Inc. and Dimmit (excluding Schedules and
Exhibits)./(11)/
10.24 - Amended and Restated Credit Agreement dated as of June 4, 1996 between Industries,
the Company and certain subsidiaries and First Union National Bank of North
Carolina, as agent and lender, and the other lender's party thereto./(12)/
10.25 - Third Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated June
7, 1996./(13)/*
10.26 - Sixth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries,
Inc. dated June 7, 1996./(13)/*
10.27 - Seventh Amendment to The Savings and Profit Sharing Plan of Galey & Lord
Industries, Inc. dated September 30, 1996./(13)/*
10.28 - Amended and Restated Reimbursement and Security Agreement, dated as of June 4,
1996, among Galey & Lord Industries, Inc., Galey & Lord, Inc. and Wachovia Bank of
North Carolina, N.A./(14)/
10.29 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated
February 7, 1995./(15)/*
10.30 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated
February 11, 1997./(15)/*
10.31 - 1996 Restricted Stock Plan of the Company./(16)/*
66
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
10.32 - First Amendment to the Amended and Restated Credit Agreement dated May 13, 1997
between Galey & Lord Industries, Inc., the Company and certain subsidiaries and
First Union National Bank of North Carolina, as agent and lender./(16)/
10.33 - Agreement, dated October 27, 1997, between Polymer Group, Inc. ("Polymer"), DT
Acquisition, Inc. ("DTA") and the Company./(17)/
10.34 - Amendment to the Agreement between Polymer, DTA and the Company, dated November 16,
1997./(17)/
10.35 - Operating Agreement, dated December 19, 1997, between Polymer, DTA and the Company./(17)/
10.36 - Credit Agreement dated as of December 19, 1997 among Galey & Lord Industries, Inc.,
the Company, G&L Service Company, North America, Inc. ("Service Company") and First
Union National Bank, as agent and lender, and the other lenders' party thereto./(17)
10.37 - Security Agreement dated as of December 19, 1997, among Industries, the Company,
Service Company and First Union National Bank, as collateral agent./(17)/
10.38 - Pledge Agreement dated as of December 19, 1997, among Industries, the Company,
Service Company and First Union National Bank, as collateral agent./(17)/
10.39 - Senior Subordinated Credit Agreement dated as of December 19, 1997 among
Industries, the Company and First Union Corporation, as agent and lender./(17)/
10.40 - Master Separation Agreement, dated January 29, 1998, among the Company, Polymer,
DTA, Dominion Textile, Inc. ("Dominion") and certain other parties thereto./(18)/
10.41 - Credit Agreement dated as of January 29, 1998 among the Company, Industries,
Service Company, Swift Textiles Inc. ("Textiles"), Swift Denim Services Inc.
("Denim") and First Union National Bank, as agent and lender, and the other
lenders' party thereto./(18)/
10.42 - Security Agreement dated as of January 29, 1998, among the Company, Industries,
Service Company, Textiles, Denim and First Union National Bank, as collateral
agent./(18)/
10.43 - Pledge Agreement dated as of January 29, 1998, among the Company, Industries,
Service Company, Textiles, Denim and First Union National Bank, as collateral
agent./(18)/
67
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
10.44 - Foreign Subsidiary Pledge Agreement dated as of January 29, 1998, among the Company,
certain of its subsidiaries party thereto and First Union National Bank, as
collateral agent./(18)/
10.45 - First Amendment to Senior Subordinated Credit Agreement dated as of January 29, 1998
among Industries, the Company and First Union Corporation, as agent and lender./(18)/
10.46 - Second Amendment to Senior Subordinated Credit Agreement dated as of January 29,
1998 among the Company, Industries, Service Company, Textiles, Denim and First Union
Corporation, as agent and lender./(18)/
10.47 - Waiver, Release and First Amendment to the Credit Agreement dated March 19, 1998
among the Company, Industries, Service Company, Textiles, Denim and First Union
National Bank, as agent and lender./(19)/
10.48 - Second Amendment to the Credit Agreement dated March 27, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union Nation Bank, as agent
and lender, and the other lenders' party thereto./(19)/
10.49 - Indenture, dated as of February 24, 1998 among the Company, Industries, Service
Company, Textiles, Denim and Suntrust Bank, Atlanta./(20)/
10.50 - Note Purchase Agreement, dated February 19, 1998 among the Company, Industries,
Service Company, Textiles, Denim and First Union Capital Markets, a division of
Wheat First Securities, Inc./(20)/
10.51 - Form of Initial Global Note./(20)/
10.52 - Form of Initial Certificated Note./(20)/
10.53 - Registration Rights Agreement, dated February 24, 1998, by and among the Company,
Industries, Service Company, Textiles, Denim and First Union Capital Markets, a
division of Wheat First Securities, Inc./(21)/
10.54 - Third Amendment, Consent and Release, to the Credit Agreement dated September 15,
1998, among the Company, Industries, Service Company, Textiles, Denim and First
Union Nation Bank, as agent and lender, and the other lenders' party thereto./(24)/
10.55 - Fourth Amendment to the Credit Agreement dated December 23, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union Nation Bank, as agent
and lender, and the other lenders' party thereto./(24)/
10.56 - Agreement dated April 29, 1996, between Dominion and John J. Heldrich./(24)/*
10.57 - Galey & Lord, Inc. 1999 Stock Option Plan./(22)/*
68
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
10.58 - Fifth Amendment to the Credit Agreement dated July 3, 1999 among the Company,
Industries, Service Company, Textiles, Denim, Galey & Lord Properties, Inc., Swift
Denim Properties, Inc. and First Union National Bank, as agent and lender, and the
other lenders' thereto./(23)/
10.59 - Amended and Restated Retirement Plan for Employees of Galey & Lord, Inc./(25)/*
10.60 - Amended and Restated Galey & Lord Retirement Savings Plan (401(k))./(25)/*
10.61 - Form of Supplemental Indenture./(26)/
10.62 - Sixth Amendment to the Credit Agreement dated September 7, 2000 among the Company,
Industries, Service Company, Textiles, Denim, Galey & Lord Properties, Inc., Swift
Denim Properties, Inc. and First Union National Bank, as agent and lender, and the
other lenders' thereto.
10.63 - Employment Agreement between the Company and Arthur C. Wiener.*
10.64 - Employment Agreement between the Company and John J. Heldrich, Jr.*
10.65 - Employment Agreement between the Company and Robert McCormack.*
10.66 - Employment Agreement between the Company and Charles A. Blalock.*
21 - Subsidiaries of the Company./(24)/
23.1 - Consent of Ernst & Young LLP.
27 - Financial Data Schedule
/(1)/ Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No.
33-45895) which was declared effective by the Securities and Exchange Commission on
April 30, 1992 and incorporated herein by reference.
/(2)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year
ended October 2, 1993 and incorporated herein by reference.
/(3)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended April 2, 1994 and incorporated herein by reference.
/(4)/ Filed as an Exhibit to the Company's Registration Statement on Form S-8 (File No.
33-52248) dated August 25, 1994 and incorporated herein by reference.
/(5)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year
ended October 1, 1994 and incorporated herein by reference.
69
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
/(6)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 1994 and incorporated herein by reference.
/(7)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended April 1, 1995 and incorporated herein by reference.
/(8)/ Filed as an Exhibit to the Company's Form 8-K dated September 22, 1995 and
incorporated herein by reference.
/(9)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995 and incorporated herein by reference.
/(10)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended March 30, 1996 and incorporated herein by reference.
/(13)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1996 and incorporated herein by reference.
/(14)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended December 28, 1996 and incorporated herein by reference.
/(15)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended March 29, 1997 and incorporated herein by reference.
/(16)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended June 28, 1997 and incorporated herein by reference.
/(17)/ Filed as an Exhibit to the Company's Form 8-K dated December 19, 1997 and
incorporated herein by reference.
/(18)/ Filed as an Exhibit to the Company's Form 8-K dated January 29, 1998 and
incorporated herein by reference.
/(19)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended March 28, 1998 and incorporated herein by reference.
/(20)/ Filed as an Exhibit to the Company's Form 8-K dated February 24, 1998 and
incorporated herein by reference.
/(21)/ Filed as an Exhibit to the Company's Registration Statement on Form S-4 (File No.
333-49503) dated April 22, 1998 and incorporated herein by reference.
/(22)/ Filed as an Exhibit to the Company's Registration Statement on Form S-8 (File No.
333-78809) dated May 19, 1999 and incorporated herein by reference.
/(23)/ Filed as an Exhibit to the Company's Form 8-K dated July 13, 1999 and incorporated
herein by reference.
70
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
/(24)/ Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended October 3,
1998 and incorporated herein by reference.
/(25)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period
ended April 1, 2000 and incorporated herein by reference.
/(26)/ Filed as an Exhibit to the Company's Form 8-K dated June 1, 2000 and incorporated
herein by reference.
* Management contract or compensatory plan or arrangement identified pursuant to item
14(a)3 of this report.
71
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALEY & LORD, INC.
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions- End of
Classification of Period Expenses Accounts Describe(1) Period
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 2000
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances.......... $6,531 $1,292 $ (524) $ 388 $6,911
---------- ---------- ---------- ----------- ----------
Totals................................... $6,531 $1,292 $ (524) $ 388 $6,911
========== ========== ========== =========== ==========
YEAR ENDED OCTOBER 2, 1999
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances.......... $8,215 $ (320) $ (308) $1,056 $6,531
---------- ---------- ---------- ----------- ----------
Totals................................... $8,215 $ (320) $ (308) $1,056 $6,531
========== ========== ========== =========== ==========
YEAR ENDED OCTOBER 3, 1998
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances.......... $4,687 $1,052 $ 5,433/(2)/ $2,957 $8,215
---------- ---------- ---------- ----------- ----------
Totals................................... $4,687 $1,052 $ 5,433 $2,957 $8,215
========== ========== ========== =========== ==========
___________________
/(1)/Uncollectible accounts written off.
/(2)/Includes reserves for the Acquired Business as of the date of Acquisition.
72
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GALEY & LORD, INC.
December 27, 2000 /s/ Arthur C. Wiener
- ----------------- --------------------
Date Arthur C. Wiener
Chairman of the Board
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Arthur C. Wiener December 27, 2000 /s/ Michael R. Harmon December 27, 2000
- ------------------------------------------------------ --------------------------------------------------------
Arthur C. Wiener Date Michael R. Harmon Date
Chairman of the Board Executive Vice President,
and President (Principal Executive Officer) Chief Financial Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary
/s/ Michael T. Bradley December 27, 2000 /s/ Howard S. Jacobs December 27, 2000
- ------------------------------------------------------ --------------------------------------------------------
Michael T. Bradley Date Howard S. Jacobs Date
Director Director
/s/ Paul G. Gillease December 27, 2000 /s/ William M.R. Mapel December 27, 2000
- ------------------------------------------------------ --------------------------------------------------------
Paul G. Gillease Date William M.R. Mapel Date
Director Director
/s/ William deR. Holt December 27, 2000 /s/ Stephen C. Sherrill December 27, 2000
- ------------------------------------------------------ --------------------------------------------------------
William deR. Holt Date Stephen C. Sherrill Date
Director Director
73