Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -------
EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number 0-20080
-------
September 29, 2001
- ------------------
GALEY & LORD, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1593207
- -------------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
980 Avenue of the Americas
New York, New York 10018
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
212/465-3000
-------------------------------------------------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _________
-------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 7, 2001, was approximately
$2,369,000.
The number of shares outstanding of Common Stock, as of December 7, 2001, was
11,996,965 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for the 2002 annual meeting of
stockholders of the Company are hereby incorporated by reference into Part III
of this 10-K.
PART I
Item 1. BUSINESS
- -----------------
This 2001 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 and belief
of current expectations of the Company and its management team. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements. Such risks and uncertainties include, among other things,
competitive and economic factors in the textile, apparel and home furnishings
markets, raw materials and other costs, the level of the Company's indebtedness,
interest rate fluctuations, weather-related delays, general economic conditions,
governmental legislation and regulatory changes, the long-term implications of
regional trade blocs and the effect of quota phase-out and lowering of tariffs
under the WTO trade regulations and other risks and uncertainties that may be
detailed herein, and from time-to time, in Galey & Lord's other reports filed
with the Securities and Exchange.
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, and the subsidiaries and joint venture interests that comprise Dimmit,
Swift, Swift Europe 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 markets dyed and printed
fabrics for use in home fashions.
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
The Company believes that it is the world's largest producer of value-added
denim which it achieved through development of differentiated denim products.
Accordingly, the Company believes that domestically most of its denim products
are in the mid to upper range of the market.
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. Dimmit was composed of six manufacturing facilities
located in Piedras Negras, Mexico for the purpose of sewing and finishing pants
and shorts for the casual wear market. As discussed below, the Company
discontinued all of G&L Service Company's operations in the fourth quarter of
fiscal 2001.
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
credit facilities (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
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 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 four years. In exchange for a $14 million
contribution comprised of cash, inventory and equipment, the Company received a
50% interest in the ownership of this joint venture. The Company contributed
$7.8 million in cash and inventory in fiscal 2000 and $5.0 million in inventory
and equipment in fiscal 2001. The equipment is from the Company's Erwin facility
which closed in December 2000. The remaining equipment will be transferred in
fiscal 2002.
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
included (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 of 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 operation in Italy. Approximately 1,370 employees were
terminated as a result of the initiatives, including production workers,
administrative support and management.
3
In the fourth quarter of fiscal 2001, the Company announced additional actions
due to a continuing difficult business environment. These actions included (1)
the discontinuation of G&L Service Company, the Company's garment making
operations in Mexico and (2) the consolidation of its greige fabrics operations
which includes the closure of its Asheboro, North Carolina weaving facility and
Caroleen, North Carolina spinning facility. In addition, the Company provided
for the reduction of approximately 5% of its salaried overhead employees. The
above actions resulted in the termination of approximately 3,300 Mexican
employees and 500 U.S. employees. 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, and (iii) to continue to modernize its
facilities in order to maintain its competitive position.
Key tactics of the Company's strategy include:
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.
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 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.
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 29, 2001, approximately 32% of the
Company's long lived assets were located outside of the United States.
The Company also has a marketing and product development partnership with Litton
Mills in the Phillippines whereby product produced by Litton is sold under the
Swift Denim name to customers throughout the Pacific Rim.
Increasing Manufacturing Efficiencies. The Company has made significant
investments in its manufacturing operations to provide for the flexible
production of its broad line of value-added fabrics and to reduce production
costs.
4
Products and Customers
The following chart sets forth the Company's net sales for Galey & Lord Apparel,
Swift Denim, Klopman International and Home Fashion Fabrics, for each of the
last three fiscal years.
Fiscal Year
-----------------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------- -------------------------
(dollar amounts in thousands)
Galey & Lord Apparel ................. $ 402,024 47.3% $ 459,410 48.0% $ 457,851 48.0%
Swift Denim .......................... 299,124 35.2% 348,540 36.4% 324,661 34.1%
Klopman International ................ 135,409 15.9% 128,923 13.4% 140,838 14.8%
Home Fashion Fabrics ................. 13,436 1.6% 20,887 2.2% 29,766 3.1%
----------- ------- ---------- ------- ---------- -------
Totals ......................... $ 849,993 100.0% $ 957,760 100.0% $ 953,116 100.0%
=========== ======= ========== ======= ========== =======
For additional financial information with respect to the four segments and for
geographical segment data, see Note N to the Company's consolidated financial
statements contained herein.
Galey & Lord Apparel
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended
apparel, uniform and corduroy fabrics. From January 1997 to September 2001, the
Company also sold garment packages to its customers.
The Company believes it is the largest domestic producer by capacity of cotton
and cotton blended fabrics used in apparel. 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 is a vertically integrated manufacturer of woven cotton and cotton
blended apparel fabrics with plants involved in spinning, weaving and dyeing and
finishing. The Company supplements its spinning production with purchased yarn.
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 has historically purchased 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. As part of its
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company
consolidated certain of its greige fabrics operations, which included the
closure of its Asheboro, North Carolina weaving facility and Caroleen, North
Carolina spinning facility.
5
The Company maintains rigorous quality control throughout each production
process. Testing and inspection occur at various stages in the spinning,
weaving, dyeing and finishing processes. The Company's plants use computers to
monitor and control manufacturing processes and the flow of products.
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
predominantly 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, VF Services, Polo Ralph
Lauren, GAP, Inc., Liz Claiborne, American Trouser, Inc., and Oxford Industries.
In addition, the Company sells to suppliers of mail order catalogs.
The Company's uniform fabrics are distributed to the government, the industrial
laundry market, the hospitality market and the healthcare market. Durability of
fabric, compliance with strict specifications for use, continuity of color and
customer service are the factors most important to the Company's customers.
Domestic customers for uniform fabrics include Riverside Manufacturing Co.,
Garment Corporation of America, Superior Surgical Mfg. Co., Inc., Landau
Uniforms Corp., and Kellwood Company.
The Company is the only vertically integrated manufacturer of corduroy in the
U.S. and is the largest domestic manufacturer. The Company's weaving, dyeing and
finishing equipment and processes used to produce woven cotton, cotton-blended,
and uniform fabrics may also be used to produce corduroy. The ability to produce
both types of fabric using substantially the same equipment and processes allows
the Company to schedule its production both economically and efficiently to 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.
The Company manufactures corduroy 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. Major corduroy customers are Levi's, Haggar,
GAP, Inc., Savane and Tropical Sportswear Int'l Corporation, Azteca Production
International Inc., and VF Services.
In June 1996, the Company acquired garment manufacturing facilities located in
Piedras Negras, Mexico and later opened an additional garment manufacturing
facility in Monclova, Mexico. This allowed the Company to offer its customers a
finished package of fabric and garments from one source. Due to pricing
pressures associated with a worldwide overcapacity of garment production, a
strong U.S. dollar relative to Asian currencies and the impact of the Caribbean
Basin Initiative ("CBI"), the Company closed all of its garment manufacturing
facilities as part of its Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives. The Company's customers for garment packages included Levi's, Liz
Claiborne and Calvin Klein.
6
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 a 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 and character yarn products
such as rough spun 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 joint venture, Swift Denim-Hidalgo, the Company is producing basic
denim fabric in Mexico. The Company believes that the lower cost of production
in Mexico 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, Inc., 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 Apparel and sells to mail order suppliers including
Land's End, Inc., L.L. Bean Inc., J. Crew 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 polyester and cotton blended fabrics in
Europe. Klopman is unique in being Europe's only manufacturer dedicated solely
to the production of fabrics for workwear, protectivewear and casual apparel.
Klopman 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. Klopman has continued to expand its production and marketing
of woven casual wear fabric.
Klopman operates a spinning, weaving and dyeing and finishing plant in
Frosinone, Italy 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's customers include the Kansas Group, Alexandra Workwear plc.,
Apparelmaster, CCM Limited, Alsico NV, Mulliez Freres, Amuco International SpA,
Van Moer, Dickies, Haniel/Eurodress, Levi's, Carhartt and G-Star.
7
Home Fashion Fabrics
The Company's Home Fashion Fabrics Division sells dyed and printed fabrics to
the home furnishing market for use in bedspreads, comforters, curtains,
accessories and certain upholstery applications. Prior to September 2001, the
Company operated its own yarn and greige manufacturing facilities to produce
home fashions greige fabric (undyed and unfinished) that was dyed and printed
for its customers. Home fashions greige fabric was also sold to independent
contractors for dyeing and finishing. However, as part of the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives, the yarn and greige manufacturing
plants were closed and in the future, the Company will purchase the greige
fabric it requires to meet sales demand. The Company uses various suppliers to
dye and print fabrics according to customers' specifications. Home Fashion
Fabrics' major customers include Regency Home Fashions Inc., Burlington
Industries, Inc., V.K.O. Incorporated and Design Craft.
Sales and Marketing
The Company's personnel work continually with customers to develop product lines
well in advance of actual shipment. Sales personnel often present fabrics to
customers in the form of commercially made sample garments rather than the
traditional method of just showing fabrics. The Company believes this enables
customers to bring products to market quicker and more efficiently.
The Company has separate sales and marketing groups for Galey & Lord Apparel,
Swift, Klopman 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 2001 and fiscal 2000 to various divisions of Levi Strauss &
Co., Inc. accounted for approximately 21% and 24% of the Company's total net
sales, respectively. 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 29, 2001, the Company had approximately 3,000 customer accounts.
Raw Materials and Services
The Company's principal raw materials are cotton and polyester. Cotton is
available from a large number of suppliers. The quantity of plantings, crop and
weather conditions, agricultural policies, domestic uses, exports and market
conditions can significantly affect the cost and availability of cotton, but, to
date, the Company has not experienced any difficulty obtaining adequate supplies
of cotton. The Company traditionally 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 U.S. Department of Agriculture had adopted a program under
which it paid 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
8
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 as of 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 could adversely impact its financial
position.
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. to purchase yarn. Parkdale
Mills, Inc. is a highly modernized, state of the art yarn spinner that 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 customer
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.
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 suppliers 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.
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 U.S. 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.
9
Backlog
The Company's order backlog at September 29, 2001 was $83.8 million, a 53%
decrease from the September 30, 2000 backlog of $178.4 million. The decline in
order backlog is due to lower demand as a result of the difficult domestic
retail environment, as well as decreased visibility due to shortened lead times.
Over the past several years, many apparel manufacturers, including many of the
Company's customers, have modified their purchasing procedures and have
shortened lead times from order to delivery. Accordingly, the Company believes
that order backlogs may not be as meaningful as they have in the past with
regard to the Company's future sales.
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'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'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 sells.
Competition
The United States textile industry has been and continues to be negatively
impacted by existing worldwide trade practices. The establishment of the World
Trade Organization in 1995 has resulted in the phase out of quotas on textiles
and apparel through 2005. This phase out will gradually allow more low cost
imports to enter the U.S.
U.S. government policy on an overall basis has not been favorable to the U.S.
textile industry. The Company believes that the increasing flow of imports in
the United States is partly due to the U.S. government's strong dollar monetary
policy that allows foreign manufacturers to sell in the U.S. while a significant
portion of their production costs are denominated in devalued local currencies.
Further, the Company believes that as a result of the September 11, 2001 tragic
events, the U.S. government may grant trade concessions to textile producing
nations providing assistance in its war on terrorism. These trade concessions
would further harm the U.S. textile industry.
Certain U.S. government trade programs do provide some benefit to the U.S.
textile industry as outlined below:
. 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 the North American Free Trade
Agreement ("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 the U.S. Congress has
established several incentives that allow garments manufactured in the
Caribbean to 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
10
U.S. yarn. While the Company to date has not experienced any increased
fabric sales related to Caribbean Basin Initiatives it does expect
that the initiatives will positively impact its future sales.
. The Company believes that it has benefited, and will continue to
benefit, from the 1994 implementation of NAFTA, which phased 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.
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. 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.
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 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., Riegel Textile Corp., a division of Mount Vernon Mills, Inc. and
Burlington are Swift's major competitors.
Klopman International
Klopman is the leading pan-European manufacturer and marketer of fabric for
workwear and protectivewear. 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 Dan River, Santee Print Works
Inc. and Slater Screen Print Works.
11
Other
In Europe, the Company believes that its joint venture, Swift Europe, is the
leader in the value-added 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 and Tavex Alogodoner, S.A. in Spain.
Employees
At September 29, 2001, the Company had approximately 4,121 U.S. employees. Of
these U.S. employees, approximately 3,872 were employed in manufacturing and 249
in administration and sales. At September 29, 2001, G&L Service Company had
approximately 36 employees in Mexico. Also, at September 29, 2001, the Company
had approximately 820 Canadian employees and 858 employees in operations
elsewhere in the world, mainly in Europe. The majority of these employees are
covered by collective bargaining agreements, none of which expire in the next
fiscal year. Substantially all of the Company's employees are full-time. The
Company believes that its employee relations are satisfactory.
Government Regulation
The Company is subject to various environmental laws and regulations in its
operations governing the discharge, storage, handling and disposal of a variety
of substances in the North American and European countries in which it operates.
In particular, such laws include (i) in the United States, the Federal Water
Pollution Control Act, the Federal Clean Air Act, the Resource Conservation
Recovery Act (including amendments relating to underground tanks) and the
Federal "Superfund" program, and (ii) in Canada, the Canadian Environmental
Protection Act, the Hazardous Products Act, the Hazardous Material Information
Review Act, the Fisheries Act, the Environmental Protection Act (Ontario), the
Water Resources Act (Ontario) and the Environmental Quality Act (Quebec). In
addition, the Company's operations are governed by laws and regulations relating
to workplace safety and worker health in the North American and European
countries in which it operates. In particular, in the United States, the
Occupational, Safety and Health Act and regulations thereunder, among other
things, establish cotton dust, formaldehyde, asbestos and noise standards, and
regulate the use of hazardous chemicals in the workplace. Additionally, in
Canada, the Occupational Health and Safety Act (Ontario), the Act Respecting
Occupational Health and Safety (Quebec) and their respective regulations
establish standards for dust, noise and substances including, among others,
asbestos and formaldehyde and regulate the use of hazardous chemicals in the
workplace.
12
Item 2. PROPERTIES
- -------------------
The following table sets forth the general location, principal uses and
approximate size of the Company's principal properties and whether such
properties are leased or owned:
Approximate Leased
Area In Or
Facility Name Location Use Square Feet Owned
- ------------- -------- --- ----------- -----
Flint ........................... Gastonia, NC Spinning 250,000 Owned
Brighton/(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/(2)/ ................... Asheboro, NC Weaving and greige cloth storage 386,000 Owned
Caroleen/(2)/ ................... 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/(2)/ .......... Piedras Negras, Mexico 6 sewing & garment finishing facilities 228,000 Leased
Alta Loma/(2)/ .................. Monclova, Mexico Sewing and warehousing facility 200,000 Leased
Eagle Pass Facilities/(2)/ ...... 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
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
yarn spinning facility at the Brighton Plant were ceased. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Events".
(2) As a result of the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives, G&L Service Company discontinued its garment making operations
in August 2001 and Industries closed its Asheboro, North Carolina weaving
facility and Caroleen, North Carolina spinning facility in September 2001.
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.
13
Item 3. LEGAL PROCEEDINGS
- --------------------------
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
14
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK
- ----------------------------------------------
AND RELATED STOCKHOLDER MATTERS
-------------------------------
The Company's common stock, $.01 par value, (the "Common Stock") is traded on
the New York Stock Exchange under the symbol "GNL". As of November 30, 2001, the
Company had approximately 2,321 stockholders of record. The following table sets
forth the high and low sales prices for the Common Stock for the periods
indicated.
2001 2000
-------------------- --------------------
High Low High Low
-------- -------- -------- --------
First Quarter .................. $ 4.13 $ 1.75 $ 3.19 $ 1.25
Second Quarter ................. $ 5.45 $ 2.06 $ 2.56 $ 1.63
Third Quarter .................. $ 2.50 $ 1.50 $ 3.06 $ 1.81
Fourth Quarter ................. $ 2.15 $ 0.60 $ 4.75 $ 2.13
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.
The Company was notified by the New York Stock Exchange (the "NYSE") that it is
not in compliance with the NYSE's continued listing standards because the
average closing price of the Company's common stock has fallen below $1.00 per
share over a consecutive 30 trading day period and the Company's market
capitalization has fallen below $15 million over a 30 trading day period.
In accordance with NYSE rules, the Company has submitted to the NYSE a business
plan to remedy the deficiencies. After reviewing the plan, the NYSE may accept
the plan (following which the Company will be subject to periodic monitoring for
compliance with the plan), or the Company's common stock will be subject to
trading suspension and delisting.
If the Company's common stock were to be delisted from trading on the NYSE,
trading, if any in the common stock may continue to be conducted on the OTC
Bulletin Board or in the non-Nasdaq over-the-counter market in the likely event
that the Company was unable to list its Common Stock on Nasdaq, the American
Stock Exchange or other alternative stock exchange. Delisting of the Company's
common stock would result in limited availability of market price information
and limited news coverage. In addition, delisting could restrict investors'
interest in the common stock as well as materially adversely affect the trading
market and prices for the common stock and the Company's ability to issue
additional securities.
15
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
FISCAL YEAR
----------------------------------------------------------------------
Statements of Operations Data/(1)/: 2001/(2)/ 2000/(3)/ 1999 1998/(4)/ 1997/(5)/
--------- ---------- ---- --------- ---------
Net sales ................................................ $ 849,993 $ 957,760 $ 953,116 $ 902,651 $ 493,362
Cost of sales ............................................ 779,599 855,045 874,571 796,219 439,207
Gross profit ............................................. 70,394 102,715 78,545 106,432 54,155
Selling, general and administrative expenses ............. 34,001 33,408 34,269 30,524 18,123
Amortization of intangible assets ........................ 4,557 4,768 4,826 3,793 1,679
Impairment of goodwill ................................... 30,445 -- -- -- --
Impairment of fixed assets ............................... 20,280 49,251 -- -- --
Plant closing costs ...................................... 12,134 14,316 -- -- --
Net (gain)loss on benefit plan curtailment ............... (2,294) -- -- -- --
Operating income (loss) .................................. (28,729) 972 39,450 72,115 34,353
Interest expense ......................................... 60,226 66,081 60,935 47,566 12,326
Income from associated companies ......................... (8,721) (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 items (80,234) (58,851) (17,245) 20,497 22,027
Income tax expense (benefit) ............................. (10,088) (20,563) (6,209) 8,678 8,350
Income (loss) before extraordinary items ................. (70,146) (38,288) (11,036) 11,819 13,677
Extraordinary items ...................................... -- -- -- (524) --
Net income (loss) ........................................ $ (70,146) $ (38,288) $ (11,036) $ 11,295 $ 13,677
Weighted average number of shares outstanding ............ 11,985 11,942 11,881 12,173 11,986
Net income (loss) per common share - diluted:
Income (loss) before extraordinary items ................. $ (5.85) $ (3.21) $ (.93) $ 97 $ 1.14
Extraordinary items ...................................... -- -- -- (.04) --
Net income (loss) - diluted .............................. $ (5.85) $ (3.21) $ (.93) $ 93 $ 1.14
Cash dividends per common share .......................... $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Total assets ........................................... $ 764,715 $ 896,104 $ 978,716 $ 1,038,293 $ 349,191
Long-term debt ......................................... 634,821 648,505 658,051 682,926 176,755
Stockholders' equity (deficit) ......................... (12,984) 55,589 108,737 127,877 104,317
/(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 $71.8 million (pre-tax) of charges related to the Company's
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives announced in
July 2001 and $7.9 million (pre-tax) of costs associated with the
Company's Fiscal 2000 Strategic Initiatives. Excluding these charges, the
net loss would have been $0.4 million or $.04 per common share. See Notes
I and J to the Company's consolidated financial statements.
/(3)/ 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.
/(4)/ Includes the acquisition of the apparel fabrics business of Dominion
Textile, Inc. which occurred on January 29, 1998.
/(5)/ Selling, general and administrative expenses include a $3.0 million
pre-tax charge taken due to the bankruptcy of a Home Fashion Fabrics
customer.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Significant Events
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
Throughout fiscal 2001, the Company has continued to operate in a very
difficult business environment which resulted in the July 2001 announcement
of certain actions (the "Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives"). The Company's goal in taking these actions is future loss
avoidance, cost reduction, production capacity rationalization and
increased cash flow. The principal manufacturing initiatives include:
(1) Discontinuation of G&L Service Company, the Company's garment
making operations in Mexico, which includes the closure of the
Dimmit facilities in Piedras Negras, Mexico, the Alta Loma
facilities in Monclova, Mexico and the Eagle Pass Warehouse in
Eagle Pass, Texas.
(2) Consolidation of its greige fabrics operations which includes the
closure of its Asheboro, North Carolina weaving facility and
Caroleen, North Carolina spinning facility.
In addition to the principal manufacturing initiatives above, the Company
also provided for the reduction of approximately 5% of its salaried
overhead employees.
In the fourth quarter of fiscal 2001, the Company recorded $63.4 million
before taxes of plant closing and impairment charges and $4.9 million
before taxes of losses related to completing garment customer orders all
related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.
The components of the plant closing and impairment charges included $30.4
million for goodwill impairments, $20.3 million for fixed asset
impairments, $7.5 million for severance expense and $5.2 million for the
write-off of leases and other exit costs. Approximately 3,300 Mexican
employees and 500 U.S. employees were terminated as a result of the
initiatives. All production at the affected facilities ceased in early
September 2001 by which time substantially all the affected employees were
terminated. The Company expects that the sale of real estate and equipment
in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives could take 12 months or longer to complete.
The table below summarizes the activity related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives plant closing accruals for the
year ended September 29, 2001 (in thousands):
Accrual Balance at
Plant closing Cash September 29,
charge payments 2001
------------- --------- ------------------
Severance benefits $ 7,508 $ (5,516) $ 1,992
Lease cancellation and other 5,213 (186) 5,027
-------- -------- --------
$ 12,721 $ (5,702) $ 7,019
======== ======== ========
The Company expects to incur run-out expenses related to the plant closings
of approximately $4.0-$6.0 million before taxes, $3.1 million of which were
incurred in the September quarter 2001. These expenses, which include
efficiency losses, equipment relocation, losses on inventories of
discontinued styles, plant carrying costs and other costs, are included in
cost of sales in the consolidated statement of operations.
17
As a result of the employees terminated due to the Fiscal 2001 Cost Reduction
and Loss Avoidance Initiatives, the Company recognized a net benefit curtailment
loss of $0.1 million in the September quarter of 2001 related to its defined
benefit pension plan.
In August 2001, the Company amended its Senior Credit Facility (as defined
herein) to, among other things, exclude from covenant calculations the charges
related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
discussed above. See "Management's Discussion and Analysis of Financial
Condition - Liquidity and Capital Resources".
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 priced imports 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 (the
"Fiscal 2000 Strategic Initiatives") aimed at increasing the Company's
competitiveness and profitability by reducing the cost of products manufactured.
The principal manufacturing initiatives included:
(1) Completion of a joint venture, Swift Denim-Hidalgo, in Mexico to
produce denim (see further discussion below). This operation is being
expanded and is expected to be at full capacity by June 2002.
(2) Closed the Company's denim manufacturing facility in Erwin, North
Carolina in December 2000. Value added denim produced by this plant
was transferred to the Company's Columbus, Georgia plant. The
remaining volume, mostly basic denim, has shifted to the Company's
Swift Denim-Hidalgo joint venture in Mexico.
(3) Closed the Company's yarn spinning operation at its Brighton Plant in
Shannon, Georgia in December 2000. The yarn produced by this plant has
been 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 operation in
Italy that impacted 34 positions.
The total of all of the Fiscal 2000 Strategic 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
charges included $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.
The table below summarizes the activity related to Fiscal 2000 Strategic
Initiatives plant closing accruals for the year ended September 29, 2001 (in
thousands):
Accrual Balance at Accrual Balance at
September 30, Cash Change in September 29,
2000 Payments Estimate 2001
------------------ -------- -------- -------------
Severance benefits $ 10,763 $ (8,358) $ (588) $ 1,817
Lease cancellation and
other 3,553 (1,151) -- 2,402
-------- -------- -------- --------
$ 14,316 $ (9,509) $ (588) $ 4,219
======== ======== ======== ========
As of September 29, 2001, substantially all of the 1,370 employees affected by
the Fiscal 2000 Strategic Initiatives were terminated and were principally
production workers, administrative support and management. All production at the
affected facilities ceased during the December quarter 2000 at which time
substantially all
18
of the affected employees were terminated. During fiscal 2001, the Company sold
a portion of the Erwin facility as well as substantially all of the equipment at
that facility and the Brighton facility. The Company expects that the sale of
the remaining real estate and equipment related to the Fiscal 2000 Strategic
Initiatives could take 12 months or longer to complete.
In connection with the Fiscal 2000 Strategic Initiatives, the Company has
incurred run-out expenses related to the plant closings of $10.8 million before
taxes in fiscal 2001. Run-out expenses include efficiency losses, equipment
relocation, losses on inventories of discontinued styles, plant carrying costs
and other costs charged to operations as incurred.
As a result of the employees terminated due to the Fiscal 2000 Strategic
Initiatives, the Company recognized a net curtailment gain of $2.4 million in
fiscal 2001 related to its defined benefit pension and post-retirement medical
plans.
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 2001, 2000 and 1999 for each segment are shown
below:
Fiscal Year Ended
September 29, September 30, October 2,
2001 2000 1999
---- ---- ----
Net Sales Per Segment
Galey & Lord Apparel $ 402.0 $ 459.4 $ 457.9
Swift Denim 299.1 348.6 324.7
Klopman International 135.4 128.9 140.8
Home Fashion Fabrics 13.5 20.9 29.7
------------ ----------- -----------
Total $ 850.0 $ 957.8 $ 953.1
============ =========== ===========
Operating Income (Loss) Per Segment As Reported
Galey & Lord Apparel $ (12.8) $ 25.9 $ 23.0
Swift Denim 16.4 (33.6) 5.2
Klopman International 11.0 11.2 11.6
Home Fashion Fabrics (41.8) (2.2) (.2)
Corporate* (1.5) (0.3) (.2)
------------ ----------- -----------
Total $ (28.7) $ 1.0 $ 39.4
============ =========== ===========
Operating Income (Loss) Per Segment Excluding
the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives and the Fiscal 2000
Strategic Initiatives
Galey & Lord Apparel $ 22.5 $ 37.3 $ 23.0
Swift Denim 23.1 18.0 5.2
Klopman International 11.0 11.9 11.6
Home Fashion Fabrics (4.5) (2.2) (.2)
Corporate* (1.1) (0.3) (.2)
--------- ----------- -----------
Total $ 51.0 $ 64.7 $ 39.4
========= =========== ===========
* Corporate operating income (loss) consists principally of administrative
expenses from the Company's various holding companies.
19
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales
Net sales for fiscal 2001 were $850.0 million as compared to $957.8 million for
fiscal 2000. The $107.8 million decrease in net sales primarily resulted from
decreased sales volume due to the Erwin, North Carolina facility closure and
poor retail environment and lower selling prices.
Galey & Lord Apparel
Galey & Lord Apparel's net sales for fiscal 2001 were $402.0 million, a $57.4
million decrease over fiscal 2000 net sales of $459.4 million. The net sales
decrease is primarily attributable to a 10% decline in fabric sales volume due
to the difficult domestic retail environment during the period and an 8% decline
in unit sales of garment packages principally as a result of the discontinuation
in September 2001 of the Company's garment making operations in Mexico announced
as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives.
Average selling prices, inclusive of product mix changes, declined approximately
3.8%.
Swift Denim
Swift's net sales for fiscal 2001 were $299.1 million as compared to $348.6
million in fiscal 2000. The $49.5 million decrease in net sales is primarily due
to a 19% decrease in volume and a 0.4% decline in selling prices, partially
offset by improvements in product mix. The volume decrease is primarily due to
the reduction in manufacturing capacity resulting from the closure of the Erwin,
North Carolina facility in December 2000.
Klopman International
Klopman's net sales for fiscal 2001 were $135.4 million, a $6.5 million increase
compared to fiscal 2000's net sales of $128.9 million. The net sales increase is
primarily a result of a 15% increase in sales volume, partially offset by
changes in product mix and a 3% decrease in selling prices. The decline in the
value of the Euro against the U.S. dollar in fiscal 2001 over fiscal 2000
negatively impacted net sales by approximately 8%.
Home Fashion Fabrics
Net sales for Home Fashion Fabrics for fiscal 2001 were $13.5 million compared
to $20.9 million in fiscal 2000. The $7.4 million decline in net sales has
principally resulted from changes in product mix and a 4% decline in average
selling prices, partially offset by an 8% increase in volume.
Operating Income (Loss)
The Company reported an operating loss of $28.7 million for fiscal 2001 compared
to an operating income of $1.0 million in fiscal 2000. Excluding the charges
related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and
run-out costs related to the Fiscal 2000 Strategic Initiatives, fiscal 2001
operating income would have been $51.0 million. Excluding the charges related to
the Fiscal 2000 Strategic Initiatives, fiscal 2000 operating income would have
been $64.7 million.
Galey & Lord Apparel
Galey & Lord Apparel's operating loss for fiscal 2001 was $12.8 million as
compared to an operating income of $25.9 million for fiscal 2000. Excluding the
costs related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
and Fiscal 2000 Strategic Initiatives, Galey & Lord Apparel's fiscal 2001 and
fiscal 2000 operating income would have been $22.5 million and $37.3 million,
respectively. The operating income decrease,
20
excluding the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and
Fiscal 2000 Strategic Initiatives, principally reflects lower selling prices,
reduced sales and manufacturing volume and change in product mix. Operating
income decreases were partially offset by a $3.5 million improvement in the
Company's garment production facilities in Mexico prior to closure in September
2001.
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's operating income for fiscal 2001 was $16.4 million compared to a fiscal
2000 operating loss of $33.6 million. Excluding the run-out costs related to the
Fiscal 2000 Strategic Initiatives, Swift's fiscal 2001 operating income would
have been $23.1 million. Excluding the costs related to the Fiscal 2000
Strategic Initiatives, Swift's fiscal 2000 operating income would have been
$18.0 million. The increase in Swift's operating income, excluding the Fiscal
2000 Strategic Initiatives, principally reflects positive changes in product mix
and improvement in raw material costs, partially offset by the impact of lower
sales volume and selling prices.
Klopman International
Klopman's operating income in fiscal 2001 was $11.0 million as compared to $11.2
million in fiscal 2000. Excluding the costs related to the Fiscal 2000 Strategic
Initiatives, Klopman's fiscal 2000 operating income would have been $11.9
million. The operating income decrease, excluding the Fiscal 2000 Strategic
Initiatives, principally reflects a $6.4 million decline related to changes in
product mix and lower selling prices, partially offset by higher volume. In
addition, Klopman's results were negatively impacted by $0.9 million of foreign
currency translation due to the weakness of the Euro to the U.S. Dollar.
Home Fashion Fabrics
Home Fashion Fabrics reported an operating loss for fiscal 2001 of $41.8 million
as compared to an operating loss for fiscal 2000 of $2.2 million. Excluding the
costs related to the Fiscal 2001 Strategic Initiatives, Home Fashion Fabrics'
fiscal 2001 operating loss would have been $4.5 million. The increase in
operating loss was principally due to lower selling prices, volume and changes
in product mix.
Income from Associated Companies
Income from associated companies was $8.7 million in fiscal 2001 as compared to
$6.3 million in fiscal 2000. The income represents amounts from several joint
venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $60.2 million in fiscal 2001 compared to $66.1 million in
fiscal 2000. The decrease in interest expense was primarily due to lower average
debt balances as well as lower prime and LIBOR base rates in fiscal 2001 as
compared to fiscal 2000, partially offset by increased spreads over prime and
LIBOR due to the August 9, 2001 amendment of the Senior Credit Facility (as
defined herein) in fiscal 2001 as compared to fiscal 2000. The average interest
rate paid by the Company on its bank debt in fiscal 2001 was 8.9% per annum as
compared to 9.4% per annum in fiscal 2000.
21
Income Taxes
The Company's overall tax rate for fiscal 2001 was approximately 12.6% as
compared to 34.9% for fiscal 2000. For 2001, the difference from the statutory
rate resulted primarily from the U.S. tax impact of the European reorganization
whereby the Company changed its foreign subsidiary ownership structure due to
changes in the tax laws of the Netherlands. The Company's European operations
are now functioning through Luxembourg as a result of this reorganization.
Additionally, the rate is being impacted by the establishment of a $13.8 million
valuation allowance related to domestic operating losses since it is more
likely than not that some portion of the deferred tax assets will not be
recognized.
Net Income (Loss) and Net Income (Loss) Per Share
The Company reported a net loss for fiscal 2001 of $70.1 million or $5.85 per
common share compared to a net loss for fiscal 2000 of $38.3 million or $3.21
per common share. Excluding the costs related to the Fiscal 2001 Cost Reduction
and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, the
Company's net loss for fiscal 2001 would have been $0.4 million or $0.04 per
common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's net
income for fiscal 2000 would have been $3.2 million or $0.27 per common share.
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 reflected the additional production capacity at the Company's
Monclova, Mexico garment facility. Overall, average selling prices, inclusive of
product mix changes, declined approximately 1.9%.
Swift Denim
Swift'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'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.
22
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.
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'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's operating income would have been $18.0
million. The increase in Swift'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'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'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
expenses 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
23
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, higher prime
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 9.4% 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 $0.93
per common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's
net income for fiscal 2000 would have been $3.2 million or $0.27 per common
share.
Liquidity and Capital Resources
The Company and its subsidiaries had cash and cash equivalents totaling $9.2
million and $9.6 million at September 29, 2001 and September 30, 2000,
respectively. At September 29, 2001, the Company had a total of $25.6 million
and $5.8 million of borrowing availability under its Senior Credit Facility and
Canadian Loan Agreement, respectively.
During fiscal 2001, the Company primarily utilized its available cash and
revolving credit borrowings under its Senior Credit Facility and Canadian Loan
Facility to fund the Company's operating and investing requirements.
The Company expects to spend approximately $12 million for capital expenditures
in fiscal 2002. The Company anticipates that approximately 15% of the forecasted
capital expenditures will be used to increase the Company's capabilities while
the remaining 85% will be used to maintain existing capabilities.
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 and the Canadian Loan 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 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 or a borrowing base (comprised of eligible
accounts receivable and eligible inventory, as defined in the Senior Credit
Facility), (ii) a term loan in the principal amount of $155.0 million ("Term
Loan B") and (iii) a term loan in the principal amount of $110.0 million ("Term
Loan C"). In July 1999, the Company amended its Senior Credit Facility (the
"July 1999 Amendment") pursuant to which the Company, among other things, repaid
$25 million
24
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. As a result of the
February 2001 funding of the Company's Canadian Loan Agreement (as defined
below), the Company repaid $12.7 million principal amount of its U.S. term loan
balance and reduced the maximum amount of borrowings under its U.S. revolving
line of credit by $12.3 million to $187.7 million. Both the repayment resulting
from the July 1999 Amendment and the February 2001 repayment of the Term Loan B
and Term Loan C principal balances ratably reduced the remaining quarterly
principal payments. The reduction in the U.S. revolving line of credit facility
in February 2001 resulted in a write-off of $0.1 million of deferred debt
charges which is included in selling, general and administrative expenses in the
March quarter 2001.
In September 2000, the Company amended the Senior Credit Facility to exclude
charges related to the Company's Fiscal 2000 Strategic Initiatives from the
computation of the covenants. In March 2001, the Company further amended the
Senior Credit Facility to allow for a more tax efficient European corporate
structure. In August 2001, the Company amended the Senior Credit Facility (the
"August 2001 Amendment") which, among other things, replaced the Adjusted
Leverage Ratio covenant (as defined in the August 2001 Amendment) with a minimum
EBITDA covenant (as defined in the August 2001 Amendment) until the Company's
December quarter 2002, waived compliance by the Company with the Adjusted Fixed
Charge Coverage Ratio (as defined in the August 2001 Amendment) until the
Company's December quarter 2002 and modified the Company's covenant related to
capital expenditures. The August 2001 Amendment also excludes, for covenant
purposes, charges related to closure of facilities announced on July 26, 2001 as
part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The
August 2001 Amendment also increased the interest rate spread on all borrowings
under the Company's revolving line of credit and term loans by 100 basis points
for the remainder of the term of the Senior Credit Facility.
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 bore 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 bore interest at a per annum rate, at the Company's option, of
(A) with respect to Term Loan B either (i)(a) the greater of the prime rate or
federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a
margin of 3.50% and (B) with respect to Term Loan C, either (i)(a) greater of
the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or
(ii) LIBOR plus a margin of 3.75%.
Under the Senior Credit Facility, the revolving line of credit expires on March
27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly
payments of $304,645 through March 27, 2004, three quarterly payments of
$28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April
2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111
through April 2, 2005, three quarterly payments of $20,098,295 and a final
amount of $17,024,140 on Term Loan C's maturity of April 1, 2006. Under the
Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August
9, 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 1.0%, 1.25%, 1.50%,
1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios
(as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75%, 3.00%, 3.25% or 3.50%, 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
2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, 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 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%,
4.00% or 4.25%, based on the Company's achieving certain leverage ratios.
25
At September 29, 2001, interest on the Company's term loan and revolving credit
borrowings were based on one-month market LIBOR rates averaging 2.82% and on a
prime rate of 6.0%. The Company's weighted average borrowing rate on these loans
at September 29, 2001 was 6.74%, which includes spreads ranging from 3.5% to
4.25% on the LIBOR borrowings and a spread of 2.25% on the prime rate
borrowings.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the July 1999 Amendment, are secured substantially by all of the assets of
the Company and each of its domestic subsidiaries (including a lien on all real
property owned in the United States), a pledge by the Company and each of its
domestic subsidiaries of all the outstanding capital stock of its respective
domestic subsidiaries and a pledge of 65% of the outstanding voting capital
stock, and 100% of the outstanding non-voting capital stock, of certain of its
respective foreign subsidiaries. In addition, payment of all obligations under
the Senior Credit Facility is guaranteed by each of the Company's domestic
subsidiaries. Under the Senior Credit Facility, the Company is required to make
mandatory prepayments of principal annually in an amount equal to 50% of Excess
Cash Flow (as defined in the Senior Credit Facility), and also in the event of
certain dispositions of assets or debt or equity issuances (all subject to
certain exceptions) in an amount equal to 100% of the net proceeds received by
the Company therefrom. Based on fiscal 2001 results, the Company is not required
to make an Excess Cash Flow payment with respect to fiscal 2001.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
Senior Subordinated Debt
In February 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes"). In May 1998, the Notes were exchanged for freely transferable
identical Notes registered under the Securities Act of 1933. Net proceeds from
the offerings of $289.3 million (net of initial purchaser's discount and
offering expenses), were used to repay (i) $275.0 million principal amount of
bridge financing borrowings incurred to partially finance the acquisition of the
apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii)
a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein). Interest on the Notes
is payable on March 1 and September 1 of each year.
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 herein. See "Item 1. Business - General".
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.
26
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
Canadian Loan Agreement
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million.
Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable in equal
monthly installments of $229,500 CDN with the unpaid balance repayable in
February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially was fixed through the second
quarter of fiscal year 2001 (March quarter 2001) at a per annum rate, at
Drummondville's option, of either LIBOR plus 2.75% or the U.S. prime rate plus
.75% (for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for
borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a
per annum rate, at Drummondville's option, of either (i) the U.S. prime rate
plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the
Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in
Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for
borrowings in U.S. dollars), all based on Drummondville maintaining certain
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving certain fixed charge coverage ratio levels (as
set forth in the Canadian Loan Agreement).
At September 29, 2001, interest on the Company's term loan and revolving credit
borrowings were based on one-month market LIBOR rates averaging 3.58%, on a U.S.
prime rate of 6.5% and on a Canadian prime rate of 5.75%. The Company's weighted
average borrowing rate on these loans at September 29, 2001 was 6.55%, which
includes a spread of 2.25% on the LIBOR borrowings and spreads ranging from
0.25% to 1.00% on the prime rate borrowings.
Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).
Tax Matters
During fiscal 2001, the Company reorganized its European operations due to tax
law changes in The Netherlands. As a result of such reorganization, the Company
recognized approximately $15.7 million of U.S. taxable income, which reduced the
Company's U.S. net operating loss carryforward.
Approximately $5.0 million of undistributed earnings further reduced the U.S.
net operating loss carryforward due to the U.S. tax effect of the
discontinuation of the garment making operation in Mexico.
27
At September 29, 2001, the Company had outstanding net operating loss
carryforwards ("NOLs") for U.S. federal and state tax purposes of approximately
$108.6 million, which will be carried forward to offset future taxable income
and will expire in 2019-2021 if unused. As of September 29, 2001, the Company
has established a $13.8 million valuation allowance related to domestic
operating losses since it is more likely than not that some portion of the
deferred tax assets will not be recognized.
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.
On November 7, 2001, due to the current economic environment and the limited
visibility in the apparel marketplace, the Company announced that it had engaged
Houlihan, Lokey, Howard & Zukin to evaluate the strategic alternatives available
to the Company.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash
transactions. During this time period, the Euro will be traded on currency
exchanges and will be the basis of valuing legacy currencies. The legacy
currencies will continue to be legal tender. Beginning January 1, 2002, the
participating countries will issue new Euro-denominated bills and coins for use
in cash transactions, and no later than July 1, 2002, will withdraw all bills
and coins denominated in the legacy currencies. The legacy currencies will then
no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the 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 the Euro began January 1, 1999. The conversion of the
Company's financial reporting and information systems was completed during the
Company's 2001 fiscal year. The costs related to the conversion were not
material to the Company's operating results or liquidity.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). For all business
combinations initiated after June 30, 2001, FAS 141 eliminates the
pooling-of-interests method of accounting and requires the purchase method of
accounting, including revised recognition criteria for intangible assets other
than goodwill. Under FAS 142, which is effective for years beginning after
December 15,
28
2001, the Company's fiscal year 2003, goodwill and indefinite lived intangible
assets are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Intangible assets that have finite
lives will continue to be amortized over their useful lives and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," ("FAS 121"). The Company has not yet determined what
the effect of FAS 142 will be on the earnings and financial position of the
Company.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"), which is effective for years beginning after June 15,
2002, the Company's fiscal year 2003. FAS 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The Company has not yet
determined what the effect of FAS 143 will be on the earnings and financial
position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which is effective for fiscal years
beginning after December 15, 2001, the Company's fiscal year 2003. FAS 144
clarifies accounting and reporting for assets held for sale, scheduled for
abandonment or other disposal, and recognition of impairment loss related to the
carrying value of long-lived assets. The Company has not yet determined what the
effect of FAS 144 will be on earnings and financial position of the Company.
29
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. The result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which the Company manufactures or sells
its products would not be material. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. In addition
to the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. The Company's analysis of
the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
Cotton Commodity Exposures
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. As of September 29, 2001,
a 10% decline in market price would have a negative impact of approximately $2.6
million on the value of the contracts.
Interest Rate Exposures
In prior years, the Company entered into interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate debt. In January
2001, interest rate swap agreements on $25.0 million of the Company's
outstanding floating-rate bank debt expired. The interest rate swaps assured
that the Company would pay a maximum LIBOR rate of 5.53% (excluding any
applicable spread required by the Senior Credit Facility) until its expiration.
At September 29, 2001, the Company did not have any interest rate swap
agreements outstanding.
Derivative Financial Instruments
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("FAS 133"), which requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting FAS 133 as of October 1, 2000 was not material to
the Company's financial statements.
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on sales, purchases, short-term assets and commitments. These
short-term assets and commitments principally related to accounts receivable and
trade payable positions and fixed asset purchase obligations. The Company does
not utilize derivative financial instruments for trading or other speculative
purposes. The Company actively evaluates the creditworthiness of the financial
institutions that are counterparties to derivative financial instruments, and it
does not expect any counterparties to fail to meet their obligations.
Cash Flow Hedging Strategy
The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency cash flows resulting from
sales or purchases denominated in other than the Company's functional currencies
over the next year, the Company has instituted a foreign currency hedging
program. The Company hedges portions of its forecasted sales and purchases
denominated in foreign currencies with forward contracts.
Foreign currency forward contracts that hedge forecasted sales and purchases are
designated as cash flow hedges. The amount of gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in the
30
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Derivative Financial Instruments (Continued)
spot exchange rates and forward contract rates. The net loss was not material
for the year ended September 29, 2001 and is included in cost of sales in the
consolidated statement of income.
At September 29, 2001, the Company expects to reclassify approximately $50,000
of pre-tax gains ($20,000 after-tax) on derivative instruments from accumulated
other comprehensive income to earnings over the next twelve months. This
reclassification will be made when the forecasted transactions occur.
Fair Value Hedging Strategy
The Company also maintains foreign currency forward contracts to hedge
receivables and payables denominated in foreign currencies. These contracts are
designated as fair value hedges. The gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in spot
exchange rates and forward contract rates. The net loss was not material for the
year ended September 29, 2001 and is included in cost of sales in the
consolidated statement of income.
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 29, 2001 and September 30, 2000 and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended September 29, 2001. 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 29, 2001 and September 30, 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 29, 2001, 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
November 5, 2001
32
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share and share data)
ASSETS
September 29, September 30,
2001 2000
------------- -------------
Current assets:
Cash and cash equivalents ..................................................................... $ 9,157 $ 9,641
Trade accounts receivable, less deductions for doubtful receivables, discounts, returns and
allowances of $6,263 in 2001 and $6,911 in 2000 ............................................. 145,366 197,422
Sundry notes and accounts receivable .......................................................... 4,802 7,461
Inventories ................................................................................... 166,820 166,522
Income taxes receivable ....................................................................... 2,945 1,556
Deferred income taxes ......................................................................... - 12,902
Prepaid expenses and other current assets ..................................................... 4,371 3,957
--------- ---------
Total current assets ..................................................................... 333,461 399,461
Property, plant and equipment, at cost:
Land .......................................................................................... 11,624 11,489
Buildings ..................................................................................... 117,911 121,775
Machinery, fixtures and equipment ............................................................. 326,374 339,303
--------- ---------
................................................................................................ 455,909 472,567
Less accumulated depreciation and amortization ................................................ (191,471) (172,484)
--------- ---------
................................................................................................ 264,438 300,083
Investment in and advances to associated companies .............................................. 38,897 31,878
Deferred charges, net ........................................................................... 12,039 13,571
Other non-current assets ........................................................................ 1,506 1,735
Intangibles, net ................................................................................ 114,374 149,376
--------- ---------
................................................................................................ $ 764,715 $ 896,104
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt ............................................................. $ 4,670 $ 3,072
Trade accounts payable ........................................................................ 53,503 59,907
Accrued salaries and employee benefits ........................................................ 22,759 24,028
Accrued liabilities ........................................................................... 35,529 45,583
Income taxes payable .......................................................................... 5,600 1,507
--------- ---------
Total current liabilities ................................................................ 122,061 134,097
Long-term debt .................................................................................. 634,821 648,505
Other long-term liabilities ..................................................................... 17,814 22,813
Deferred income taxes ........................................................................... 3,003 35,100
Stockholders' equity (deficit):
Common Stock-$.01 par value, authorized 25,000,000 shares; issued 12,386,172
shares in 2001 and 12,349,960 shares in 2000,
Outstanding 11,996,965 shares in 2001 and 11,960,754 shares in 2000 ......................... 124 124
Contributed capital in excess of par value .................................................... 40,878 39,673
Retained earnings (Accumulated deficit) ....................................................... (37,609) 32,537
Less 389,207 Common Stock shares in 2001 and 389,206 share in 2000 in treasury, at cost ....... (2,247) (2,247)
Accumulated other comprehensive income (loss) ................................................. (14,130) (14,498)
--------- ---------
Total stockholders' equity (deficit) ..................................................... (12,984) 55,589
--------- ---------
................................................................................................ $ 764,715 $ 896,104
========= =========
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 29, September 30, October 2,
2001 2000 1999
------------- ------------- -----------
Net sales........................................................................ $ 849,993 $ 957,760 $ 953,116
Cost of sales.................................................................... 779,599 855,045 874,571
----------- ---------- ----------
Gross profit..................................................................... 70,394 102,715 78,545
Selling, general and administrative expenses..................................... 34,001 33,408 34,269
Amortization of intangible assets................................................ 4,557 4,768 4,826
Impairment of goodwill........................................................... 30,445 - -
Impairment of fixed assets....................................................... 20,280 49,251 -
Plant closing costs.............................................................. 12,134 14,316 -
Net (gain) loss on benefit plan curtailment...................................... (2,294) - -
----------- ---------- ----------
Operating income (loss).......................................................... (28,729) 972 39,450
Interest expense................................................................. 60,226 66,081 60,935
Income from associated companies................................................. (8,721) (6,258) (4,240)
----------- ---------- ----------
Income (loss) before income...................................................... (80,234) (58,851) (17,245)
Income tax expense (benefit):
Current........................................................................ 9,107 3,738 374
Deferred....................................................................... (19,195) (24,301) (6,583)
----------- ---------- ----------
(10,088) (20,563) (6,209)
----------- ---------- ----------
Net income (loss)................................................................ $ (70,146) $ (38,288) $ (11,036)
=========== ========== ==========
Net income (loss) per common share:..............................................
Basic:
Average common shares outstanding.............................................. 11,985 11,942 11,881
Net income (loss) per common share - basic..................................... $ (5.85) $ (3.21) $ (.93)
=========== ========== ==========
Diluted:
Average common shares outstanding.............................................. 11,985 11,942 11,881
Net income (loss) per common share - diluted................................... $ (5.85) $ (3.21) $ (.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 29, September 30, October 2,
2001 2000 1999
------------- ------------- -----------
Cash flows from operating activities:
Net income (loss)............................................................... $ (70,146) $ (38,288) $ (11,036)
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation of property, plant and equipment................................. 31,672 40,028 41,819
Amortization of intangible assets............................................. 4,557 4,768 4,826
Amortization of deferred charges.............................................. 3,060 2,844 2,548
Deferred income taxes......................................................... (19,195) (24,301) (6,582)
Non-cash compensation......................................................... 1,205 254 207
(Gain)/loss on disposals of property, plant and equipment..................... 105 500 (132)
Undistributed income from associated companies................................ (8,721) (6,258) (4,240)
Impairment of goodwill........................................................ 30,445 - -
Impairment of fixed assets.................................................... 20,280 49,251 -
Net gain on benefit plan curtailment.......................................... (2,294) - -
Other......................................................................... 162 - -
Sources (Uses) due to changes in assets and liabilities:
Accounts receivable - net................................................... 52,173 (25,314) 4,509
Sundry notes and accounts receivable........................................ 867 (1,242) 4,351
Inventories................................................................. (56) 3,611 9,192
Prepaid expenses and other current assets................................... (375) 309 (628)
Other non-current assets.................................................... 237 511 (1,039)
Trade accounts payable...................................................... (6,569) 210 (1,509)
Accrued liabilities......................................................... (7,717) 860 (2,325)
Income taxes payable........................................................ 4,112 5,568 (3,510)
Other long-term liabilities................................................. (3,703) (327) 155
Plant closing liabilities................................................... (3,078) 14,316 -
----------- --------- ---------
Total adjustments........................................................ 97,167 65,588 47,642
----------- --------- ---------
Net cash provided by (used in) operating activities........................... 27,021 27,300 36,606
----------- --------- ---------
Cash flows from investing activities:
Property, plant and equipment expenditures...................................... (24,292) (19,001) (27,185)
Proceeds from sale of property, plant and equipment............................. 4,002 339 5,014
Distributions received from associated companies................................ 8,636 5,142 6,519
Investment in affiliates........................................................ (750) (7,821) -
Other........................................................................... (994) (942) 1,066
----------- --------- ---------
Net cash provided by (used in) investing activities........................... (13,398) (22,283) (14,586)
----------- --------- ---------
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit................................. 8,343 4,900 8,600
Principal payments on long-term debt............................................ (32,010) (12,959) (51,604)
Issuance of long-term debt...................................................... 10,934 - 18,000
Net proceeds from issuance of common stock...................................... - - 22
Tax benefit from exercise of stock options...................................... - - 205
Payment of bank fees and loan costs............................................. (1,505) (828) (2,687)
----------- --------- ---------
Net cash provided by (used in) financing activities........................... (14,238) (8,887) (27,464)
Effect of exchange rate changes on cash and cash equivalents.................... 131 (789) (202)
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (484) (4,659) (5,646)
Cash and cash equivalents at beginning of period................................ 9,641 14,300 19,946
----------- --------- ---------
Cash and cash equivalents at end of period...................................... $ 9,157 $ 9,641 $ 14,300
=========== ========= =========
See accompanying notes to consolidated financial statements.
35
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(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 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
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
Issuance of 36,212 shares of Restricted
Common Stock ............................ - 102 - - - 102
Compensation earned related to issuance
of stock options ........................ - 1,103 - - - 1,103
Purchase of 1 share of Treasury Stock ....... - - - - - -
Comprehensive income (loss):
Foreign currency translation
adjustment ........................... $ 344 - - - - 344 344
Gain on derivative instruments .......... 24 - - - - 24 24
Net income (loss) for fiscal 2001 ....... (70,146) - - (70,146) - - (70,146)
---------- ---- -------- --------- -------- --------- ----------
Total comprehensive income (loss) ........... $ (69,778)
==========
Balance at September 29, 2001 ............... $ 124 $ 40,878 $ (37,609) $ (2,247) $ (14,130) $ (12,984)
===== ======== ========= ======== ========= ==========
See accompanying notes to consolidated financial statements.
36
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
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 29, 2001 and September 30, 2000 was $9.2 million and $6.3 million,
respectively.
Goodwill: The Company has $67.1 million and $100.8 million of goodwill at
September 29, 2001 and September 30, 2000, respectively, which represents the
excess of the purchase cost over the fair value of assets acquired and is being
amortized over 20 to 40 years. Accumulated amortization at September 29, 2001
and September 30, 2000 was $8.6 million and $15.4 million, respectively. The
Company evaluates whether events and circumstances have occurred that indicate
that the remaining estimated useful life of goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the Company
uses an estimate of the undiscounted future cash flows over the remaining life
to determine whether goodwill is recoverable. As part of the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives, goodwill of $8.4 million related to
G&L Service Company and $22.0 million related to the greige fabrics operations
was determined to be completely impaired and was written off in the September
2001 quarter. The Company believes that no impairment of the remaining goodwill
existed at September 29, 2001.
Other Intangibles: The Company has $47.3 million and $48.6 million of other
intangibles at September 29, 2001 and September 30, 2000, 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
29, 2001 and September 30, 2000 was $4.7 million and $3.4 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 29, 2001, September 30, 2000 and October 2, 1999
NOTE A - Summary of Significant Accounting Policies (Continued)
Derivative Financial Instruments: The Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended ("FAS 133"), effective October 1, 2000. 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. Under FAS 133,
the Company is 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.
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 2001, 2000 and 1999, invoices issued under these terms
represent 12%, 14% and 20% of revenue, respectively.
The Company classifies amounts billed to customers for shipping and handling in
net sales and costs incurred for shipping and handling in cost of sales in the
consolidated statements of income.
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 29, 2001, September 30, 2000 and October 2, 1999 were 52-week years.
Recently Issued Accounting Pronouncements: In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, "Business Combinations," ("FAS 141") and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). For all business combinations initiated after
June 30, 2001, FAS 141 eliminates the pooling-of-interests method of accounting
and requires the purchase method of accounting, including revised recognition
criteria for intangible assets other than goodwill. Under FAS 142, which is
effective for years beginning after December 15, 2001, the Company's fiscal year
2003, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually, or more frequently if impairment indicators arise,
for impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,"
("FAS 121"). The Company has not yet determined what the effect of FAS 142 will
be on the earnings and financial position of the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("FAS 143"), which is effective for years beginning after June 15,
2002, the Company's fiscal year 2003. FAS 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The Company has not yet
determined what the effect of FAS 143 will be on the earnings and financial
position of the Company.
38
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE A - Summary of Significant Accounting Policies (Continued)
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"), which is effective for fiscal years
beginning after December 15, 2001, the Company's fiscal year 2003. FAS 144
clarifies accounting and reporting for assets held for sale, scheduled for
abandonment or other disposal, and recognition of impairment loss related to the
carrying value of long-lived assets. The Company has not yet determined what the
effect of FAS 144 will be on earnings and financial position of the Company.
NOTE B - Inventories
Inventories at September 29, 2001 and September 30, 2000 are summarized as
follows (in thousands):
2001 2000
---- ----
Raw materials .................................... $ 4,760 $ 5,009
Stock in process ................................. 19,015 32,502
Produced goods ................................... 140,742 126,348
Dyes, chemicals and supplies ..................... 11,152 11,536
--------- ---------
Total inventory at first-in, first-out (FIFO) cost 175,669 175,395
Less LIFO and other reserves ..................... (8,849) (8,873)
--------- ---------
$ 166,820 $ 166,522
========= =========
Inventories valued using the LIFO method comprised approximately 69% and 67% of
domestic inventories at September 29, 2001 and September 30, 2000, respectively.
Inventory held at foreign locations was $36.9 million and $33.8 million at
September 29, 2001 and September 30, 2000, respectively.
NOTE C - Long-term Debt
Long-term debt consists of the following (in thousands):
2001 2000
---- ----
Senior Credit Facility:
Revolving Credit Note ....................... $ 123,100 $ 120,000
Term Loan B ................................. 113,259 131,062
Term Loan C ................................. 80,345 92,973
Senior Subordinated Notes ........................ 299,037 298,887
Canadian Loan:
Revolving Credit Note ..................... 5,849 --
Term Loan ................................. 7,849 --
Other borrowings with various rates and maturities 10,052 8,655
--------- ---------
639,491 651,577
Less Current portion ............................. (4,670) (3,072)
--------- ---------
$ 634,821 $ 648,505
========= =========
At September 29, 2001, the annual maturities of the principal amounts of
long-term debt were as follows (in thousands):
2002 ................................................... $ 4,670
2003 ................................................... 4,705
2004 ................................................... 184,509
2005 ................................................... 95,789
2006 ................................................... 44,267
Thereafter ............................................. 305,551
39
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
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. The Senior Credit
Facility provides for (i) a revolving line of credit under which the Company may
borrow up to an amount (including letters of credit up to an aggregate of $30.0
million) equal to the lesser of $225.0 million or a borrowing base (comprised of
eligible accounts receivable and eligible inventory, as defined in the Senior
Credit Facility), (ii) a term loan in the principal amount of $155.0 million
("Term Loan B") and (iii) a term loan in the principal amount of $110.0 million
("Term Loan C"). In July 1999, the Company amended its Senior Credit Facility
(the "July 1999 Amendment") pursuant to which the Company, among other things,
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million. As
a result of the February 2001 funding of the Company's Canadian Loan Agreement
(as defined below), the Company repaid $12.7 million principal amount of its
U.S. term loan balance and reduced the maximum amount of borrowings under its
U.S. revolving line of credit by $12.3 million to $187.7 million. Both the
repayment resulting from the July 1999 Amendment and the February 2001 repayment
of the Term Loan B and Term Loan C principal balances ratably reduced the
remaining quarterly principal payments. The reduction in the U.S. revolving line
of credit facility in February 2001 resulted in a write-off of $0.1 million of
deferred debt charges which is included in selling, general and administrative
expenses in the March quarter 2001.
In September 2000, the Company amended the Senior Credit Facility to exclude
charges related to the Company's Fiscal 2000 Strategic Initiatives from the
computation of the covenants. In March 2001, the Company further amended the
Senior Credit Facility to allow for a more tax efficient European corporate
structure. In August 2001, the Company amended the Senior Credit Facility (the
"August 2001 Amendment") which, among other things, replaced the Adjusted
Leverage Ratio covenant (as defined in the August 2001 Amendment) with a minimum
EBITDA covenant (as defined in the August 2001 Amendment) until the Company's
December quarter 2002, waived compliance by the Company with the Adjusted Fixed
Charge Coverage Ratio (as defined in the August 2001 Amendment) until the
Company's December quarter 2002 and modified the Company's covenant related to
capital expenditures. The August 2001 Amendment also excludes, for covenant
purposes, charges related to closure of facilities announced on July 26, 2001.
The August 2001 Amendment also increased the interest rate spread on all
borrowings under the Company's revolving line of credit and term loans by 100
basis points for the remainder of the term of its Senior Credit Facility.
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 bore 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 bore 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) the greater
of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or
(ii) LIBOR plus a margin of 3.75%.
Under the Senior Credit Facility, the revolving line of credit expires on March
27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly
payments of $304,645 through March 27, 2004, three quarterly payments of
$28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April
2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111
through April 2, 2005, three quarterly payments of $20,098,295 and a final
amount of $17,024,140 on Term Loan C's maturity of April 1, 2006. Under the
Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August
9, 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 1.0%, 1.25%, 1.50%,
1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios
(as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%,
2.50%, 2.75%, 3.00%, 3.25% or 3.50%, 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
2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage
ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, 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 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%,
4.00% or 4.25%, based on the Company's achieving certain leverage ratios.
40
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
At September 29, 2001, interest on the Company's term loan and revolving credit
borrowings were based on one-month market LIBOR rates averaging 2.82% and on a
prime rate of 6.0%. The Company's weighted average borrowing rate on these loans
at September 29, 2001 was 6.74%, which includes spreads ranging from 3.5% to
4.25% on the LIBOR borrowings and a spread of 2.25% on the prime rate
borrowings.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the July 1999 Amendment, are secured substantially by all of the assets of
the Company and each of its domestic subsidiaries (including a lien on all real
property owned in the United States), a pledge by the Company and each of its
domestic subsidiaries of all the outstanding capital stock of its respective
domestic subsidiaries and a pledge of 65% of the outstanding voting capital
stock, and 100% of the outstanding non-voting capital stock, of certain of its
respective foreign subsidiaries. In addition, payment of all obligations under
the Senior Credit Facility is guaranteed by each of the Company's domestic
subsidiaries. Under the Senior Credit Facility, the Company is required to make
mandatory prepayments of principal annually in an amount equal to 50% of Excess
Cash Flow (as defined in the Senior Credit Facility), and also in the event of
certain dispositions of assets or debt or equity issuances (all subject to
certain exceptions) in an amount equal to 100% of the net proceeds received by
the Company therefrom. Based on fiscal 2001 results, the Company was not
required to make an Excess Cash Flow payment with respect to fiscal 2001.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
Senior Subordinated Debt
In February 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes"). In May 1998, the Notes were exchanged for freely transferable
identical Notes registered under the Securities Act of 1933. Net proceeds from
the offerings of $289.3 million (net of initial purchaser's discount and
offering expenses), were used to repay (i) $275.0 million principal amount of
bridge financing borrowings incurred to partially finance the acquisition of the
apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii)
a portion of the outstanding amount under a revolving line of credit provided
for under the Senior Credit Facility (as defined herein). Interest on the Notes
is payable on March 1 and September 1 of each year.
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.
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.
41
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
Canadian Loan Agreement
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville
Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian
Loan Agreement") with Congress Financial Corporation (Canada), as lender. The
Canadian Loan Agreement provides for (i) a revolving line of credit under which
Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0
million or a borrowing base (comprised of eligible accounts receivable and
eligible inventory of Drummondville, as defined in the Canadian Loan Agreement),
and (ii) a term loan in the principal amount of U.S. $9.0 million.
Under the Canadian Loan Agreement, the revolving line of credit expires in
February 2004 and the principal amount of the term loan is repayable in equal
monthly installments of $229,500 CDN with the unpaid balance repayable in
February 2004; provided, however, that the revolving line of credit and the
maturity of the term loan may be extended at the option of Drummondville for up
to two additional one year periods subject to and in accordance with the terms
of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest
rate on Drummondville's borrowings initially was fixed through the second
quarter of fiscal year 2001 (March quarter 2001) at a per annum rate, at
Drummondville's option, of either LIBOR plus 2.75% or the U.S. prime rate plus
.75% (for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for
borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a
per annum rate, at Drummondville's option, of either (i) the U.S. prime rate
plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the
Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in
Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for
borrowings in U.S. dollars), all based on Drummondville maintaining certain
quarterly excess borrowing availability levels under the revolving line of
credit or Drummondville achieving certain fixed charge coverage ratio levels (as
set forth in the Canadian Loan Agreement).
At September 29, 2001, interest on the Company's term loan and revolving credit
borrowings were based on one-month market LIBOR rates averaging 3.58%, on a U.S.
prime rate of 6.5% and on a Canadian prime rate of 5.75%. The Company's weighted
average borrowing rate on these loans at September 29, 2001 was 6.55%, which
includes a spread of 2.25% on the LIBOR borrowings and spreads ranging from .25%
to 1.00% on the prime rate borrowings.
Drummondville's obligations under the Canadian Loan Agreement are secured by all
of the assets of Drummondville. The Canadian Loan Agreement contains certain
covenants, including without limitation, those limiting Drummondville's ability
to incur indebtedness (other than incurring or paying certain intercompany
indebtedness), incur liens, sell or acquire assets or businesses, pay dividends,
make loans or advances or make certain investments. In addition, the Canadian
Loan Agreement requires Drummondville to maintain a certain level of tangible
net worth (as defined in the Canadian Loan Agreement).
NOTE D - 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 29, 2001.
Forward exchange contracts - The fair value of outstanding forward exchange
contracts is determined based on quotes obtained from public-trading currency
markets.
42
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE D - Financial Instruments (Continued)
Publicly Traded Debt
At September 29, 2001 and September 30, 2000, the fair value of the Company's 9
1/8% Senior Subordinated Notes Due 2008 was approximately $75.0 million and
$192.0 million, respectively, as compared to the carrying values of $299.0
million and $298.9 million, respectively.
Interest Rate Swap Agreements
In prior years, the Company entered into interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate debt. In January
2001, interest rate swap agreements on $25.0 million of the Company's
outstanding floating-rate bank debt expired. The interest rate swaps assured
that the Company would pay a maximum LIBOR rate of 5.53% (excluding any
applicable spread required by the Senior Credit Facility) until its expiration.
The amount paid or received under the swap agreements was based on the changes
in actual interest rates and was recorded as an adjustment to interest expense.
At September 29, 2001, the Company had no interest rate swap agreements
outstanding.
Derivative Instruments and Hedging Activities
Effective October 1, 2000, the Company adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("FAS 133"), which requires that all derivative
instruments be reported on the balance sheet at fair value and establishes
criteria for designation and effectiveness of hedging relationships. The
cumulative effect of adopting FAS 133 as of October 1, 2000 was not material to
the Company's financial statements.
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on sales, purchases, short-term assets and commitments. These
short-term assets and commitments principally related to accounts receivable and
trade payable positions and fixed asset purchase obligations. The Company does
not utilize derivative financial instruments for trading or other speculative
purposes. The Company actively evaluates the creditworthiness of the financial
institutions that are counterparties to derivative financial instruments, and it
does not expect any counterparties to fail to meet their obligations.
Cash Flow Hedging Strategy
The Company conducts its business in various foreign currencies and, as a
result, is exposed to movements in foreign currency exchange rates. To protect
against the volatility of forecasted foreign currency cash flows resulting from
sales or purchases denominated in other than the Company's functional currencies
over the next year, the Company has instituted a foreign currency hedging
program. The Company hedges portions of its forecasted sales and purchases
denominated in foreign currencies with forward contracts.
Foreign currency forward contracts that hedge forecasted sales and purchases are
designated as cash flow hedges. The amount of gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in the
spot exchange rates and forward contract rates. The net loss was not material
for the year ended September 29, 2001 and is included in cost of sales in the
consolidated statement of income.
At September 29, 2001, the Company expects to reclassify approximately $50,000
of pre-tax gains ($20,000 after-tax) on derivative instruments from accumulated
other comprehensive income to earnings over the next twelve months. This
reclassification will be made when the forecasted transactions occur.
Fair Value Hedging Strategy
The Company also maintains foreign currency forward contracts to hedge
receivables and payables denominated in foreign currencies. These contracts are
designated as fair value hedges. The gain or loss resulting from hedge
ineffectiveness for these contracts is attributable to the difference in spot
exchange rates and forward contract rates. The net loss was not material for the
year ended September 29, 2001 and is included in cost of sales in the
consolidated statement of income.
43
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE E - Income Taxes
Income (loss) from continuing operations before the provision of income
taxes consisted of (in thousands):
2001 2000 1999
---- ---- ----
Domestic ........... $ (110,922) $ (83,537) $ (38,544)
Foreign ............ 30,688 24,686 21,299
---------- ---------- ----------
$ (80,234) $ (58,851) $ (17,245)
========== ========== ==========
The components of income tax expense (benefit) from continuing operations
are as follows (in thousands):
2001 2000 1999
---- ---- ----
Current tax provision:
Federal ................... $ 5 $ -- $ (2,174)
State ..................... 91 70 51
Foreign ................... 9,011 3,668 2,497
-------- -------- --------
Total current tax provision .... 9,107 3,738 374
-------- -------- --------
Deferred tax provision:
Federal ................... (18,657) (27,051) (9,999)
State ..................... (2,004) (3,980) (1,472)
Foreign ................... 1,466 6,730 4,888
-------- -------- --------
Total deferred tax provision ... (19,195) (24,301) (6,583)
-------- -------- --------
Total provision for income taxes $(10,088) $(20,563) $ (6,209)
======== ======== ========
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:
2001 2000 1999
---- ---- ----
Federal statutory rate (35.0)% (35.0)% (35.0)%
Distribution of Canadian limited partnership
earnings subject to U.S. tax 0.7 3.7 -
Undistributed foreign earnings subject to U.S. tax 2.0 1.7 -
State taxes, net of federal benefit (3.1) (4.8) (5.3)
Goodwill amortization 0.9 1.1 4.7
Foreign taxes in excess of (less than) federal
statutory rate (1.8) (2.3) (0.3)
U.S. tax impact of European reorganization 6.8 - -
Change in valuation allowance 16.1 - -
Other 0.8 0.7 (0.1)
----- ----- -----
Effective rate (12.6)% (34.9)% (36.0)%
===== ===== =====
44
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE E - Income Taxes (Continued)
Deferred income taxes are provided for temporary differences between the
carrying amounts and the tax bases of assets and liabilities. At September 29,
2001 and September 30, 2000, the Company had $72.4 million and $53.1 million,
respectively, of deferred income tax assets and $75.4 million and $75.3 million,
respectively, of net deferred income tax liabilities which have been netted for
financial statement presentation purposes. The significant components of these
amounts as shown on the balance sheet are as follows (in thousands):
September 29, 2001 September 30, 2000
---------------------------- ----------------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
Inventory valuation .............................. $ 495 $ -- $ (491) $ --
Accruals and allowances .......................... 7,510 -- 9,210 --
Property, plant and equipment .................... -- (47,948) -- (53,783)
Intangibles ...................................... -- (17,010) -- (20,210)
Net operating loss carryforward .................. -- 42,542 -- 14,753
Postretirement benefits .......................... -- 3,363 -- 4,565
Impairment of fixed assets and plant closing costs 2,192 19,201 4,183 20,409
Other ............................................ -- 432 -- (34)
Valuation allowance .............................. (10,197) (3,583) -- (800)
-------- -------- -------- ---------
Total .......................................... $ -- $ (3,003) $ 12,902 $ (35,100)
======== ======== ======== =========
During fiscal 2001, the Company reorganized its European operations due to tax
law changes in The Netherlands. As a result of the reorganization, the Company
recognized approximately $15.7 million of U.S. taxable income, which reduced the
U.S. net operating loss carryforward by the same amount.
Approximately $5.0 million of undistributed earnings further reduced the U.S.
net operating loss due to the U.S. tax effect of the discontinuation of the
garment making operation in Mexico.
During fiscal 2001, the Company incurred net operating losses for U.S. federal
and state income tax purposes of approximately $73.6 million which will be
carried forward for U.S. federal income tax purposes to offset future taxable
income. At September 29, 2001, the Company has a total of approximately $108.6
million U.S. federal net operating loss carryforwards which will expire in years
2019-2021. All state net operating loss carryforwards will be carried forward
and will expire in years 2004-2016.
Deferred income taxes include the tax impact of net operating loss
carryforwards. Realization of these assets is contingent on future taxable
earnings in the U.S. federal and state tax jurisdictions. In accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," a valuation allowance of $13.8 million has been established since it is
more likely than not that some portion of the deferred tax assets will not be
realized.
At September 29, 2001 and September 30, 2000, undistributed earnings of the
Company's foreign subsidiaries amounted to approximately $36.1 million and $36.3
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 February 2001
repatriation of existing cash and loan proceeds from its Canadian operations.
During fiscal year 2001, the Company incurred additional tax expense due to the
reorganization of its European operations.
45
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE F - Supplemental Cash Flow Information
Cash paid (received) for interest and income taxes is as follows (in thousands):
2001 2000 1999
-------- -------- --------
Interest ................ $ 57,639 $ 63,033 $ 57,723
Income taxes ............ $ 4,601 $ (2,010) $ 1,691
NOTE G - 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.
On September 20, 2001, the Company froze the accrual of future retirement
benefits under its U.S. defined benefit plans effective December 31, 2001. The
resulting curtailment gain was offset by unamortized actuarial losses.
The Company provides health care and life insurance benefits to certain retired
employees and their dependents. The plans are unfunded and approved claims are
paid by the Company. The Company's cost is partially offset by retiree premium
contributions.
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 29, 2001 and September 30,
2000 (in thousands):
Defined Benefit Plans Supplemental Plan Postretirement Benefit
--------------------- ----------------- ----------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year ........ $ 65,351 $ 60,838 $ 2,521 $ 2,363 $ 8,738 $ 9,008
Service cost ................................... 3,952 5,475 300 269 138 264
Interest cost .................................. 4,546 4,212 215 165 461 645
Participant contributions ...................... - - - - 224 140
Actuarial (gain) loss .......................... 1,919 919 334 (276) (296) (641)
Benefits paid .................................. (13,723) (6,093) - - (840) (678)
Decrease due to curtailment and settlement ..... (7,012) - - - (2,548) -
--------- --------- --------- --------- --------- ---------
Benefit obligation at end of year .............. $ 55,033 $ 65,351 $ 3,370 $ 2,521 $ 5,877 $ 8,738
========= ========= ========= ========= ========= =========
Change in plan assets:
Fair value of assets at beginning of year ...... $ 73,117 $ 66,020 $ - $ - $ - $ -
Actual return on plan assets ................... (9,764) 8,889 - - - -
Employer contributions ......................... 1,048 4,301 - - 616 538
Participant contributions ...................... - - - - 224 140
Benefits paid .................................. (13,723) (6,093) - - (840) (678)
--------- --------- --------- --------- --------- ---------
Fair value of assets at end of year ............ $ 50,678 $ 73,117 $ - $ - $ - $ -
========= ========= ========= ========= ========= =========
46
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
Defined Benefit Plans Supplemental Plan Postretirement Benefit
--------------------- ----------------- ----------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Funded status ................................ $ (4,355) $ 7,766 $ (3,370) $ (2,521) $ (5,877) $ (8,738)
Unrecognized prior service cost .............. - - 266 253 - -
Unrecognized net actuarial (gain) loss ....... 2,913 (7,609) 515 267 (1,308) (1,056)
Plan amendments .............................. 2,548 2,667 - - - -
--------- --------- --------- --------- --------- ---------
Net amount recognized ........................ $ 1,106 $ 2,824 $ (2,589) $ (2,001) $ (7,185) $ (9,794)
========= ========= ========= ========= ========= =========
Amounts recognized in the consolidated
balance sheet:
Prepaid benefit cost ......................... $ 1,106 $ 2,824 $ - $ - $ - $ -
Accrued benefit liability .................... - - (2,589) (2,001) (7,185) (9,794)
--------- --------- --------- --------- --------- ---------
Net amount recognized ........................ $ 1,106 $ 2,824 $ (2,589) $ (2,001) $ (7,185) $ (9,794)
========= ========= ========= ========= ========= =========
Net pension cost for the plans for the years ended September 29, 2001, September
30, 2000 and October 2, 1999 included the following components (in thousands):
Defined Benefit Plans Supplemental Plan Postretirement Benefit
--------------------- ----------------- ----------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Components of net periodic
benefit cost:
Service cost .......................... $ 3,952 $ 5,475 $ 5,428 $ 300 $ 269 $ 291 $ 138 $ 264 $ 283
Interest cost ......................... 4,546 4,212 4,086 215 165 145 461 645 627
Expected return on plan assets ........ (5,749) (5,535) (4,944) - - - - - -
Amortization of prior service cost .... 120 139 (87) 43 38 38 - - -
Recognized net actuarial (gain)
loss due to curtailment and
settlement ........................ 246 - - - - - (2,540) - -
Recognized net actuarial (gain) loss .. (349) (210) 230 30 18 51 (44) (22) -
--------- -------- -------- ------- ------ ------ ------- ------ ------
Net periodic benefit cost ............. $ 2,766 $ 4,081 $ 4,713 $ 588 $ 490 $ 525 $(1,985) $ 887 $ 910
========= ======== ======== ======= ====== ====== ======= ====== ======
Weighted-average assumptions:
Discount rate ......................... 7.30% 7.80% 7.40% 7.30% 7.80% 7.40% 7.30% 7.80% 7.40%
Expected return on plan assets ........ 8.50 8.50 8.50 - - - - - -
Rate of compensation increase ......... 5.00 5.00 5.00 5.00 5.00 5.00 - - -
47
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
The assumed health care cost trend rate was 7% for fiscal 2001, 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 2001 (in thousands):
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components ... $ 91 $ (79)
Effect on postretirement benefit obligation ............... 420 (363)
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
2001, 2000 and 1999 were approximately $2.2 million, $3.5 million and $2.9
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 2001, 2000 and 1999 were approximately $16.5 million,
$17.3 million and $16.3 million, respectively.
Deferred Compensation Plan
The Company has a nonqualified, unfunded deferred compensation plan which
provides certain key executives with a deferred compensation award which will
earn interest at the United States Treasury Bill rate. The award, which is based
on the year's operating results, was $0, $792,000 and $0 for fiscal 2001, 2000
and 1999, respectively. The plan participants will be vested in the awards upon
the completion of five years of service after the date of the award, upon normal
retirement, upon involuntary termination subject to certain limitations, upon
permanent and total disability or death, whichever occurs first. In the event of
retirement or disability, any unpaid deferred awards will be paid on the normal
five-year maturity schedule. Upon the death of a participant, the Company has
the option to either immediately pay the award to the participant's estate or
pay the award on the normal five-year maturity schedule.
Foreign Employee Plans
A significant number of the Company's European employees participate in a
government mandated deferred compensation plan. This plan provides benefits to
employees upon termination of service with the Company. Employees accrue
benefits under the plan based on compensation levels and length of service.
Accrued benefits are adjusted upward annually for interest earned on accumulated
balances and cost of living increases. Approximately $1.4 million, $1.4 million
and $1.7 million has been recognized as expense related to the plan in the
accompanying statements of operations for fiscal 2001, 2000 and 1999,
respectively. A liability of approximately $7.9 million and $7.8 million is
included within other long-term liabilities in the Company's consolidated
balance sheets as of September 29, 2001 and September 30, 2000, 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 2001, 2000 and 1999, the
Company's portion of the funding totaled $5.6 million, $5.7 million and $6.5
million, respectively.
48
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
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 2001, 2000 and
1999 were approximately $1.6 million, $1.4 million and $1.3 million,
respectively. In addition, the Company provides supplemental health and life
insurance benefits with contributions for fiscal 2001, 2000 and 1999 totaling
$0.4 million, $0.4 million and $0.3 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 2001,
2000 and 1999 were $0.7 million, $0.6 million and $0.6 million, respectively.
NOTE H - Commitments and Contingencies
Future minimum commitments for operating leases at September 29, 2001 are as
follows (in thousands):
2002 ................................... $ 7,832
2003 ................................... 5,575
2004 ................................... 3,599
2005 ................................... 2,164
2006 ................................... 1,153
Thereafter ............................. 2,160
-----------
Total minimum lease payments ........... $ 22,483
===========
Approximately 74% of minimum lease payments on operating leases pertain to real
estate as of September 29, 2001. The remainder covers a variety of machinery and
equipment. Rental expense for all operating leases was approximately $11.8
million, $12.9 million and $11.7 million in fiscal 2001, 2000 and 1999,
respectively.
The Company is involved in various litigation arising in the ordinary course of
business. Although the final outcome of these matters cannot be determined,
based on the facts presently known, it is management's opinion that the final
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
Throughout fiscal 2001, the Company has continued to operate in a very difficult
business environment which resulted in the July 2001 announcement of additional
actions (the "Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives"). The
Company's goal in taking these actions is future loss avoidance, cost reduction,
production capacity rationalization and increased cash flow. The principal
manufacturing initiatives include:
(1) Discontinuation of G&L Service Company, the Company's garment
making operations in Mexico, which includes the closure of the
Dimmit facilities in Piedras Negras, Mexico, the Alta Loma
facilities in Monclova, Mexico and the Eagle Pass Warehouse in
Eagle Pass, Texas.
(2) Consolidation of its greige fabrics operations which includes the
closure of its Asheboro, North Carolina weaving facility and
Caroleen, North Carolina spinning facility.
In addition to the principal manufacturing initiatives above, the Company also
provided for the reduction of approximately 5% of its salaried overhead
employees.
In the fourth quarter of fiscal 2001, the Company recorded $63.4 million before
taxes of plant closing and impairment charges and$4.9 million before taxes of
losses related to completing garment customer orders all related to the Fiscal
2001 Cost Reduction and Loss Avoidance Initiatives. The components of the plant
closing and impairment charges included $30.4 million for goodwill impairments,
$20.3 million for fixed asset impairments, $7.5 million for severance expense
and $5.2 million for the write-off of
49
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives (Continued)
leases and other exit costs. Approximately 3,300 Mexican employees and 500 U.S.
employees were terminated as a result of the initiatives. All production at the
affected facilities ceased in early September 2001 by which time substantially
all the affected employees were terminated. The Company expects that the sale of
real estate and equipment in connection with the Fiscal 2001 Cost Reduction and
Loss Avoidance Initiatives could take 12 months or longer to complete.
The table below summarizes the activity related to the Fiscal 2001 Cost
Reduction and Loss Avoidance Initiatives plant closing accruals for the year
ended September 29, 2001 (in thousands):
Accrual Balance at
Plant closing Cash September 29,
charge payments 2001
------------- ----------- ------------------
Severance benefits $ 7,508 $ (5,516) $ 1,992
Lease cancellation and other 5,213 (186) 5,027
------------- ----------- -----------------
$ 12,721 $ (5,702) $ 7,019
============= =========== =================
The Company expects to incur run-out expenses related to the plant closings of
approximately $4-$6 million before taxes, $3.1 million of which was incurred in
the September quarter of fiscal 2001. These expenses, which include efficiency
losses, equipment relocation, losses on inventories of discontinued styles,
plant carrying costs and other costs, are included in cost of sales in the
consolidated statement of operations.
As a result of the employees terminated due to the Fiscal 2001 Cost Reduction
and Loss Avoidance Initiatives, the Company recognized a net benefit curtailment
loss of $0.1 million in the September quarter of fiscal 2001 related to its
defined benefit pension plan.
In August 2001, the Company amended its Senior Credit Facility (as defined
herein) to, among other things, exclude from covenant calculations the charges
related to the Fiscal 2001 Strategic Initiatives discussed above. See Note C -
Long-term Debt.
NOTE J - Fiscal 2000 Strategic Initiatives
During the fourth quarter of fiscal 2000, the Company announced a series of
strategic initiatives (the "Fiscal 2000 Strategic Initiatives") aimed at
increasing the Company's competitiveness and profitability by reducing costs.
The initiatives include completing a joint venture in Mexico, closing two of the
Company's plants, consolidating some operations, outsourcing certain yarn
production and eliminating excess employees in certain operations. The cost of
these initiatives was reflected in a plant closing and impairment charge
totaling $63.6 million before taxes in the fourth quarter of fiscal 2000. The
original components of the plant closing and impairment charge included $49.3
million for fixed asset write-offs, $10.8 million for severance expense and $3.5
million for the write-off of leases and other exit costs. During fiscal 2001,
the Company recorded a change in estimate for severance benefits that reduced
the plant closing charge by $0.6 million. All production at the affected
facilities ceased during the December quarter of fiscal 2000. Of the 1,370
employees to be terminated as a result of the Fiscal 2000 Strategic Initiatives,
substantially all have been terminated as of September 29, 2001. Severance has
been paid out in either a lump sum or over a maximum period of up to eighteen
months. During fiscal 2001, the Company sold a portion of the Erwin facility as
well as substantially all of the equipment at the Erwin facility and the
Brighton facility. The Company expects that the sale of the remaining real
estate and equipment related to the Fiscal 2000 Strategic Initiatives could take
12 months or longer to complete.
50
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE J - Fiscal 2000 Strategic Initiatives (Continued)
The table below summarizes the activity related to the Fiscal 2000 Strategic
Initiatives plant closing accruals for the year ended September 29, 2001 (in
thousands):
Accrual Balance at Accrual Balance at
September 30, Cash Change in September 29,
2000 Payments Estimate 2001
------------- --------- -------- --------
Severance benefits .............. $ 10,763 $ (8,358) $ (588) $ 1,817
Lease cancellation and other .... 3,553 (1,151) -- 2,402
-------- -------- -------- --------
$ 14,316 $ (9,509) $ (588) $ 4,219
======== ======== ======== ========
In connection with the Fiscal 2000 Strategic Initiatives, the Company incurred
run-out expenses totaling $10.8 million before taxes in fiscal 2001. These
expenses, which include efficiency losses, equipment relocation, losses on
inventories of discontinued styles, plant carrying costs and other costs, are
included in cost of sales in the consolidated statement of income.
As a result of the employees terminated due to the Fiscal 2000 Strategic
Initiatives, the Company recognized a net curtailment gain of $2.4 million in
fiscal 2001 related to its defined benefit pension and post-retirement medical
plans.
NOTE K - 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 11,996,965 shares are
outstanding at September 29, 2001, (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. Effective February 13, 2001, the Plan was amended to
increase the number of shares of Company Common Stock available for issuance
from 500,000 to 1.3 million. Options may be granted through the Plan's
expiration in February 2009 at an exercise price of not less than fair market
value. Currently, the Company has both fixed stock options and target stock
price performance stock options outstanding under the Plan. As of September 29,
2001, the Company had 415,351 shares available for the issuance of stock options
under the Plan.
On September 7, 2000, the Board of Directors approved offering all employees
holding outstanding options with an exercise price equal to or in excess of
$10.00 per share, the opportunity to cancel all such options (the "Option
Cancellation Program") in exchange for a new grant of options in an amount equal
to the same number of options cancelled (the "New Options") with an exercise
price of $4.1875 per share. The New Options will vest and become exercisable
when the Company's Common Stock equals or exceeds $12 per share for a 90
consecutive trading day period and will expire on September 6, 2010, unless
terminated earlier pursuant to the terms of the option agreements and the Plan.
A total of 27 employees were eligible and elected to participate in the Option
Cancellation Program and receive New Options to purchase an aggregate of 785,649
shares of Common Stock. Due to an insufficient number of options available under
the Plan, the Option Cancellation Program and issuance of New Options was
contingent upon shareholder approval of an increase in the number of shares
available for grant. As discussed in the above paragraph, shareholder approval
was received at the February 2001 annual meeting; therefore, the actual exchange
of options occurred in fiscal year 2001. In connection with the Option
Cancellation Program and issuance of New Options, the Company incurred a
non-cash charge in 2001 of approximately $1.2 million.
51
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE K - 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 2001, 2000 and 1999: expected dividend
yield of 0% for all years; expected volatility of 105.7%, 130.4% and 34%,
respectively; weighted average risk-free interest rate of 4.97%, 6.62% and
4.73%, respectively; and expected lives of 5 years for all years.
A summary of the status of the Company's fixed stock options as of September 29,
2001, September 30, 2000 and October 2, 1999, and changes during the years are
presented below:
2001 2000 1999
---------------------------- ---------------------------- -------------------------------
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 ......... 461,099 $ 9.89 456,599 $ 9.96 503,249 $ 9.48
Granted ................................ 4,500 2.66 4,500 2.02 11,350 7.71
Exercised .............................. - - - - (37,200) 59
Forfeited or canceled .................. (304,449) 10.96 - - (20,800) 13.67
-------- -------- -------- -------- --------- --------
Outstanding, end of year ............... 161,150 $ 7.65 461,099 $ 9.89 456,599 $ 9.96
======== ======== ======== ======== ========= ========
Options exercisable at year-end ........ 156,650 455,599 432,449
======== ======== =========
Weighted average fair value of
Options granted during the year
Calculated using modified Black-
Scholes model ...................... $ 2.11 $ 1.77 $ 2.92
The following table summarizes information about fixed stock options
outstanding at September 29, 2001:
Options Exercisable
-------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 9/29/01 Contractual Life Exercise Price at 9/29/01 Exercise Price
--------------- ---------- ---------------- -------------- ---------- --------------
$ 1.75 to 3.10 75,700 4.4 Yrs $ 1.82 71,200 $ 1.77
4.50 to 14.00 57,950 3.6 11.10 57,950 11.10
14.25 to 18.31 27,500 3.7 16.40 27,500 16.40
----------------- --------- ------ ------ --------- ------
$ 1.75 to 18.31 161,150 4.0 $ 7.65 156,650 $ 7.79
52
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE K - 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 $20, 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 2001 and 2000: weighted average risk-free interest rate of
6.14% and 6.86%, respectively; expected dividend yield of 0% for both years;
expected lives ranging from 2.0 to 4.0 years and 2.0 to 3.0 years, respectively;
and volatility of 119.9% and 108%, 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 29, 2001, September 30, 2000 and October 2, 1999 and
changes during the year is presented below:
2001 2000 1999
----------------------------- ---------------------------- ---------------------------
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 ....... 589,600 $ 9.80 499,600 $ 11.21 507,100 $ 11.27
Granted .............................. 785,649 4.19 90,000 2.00 - -
Exercised ............................ - - - - - -
Forfeited or canceled ................ (577,100) 10.20 - - (7,500) 15.52
--------- -------- --------- -------- --------- --------
Outstanding, end of year ............. 798,149 $ 3.99 589,600 $ 9.80 499,600 $ 11.21
========= ======== ========= ======== ========= ========
Options exercisable at year-end ...... - 484,600 484,600
========= ========= =========
Weighted average fair value of
options granted during the year
calculated using modified Black-
Scholes model .................... $ 2.95 $ 1.19 $ -
As of September 29, 2001, the 798,149 target stock price performance options
outstanding under the Plan have a weighted average remaining contractual life of
8.87 years assuming all options vest.
53
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE L - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
2001 2000 1999
---- ---- ----
Numerator:
Net income (loss) .................................. $(70,146) $(38,288) $(11,036)
======== ======== ========
Denominator:
Denominator for basic earnings per share -
Weighted average shares .......................... 11,985 11,942 11,881
Effect of dilutive securities:
Stock options .................................... -- -- --
-------- -------- --------
Diluted potential common shares denominator
For diluted earnings per share - adjusted
Weighted average shares and assumed exercises .... 11,985 11,942 11,881
======== ======== ========
NOTE M - Concentration of Credit Risk
The Company manufactures and sells textile products to companies located
worldwide which are predominantly in the apparel and home fabrics industries.
The Company performs periodic credit evaluations of its customers' financial
condition and, although the Company does not generally require collateral, it
does require cash payments in advance when the assessment of credit risk
associated with a customer is substantially higher than normal. At September 29,
2001, 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
21%, 24% and 22% of the Company's consolidated net sales for fiscal 2001, 2000
and 1999, respectively.
NOTE N - Segment Information
The Company's operations are classified into four business segments: Galey &
Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. The
Company is principally organized around differences in products; however, one
segment exists primarily due to geographic location. The business segments are
managed separately and distribute products through different marketing channels.
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended
apparel fabrics. Swift Denim manufactures and markets a wide variety of denim
products for apparel and non-apparel uses. Klopman International manufactures
principally workwear and careerwear fabrics as well as woven apparel fabrics
primarily for consumption in Europe. Home Fashion Fabrics sells dyed and printed
fabrics to the home furnishing trade for use in bedspreads, comforters, curtains
and accessories as well as greige fabrics (undyed and unfinished) which it sends
to independent contractors for dyeing and finishing.
54
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE N - Segment Information (Continued)
The Company evaluates performance and allocates resources based on operating
income; therefore, certain expenses, principally net interest expense and income
taxes, are excluded from the chief operating decision makers' assessment of
segment performance. Accordingly, such expenses have not been allocated to
segment results. The accounting policies of the reportable segments are the same
as those described in the Summary of Significant Accounting Policies (see Note A
above). The corporate segment's operating income (loss) represents principally
the administrative expenses from the Company's various holding companies.
Additionally the corporate segment'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):
2001 2000 1999
---- ---- ----
Net Sales to External Customers
Galey & Lord Apparel ........ $ 402,024 $ 459,410 $ 457,851
Swift Denim ................. 299,124 348,540 324,661
Klopman International ....... 135,409 128,923 140,838
Home Fashion Fabrics ........ 13,436 20,887 29,766
--------- --------- ---------
Consolidated ................ $ 849,993 $ 957,760 $ 953,116
========= ========= =========
Operating Income (Loss)/(1,2)/
Galey & Lord Apparel ........ $ (12,814) $ 25,897 $ 23,020
Swift Denim ................. 16,372 (33,600) 5,223
Klopman International ....... 10,955 11,198 11,600
Home Fashion Fabrics ........ (41,761) (2,198) (243)
Corporate ................... (1,481) (325) (150)
--------- --------- ---------
(28,729) 972 39,450
Interest expense ................ 60,226 66,081 60,935
Income from associated companies (8,721) (6,258) (4,240)
--------- --------- ---------
Income (loss) before income taxes $ (80,234) $ (58,851) $ (17,245)
========= ========= =========
Depreciation and Amortization
Galey & Lord Apparel ........ $ 12,564 $ 14,062 $ 15,092
Swift Denim ................. 15,632 22,056 22,205
Klopman International ....... 5,428 5,598 6,199
Home Fashion Fabrics ........ 2,825 3,293 3,300
Corporate ................... 665 598 578
--------- --------- ---------
$ 37,114 $ 45,607 $ 47,374
========= ========= =========
Other Non-cash Charges/(3)/
Galey & Lord Apparel ........ $ 48 $ 218 $ 11
Swift Denim ................. 92 36 25
Klopman International ....... -- 466 --
Home Fashion Fabrics ........ 31 -- --
Corporate ................... 1,299 -- 33
--------- --------- ---------
$ 1,470 $ 720 $ 69
========= ========= =========
Assets/(4,5,6)/
Galey & Lord Apparel ........ $ 252,220 $ 308,188 $ 300,422
Swift Denim ................. 327,081 373,881 440,068
Klopman International ....... 113,156 105,992 131,018
Home Fashion Fabrics ........ 15,718 53,823 56,447
Corporate ................... 56,540 54,220 50,761
--------- --------- ---------
$ 764,715 $ 896,104 $ 978,716
========= ========= =========
55
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE N - Segment Information (Continued)
2001 2000 1999
---- ---- ----
Capital Expenditures
Galey & Lord Apparel $ 11,156 $ 7,038 $ 19,275
Swift Denim 10,823 9,108 4,940
Klopman International 2,228 2,594 2,848
Home Fashion Fabrics 85 261 122
------------ ------------ ------------
$ 24,292 $ 19,001 $ 27,185
============ ============ ============
Net Sales to External Customers /7)/
United States $ 625,469 $ 738,741 $ 732,257
Europe 135,409 128,923 140,838
Canada 81,473 83,589 80,021
Mexico 1,292 6,507 -
Asia 6,350 - -
------------ ------------ ------------
Consolidated $ 849,993 $ 957,760 $ 953,116
============ ============ ============
Long-lived Assets
United States $ 180,708 $ 197,520 $ 265,849
Europe /8)/ 52,400 53,790 69,119
Canada 27,739 31,411 31,559
Other Foreign Countries 3,590 17,362 17,174
------------ ------------ ------------
Consolidated $ 264,437 $ 300,083 $ 383,701
============ ============ ============
/1)/Fiscal 2001 operating income (loss) includes costs related to the
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the
Fiscal 2000 Strategic Initiatives of $35.3 million, $6.8 million,
$37.2 million and $0.4 million for Galey & Lord Apparel, Swift Denim,
Home Fashion Fabrics and Corporate, respectively.
/(2)/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.
/(3)/Fiscal 2001 other non-cash charges exclude fixed asset and goodwill
impairment charges related to the Fiscal 2001 Cost Reduction and Loss
Avoidance Initiatives of $19.8 million, $1.0 million and $29.9 million
for Galey & Lord Apparel, Swift Denim, and Home Fashion Fabrics,
respectively. Fiscal 2000 other non-cash charges exclude fixed asset
impairment charges related to the Fiscal 2000 Strategic Initiatives of
$5.8 million and $43.5 million for Galey & Lord Apparel and Swift
Denim, respectively.
/(4)/Excludes intercompany balances and investments in subsidiaries which
are eliminated in consolidation.
/(5)/Fiscal 2001 assets include long-lived assets to be disposed of in
connection with the Fiscal 2001 Cost Reduction and Loss Avoidance
Initiatives of $8.6 million and $0.1 million for Galey & Lord Apparel
and Swift Denim, respectively. Fiscal 2001 assets also include
long-lived assets to be disposed of in connection with the Fiscal 2000
Strategic Initiatives of $5.9 million for Swift Denim.
/(6)/Fiscal 2000 assets include long-lived assets to be disposed of in
connection with the Fiscal 2000 Strategic Initiatives of $0.8 million
and $12.5 million for Galey & Lord Apparel and Swift Denim,
respectively.
/(7)/Revenues are attributed to countries based on geographic origin.
/(8)/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 $142.2 million, $195.5
million and $145.8 million for fiscal 2001, 2000 and 1999, respectively. Swift
Denim net sales to this customer were $35.9 million, $33.8 million and $59.2
million for fiscal 2001, 2000 and 1999, respectively. Klopman International's
net sales to this customer were $1.3 million, $1.5 million and $5.3 million for
fiscal 2001, 2000 and 1999, respectively.
56
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE O - 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. The Swift Denim-Hidalgo
joint venture, which manufactures denim in Mexico, was formed on August 18, 2001
with Grupo Dioral. In exchange for a $14 million contribution comprised of cash,
inventory and equipment, the Company received a 50% interest in the ownership of
this joint venture. The Company contributed $7.8 million in cash and inventory
in fiscal 2000 and $5.0 million in inventory and equipment in fiscal 2001. The
equipment is from the Company's Erwin facility which closed in December 2000 and
is being transferred as the joint venture prepares its facility. The remaining
equipment will be transferred in fiscal 2002. The joint venture is accounted for
under the equity method and the results of operations are reported on a
one-month lag.
A secured loan to Swift Europe of $3.5 million at September 29, 2001 and $3.7
million at September 30, 2000 is included in investments in and advances to
associated companies. This loan bears interest at 5% and is payable in
installments through 2009. Also included in investments in and advances to
associated companies are advances to Swift Denim-Hidalgo of $2.9 million at
September 29, 2001 and $1.2 million at September 30, 2000. These loans are
unsecured, bear interest at the prime rate plus 1% and the principal balances
are payable in balloon payments with due dates ranging from August 2002 to
September 2003.
At September 29, 2001 and September 30, 2000, the excess of the Company's
investment over its equity in the underlying net assets of its joint venture
interests is approximately $10.4 million and $11.0 million, respectively, (net
of accumulated amortization of $2.3 million and $1.7 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 for the Company's associated companies as of September 29, 2001 and
September 30, 2000 and for the years ended September 29, 2001 and September 30,
2000. The financial information has been derived from statutory financial
statements and has been adjusted to conform to U.S. generally accepted
accounting principles.
2001 2000
---- ----
(In thousands)
Selected Balance Sheet Data:
Current assets $ 41,493 $ 44,589
Noncurrent assets 53,563 48,615
Current liabilities 46,685 37,749
Noncurrent liabilities 11,394 21,462
Stockholders' equity 36,977 33,993
Selected Income Statement Data:
Net sales $ 99,406 $ 74,955
Gross profit 28,311 21,624
Operating income 20,395 15,147
Net income $ 18,746 $ 13,708
57
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE P - Quarterly Results of Operations (Unaudited)
The Company's unaudited quarterly consolidated results of operations are
presented below (in thousands, except per share data):
Fiscal 2001 Quarters
------------------------------------------------------------
December/(1)/ March/(2)/ June/(3)/ September/(4)/
---------- ------- ------- -----------
Net sales..................................................... $ 221,685 $ 231,707 $ 220,161 $ 176,440
Cost of sales................................................. 199,901 208,460 198,572 172,666
---------- ---------- ---------- ----------
Gross profit.................................................. 21,784 23,247 21,589 3,774
Income tax expense (benefit).................................. (189) (140) (105) (9,654)
Net income (loss)............................................. $ 70 $ 194 $ 847 $ (71,257)
========== ========== ========== ==========
Per share data - basic:
Average common shares outstanding............................. 11,961 11,984 11,997 11,997
Net income (loss) - basic..................................... $ .01 $ .02 $ .07 $ (5.94)
========== ========== ========== ==========
Per share data - diluted:
Average common shares outstanding............................. 11,984 12,015 12,007 11,997
Net income (loss) - diluted................................... $ .01 $ .02 $ .07 $ (5.94)
========== ========== ========== ==========
Fiscal 2000 Quarters
------------------------------------------------------------
December March June September/(5)/
-------- ----- ---- ------------
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)
========== ========== ========== ==========
All quarters presented are 13-week periods.
/(1)/ December quarter of fiscal 2001 includes $1.9 million (pre-tax) of costs
related to the Company's Fiscal 2000 Strategic Initiatives.
/(2)/ March quarter of fiscal 2001 includes $2.4 million (pre-tax) of costs
related to the Company's Fiscal 2000 Strategic Initiatives.
/(3)/ June quarter of fiscal 2001 includes $1.3 million (pre-tax) of costs
related to the Company's Fiscal 2000 Strategic Initiatives.
/(4)/ September quarter of fiscal 2001 includes $74.1 million (pre-tax) of costs
related to the Company's Fiscal 2001 Cost Reduction and
Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives.
/(5)/ September quarter of fiscal 2000 includes $63.7 million (pre-tax) of costs
related to the Company's Fiscal 2000 Strategic Initiatives.
_______________________
58
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information
The following summarizes condensed consolidating financial information for the
Company, segregating Galey & Lord, Inc. (the "Parent") and subsidiaries that are
guarantors of the Notes ("Guarantor Subsidiaries") from subsidiaries that are
not guarantors of the Notes ("Non-Guarantor Subsidiaries"). The Guarantor
Subsidiaries are wholly-owned subsidiaries of the Company and guarantees are
full, unconditional and joint and several. Separate financial statements of each
of the Guarantor Subsidiaries are not presented because management believes that
these financial statements would not be material to investors.
September 29, 2001
-----------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------ ------------ ------------ ------------ ------------
Current assets:
Trade accounts receivable $ - $ 102,557 $ 42,809 $ - $ 145,366
Inventories - 129,969 36,851 - 166,820
Other current assets 19 11,280 12,112 (2,136) 21,275
--------- ----------- ----------- ------------- -----------
Total current assets 19 243,806 91,772 (2,136) 333,461
Property, plant and equipment, net - 182,339 82,099 - 264,438
Intangibles, net - 114,374 - - 114,374
Investments in subsidiaries and other assets 47,615 (2,865) 36,674 (28,982) 52,442
--------- ----------- ----------- ------------ -----------
$ 47,634 $ 537,654 $ 210,545 $ (31,118) $ 764,715
========= =========== =========== ============ ===========
Current liabilities:
Trade accounts payable $ - $ 36,784 $ 16,719 $ - $ 53,503
Accrued liabilities 15,755 26,647 15,902 (16) 58,288
Other current liabilities 11,223 (3,221) 4,404 (2,136) 10,270
--------- ----------- ----------- ------------ -----------
Total current liabilities 26,978 60,210 37,025 (2,152) 122,061
Net intercompany balance (577,749) 588,705 (10,956) - -
Long-term debt 613,658 5,803 15,360 - 634,821
Other non-current liabilities (2,269) 11,064 12,022 - 20,817
Stockholders' equity (deficit) (12,984) (128,128) 157,094 (28,966) (12,984)
--------- ----------- ----------- ------------ -----------
$ 47,634 $ 537,654 $ 210,545 $ (31,118) $ 764,715
========= =========== =========== ============ ===========
59
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
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 (deficit) 55,589 (40,021) 235,547 (195,526) 55,589
--------- ----------- ----------- ------------ -----------
$ 208,549 $ 675,044 $ 208,242 $ (195,731) $ 896,104
========= =========== =========== ============ ===========
60
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
For the year ended September 29, 2001
---------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $ 635,146 $ 254,506 $ (39,659) $ 849,993
Gross profit - 38,405 31,989 - 70,394
Operating income (loss) (1,300) (42,478) 15,049 - (28,729)
Interest expense, income taxes and other, net 354 38,597 2,274 192 41,417
Net income (loss) $ (1,654) $ (81,075) $ 12,775 $ (192) $ (70,146)
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)
61
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
For the year ended September 29, 2001
---------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------ ------------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 2,790 $ 21,406 $ 2,835 $ (10) $ 27,021
Cash provided by (used in) investing activities 86,663 (18,841) (94,997) 13,777 (13,398)
Cash provided by (used in) financing activities (89,458) (2,136) 91,123 (13,767) (14,238)
Effect of exchange rate change on cash and cash
equivalents - - 131 - 131
---------- ---------- ---------- ------------ ------------
Net change in cash and cash equivalents (5) 429 (908) - (484)
Cash and cash equivalents at beginning of period 10 4,194 5,437 - 9,641
---------- ---------- ---------- ------------ ------------
Cash and cash equivalents at end of period $ 5 $ 4,623 $ 4,529 $ - $ 9,157
========== ========== ========== ============ ============
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
========== ========== ========== ============ ============
62
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
63
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."
64
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 29, 2001 and September
30, 2000.
Consolidated Statements of Operations for the fiscal years ended
September 29, 2001, September 30, 2000 and October 2, 1999.
Consolidated Statements of Cash Flows for the fiscal years ended
September 29, 2001, September 30, 2000 and October 2, 1999.
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended September 29, 2001, September 30, 2000 and
October 2, 1 999.
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 July 26, 2001 to report, among
other things, a series of strategic initiatives due to the continuing
difficult business environment.
65
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)/*
66
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)/*
67
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 - Senior Subordinated Credit Agreement dated as of December 19,
1997 among Industries, the Company and First Union
Corporation, as agent and lender./(17)/
10.37 - Master Separation Agreement, dated January 29, 1998, among the
Company, Polymer, DTA, Dominion Textile, Inc. ("Dominion") and
certain other parties thereto./(18)/
10.38 - Credit Agreement dated as of January 29, 1998 among the
Company, Industries, G&L 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)/
10.39 - Security Agreement dated as of January 29, 1998, among the
Company, Industries, G&L Service Company, Textiles, Denim and
First Union National Bank, as collateral agent./(18)/
10.40 - Pledge Agreement dated as of January 29, 1998, among the
Company, Industries, G&L Service Company, Textiles, Denim and
First Union National Bank, as collateral agent./(18)/
10.41 - 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)/
10.42 - 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)/
10.43 - Second Amendment to Senior Subordinated Credit Agreement dated
as of January 29, 1998 among the Company, Industries, G&L
Service Company, Textiles, Denim and First Union Corporation,
as agent and lender./(18)/
68
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------- ----------- -------
10.44 - Waiver, Release and First Amendment to the Credit Agreement
dated March 19, 1998 among the Company, Industries, G&L
Srvice Company, Textiles, Denim and First Union National
Bank, as agent and lender./(19)/
10.45 - Second Amendment to the Credit Agreement dated March 27, 1998,
among the Company, Industries, G&L Service Company, Textiles,
Denim and First Union National Bank, as agent and lender, and
the other lenders' party thereto./(19)/
10.46 - Indenture, dated as of February 24, 1998 among the Company,
Industries, G&L Service Company, Textiles, Denim and Suntrust
Bank, Atlanta./(20)/
10.47 - Note Purchase Agreement, dated February 19, 1998 among the
Company, Industries, G&L Service Company, Textiles, Denim and
First Union Capital Markets, a division of Wheat First
Securities, Inc./(20)/
10.48 - Form of Initial Global Note./(20)/
10.49 - Form of Initial Certificated Note./(20)/
10.50 - Registration Rights Agreement, dated February 24, 1998, by and
among the Company, Industries, G&L Service Company, Textiles,
Denim and First Union Capital Markets, a division of Wheat
First Securities, Inc./(21)/
10.51 - Third Amendment, Consent and Release, to the Credit Agreement
dated September 15, 1998, among the Company, Industries, G&L
Service Company, Textiles, Denim and First Union National
Bank, as agent and lender, and the other lenders' party
thereto.(24)/
10.52 - Fourth Amendment to the Credit Agreement dated December 23,
1998, among the Company, Industries, G&L Service Company,
Textiles, Denim and First Union National Bank, as agent and
lender, and the other lenders' party thereto./(24)/
10.53 - Agreement dated April 29, 1996, between Dominion and John J.
Heldrich./(24)/*
10.54 - Galey & Lord, Inc. 1999 Stock Option Plan./(22)/*
10.55 - Fifth Amendment to the Credit Agreement dated July 3, 1999
among the Company, Industries, G&L Service Company, Textiles,
Denim, Galey & Lord Properties, Inc. ("G&L Properties"), Swift
Denim Properties, Inc. ("Swift Properties") and First Union
National Bank, as agent and lender, and the other lenders'
thereto./(23)/
10.56 - Amended and Restated Retirement Plan for Employees of Galey &
Lord, Inc./(25)/*
10.57 - Amended and Restated Galey & Lord Retirement Savings Plan
(401(k))/(25)/*
69
EXHIBIT INDEX
Sequential
Number Description Page No.
------ ----------- -------
10.58 - Form of Supplemental Indenture./(26)/
10.59 - Sixth Amendment to the Credit Agreement dated September 7,
2000 among the Company, Industries, G&L Service Company,
Textiles, Denim, G&L Properties, Swift Properties and First
Union National Bank, as agent and lender, and the other
lenders' thereto./(27)/
10.60 - Employment Agreement between the Company and Arthur C. Wiener.
/(27)/*
10.61 - Employment Agreement between the Company and John J. Heldrich,
Jr./(27)/*
10.62 - Employment Agreement between the Company and Robert McCormack.
/(27)/*
10.63 - Employment Agreement between the Company and Charles A.
Blalock./(27)/*
10.64 - 1996 Restricted Stock Plan (as amended)./(28)/*
10.65 - Amendment to 1999 Stock Option Plan of Galey & Lord, Inc.
/28)/*
10.66 - Loan Agreement by and between Congress Financial Corporation
(Canada), as Lender, and Drummondville Services Inc./Les
Services Drummondville Inc., as borrower, dated as of February
13, 2001./(28)/
10.67 - Amended and Restated Supplemental Executive Retirement Plan of
Galey & Lord, Inc./(28)/*
10.68 - Seventh Amendment and Consent to the Credit Agreement dated
March 30, 2001 among the Company, Industries, G&L Service
Company, Textiles, Denim, G&L Properties, Swift Properties and
First Union National Bank, as agent and lender, and the other
lenders' party thereto.
10.69 - Eighth Amendment and Consent to the Credit Agreement dated
August 9, 2001 among the Company, Industries, G&L Service
Company, Textiles, Denim, G&L Properties, Swift Properties and
First Union National Bank, as agent and lender, and the other
lenders' party thereto.
10.70 - Employment Agreement between the Company and Leonard F.
Ferro.*
10.71 - First Amendment to the Retirement Plan for Employees of Galey
& Lord, Inc., as amended and restated.*
10.72 - First Amendment to the Supplemental Executive Retirement Plan
of Galey & Lord, Inc., as amended and restated.*
21 - Subsidiaries of the Company./(24)/
23.1 - Consent of Ernst & Young LLP.
/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.
70
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
/(2)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 2, 1993 and incorporated herein
by reference.
/(3)/ Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended April 2, 1994 and incorporated herein
by reference.
/(4)/ Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 33-52248) dated August 25, 1994 and
incorporated herein by reference.
/(5)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 1, 1994 and incorporated herein
by reference.
/(6)/ Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1994 and incorporated
herein by reference.
/(7)/ Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended April 1, 1995 and incorporated herein
by reference.
/(8)/ Filed as an Exhibit to the Company's Form 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.
71
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
------ ----------- --------
/(21)/ Filed as an Exhibit to the Company's Registration Statement on
Form S-4 (File No. 333-49503) dated April 22, 1998 and
incorporated herein by reference.
/(22)/ Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 333-78809) dated May 19, 1999 and incorporated
herein by reference.
/(23)/ Filed as an Exhibit to the Company's Form 8-K dated July 13, 1999
and incorporated herein by reference.
/(24)/ Filed as an Exhibit to the Company's Form 10-K for the fiscal
year ended October 3, 1998 and incorporated herein by reference.
/(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.
/(27)/ Filed as an Exhibit to the Company's Form 10-K for the fiscal
year ended September 30, 2000 and incorporated herein by
reference.
/(28)/ Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended March 31, 2001 and incorporated herein
by reference.
* Management contract or compensatory plan or arrangement
identified pursuant to item 14(a)3 of this report.
72
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 29, 2001
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances ............... $6,911 $ (616) $ 69 $ 101 $6,263
------ ------ ------ ------ ------
Totals ....................................... $6,911 $ (616) $ 69 $ 101 $6,263
====== ====== ====== ====== ======
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
====== ====== ====== ====== ======
___________________
/(1)/Uncollectible accounts written off.
73
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 10, 2001 /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 10, 2001 /s/ Leonard F. Ferro December 10, 2001
____________________________________________ _____________________________________________
Arthur C. Wiener Date Leonard F. Ferro Date
Chairman of the Board Vice President and Chief Accounting
and President (Principal Executive Officer) Officer (Principal Financial and Accounting
Officer)
/s/ Paul G. Gillease December 10, 2001 /s/ William M.R. Mapel December 10, 2001
____________________________________________ _____________________________________________
Paul G. Gillease Date William M.R. Mapel Date
Director Director
/s/ Howard S. Jacobs December 10, 2001 /s/ Stephen C. Sherrill December 10, 2001
____________________________________________ _____________________________________________
Howard S. Jacobs Date Stephen C. Sherrill Date
Director Director
/s/ Jose de Jesus Valdez December 10, 2001
_____________________________________________
Jose de Jesus Valdez Date
Director
74