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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended Commission File Number 0-20080
September 27, 1997
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
Common Stock, Par Value $.01
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 (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on November 28, 1997, was approximately
$109,150,992.
The number of shares outstanding of Common Stock, as of November 28, 1997, was
11,664,490 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for the 1998 annual meeting of
stockholders of the Company are incorporated by reference into Part III.
Exhibit Index at Pages 45-48
1
PART I
Item 1. BUSINESS
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") and conducts all of its operations through Industries and its
subsidiaries and has no significant assets other than shares of Industries.
Prior to April 1992, the Company was known as Galey & Lord Holdings, Inc., and
its 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.
Unless otherwise specified herein, all references to the Company or the
Registrant include the Company, Industries, G&L Service Company and Dimmit.
The Company is a leading developer, manufacturer and marketer of high
quality woven cotton and cotton blended apparel fabrics. It principally sells
fabrics to well-known manufacturers of sportswear for use in the production of
men's, women's and children's pants and shorts and to manufacturers of
commercial uniforms. The Company's technical expertise in finishing enables it
to provide a number of fabrics to its customers that are not otherwise available
in the domestic marketplace. The location of the Company's facilities in the
United States and Mexico enables it to respond quickly to customers' changing
needs, as well as their increasing demands for tight production schedules and
rapid delivery.
In April 1994, the Company, through Industries, acquired the Decorative
Prints Division of Burlington. This business, which was renamed Galey & Lord
Home Fashion Fabrics, sells greige, dyed and printed fabrics to the home
furnishings trade for use in bedspreads, comforters and curtains.
On September 19, 1995, the Company closed its printed apparel fabrics
businesses, made up of Galey & Lord Prints and Galey & Lord Group II, due to
declining business conditions that the printed apparel fabrics businesses had
experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and has laid off approximately
450 employees located primarily in Society Hill, South Carolina and New York
City.
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On June 7, 1996, the Company, through its subsidiary, G&L Service Company
acquired the capital stock of Dimmit and certain related assets from Farah
Incorporated for approximately $22.8 million in cash including certain costs
related to the acquisition (the "Mexico Acquisition"). Dimmit is composed of six
manufacturing facilities located in Piedras Negras, Mexico and sews and finishes
pants and shorts for the casual wear market. Funding for the Mexico Acquisition
was provided through funds generated by operations, working capital reductions
and by the Company's current bank group through amendments to the Company's term
loan and revolving credit facility. The results of operations of G&L Service
Company and Dimmit have been included in the consolidated financial statements
from the date of acquisition.
On October 27, 1997, the Company entered into an agreement with Polymer Group,
Inc. and its affiliate, DT Acquisition Inc. ("DTA"), to acquire from DTA the
apparel fabrics business (the "Dominion Acquisition") of Dominion Textiles Inc.
("Dominion") in the event that DTA successfully completes its tender offer to
purchase the capital stock of Dominion. Dominion's apparel fabrics business to
be acquired by the Company primarily consists of several direct and indirect
subsidiaries and operating divisions of Dominion which manufacture and market
denim fabrics and fabrics for the commercial uniform market. Under the current
terms of DTA's tender offer, Dominion's shareholders may tender their shares of
Dominion's common stock for CDN $14.50 and shares of Dominion's preferred stock
for CDN $150.00 until 4 p.m. Toronto time on December 29, 1997. As of December
15, 1997, 98.56% of Dominion's shares of common stock held by the public and
92.7% of Dominion's shares of preferred stock held by the public have been
tendered. The completion of the tender offer and the Dominion Acquisition are
both subject to, among other things, certain governmental and other regulatory
approvals. It is currently anticipated that the tender offer will be completed
in December 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Significant Events."
Products and Customers
The following chart sets forth the Company's net sales for both the
apparel fabrics segment, comprised of woven fabrics and G&L Service Company, and
the home fabrics segment, comprised of Home Fashion Fabrics, for each of the
last three fiscal years.
Fiscal Year
1997 1996 1995
------------------------ ------------------------- -------------------------
(dollar amounts in thousands)
Apparel fabrics..................... $456,597 92.5% $364,157 88.5% $443,544 88.3%
Home fabrics........................ 36,765 7.5% 47,298 11.5% 58,676 11.7%
----------- -------- ----------- -------- ---------- -------
Totals........................ $493,362 100.0% $411,455 100.0% $502,220 100.0%
======== ====== ======== ====== ======== ======
For additional financial information with respect to the apparel
fabrics segment and home fabrics segment, see Note M to the Company's
consolidated financial statements contained herein.
Apparel fabrics. The Company's principal products are spun woven
mediumweight cotton and cotton blended apparel fabrics. Fabric styles are
distinguished by weave (twills, poplins, canvas and corduroy), interlacing and
weight. In conjunction with the formation of G&L Service Company and the Mexico
Acquisition in June 1996, the Company began offering sewn garments to its
current customer base.
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The Company's strategy is to manufacture a relatively limited number of
basic fabric styles and to enhance the value of fabrics to its customers through
a wide variety of sophisticated mechanical and chemical finishing processes,
including dyeing, napping, sueding and prewashing. The Company offers fabrics in
a variety of finishes including wrinkle-resistant and soil release finishes and
offers an extensive range of colors to respond to its customers' particular
product requirements. The Company works closely with its customers and weaves
basic fabrics according to projected sales based on strong indications from
major customers, but only dyes and finishes according to specific purchase
orders. This practice allows the Company to respond quickly to actual demand and
has resulted in improved operating efficiencies and inventory control.
The Company's woven apparel fabrics are sold to apparel manufacturers
that sell principally to four end-user customer groups: menswear, uniforms,
branded womenswear and private label womenswear. Fabrics produced by the Company
for menswear apparel manufacturers are principally high quality mediumweight
fabrics used to manufacture pants and shorts. The Company's primary menswear
customers include Levi Strauss & Co., Tropical Sportswear International Corp.,
Haggar Apparel Co., and Farah Incorporated. The Company also sells to suppliers
of private label mail order marketers, including Lands' End, Inc. and L.L. Bean,
Inc.
In the branded womenswear apparel fabric market, the Company sells
woven fabrics principally for women's pants, skirts and shorts. The Company's
primary customers are leading women's apparel manufacturers, including Liz
Claiborne, Polo Ralph Lauren Corp., Levi Strauss & Co., Inc., Tommy Hilfiger,
Calvin Klein and the Polo Jean Co.
Fabrics for private label womenswear are principally sold to garment
manufacturers that supply women's pants, skirts and shorts to department stores
and mass merchandisers. Major end-use customers include Wal-Mart Stores, Inc.,
Kmart Corporation, J.C. Penney Co. Inc., Sears Roebuck & Company and Montgomery
Ward. Increasingly, end-use customers are working directly with the Company to
develop fabrics for garments sold by them and specify that the Company's fabrics
be used by their suppliers.
The Company manufactures corduroy to customer order in various wales
and widths. Corduroy is sold to manufacturers of menswear, womenswear and
childrenswear. The Company believes that it is the only vertically-integrated
domestic producer of corduroy. The Company's major corduroy customers include
Levi Strauss & Co., H.D. Lee Co., Inc., Aalfs Manufacturing, Polo Ralph Lauren
Corp. and Haggar Apparel Co.
The Company's uniform fabrics are distributed to the industrial laundry
market, the hospitality market and to the healthcare market. Durability of
fabric, compliance with strict standards for fitness for use, continuity of
color and customer service are the factors most important to the Company's
customers. The Company sells chemically treated fabrics, including fabrics
treated with Flamex(TM), a fire retardant finish, and Bioguard(TM), an
anti-bacterial finish. Customers for uniform fabrics include Cintas Corporation,
Riverside Mfg. Co., Garment Corporation of America, Kellwood Company and
Superior Surgical Manufacturing Co.
4
In June 1996, the Company, through its subsidiary, G&L Service Company,
purchased Dimmit to take advantage of the movement of garment manufacturing from
the Pacific Rim to the Western Hemisphere. Dimmit sews and finishes pants and
shorts for the casual wear market. Also, a number of the Company's apparel
fabrics customers outsource some or all of their garment production, often
dealing with several suppliers to complete each garment. The Mexico Acquisition
has allowed the Company to offer a package of fabric and garments from one
source to its current customers. The Company believes that by purchasing
garments from a single source of supply, its customers will reduce their
logistical and quality problems and their lead times. The Company believes that
offering its customers a single source of supply represents a major step in
changing the current manufacturing chain. Customers for G&L Service Company
include Polo Ralph Lauren Corp., Liz Claiborne, Levi Strauss & Co., Jones
Apparel Group and Calvin Klein.
Home fabrics. As a result of the April 1994 acquisition of the Home
Fashion Fabrics Division from Burlington, the Company entered into the
non-apparel textile market. This division manufactures and sells greige, dyed
and printed fabrics to the home furnishing trade for use in bedspreads,
comforters, curtains and accessories. Home Fashion Fabrics' major customers
include Arley Merchandise Corp., Regency Home Fashions Inc., Burlington
Industries, Inc. and Dan River, Inc.
General. Apparel fabric sales for fiscal year 1997 and fiscal year 1996
to various divisions of Levi Strauss & Co., Inc. accounted for approximately
21.6% and 17.4% , respectively, of the Company's total net sales for each year.
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 5% of the Company's total net sales.
At September 27, 1997, the Company had more than 2,200 customer
accounts.
Marketing
The Company markets its products through two segments, apparel fabrics
and home fabrics, with five main areas of distribution: Sportswear, Uniform
Fabrics, Corduroy Fabrics, G&L Service Company and Home Fashion Fabrics. The
Company's principal marketing functions are based in New York City in order to
be close to major apparel manufacturing customers. The Company also has regional
sales offices located in Los Angeles, San Francisco and Dallas. The Company
employs marketing executives and salespersons and several independent sales
agents.
Sales personnel work continually with major fabric and garment
customers who may provide information to the Company to develop product lines as
much as 18 months in advance of actual shipment. Until a customer selects
particular colors and finishes and the dyeing and finishing process begins
(between two and six weeks before anticipated shipment), unfinished woven
fabrics can be used for a large variety of customers. The Company believes that
the coordination of its marketing and production processes enhances its
flexibility to respond quickly to both apparel and home furnishings
manufacturers' requirements.
5
Manufacturing
Apparel fabrics. The Company is a vertically-integrated manufacturer of
dyed and finished woven cotton and cotton blended apparel fabrics with various
plants involved in spinning, weaving and state-of-the-art dyeing and finishing.
In conjunction with the formation of G&L Service Company and the Mexico
Acquisition in June 1996, the Company began offering sewn and finished garments
to its current customer base.
The Company either spins or purchases the yarn it uses to weave
fabrics. The yarn is woven into fabric using high-speed air-jet looms. All woven
fabrics sold by the Company are either dyed or finished. Special chemicals and
resins may be applied to a fabric to give it special properties, including
wrinkle resistance and soil release. 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 only according to customer purchase orders.
Customer orders typically are completed between three and five weeks after a
customer selects colors and finishes.
The Company's weaving, dyeing and finishing equipment and processes may
be used to produce both corduroy and other woven cotton and cotton blended
apparel fabrics. The ability to produce both types of fabric using substantially
the same equipment and processes allows the Company to adapt to changes in
demand which varies seasonally (corduroy for the fall/winter selling season and
sportswear for the spring/summer selling season) and to maintain consistent
levels of production throughout the entire year. The Company manufactures
corduroy seasonally to customer order rather than year round.
In order to operate its dyeing and finishing facility at optimum
capacity, the Company purchases greige fabrics from outside sources to fill
orders and does not rely solely on production by its spinning and weaving
facilities. During periods of lower demand for dyed and finished fabrics, the
Company reduces its purchases of greige fabrics from outside sources to keep its
spinning and weaving facilities operating at full or near full capacity. In
fiscal 1997, the Company's greige manufacturing facilities as well as the
Company's dyeing and finishing facilities operated at full capacity.
Through G&L Service Company, the Company sews and finishes garments for
its apparel customers. The location of the Company's garment manufacturing
facilities in Mexico allow the Company to respond quickly to the needs of its
United States apparel customers and to compete effectively with competitors in
the Far East who have longer lead times for delivery of goods to the United
States. In response to rising demand for the Company's garments, the Company
currently plans to open a new garment manufacturing facility in Monclova, Mexico
during fiscal 1998.
Home fabrics. The Company operates its own yarn and greige
manufacturing facilities to produce polyester/cotton sheeting fabrics for the
home furnishings trade. The Home Fashion Fabrics Division's weaving facility
operates wide Sulzer looms, which allow it to manufacture fabrics ranging from
48" to 127" in width. The Company believes that having wide weaving capability
is key to being able to offer wider fabrics required by the home furnishings
trade for comforters and bedspreads. These looms also have the capability of
producing apparel fabrics, allowing the Company flexibility to shift production
with market demand. The Company purchases outside dyeing and printing services
from various suppliers to dye and print fabrics according to customers'
specifications.
6
General. The Company maintains rigorous quality control throughout each
production process. Testing and inspection occur at various stages in the
spinning, weaving, dyeing, finishing, sewing and laundering processes. The
Company's plants employ computers to monitor and control manufacturing processes
and the flow of products.
Raw Materials and Services
The principal raw materials used by the Company are cotton and man-made
fibers and yarns. Cotton is available from a large number of suppliers. Weather,
crop conditions, agricultural policies and market conditions can significantly
affect the cost and availability of cotton, but, to date, the Company has
experienced no difficulty obtaining adequate supplies of cotton. The Company
enters into contracts for cotton several months in advance of expected delivery
to ensure availability. The prices associated with these contracts may be either
fixed at the time the contract is signed or at a later date.
The United States restricts the importation of cotton. In order to make
the price of domestic cotton competitive with prices quoted in the world market,
the United States Department of Agriculture has adopted a program under which it
pays rebates to users of domestically produced cotton when domestic prices
exceed world prices, based upon a formula. The domestic price for cotton did not
begin to exceed the world price for cotton until July 1997. Since that time, the
criteria for receiving rebates has been met and the Company has received the
related rebates.
The principal man-made fiber purchased by the Company is polyester. The
Company currently purchases man-made fibers for its woven fabrics from two
principal suppliers. Such fibers are readily available from other suppliers. The
Company has not experienced any difficulty in obtaining sufficient quantities of
man-made fibers.
The Company purchases greige cotton, cotton blended fabrics and
selected synthetic fabrics for its apparel fabrics segment to supplement its own
production. Greige fabric is available from a large number of suppliers.
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 Home Fashion Fabrics Division employs the services of several
outside processors to dye or print the greige fabric in accordance with the
customer's 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 available from many other outside
processors which are also capable of meeting the same production schedules
(delivery within three to four weeks after ordered).
Trademarks and Patents
The Company owns, or has the right to use under license various
patents, trademarks and service marks. The "Flamex" and "Galey & Lord"
trademarks are registered with many countries worldwide,
7
including the United States Patent and Trademark Office. Other than the "Galey &
Lord" trademark, which expires in May 2009 and may be renewed thereafter for a
20-year term, the Company does not consider any of its patents, licensed
technology, trademarks or service marks to be material to the conduct of its
business.
Backlog
The Company's order backlog consists of orders that are not subject to
cancellation prior to shipment, although the Company has in the past
accommodated customer requests for order deferments due to unusual
circumstances. The Company's order backlog at September 27, 1997 was $135
million, a 37% increase from the September 28, 1996 backlog of $99 million.
Apparel fabrics backlog increased 46% as a result of a stronger business
environment than fiscal 1996. Home fabrics backlog decreased 13%, primarily due
to a decline in orders from a Home Fashion Fabrics customer who filed for
bankruptcy protection during the June quarter 1997. The customer was
subsequently sold and the Company is selling to the new owner under standard
credit terms.
Seasonality
The Company's business is not highly seasonal. The apparel fabrics
segment product mix varies seasonally (with demand for corduroy fabric primarily
in the fall/winter selling season and sportswear in the spring/summer selling
season). The Company'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. The Home Fashion Fabrics Division
experiences a very minimal fluctuation in the demand for the products it
produces.
Competition
Domestic. The Company has numerous competitors. Principal competitive
factors are product type, price, service, delivery time, quality and
flexibility, with the significance of each factor depending upon the product
involved. The Company's competitive position varies among the different fabrics
produced.
There are several major domestic competitors in the finished woven
cotton and cotton blended apparel fabrics business, none of which dominates the
market and some of which have greater resources than the Company. The Company's
major competitors include Milliken & Company, Delta Woodside Industries, Inc.,
Springs Industries, Inc., Graniteville Company, a division of Avondale Mills,
Inc., and Riegel, a division of Mount Vernon Mills Inc. The Company believes
that it has a strong competitive position with respect to the manufacture of
dyed and finished woven cotton and cotton blended apparel fabrics because of its
experience in performing highly sophisticated and technical manufacturing
processes and its state-of-the-art equipment.
The Company believes it is the only vertically-integrated domestic
producer of corduroy fabrics.
8
G&L Service Company allows the Company to offer its apparel fabrics
customers a finished garment. The Company is not aware of any other domestic
sportswear producers that are currently able to offer the same services. The
Company believes it achieves a competitive advantage over the small contract
sewing and finishing operations located in Mexico and the Caribbean because of
its ability to reduce customers' lead times and improve quality by eliminating
the need to use multiple vendors.
Home Fashion Fabrics competes with a number of suppliers in the greige
goods market including Clinton Mills, Alice Manufacturing Co., Inc., Greenwood
Mills, Inc. and Mayfair Mills, Inc. In the dyed and printed goods market, there
are numerous converting and commission finishing competitors including Spartan
Mills, Raytex Finishing Company, Santee Print Works, Inc. and Slater Screen
Print Works.
Imports. Import decisions by United States retailers and apparel
manufacturers are influenced by a number of factors, including changing relative
labor and raw material costs, lead times, political instability and
infrastructure deficiencies of newly industrializing countries, fluctuating
currency exchange rates, individual government policies and international
agreements regarding textile and apparel trade. The Company concentrates on
developing, manufacturing and marketing mediumweight woven cotton and cotton
blended apparel fabrics and home fabrics that have been less vulnerable to
import penetration. The location of the Company's fabric manufacturing
facilities in the United States and garment manufacturing facilities in Mexico
and its emphasis on shortening production and delivery times allows the Company
to respond more quickly than foreign producers to its customers' demands for
tight production schedules, rapid delivery and changing needs. Capital
expenditures have modernized and consolidated operations, increasing
productivity, adding flexibility, lowering costs and improving quality. The
Company believes that the technical infrastructure necessary to produce high
quality, high-value-added dyed and finished fabrics and garments currently does
not exist in many countries with lower cost structures.
United States government policy, which is designed to benefit Western
Hemisphere nations, has been favorable to the United States textile industry.
Under the United States "807" tariff program, many of the Company's customers
purchase fabric from domestic suppliers and ship the fabric offshore to be sewn
into garments which are then returned to the United States market where duty is
charged only on the value added on the sewing of the garment. Because the fabric
is shipped to domestic destinations prior to shipment offshore, it is impossible
for the Company to give an accurate percentage as to what portion of those
fabrics are produced under the "807" tariff program, but the Company believes
that it is the majority.
The passage of the North American Free Trade Agreement ("NAFTA") during
1994 is believed to have a positive effect on the Company. NAFTA phases out
quotas and duties on textiles and apparel shipped between Mexico, the United
States and Canada. NAFTA's yarn forward rule of origin assures that only those
textiles produced in NAFTA countries will benefit from the phasing out of quotas
and duties. The Company believes that with the NAFTA benefits noted above and
with Mexican labor costs, which are competitive with those of the Far East,
NAFTA is resulting in increased apparel fabric and garment manufacturing in this
hemisphere.
The Company believes that the General Agreement on Trade and Tariffs
("GATT"), as passed, will have a negative effect on the textile and apparel
industry of this country. The ten-year phaseout of
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quotas under GATT will gradually allow more imports to enter the country. The
GATT agreement will replace and end the existing Multifiber Arrangements which
are currently used to bilaterally limit the amount of imports allowed into the
United States. Although the Company cannot determine with certainty the
long-term impact of GATT, the Company believes that the positive results of
NAFTA will offset the potential negative implications of GATT.
Under the "807" tariff program and NAFTA, the Company's customers have
purchased fabric from the Company's fabric business and shipped it to small
contract sewing and finishing companies in Mexico and the Caribbean. The Company
responded to this outsourcing by forming G&L Service Company, which acquired
Dimmit in June 1996. Dimmit sews and finishes pants and shorts for the casual
wear market in its six manufacturing facilities located in Piedras Negras,
Mexico. The Mexico Acquisition allows the Company to offer its current apparel
customers a quality, finished garment. The Company believes it has a competitive
advantage over these contract sewing and finishing companies because it can
reduce required lead times and improve the quality of the finished garment by
controlling the entire manufacturing process. The Company also believes that the
combination of United States fabric and Mexican competitive sewing costs allow
it to compete effectively with garment producers in the Far East.
Employees
At September 27, 1997, the Company had 3,868 United States employees,
none of whom were covered by a collective bargaining agreement. Of these
employees, 3,281 were employed in manufacturing and 587 in administration and
sales. Substantially all of the Company's employees are full-time. The Company
believes that its employee relations are excellent.
At September 27, 1997, Dimmit had 2,416 employees in Mexico. The
majority of these employees are covered by a collective bargaining agreement
which expires January 1, 1999. The Company experienced labor disruptions in
Mexico during the fourth quarter of fiscal year 1997 due to concerns that the
union employees had related to the election of their local union leader.
Throughout this time, the Company's relationship with the union remained strong,
and the Company believes that the labor problems have been resolved. In January
1998, the Company will be negotiating the minimum pay scale for its Mexican
employees for the upcoming year with union officials.
Regulation
The Company is subject to various federal, state and local
environmental laws and regulations limiting the discharge, storage, handling and
disposal of a variety of substances, particularly the Federal Water Pollution
Control Act, the Clean Air Act of 1970 (as amended in 1990), the Resource
Conservation and Recovery Act, as amended, and the Federal Comprehensive
Environmental Response Compensation and Liability Act, as amended. The Company
does not believe that there is a reasonable likelihood that its compliance
efforts with currently applicable environmental laws and regulations will
materially affect its operations or financial condition.
The Company also is subject to Federal, state and local laws and
regulations relating to workplace safety and worker health, including those
promulgated under the Occupational Safety and Health Act ("OSHA"). The Company
does not believe that there is a reasonable likelihood that its
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compliance efforts with currently applicable laws and regulations relating to
workplace safety and worker health will materially affect its operations or
financial condition.
Forward-Looking Statements
This 1997 Annual Report on Form 10-K contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding the
intent, belief or current expectations of the Company and its management team.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among other
things, competitive and economic factors in the textile, apparel and home
furnishings markets, raw materials and other costs, weather-related delays,
general economic conditions and other risks and uncertainties that may be
detailed herein.
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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................... Shannon, GA Spinning and weaving 877,000 Owned
McDowell................... Marion, NC Weaving 222,000 Owned
Society Hill............... Society Hill, SC Dyeing and finishing 527,000 Owned
Society Hill II............ Society Hill, SC Dyeing, finishing and warehousing 250,000 Owned
Asheboro................... Asheboro, NC Weaving and greige cloth storage 386,000 Owned
Caroleen................... Caroleen, NC Spinning 375,000 Owned
Corporate Offices.......... Greensboro, NC Corporate 24,000 Leased
Executive Offices.......... New York, NY Executive and sales office 22,000 Leased
Blue Warehouse............. Society Hill, SC Greige and finished cloth storage 100,000 Owned
Hermitage Warehouse........ Rome, GA Cotton and yarn storage 45,000 Leased
Riverside Warehouse........ Rome, GA Cotton and yarn storage 20,000 Leased
Red Warehouse.............. Marion, NC Yarn storage 33,000 Owned
Elm Street Warehouse....... Greensboro, NC Finished cloth storage 108,000 Owned
Dimmit Industries.......... Piedras Negras, MX 6 sewing & garment finishing facilities 228,000 Leased
Eagle Pass Warehouse....... Eagle Pass, TX 1 cutting and 1 warehousing facility 16,000 Leased
The Company believes that its facilities are suitable for its current
level of operations and that the Company could expand productive capacity for
its foreseeable needs at relatively low capital cost. In response to rising
demand for the Company's garments, the Company currently plans to open a new
garment manufacturing facility in Monclova, Mexico during fiscal 1998.
The Company's executive and sales offices located at 980 Avenue of the
Americas, New York, New York are occupied pursuant to a lease that expires in
2003. The lease for corporate offices in Greensboro, North Carolina also expires
in 2003, with a five-year renewal option.
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Item 3. LEGAL PROCEEDINGS
The Company was notified last year by the South Carolina Department of
Health and Environmental Control that tests of two boilers at its Society Hill
facility located in Society Hill, South Carolina, showed that such boilers were
operating outside the parameters of the facility's South Carolina air quality
permit. During fiscal year 1997, the Company identified the problem with the
boilers and brought the facility back into compliance with air permit
limitations. The cost to the Company to resolve this issue was immaterial and
was limited to the actual repair of the boilers.
The Company is involved in various lawsuits incidental to its business
operations, as well as product liability litigation. In the opinion of the
Company, none of such litigation in which it is currently involved will have a
material effect on the Company's financial condition or its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
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 28,
1997, the Company had approximately 2,000 stockholders of record. The following
table sets forth the high and low sales prices for the Common Stock for the
periods indicated.
1997 1996
------------------ -------------------
High Low High Low
First Quarter........ $14 7/8 $12 1/2 $13 5/8 $9 1/2
Second Quarter....... $19 $14 3/4 $11 1/8 $9 1/8
Third Quarter........ $18 $14 1/2 $11 1/2 $8 7/8
Fourth Quarter....... $20 $15 3/4 $12 3/4 $9 1/4
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.
14
Item 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
(In Thousands, Except Per Share Data)
FISCAL YEAR
Statements of Operations Data (1): 1997(2) 1996(3) 1995 (4) 1994 (5) 1993
------- ------- ----- ----- ----
Net sales...................................................... $ 493,362 $ 411,455 $ 502,220 $451,130 $385,841
Cost of sales.................................................. 439,207 367,992 451,314 396,911 344,007
Gross profit................................................... 54,155 43,463 50,906 54,219 41,834
Selling, general and administrative expenses................... 18,123 13,526 15,877 14,705 13,799
Amortization of goodwill....................................... 1,679 1,298 1,119 549 145
Business closing charge........................................ - - 12,065 - -
Operating income............................................... 34,353 28,639 21,845 38,965 27,890
Interest expense............................................... 12,326 11,579 13,103 8,276 6,465
Write-off of merger costs...................................... - 1,600 - - -
Income before income taxes and extraordinary items............. 22,027 15,460 8,742 30,689 21,425
Income tax expense............................................. 8,350 5,982 3,390 11,803 8,014
Income before extraordinary items
and accounting change....................................... 13,677 9,478 5,352 18,886 13,411
Extraordinary items............................................ - - (1,342) - -
Cumulative effect of change in accounting method............... - - - (1,603) -
Net income..................................................... $ 13,677 $ 9,478 $ 4,010 $ 17,283 $ 13,411
Weighted average number of shares outstanding.................. 12,160 11,960 12,041 12,106 11,972
Net income per common share - fully diluted:
Income before extraordinary items.............................. $ 1.12 $ .79 $ .44 $ 1.56 $ 1.12
Extraordinary items............................................ - - (0.11) - -
Cumulative effect of change in accounting method............... - - - (0.13) -
Net income - fully diluted..................................... $ 1.12 $ .79 $ .33 $ 1.43 $ 1.12
Cash dividends per common share................................ $ - $ - $ - $ - $ -
Balance Sheet Data:
Total assets................................................. $ 349,191 $ 304,876 $ 305,039 $299,015 $202,350
Long-term debt............................................... 176,755 149,265 162,084 149,899 95,223
Stockholders' equity......................................... 104,317 89,645 81,879 77,719 59,067
(1) The Company uses a 52-53 week fiscal year. All fiscal years presented were
52-week years.
(2) Selling, general and administrative expenses include a $3.0 million pre-tax
charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
(3) Includes the write-off of merger costs associated with the termination of
the previously announced merger of the Company and the Graniteville Company.
(4) Includes the business closing charge related to closing the Company's
printed apparel fabrics businesses. See Note C to the Company's consolidated
financial statements.
(5) Includes the acquisition of Home Fashion Fabrics which occurred on April 29,
1994.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNIFICANT EVENTS
On October 27, 1997, the Company entered into an agreement with Polymer Group,
Inc. and its affiliate, DTA, to acquire from DTA the apparel fabrics business of
Dominion in the event that DTA successfully completes its tender offer to
purchase the capital stock of Dominion. Dominion's apparel fabrics business to
be acquired by the Company primarily consists of several direct and indirect
subsidiaries and operating divisions of Dominion which manufacture and market
denim fabrics and fabrics for the commercial uniform market. Under the current
terms of DTA's tender offer, Dominion's shareholders may tender their shares of
Dominion's common stock for CDN $14.50 and shares of Dominion's preferred stock
for CDN $150.00 until 4 p.m. Toronto time on December 29, 1997. As of December
15,1997, 98.56% of Dominion's shares of common stock held by the public and
92.7% of Dominion's shares of preferred stock held by the public have been
tendered. The completion of the tender offer and the Dominion Acquisition are
both subject to, among other things, certain governmental and other regulatory
approvals. It is currently anticipated that the tender offer will be completed
in December 1997. On November 19, 1997, the Company entered into a forward
exchange contract for CDN $370 million to protect itself against Canadian dollar
fluctuations.
The Company has obtained commitments from First Union National Bank to provide
the financing to fully fund the Dominion Acquisition. The total commitment of
$720 million will consist of approximately $470 million of senior financing,
including a revolving line of credit and a term loan, which will be used to
refinance the Company's existing senior bank credit facility and to finance the
Dominion Acquisition, and approximately $250 million of senior subordinated
financing which will be used to finance the Dominion Acquisition. The Company
currently anticipates that the Dominion Acquisition will be completed in January
1998.
On April 23, 1997, the Company's Board of Directors authorized the Company's
Management to purchase up to 900,000 shares or 7.7% of the Company's outstanding
common stock from time to time over the following twelve months at prevailing
prices in open-market transactions. As of September 27, 1997, under the current
buy back program, the Company has acquired 12,201 shares of its outstanding
common stock at an average price of $16.04 per common share. Under the Company's
previous stock buy back program, which terminated January 16, 1997, the Company
acquired 197,003 shares of its outstanding common stock at an average price of
$10.07 per common share.
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 is composed of six manufacturing facilities
located in Piedras Negras, Mexico and sews and finishes pants and shorts for the
casual wear market. Funding for the Mexico Acquisition was provided through
funds generated by operations, working capital reductions and by the Company's
current bank group through amendments to the Company's term loan and revolving
credit facility.
16
On January 25, 1996, the Company and Triarc Companies, Inc. ("Triarc") mutually
agreed not to go forward with their previously announced merger of the Company
and the Graniteville Company, a subsidiary of Triarc, due to economic conditions
existing at that time in the retail, textile and apparel sectors. The Company
incurred fees and expenses related to the merger of $1.6 million and took a
charge during the fiscal year 1996 for the write-off of those costs.
On September 19, 1995, the Company closed its printed apparel fabrics businesses
due to declining business conditions that the printed apparel fabrics businesses
had experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and laid off approximately 450
employees located primarily in Society Hill, South Carolina and New York City.
During the September quarter 1995, the Company incurred a $12.1 million business
closing charge ($7.4 million or $.62 per share after tax), consisting primarily
of $3.2 million of severance and other employee related costs associated with
employee layoffs, all of which has been paid, $5.4 million of losses on the
disposal of machinery and equipment and $2.9 million of losses on the disposal
of raw material and supply inventory. As of September 27, 1997, the Company had
incurred substantially all of the losses associated with the disposal of its
machinery and equipment and raw material and supply inventory.
Printed apparel fabrics, made up of Galey & Lord Prints and Galey & Lord Group
II, represented $33.8 million or 6.7% of the Company's net sales in fiscal 1995
and had operating losses of $13.4 million in fiscal 1995.
17
RESULTS OF OPERATIONS
The Company's operations are classified into two business segments: apparel
fabrics, comprised of woven fabrics and G&L Service Company, and home fabrics,
comprised of Home Fashion Fabrics. Results for 1997, 1996 and 1995 for each
segment are shown below:
Fiscal Year Ended
-----------------
September 27, September 28, September 30,
1997 1996 1995
---- ---- ----
(in millions except percentages)
Net Sales Per Segment
Apparel Fabrics $ 456.6 $ 364.2 $ 443.5**
Home Fabrics 36.8 47.3 58.7
------- ------- -------
Total $ 493.4 $ 411.5 $ 502.2
======= ======= =======
Operating Income (Loss) Per Segment
Apparel Fabrics $ 36.8 $ 29.9 $ 29.2**
% of Apparel Fabrics Net Sales 8.1% 8.2% 6.6%**
Home Fabrics $ (2.4)* $ (1.3) $ 4.7
% of Home Fabrics Net Sales (6.8)%* (2.7)% 8.0%
Business Closing Charge $ - $ - $ (12.1)
------- ------- -------
Total $ 34.4 $ 28.6 $ 21.8
% of Total Net Sales 7.0% 7.0% 4.3%
* Operating income for the home fabrics segment for fiscal 1997 includes a
$3.0 million pre-tax charge taken due to the bankruptcy of a Home Fashion
Fabrics customer.
** Net sales and operating income for the apparel fabrics segment for fiscal
1995 include the results for the printed apparel fabrics businesses, which
were closed on September 19, 1995.
The Company's order backlog at September 27, 1997 was $135 million, a 37%
increase from the September 28, 1996 backlog of $99 million. Apparel fabrics
backlog increased 46% as a result of a stronger business environment than fiscal
1996. Home fabrics backlog decreased 13%, primarily due to a decline in orders
from a Home Fashion Fabrics customer which filed for bankruptcy protection
during the June quarter 1997. The customer was subsequently sold and the Company
is selling to the new owner under standard credit terms.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Net sales for fiscal 1997 were $493.4 million compared to $411.5 million for
fiscal 1996. The $81.9 million increase in net sales resulted from a $92.4
million increase in apparel fabrics net sales, which was partially offset by a
$10.5 million decline in home fabrics net sales. The increase in apparel fabrics
net sales resulted from a stronger business environment during fiscal 1997 as
compared to fiscal 1996 when the Company's customers were adjusting their
inventory levels due to a slow retail environment.
18
The decrease in home fabrics sales was due to a continued weak market for home
decorative prints as well as the Company's decision to significantly reduce its
sales of unfinished fabric (greige goods) in the home fabrics business because
of a lack of profitability for unfinished fabrics in the home furnishings
market.
Operating Income
Operating income for fiscal 1997 was $34.4 million compared to $28.6 million in
fiscal 1996. The increase in apparel fabrics operating income was primarily a
result of higher sales volume. Home fabrics operating income was adversely
impacted by a $3.0 million pre-tax charge taken due to the bankruptcy of a home
fashions customer. Excluding this charge, home fabrics operating income would
have increased $1.9 million to $.6 million for fiscal 1997. This improvement
resulted from the reduction of sales of unfinished fabrics and improved gross
margins on home fabrics finished goods sales.
Interest Expense
Interest expense was $12.3 million in fiscal 1997 compared to $11.6 million in
fiscal 1996. The increase was due to higher debt levels and higher interest
rates in fiscal 1997 compared to fiscal 1996. The increased debt was due to
higher working capital requirements and capital expenditures in fiscal 1997 as
compared to fiscal 1996. Both of these items increased to support higher sales
and the future growth of the Company. The average interest rate paid by the
Company on its bank debt in fiscal 1997 was 6.9% as compared to 6.7% in fiscal
1996.
Net Income and Net Income Per Share
Net income for fiscal 1997 was $13.7 million or $1.12 per common share which
included the $3.0 million pre-tax ($1.8 million after-tax) or $.15 per common
share bad debt charge taken due to the bankruptcy of a Home Fashion Fabrics
customer. Excluding this charge, net income would have been $15.7 million or
$1.27 per common share in fiscal 1997. Net income for fiscal 1996 was $9.5
million or $.79 per common share which included the pre-tax charge of $1.6
million ($1.0 million after-tax) or $.08 per common share for the write-off of
fees and expenses related to the termination of the proposed Graniteville
merger. Excluding these charges, net income would have been $10.5 million or
$.87 per common share in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales
Net sales for fiscal 1996 were $411.5 million compared to $502.2 million for
fiscal 1995. The decrease in net sales was due to the elimination of $33.8
million of net sales from the printed apparel fabrics businesses which were
closed in September 1995, a $45.5 million decline in other apparel fabric sales
and an $11.4 million decline in Home Fashion Fabrics sales. The decline in other
apparel fabric sales occurred primarily in the December quarter 1995 and March
quarter 1996 as the Company's customers adjusted their inventory levels due to a
slow retail environment. The remainder of fiscal 1996 showed improvement with
net sales returning to a more normal level in the June and September quarters.
19
Operating Income
Operating income for fiscal 1996 was $28.6 million compared to $21.8 million in
fiscal 1995. Fiscal 1995 operating income was impacted by a $12.1 million
pre-tax business closing charge related to the closing of the Company's printed
apparel fabrics businesses and a $13.4 million operating loss related to the
printed apparel fabrics business. Excluding these items, operating income for
the Company's ongoing businesses for fiscal 1995 was $47.3 million. The decrease
in operating income, excluding prints, was primarily a result of lower gross
margins resulting from the lower sales volume and the impact of lower volume on
manufacturing costs during the first two quarters of fiscal 1996.
Interest Expense
Interest expense was $11.6 million in fiscal 1996 compared to $13.1 million in
fiscal 1995. The decrease was due to lower average debt levels during the year,
a reduction in interest rates resulting from a lower spread over LIBOR achieved
in the refinancing of the Company's bank debt completed in April 1995 and
decreases in LIBOR and prime market interest rates on which the Company's bank
loans are based. The average interest rate paid by the Company on its bank debt
in fiscal 1996 was 6.7% as compared to 7.3% in fiscal 1995.
Net Income and Net Income Per Share
Net income for fiscal 1996 was $9.5 million or $.79 per common share which
included the pre-tax charge of $1.6 million ($1.0 million after-tax) or $.08 per
common share for the write-off of fees and expenses related to the termination
of the proposed Graniteville merger. Net income for fiscal 1995 was $4.0 million
or $.33 per common share which included the $12.1 million pre-tax business
closing charge, $13.4 million of operating losses related to the printed apparel
fabrics businesses and a $1.3 million extraordinary charge for the write-off of
loan fees and prepayment penalties associated with the Company's debt
refinancing in April 1995. Excluding the one-time charges and above losses for
both years, net income would have been $10.5 million or $.87 per common share in
fiscal 1996 and $21.0 million or $1.74 per common share in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has obtained commitments from First Union National Bank to provide
the financing to fully fund the Dominion Acquisition. The total commitment of
$720 million will consist of approximately $470 million of senior financing,
including a revolving line of credit and a term loan, which will be used to
refinance the Company's existing senior bank credit facility and to finance the
Dominion Acquisition, and approximately $250 million of senior subordinated
financing which will be used to finance the Dominion Acquisition.
On June 4, 1996, the Company amended its term loan and revolving credit facility
with its bank group led by First Union National Bank of North America, as agent
and lender. The amendment increased the Company's maximum allowable borrowings
under the revolving credit facility, which expires March 31, 2000, from $150
million to $170 million. The term loan was restated to the outstanding balance
of $48 million and continues to require equal quarterly principal payments of $3
million through the term loan's expiration on April 30, 2000. At September 27,
1997, the outstanding term loan balance and
20
revolving credit facility balance were $31 million and $151.1 million,
respectively. The amended term loan and revolving credit facility bear interest
at a per annum rate, at the Company's option, of either (i) the greater of the
prime rate or federal funds rate or (ii) LIBOR plus .5%, LIBOR plus .75%, LIBOR
plus 1.0%, LIBOR plus 1.25% or LIBOR plus 1.5%, in accordance with a pricing
grid based on certain financial ratios. The Company's obligations under the
credit facility are secured by all of the Company's inventory, equipment,
accounts receivable and general intangibles, and a pledge by the Company of all
the outstanding capital stock of its wholly-owned domestic subsidiaries, Galey &
Lord Industries, Inc. and G&L Service Company, and a pledge of 65% of the
outstanding capital stock of its foreign subsidiary, Dimmit.
On May 13, 1997, the Company amended its term loan and revolving credit facility
with its current bank group. The amendment modified the Company's current
covenants relating to debt service, eliminated the covenant limiting the amount
of capital expenditures to be made, and permitted the Company to enter into a
trade receivables securitization transaction. The amendment requires that
immediately upon the closing of any trade receivables securitization, the
proceeds will be used to pay in full the balance of the term loan and reduce the
outstanding balance on the revolving credit facility. The maximum available
under the revolving credit facility would then be reduced from $170 million to
$150 million.
During January 1996, the Company entered into interest rate swaps on $50 million
of its outstanding bank debt to fix the LIBOR interest rate on which those
borrowings are based. The interest rate swaps assure that the Company, under its
current credit agreement, will pay a maximum rate of 6.77% (LIBOR fixed at 5.27%
plus the maximum spread allowed under the credit agreement of 1.5%) on $25
million of bank debt for a two-year period and 7.03% (LIBOR fixed at 5.53% plus
the maximum spread allowed under the credit agreement of 1.5%) on the other $25
million of bank debt for a five-year period. The amount paid or received under
the swap agreements is based on the changes in actual interest rates and is
recorded as an adjustment to interest expense. The fair value of these interest
rate swaps, as determined by a member of the Company's bank group, at September
27, 1997, was $579,000 and was not recognized in the financial statements. The
Company is exposed to credit loss in the event of nonperformance by the other
parties to the interest rate swap agreements; however, the Company does not
anticipate nonperformance by any of the other parties.
In fiscal 1997, the Company spent $36.6 million for capital expenditures, a
significant portion of which was used to expand and modernize the Company's
weaving and dyeing and finishing plants. The Company expects to spend
approximately $22 million for capital expenditures in fiscal 1998, without
giving effect to the completion of the proposed Dominion Acquisition. These
expenditures will be primarily for the ongoing modernization of the Company's
weaving and dyeing and finishing facilities and for the expansion of the
Company's garment operations in Mexico. During fiscal 1998, the Company will
open its new garment manufacturing facility in Monclova, Mexico. The new
operation will be located in a leased building; therefore, the capital
expenditures requirements related to this expansion will be limited to the
purchase of the new equipment. The Company expects to fund these expenditures
through funds from operations and borrowings under its revolving credit
facility.
Working capital increased approximately $22.8 million to $130.5 million at
September 27, 1997 as compared to $107.7 million at September 28, 1996. The
increase in working capital was primarily attributable to a $15.6 million
increase in inventories and a $6.5 million increase in accounts receivable,
21
partially offset by a $2.5 million increase in accounts payable. The $15.6
million increase in inventories resulted from the addition of G&L Service
Company inventory in fiscal 1997 and an increase in apparel inventories to
support higher apparel fabrics sales, partially offset by reductions in home
fabrics greige goods inventory levels. The $6.5 million increase in accounts
receivable was primarily a result of increased net sales over the prior year.
The increase in accounts payable resulted from higher outside cloth purchases in
fiscal year 1997 due to higher sales volume and from normal fluctuations in the
timing of purchases and payments.
At September 27, 1997, the Company's additional borrowing availability under its
revolving credit facility was $9.9 million. The average interest rate on
balances outstanding under the Company's term loan and revolving credit facility
was 6.88% at September 27, 1997 as compared to an average rate of 7.15% at
September 28, 1996.
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 credit facility. In addition,
from time to time, the Company uses borrowings under secured bank loans, through
capital leases or through operating leases for various equipment purchases.
The Company has completed its assessment regarding the Year 2000 issue and has
developed an implementation plan which utilizes internal resources. A
significant portion of the Company's systems were developed within the last ten
years and already encompass Year 2000 compliance. It is anticipated that the
remaining systems will be updated and tested well before the Year 2000 at a
minimal cost to the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," ("FAS 128") which will be adopted by the Company on
December 27, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the years ended
September 27, 1997, September 28, 1996 and September 30, 1995 of $.04, $.01 and
$.01 per share, respectively. Under the new requirements for calculating fully
diluted earnings per share, the dilutive effect of certain target stock price
performance options will be excluded. The impact is expected to result in an
increase in fully diluted earnings per share for the years ended September 27,
1997 and September 28, 1996 of $.02 and $.01 per share, respectively. The impact
is expected to result in no change to fully diluted earnings per share for the
year ended September 30, 1995.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), effective for years beginning
after December 15, 1997, the Company's fiscal year 1999. FAS 131 requires that a
public company report financial and descriptive information about its reportable
operating segments pursuant to criteria that differs from current accounting
practice. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
22
resources and in assessing performance. The financial information to be reported
includes segment profit or loss, certain revenue and expense items and segment
assets and reconciliations to corresponding amounts in the general purpose
financial statements. FAS 131 also requires information about products and
services, geographic areas of operation, and major customers. The Company has
not completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of FAS 131 will not affect the Company's
results of operations or financial position, but may affect the disclosure of
segment information.
23
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 27, 1997 and September 28, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 27, 1997. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 27, 1997 and September 28, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 27, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note A to the consolidated financial statements,
effective October 1, 1995, the Company changed its method of accounting for
stock-based compensation.
Ernst & Young LLP
Greensboro, North Carolina
October 30, 1997, except for Notes B and E as
to which the date is November 19, 1997
24
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par value amounts)
ASSETS
September 27, September 28,
1997 1996
--------------- ------------
Current assets:
Cash and cash equivalents.................................................................... $ 2,277 $ 3,799
Trade accounts receivable, less deductions for doubtful receivables, discounts, returns and
allowances of $4,687 in 1997 and $1,434 in 1996 (Note E)................................... 80,633 74,180
Sundry notes and accounts receivable......................................................... 206 164
Inventories (Notes D and E).................................................................. 92,517 76,934
Income taxes receivable (Note F)............................................................. 1,412 -
Deferred income taxes (Note F)............................................................... - 404
Prepaid expenses and other current assets.................................................... 3,894 1,853
-------- --------
Total current assets.................................................................... 180,939 157,334
Property, plant and equipment, at cost (Note E):
Land......................................................................................... 1,529 1,529
Buildings.................................................................................... 43,654 34,954
Machinery, fixtures and equipment............................................................ 147,239 118,923
Equipment under capital leases............................................................... 4,762 6,793
-------- --------
197,184 162,199
Less accumulated depreciation and amortization............................................... (67,739) (55,178)
-------- --------
129,445 107,021
Deferred charges less accumulated amortization of $380 in 1997 and $302 in 1996.................. 820 1,055
Intangibles less accumulated amortization of $5,409 in 1997 and $3,730 in 1996................... 37,987 39,466
-------- --------
$349,191 $304,876
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note E)................................................... $ 13,281 $ 13,506
Trade accounts payable....................................................................... 23,488 20,957
Accrued salaries and employee benefits....................................................... 9,450 10,766
Accrued liabilities.......................................................................... 3,582 3,311
Income taxes payable (Note F)................................................................ - 1,115
Deferred income taxes........................................................................ 633 -
-------- --------
Total current liabilities............................................................... 50,434 49,655
Commitments and contingencies (Note I)
Long-term debt (Note E).......................................................................... 176,755 149,265
Other long-term liabilities...................................................................... - 143
Deferred income taxes (Note F)................................................................... 17,685 16,168
Stockholders' equity:
Common Stock-$.01 par value, authorized 25,000,000 shares; issued 12,053,694
shares in 1997 and 11,951,844 shares in 1996,
outstanding 11,664,490 shares in 1997 and 11,574,841 shares in 1996, (Note J)............. 121 120
Contributed capital in excess of par value................................................... 35,877 34,687
Retained earnings............................................................................ 70,566 56,889
Less 389,204 Common Stock shares in 1997 and 377,003 Common Stock shares
in 1996 in treasury, at cost.............................................................. (2,247) (2,051)
-------- --------
Total stockholders' equity.............................................................. 104,317 89,645
-------- --------
$349,191 $304,876
======== ========
See accompanying notes to consolidated financial statements
25
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
For the Years Ended
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Net sales......................................................................... $493,362 $411,455 $502,220
Cost of sales..................................................................... 439,207 367,992 451,314
--------- --------- ---------
Gross profit...................................................................... 54,155 43,463 50,906
Selling, general and administrative expenses...................................... 18,123 13,526 15,877
Amortization of goodwill.......................................................... 1,679 1,298 1,119
Business closing charge........................................................... - - 12,065
--------- --------- ---------
Operating income.................................................................. 34,353 28,639 21,845
Interest expense.................................................................. 12,326 11,579 13,103
Write-off of merger costs......................................................... - 1,600 -
--------- --------- ---------
Income before income taxes and extraordinary item................................. 22,027 15,460 8,742
Income tax expense:
Current......................................................................... 5,796 2,449 3,357
Deferred........................................................................ 2,554 3,533 33
--------- --------- ---------
8,350 5,982 3,390
--------- --------- ---------
Income before extraordinary item.................................................. 13,677 9,478 5,352
Extraordinary loss on extinguishment of debt (net of income tax benefit of $770).. - - (1,342)
--------- ---------- ---------
Net income........................................................................ $ 13,677 $ 9,478 $ 4,010
========= ========= =========
Net income per common share:
Primary:
Average common shares outstanding............................................... 12,018 11,921 12,035
Income per share before extraordinary item...................................... $ 1.14 $ .80 $ .44
Extraordinary item.............................................................. - - (.11)
--------- --------- ----------
Net income per common share - primary........................................... $ 1.14 $ .80 $ .33
========= ========= =========
Fully diluted:
Average common shares outstanding............................................... 12,160 11,960 12,041
Income per share before extraordinary item...................................... $ 1.12 $ .79 $ .44
Extraordinary item.............................................................. - - (.11)
--------- --------- ----------
Net income per common share - fully diluted..................................... $ 1.12 $ .79 $ .33
========= ========= =========
See accompanying notes to consolidated financial statements.
26
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
September 27, September 28, September 30,
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
Net income.......................................................................$ 13,677 $ 9,478 $ 4,010
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment.................................. 13,504 10,340 9,905
Amortization of intangible assets.............................................. 1,679 1,298 1,119
Amortization of deferred charges............................................... 299 221 441
Deferred income taxes.......................................................... 2,554 3,533 33
Non-cash compensation.......................................................... 550 258 -
(Gain)/loss on disposals of property, plant and equipment...................... 147 22 234
Extraordinary loss from debt refinancing....................................... - - 1,342
Business closing charge........................................................ - - 12,065
Changes in assets and liabilities (net of acquisition):
Accounts receivable - net.................................................... (6,453) 12,903 (311)
Sundry notes and accounts receivable......................................... (42) 5 12
Inventories.................................................................. (15,583) 9,298 (10,480)
Prepaid expenses and other current assets.................................... (2,041) (1,190) 750
Trade accounts payable....................................................... 2,531 2,392 (2,568)
Accrued liabilities.......................................................... (1,766) (1,532) (5,073)
Income taxes payable......................................................... (2,527) 2,590 (1,788)
---------- --------- ---------
Total adjustments......................................................... (7,148) 40,138 5,681
---------- --------- ---------
Net cash provided by (used in) operating activities............................ 6,529 49,616 9,691
--------- --------- ---------
Cash flows from investing activities:
Acquisition of business - net of cash acquired................................... - (22,823) -
Property, plant and equipment expenditures....................................... (36,626) (13,524) (14,795)
Proceeds from sale of property, plant and equipment.............................. 1,271 1,608 171
Other............................................................................ (199) (23) (26)
--------- --------- ---------
Net cash provided by (used in) investing activities............................ (35,554) (34,762) (14,650)
--------- --------- ---------
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit.................................. 42,900 (1,400) 23,958
Principal payments on long-term debt............................................. (15,635) (11,588) (185,579)
Issuance of long-term debt....................................................... - - 166,000
Net proceeds from issuance of Common Stock....................................... 534 9 91
Tax benefit from exercise of stock options....................................... 107 5 59
Purchase of treasury stock....................................................... (196) (1,984) -
Payment of bank fees and loan costs.............................................. (64) (465) (1,121)
Other............................................................................ (143) (69) (65)
--------- --------- ---------
Net cash provided by (used in) financing activities............................ 27,503 (15,492) 3,343
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. (1,522) (638) (1,616)
Cash and cash equivalents at beginning of period................................. 3,799 4,437 6,053
--------- --------- ---------
Cash and cash equivalents at end of period.......................................$ 2,277 $ 3,799 $ 4,437
========= ========= =========
See accompanying notes to consolidated financial statements.
27
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
Common Contributed Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- ----- -----
Balance at October 1, 1994.......................... $119 $34,266 $43,401 $ (67) $77,719
Issuance of 32,200 shares of Common Stock
upon exercise of options......................... - 91 - - 91
Tax benefit from exercise of stock options......... - 59 - - 59
Net income for fiscal 1995.......................... - - 4,010 - 4,010
---- ------- ------- ------- ---------
Balance at September 30, 1995....................... $119 $34,416 $47,411 $ (67) $81,879
Issuance of 10,100 shares of Common Stock
upon exercise of options......................... 1 8 - - 9
Tax benefit from exercise of stock options.......... - 5 - - 5
Compensation earned related to issuance of
stock options.................................... - 258 - - 258
Purchase of 197,003 shares of Treasury Stock........ - - - (1,984) (1,984)
Net income for fiscal 1996.......................... - - 9,478 - 9,478
---- ------- ------- ------- ---------
Balance at September 28, 1996....................... $120 $34,687 $56,889 $(2,051) $89,645
Issuance of 85,466 shares of Common Stock
upon exercise of options......................... 1 263 - - 264
Issuance of 16,384 shares of Restricted
Common Stock..................................... - 270 - - 270
Tax benefit from exercise of stock options.......... - 107 - - 107
Compensation earned related to issuance of
stock options.................................... - 550 - - 550
Purchase of 12,201 shares of Treasury Stock......... - - - (196) (196)
Net income for fiscal 1997.......................... - - 13,677 - 13,677
---- ------- ------- ------- ---------
Balance at September 27, 1997....................... $121 $35,877 $70,566 $(2,247) $104,317
==== ======= ======= ======== =======
See accompanying notes to consolidated financial statements.
28
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
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, Galey & Lord Industries, Inc., G&L Service Company, North America,
Inc. and Dimmit Industries, S.A. de C.V. 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. Cost
of substantially all inventories is determined using the last-in, first-out
(LIFO) method.
Property, Plant and Equipment: Depreciation is provided over the estimated
useful lives of the respective assets using straight-line methods. Estimated
useful lives are 40 years for buildings and 5 to 15 years for machinery,
fixtures and equipment.
Revenue Recognition: The Company recognizes revenues from product sales
when goods are shipped or when ownership is assumed by the customer.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Net Income Per Common Share: Net income per common share data is computed
based on the average number of shares of Common Stock and Common Stock
equivalents outstanding during the period.
Accounting for Stock-Based Compensation: Effective October 1, 1995, the
Company adopted the accounting provisions of Statement of Financial Accounting
Standards (SFAS) 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. In 1995, the Company accounted for stock
options in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB 25, compensation expense
is determined on the measurement date and compensation expense, if any, is
measured based on the award's intrinsic value, the excess of the market price of
the stock over the exercise price on the measurement date.
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.
Intangibles and Deferred Charges: The excess of the purchase cost over the
fair value of assets acquired is being amortized over 20 to 30 years. The
Company evaluates whether events and circumstances have occurred that indicate
the remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the undiscounted future cash flows over the remaining life to
determine whether goodwill is recoverable. The Company believes that no material
impairment of goodwill exists at September 27, 1997. Deferred debt charges are
being amortized over the lives of related debt.
Fiscal Year: The Company uses a 52-53 week fiscal year. The years ending
September 27, 1997, September 28, 1996 and September 30, 1995 were 52-week
years.
29
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE B - Business Acquisitions
On October 27, 1997, the Company entered into an agreement with Polymer
Group, Inc. and its affiliate, DT Acquisition, Inc. ("DTA"), to acquire from DTA
the apparel fabrics business (the "Dominion Acquisition") of Dominion Textiles
Inc. ("Dominion") in the event that DTA successfully completes its tender offer
to purchase the capital stock of Dominion. Dominion's apparel fabrics business
to be acquired by the Company primarily consists of several direct and indirect
subsidiaries and operating divisions of Dominion which manufacture and market
denim fabrics and fabrics for the commercial uniform market. Under the current
terms of DTA's tender offer, Dominion's shareholders may tender their shares of
Dominion's common stock for CDN $14.50 and shares of Dominion's preferred stock
for CDN $150.00 until 4 p.m. Toronto time on December 29, 1997. The completion
of the tender offer and the Dominion Acquisition are both subject to, among
other things, certain governmental and other regulatory approvals. It is
currently anticipated that the tender offer will be completed in December 1997.
On November 19, 1997, the Company entered into a forward exchange contract for
CDN $370 million to protect itself against Canadian dollar fluctuations.
The Company has obtained commitments from First Union National Bank to
provide the financing to fully fund the Dominion Acquisition. The total
commitment of $720 million will consist of approximately $470 million of senior
financing, including a revolving line of credit and a term loan, which will be
used to refinance the Company's existing senior bank credit facility and to
finance the Dominion Acquisition, and approximately $250 million of senior
subordinated financing which will be used to finance the Dominion Acquisition.
The Company currently anticipates that the Dominion Acquisition will be
completed in January 1998.
On June 7, 1996, the Company, through its subsidiary, 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 for approximately $22.8 million in cash including certain
costs related to the acquisition (the "Mexico Acquisition"). Dimmit is composed
of six manufacturing facilities located in Piedras Negras, Mexico and sews and
finishes pants and shorts for the men's casual wear market. Funding for the
Mexico Acquisition was provided through funds generated by operations, working
capital reductions and by the Company's current bank group through amendments to
the Company's term loan and revolving credit facility. These amendments
increased the Company's borrowing capacity by $20 million. In connection with
the Mexico Acquisition, which has been accounted for as a purchase transaction,
the Company acquired assets with an estimated fair value of approximately $12.7
million and assumed liabilities of approximately $1.1 million. The Company has
allocated the purchase price and has recorded goodwill of approximately $11.2
million for the excess of the purchase price over the fair value of the net
assets acquired. The goodwill amount is being amortized over a 20-year period.
The results of operations of G&L Service Company and Dimmit have been included
in the consolidated financial statements from the date of the Mexico
Acquisition.
On January 25, 1996, the Company and Triarc Companies, Inc. ("Triarc")
mutually agreed not to go forward with their previously announced merger of the
Company and the Graniteville Company, a subsidiary of Triarc, due to economic
conditions existing at that time in the retail, textile and apparel sectors. The
Company incurred fees and expenses related to the proposed merger of $1.6
million and took a charge during fiscal year 1996 for the write-off of those
costs.
NOTE C - Closure of Printed Apparel Fabrics Businesses
On September 19, 1995, the Company closed its printed apparel fabrics
businesses, made up of Galey & Lord Prints and Galey & Lord Group II, due to
declining business conditions that the printed apparel fabrics businesses had
experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and laid off approximately 450
employees located primarily in Society Hill, South Carolina and New York City.
In connection with this closing, the Company incurred in the September
quarter 1995 a $12.1 million business closing charge ($7.4 million or $.62 per
share after tax), consisting primarily of $3.2 million of severance and other
employee related costs
30
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE C - Closure of Printed Apparel Fabrics Businesses (Continued)
associated with employee layoffs, all of which had been paid as of September 27,
1997, $5.4 million of losses on the disposal of machinery and equipment and $2.9
million of losses on the disposal of raw material and supply inventory. As of
September 27, 1997, the Company had incurred substantially all of the losses
associated with the disposal of its machinery and equipment and raw material and
supply inventory. The printed apparel fabrics businesses represented $33.8
million or 6.7% of the Company's net sales in fiscal 1995 and had operating
losses of $13.4 million in fiscal 1995.
NOTE D - Inventories
Inventories at September 27, 1997 and September 28, 1996 are summarized as
follows (in thousands):
1997 1996
---- ----
Raw materials......................................... $ 2,353 $ 2,361
Stock in process...................................... 13,359 13,396
Produced goods........................................ 79,611 64,571
Dyes, chemicals and supplies.......................... 5,448 4,805
------- -------
Total inventory at first-in, first-out (FIFO) cost.... 100,771 85,133
Less LIFO and other reserves.......................... (8,254) (8,199)
------- -------
$92,517 $76,934
======= =======
Inventories valued using the LIFO method comprised approximately 97% of
inventories at September 27, 1997 and September 28, 1996.
NOTE E - Long-term Debt
1997 1996
---- ----
Long-term debt consists of the following (in thousands):
Revolving Credit Note, interest at LIBOR + .5%, LIBOR + .75%, LIBOR +
1%, LIBOR +1.25% or LIBOR +1.5%, in accordance with a pricing grid, or
prime, due on April 30, 2000, collateralized by trade accounts
receivable, inventory, machinery and equipment and intangibles............... $ 151,100 $ 108,200
Term Loan, interest at LIBOR + .5%, LIBOR + .75%, LIBOR + 1%, LIBOR
+1.25% or LIBOR +1.5%, in accordance with a pricing grid, or prime,
due March 31, 2000, collateralized by trade accounts receivable,
inventory, machinery and equipment
and intangibles............................................................... 31,000 45,000
SCJEDA tax exempt bonds, variable interest rate, reset weekly to market
demand for AA+ tax exempt bonds, quarterly interest payments through
May 1, 2014, principal due in 19 yearly installments of $300 through
May 1, 2013, plus a final payment of $1,500 on May 1, 2014, collateralized
by wastewater treatment facility............................................. 6,300 6,600
Obligations under capital leases (Note I)...................................... 1,636 2,971
--------- ---------
190,036 162,771
Less current portion......................................................... 13,281 13,506
--------- ---------
Total long-term debt.................................................. $ 176,755 $ 149,265
======= ========
31
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE E - Long-term Debt (Continued)
At September 27, 1997, the annual maturities of the principal amounts of
long-term debt excluding obligations under capital leases were (in thousands):
1998................................................... $ 12,300
1999................................................... 12,300
2000................................................... 11,169,400
2001................................................... 300
2002................................................... 300
Thereafter............................................. 4,800
The Company has obtained commitments from First Union National Bank to
provide the financing to fully fund the Dominion Acquisition. The total
commitment of $720 million will consist of approximately $470 million of senior
financing, including a revolving line of credit and a term loan, which will be
used to refinance the Company's existing senior bank credit facility and to
finance the Dominion Acquisition, and approximately $250 million of senior
subordinated financing which will be used to finance the Dominion Acquisition.
On June 4, 1996, the Company amended its term loan and revolving credit
facility with its bank group led by First Union National Bank of North America,
as agent and lender. The amendment increased the Company's maximum allowable
borrowings under the revolving credit facility, which expires April 30, 2000,
from $150 million to $170 million. The term loan was restated to the outstanding
balance of $48 million and continues to require equal quarterly principal
payments of $3 million through the term loan's expiration on March 31, 2000. The
amended term loan and revolving credit facility bear interest at a per annum
rate, at the Company's option, of either (i) the greater of the prime rate or
federal funds rate or (ii) LIBOR plus .5%, LIBOR plus .75%, LIBOR plus 1.0%,
LIBOR plus 1.25% or LIBOR 1.5%, in accordance with a pricing grid based on
certain financial ratios.
On May 13, 1997, the Company amended its term loan and revolving credit
facility with its bank group. The amendment modified the Company's current
covenants related to debt service, eliminated the covenant limiting the amount
of capital expenditures to be made and permits the Company to enter into a trade
receivables securitization.
The Company's obligations under the credit facility are secured by all of
the Company's inventory, equipment, accounts receivable and general intangibles,
and a pledge by the Company of all the outstanding capital stock of its
wholly-owned domestic subsidiaries, Galey & Lord Industries, Inc. and G&L
Service Company and a pledge of 65% of the outstanding capital stock of its
foreign subsidiary, Dimmit.
At September 27, 1997, the Company's term loan and revolving credit
borrowings were based on one and three-month market LIBOR rates averaging 5.76%
and on a prime rate of 8.5%. The Company's weighted average borrowing rate on
these loans at September 27, 1997 was 6.88%, which includes a spread of 1.0% on
the LIBOR borrowings.
On April 28, 1995, the Company refinanced its term loan and revolving
credit facility resulting in a one-time extraordinary charge of $1.3 million or
$.11 per share (net of taxes of $.8 million) in the June quarter 1995 to write
off fees associated with the previous loan agreements and pre-payment penalties.
Under the Company's financing agreements, the Company has covenants
relating to debt service, working capital, leverage, fixed charges and net
worth. These agreements permit the Company to pay dividends on common stock
subject to the satisfaction of certain financial covenants.
During January 1996, the Company entered into interest rate swaps on $50
million of its outstanding bank debt to fix the LIBOR interest rate on which
those borrowings are based. The interest rate swaps assure that the Company
under its current credit agreement will pay a maximum rate of 6.77% (LIBOR fixed
at 5.27% plus the maximum spread allowed under the credit agreement of 1.5%) on
$25 million of bank debt for a two-year period and 7.03% (LIBOR fixed at 5.53%
plus the maximum spread allowed under the credit agreement of 1.5%) on the other
$25 million of debt for a five-year period. The amount paid or received under
the
32
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE E - Long-term Debt (Continued)
swap agreements is based on the changes in actual interest rates and is recorded
as an adjustment to interest expense. The fair value of these interest rate swap
agreements, as determined by a member of the Company's bank group, at September
27, 1997 was $579,000 and was not recognized in the financial statements. The
Company is exposed to credit loss in the event of nonperformance by the other
parties to the interest rate swap agreements; however, the Company does not
anticipate nonperformance by any of the other parties.
On May 17, 1994, the Company borrowed $7,200,000 in tax-exempt adjustable
mode economic development revenue bonds from the South Carolina Jobs-Economic
Development Authority. Bond proceeds were used to finance the construction and
equipping of a wastewater treatment facility for the Company's manufacturing
facilities in Society Hill, South Carolina. The bonds are secured by an
irrevocable standby letter of credit of $7,830,000 from Wachovia Bank of North
Carolina. The bonds require yearly principal payments of $300,000 for nineteen
years with a final payment of $1,500,000 due May 1, 2014. The coupon rate on the
bonds is reset weekly and interest is paid quarterly. As of September 27, 1997,
the interest rate on the bonds was 6.22%.
NOTE F - Income Taxes
At September 27, 1997 and September 28, 1996, the Company had $1.5 million
and $2.5 million, respectively, of deferred income tax assets and $19.8 million
and $18.3 million, respectively, of deferred income tax liabilities which have
been netted for presentation purposes. The significant components of these
amounts as shown on the balance sheet are as follows (in thousands):
September 27, 1997 September 28, 1996
-------------------------- ----------------------
Current Noncurrent Current Noncurrent
Liability Liability Liability Liability
(Asset) (Asset) (Asset) (Asset)
Inventory valuation.......................... $ 1,947 $ - $ 1,937 $ -
Property, plant & equipment.................. - 16,116 - 14,468
Accruals and allowances...................... (1,437) - (2,502) -
Goodwill..................................... - 1,592 - 1,147
Other........................................ 123 (23) 161 553
------- -------- ------- -------
Current and noncurrent deferred income tax
liabilities (assets)....................... $ 633 $17,685 $ (404) $16,168
======= ======= ======= =======
The components of the provision for Federal and state income taxes for
1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
---- ---- ----
Current
Federal......................................$ 4,861 $ 1,939 $ 2,921
State........................................ 731 454 436
-------- -------- --------
5,592 2,393 3,357
Deferred
Federal...................................... 2,202 3,194 (30)
State........................................ 352 339 63
-------- -------- --------
2,554 3,533 33
-------- -------- --------
Total Domestic................................. 8,146 5,926 3,390
Foreign........................................ 204 56 -
-------- -------- --------
$ 8,350 $ 5,982 $ 3,390
======== ======== ========
33
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE F - Income Taxes (Continued)
Following is a reconciliation of the United States statutory tax rate to
the effective rate expressed as a percentage of pre-tax income:
1997 1996 1995
---- ---- ----
United States statutory tax rate.......35.0% 35.0% 35.0%
State taxes net of Federal benefit..... 3.2 3.2 3.7
Foreign tax............................ 0.9 0.4 -
Other..................................(1.2) 0.1 0.1
----- ---- ----
37.9% 38.7% 38.8%
==== ==== ====
NOTE G - Supplemental Cash Flow Information
Cash paid (received) for interest and income taxes is as follows (in
thousands):
1997 1996 1995
--------- --------- ------
Interest............. $11,213 $12,137 $12,680
Income taxes......... $ 8,287 $ (70) $ 4,815
NOTE H - Benefit Plans
Defined Benefit Pension Plans
The Company has a defined benefit pension plan covering qualified salaried
and wage employees. Effective April 1, 1992, the plan was modified to be
non-contributory and the benefit formula was amended to be based on the
employee's average compensation and years of service. Prior to April 1, 1992,
benefits were based on employee contributions to the plan. The Company's funding
policy is to contribute annually the amount recommended by the plan's actuary.
Plan assets, which consist of common stocks, bonds and cash equivalents, are
maintained in trust accounts.
The Company also has a nonqualified, unfunded supplementary retirement
plan under which the Company will pay supplemental pension benefits to key
executives in addition to the amount participants will receive under the
Company's retirement plan. The annual cost of this plan has been included in the
determination of the net periodic pension cost shown below and amounted to
$241,025, $179,500 and $158,000 for 1997, 1996 and 1995, respectively.
34
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE H - Benefit Plans (Continued)
The following sets forth the funded status of the plans at September 27,
1997 and September 28, 1996 (in thousands):
Actuarial Present Value of Benefit Obligations:
Defined Benefit Plan Supplemental Plan
-------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Accumulated benefit obligation, including vested
benefits of $18,142, $16,000, $493 and $325, respectively.... $ 19,836 $ 16,042 $ 493 $ 325
======== ======== ====== =====
Projected benefit obligation for service rendered to date........ $ 23,911 $ 19,686 $1,195 $ 768
Less plan assets at fair value................................... 23,074 17,240 - -
-------- -------- ----- -----
Projected benefit obligation in excess of plan assets............ 837 2,446 1,195 768
Unrecognized prior service cost.................................. 1,221 1,308 (188) (207)
Unrecognized net loss............................................ (2,203) (3,382) (328) (123)
-------- -------- ----- -----
Pension liability (asset) recognized in the balance sheet........ $ (145) $ 372 $ 679 $ 438
========= ======== ===== =====
Net pension cost for the plans for the years ended September 27, 1997,
September 28, 1996 and September 30,1995 included the following components (in
thousands):
1997 1996 1995
---- ---- ----
Service cost - benefits earned during the period................ $ 3,217 $ 3,227 $3,261
Interest cost on projected benefit obligation................... 1,558 1,470 1,341
Return on assets................................................ (3,789) (1,258) (1,467)
Net amortization and deferral................................... 2,178 (257) 131
-------- --------- ------
Net periodic pension cost....................................... $ 3,164 $ 3,182 $3,266
======== ======== ======
The projected benefit obligation for both plans at September 27, 1997 and
September 28, 1996 was determined using assumed discount rates of 7.5% and 8%,
respectively. The assumed long-term rate of increase in compensation was 5.5%
for all years presented, and the assumed long-term rate of return on plan assets
was 8.5% for 1997 and 9% for 1996 and 1995.
Defined Contribution Plan
The Company has a profit sharing plan covering qualified employees. The
plan includes a provision which allows employees to make pre-tax contributions
under Section 401(k) of the Internal Revenue Code. Employer contributions to the
plan are made at the discretion of the Company. The Company contributions for
1997, 1996 and 1995 were approximately $1.7 million, $1.6 million and $0,
respectively.
In addition, the Company provides life and health benefits to
substantially all 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 1997, 1996 and 1995 were approximately $6.3 million,
$8.4 million and $6.9 million, respectively.
35
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE H - Benefit Plans (Continued)
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 $344,000, $247,000 and $0 for 1997, 1996
and 1995, 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.
NOTE I - Commitments and Contingencies
Future minimum commitments for all leases at September 27, 1997 are as
follows (in thousands):
Operating Capital
--------- -------
1998............................................. $ 5,177 $1,172
1999............................................. 3,563 717
2000............................................. 2,800 -
2001............................................. 2,487 -
2002............................................. 2,022 -
Thereafter....................................... 493 -
-------- ------
Total minimum lease payments..................... $16,542 $1,889
=======
Less amount representing interest................ 253
------
Present value of future minimum lease payments... 1,636
Less amounts due in one year..................... 981
------
$ 655
=======
Approximately 16.1% of minimum lease payments on operating leases pertain
to real estate as of September 27, 1997. The remainder covers a variety of
machinery and equipment. Rental expense for all operating leases was
approximately $5.5 million, $4.3 million and $2.9 million in 1997, 1996 and
1995, 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.
36
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE J - 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 11,664,490 shares are
currently outstanding, (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.
The Company has a Stock Option Plan (the "Plan") authorizing the granting
of qualified and non-qualified stock options to officers, directors, consultants
and key employees of the Company. Effective February 11, 1997, the Plan was
amended to increase the number of shares of Company common stock available for
issuance from 1.6 million to 1.85 million. Options may be granted through the
plan's expiration in February 1999 at an exercise price of not less than fair
market value. Currently, the Company has both fixed stock options and target
stock price performance options outstanding under the Plan. As of September 27,
1997, the Company had 192,130 shares available for the issuance of stock options
under the Plan.
Fixed Stock Options
The exercise price of each fixed 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 1997 and 1996: expected dividend
yield of 0% for both years; expected volatility of 34% for both years; weighted
average risk-free interest rate of 6.17% and 6.55%, respectively; and expected
lives of 5 years and 5 to 7 years, respectively.
A summary of the status of the Company's fixed stock options as of
September 27, 1997 and September 28, 1996 and changes during the years are
presented below:
1997 1996
-------------------------------- ---------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding, beginning of year.......................... 682,210 $ 8.61 715,310 $ 8.80
Granted................................................. 4,500 16.46 14,500 10.10
Exercised............................................... (84,800) 3.00 (10,100) .93
Forfeited or Canceled................................... (19,350) 16.48 (37,500) 15.00
-------- -------- ------- -------
Outstanding, end of year................................ 582,560 $ 9.22 682,210 $ 8.61
======= ======== ======= =======
Options exercisable at year-end......................... 496,060 559,860
======= =======
Weighted average fair value of options granted during
the year calculated using Black-Scholes model....... $5.75 $4.76
The following table summarizes information about fixed stock options
outstanding at September 27, 1997:
Options Exercisable
-------------------
Number Weighted vg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 9/27/97 Contractual Life Exercise Price at 9/27/97 Exercise Price
--------------- ---------- ---------------- -------------- ---------- --------------
$0.43 25,200 1.5 Yrs. $ 0.43 25,200 $ 0.43
0.93 45,200 2.6 0.93 45,200 0.93
1.75 66,700 2.8 1.75 66,700 1.75
9.38 to 14.00 354,260 5.0 10.74 310,860 10.66
14.25 to 18.13 91,200 6.6 15.32 48,100 15.38
-------------- ------ --- ----- --------- ------
$0.43 to 18.13 582,560 4.7 $ 9.22 496,060 $ 8.51
37
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE J - Stockholders' Equity (continued)
Target Stock Price Performance Options
The exercise price of each target stock price performance 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 which were set on the date of grant. Some options vest in 20% increments
as the common stock price reaches each of five target prices, $15.00, $17.50,
$20.00, $22.50 and $25.00. Some options vest in 33-1/3% increments as the common
stock price reaches each of three target prices, $17.50, $20.00 and $22.50. All
options which have not vested within five years of the date of grant will
expire. All options which have vested 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 1997 and 1996: weighted average risk-free interest
rate of 5.84% and 6.57%, respectively; expected dividend yield of 0% for both
years; expected lives ranging from 2.25 to 4.25 years and 2 to 5.5 years,
respectively; and volatility of 34% for both years.
A summary of the status of the Company's target stock price performance
options as of September 27, 1997 and changes during the year is presented below:
1997 1996
---------------------------------- ----------------------------------
Number of Weighted Average Number of Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ----------------- --------- ----------------
Outstanding, beginning of year.............................. 475,000 $10.38 - -
Granted..................................................... 48,000 13.25 475,000 $10.38
Exercised................................................... (666) 13.25 - -
Forfeited or Canceled....................................... - - - -
------- -------- ------- -----
Outstanding, end of year.................................... 522,334 $10.64 475,000 $10.38
======= =======
Options exercisable at year-end............................. 221,654 0
======= =======
Weighted average fair value of options granted during
the year calculated using modified Black-Scholes model.. $4.00 $3.05
As of September 27, 1997, the 522,334 target stock price performance
options outstanding under the Plan have a weighted-average remaining contractual
life of 8.8 years assuming all options vest.
1995 Fixed Stock Options
The following tables summarizes information about fixed stock options for
1995:
1995
----
Number of Price Per
Shares Share
------ -----
Outstanding, beginning of year..... 617,760 $ .43-20.75
Granted............................ 129,750 14.25-19.25
Exercised.......................... (32,200) .43-11.50
Forfeited or Canceled.............. - -
--------
Outstanding, end of year........... 715,310 .43-20.75
========
Exercisable, end of year........... 454,760 .43-20.75
========
38
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE J - Stockholders' Equity (continued)
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," ("FAS 128") which will be adopted by
the Company on December 27, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in primary earnings per share for the years
ended September 27, 1997, September 28, 1996 and September 30, 1995 of $.04,
$.01 and $.01 per share, respectively. Under the new requirements for
calculating fully diluted earnings per share, the dilutive effect of certain
target stock price performance options will be excluded. The impact is expected
to result in an increase in fully diluted earnings per share for the years ended
September 27, 1997 and September 28, 1996 of $.02 and $.01 per share,
respectively. The impact is expected to result in no change to fully diluted
earnings per share for the year ended September 30,1995.
NOTE K - Major Customer
Apparel fabrics had sales to Levi Strauss and related companies which
comprised 21.6%, 17.4%, and 16.6% of the Company's total sales for 1997, 1996
and 1995, respectively.
NOTE L - 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 27, 1997, 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,
other than credit losses resulting from the Home Fashion Fabrics customer which
filed for bankruptcy protection during the June quarter 1997. All credit losses
are provided for in the financial statements.
39
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997, September 28, 1996 and September 30, 1995
NOTE M - Segment Information
The Company's operations are classified into two business segments,
apparel fabrics and home fabrics. The apparel fabrics segment sells to clothing
manufacturers worldwide and consists of woven fabrics and G&L Service Company.
The home fabrics segment produces fabrics for the domestic home furnishing trade
through the Home Fashion Fabrics Division.
Information about the Company's operations in its different industry
segments for the past three years is as follows (in thousands) (see Note A).
1997 1996 1995
---- ---- ----
Net Sales
Apparel fabrics $ 456,597 $ 364,157 $ 443,544
Home fabrics 36,765 47,298 58,676
---------- ---------- ---------
Consolidated $ 493,362 $ 411,455 $ 502,220
========== ========== =========
Operating Income
Apparel fabrics $ 36,837 $ 29,924 $ 29,201
Home fabrics (2,484) (1,285) 4,709
Business closing charge - - (12,065)
---------- ---------- ---------
Consolidated 34,353 28,639 21,845
Interest expense 12,326 11,579 13,103
Write-off of merger costs - 1,600 -
---------- ---------- ---------
Income before income taxes $ 22,027 $ 15,460 $ 8,742
========== ========== =========
Identifiable Assets
Apparel fabrics $ 279,307 $ 225,247 $219,208
Home fabrics 65,885 75,148 77,863
Corporate (including cash and income tax assets) 3,999 4,481 7,968
---------- ---------- ---------
Consolidated $ 349,191 $ 304,876 $305,039
========== ========== ========
Depreciation and Amortization
Apparel fabrics $ 12,129 $ 8,666 $ 8,633
Home fabrics 3,353 3,193 2,832
---------- ---------- ---------
Consolidated $ 15,482 $ 11,859 $ 11,465
========== ========== =========
Capital Expenditures
Apparel fabrics $ 35,871 $ 11,259 $ 9,686
Home fabrics 755 2,265 5,109
---------- ---------- ---------
Consolidated $ 36,626 $ 13,524 $ 14,795
========== ========== =========
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), effective for years beginning
after December 15, 1997, the Company's fiscal year 1999. FAS 131 requires that a
public company report financial and descriptive information about its reportable
operating segments pursuant to criteria that differ from current accounting
practice. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The financial information to be reported includes segment
profit or loss, certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of FAS 131 will not affect results of
operations or financial position, but may affect the disclosure of segment
information.
40
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995, October 1, 1994 and October 2, 1993
NOTE N - Quarterly Results of Operations (Unaudited)
The Company's unaudited consolidated results of operations are presented
below (in thousands except per share data):
Fiscal 1997 Quarters
--------------------
December March June September
-------- ----- ---- ---------
Net sales..................................................... $ 110,928 $ 129,429 $135,113 $117,892
Cost of sales................................................. 98,360 115,567 118,839 106,441
---------- ---------- ---------- ----------
Gross profit.................................................. 12,568 13,862 16,274 11,451
Income tax expense............................................ 2,215 2,398 2,599 1,138
Net income.................................................... $ 3,522 $ 3,800 $ 4,184 $ 2,171
========== ========== ========== ==========
Per share data - primary:
Average common shares outstanding............................. 11,865 12,052 12,055 12,100
Net income - primary.......................................... $ .30 $ .32 $ .35 $ .18
========== ========== ========== ========
Per share data - fully diluted:
Average common shares outstanding............................. 11,927 12,059 12,107 12,166
Net income - fully diluted.................................... $ .30 $ .32 $ .35 $ .18
========== ========== ========== ========
Fiscal 1996 Quarters
--------------------
December March June September
-------- ----- ---- ---------
Net sales..................................................... $ 85,134 $ 100,394 $ 115,437 $ 110,490
Cost of sales................................................. 78,663 89,560 102,042 97,727
---------- ---------- ---------- ---------
Gross profit.................................................. 6,471 10,834 13,395 12,763
Income tax expense (benefit).................................. (475) 1,587 2,588 2,282
Net income (loss)............................................. $ (753) $ 2,612 $ 4,051 $ 3,568
========== ========== ========== =========
Per share data - primary:
Average common shares outstanding............................. 12,010 11,928 11,889 11,858
Net income (loss) - primary................................... $ .(06) $ .22 $ .34 $ .30
=========== ========== ========== ========
Per share data - fully diluted:
Average common shares outstanding............................. 12,010 11,947 11,889 11,913
Net income (loss) - fully diluted............................. $ .(06) $ .22 $ .34 $ .30
=========== ========== ========== =========
All quarters presented are 13-week periods.
41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
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."
43
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 27, 1997 and September
28, 1996.
Consolidated Statements of Operations for the fiscal years ended
September 27, 1997, September 28, 1996 and September 30, 1995.
Consolidated Statements of Cash Flows for the fiscal years ended
September 27, 1997, September 28, 1996 and September 30, 1995.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended September 27, 1997, September 28, 1996 and September
30, 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
The following schedules are filed as a part of this Item 14:
Schedule I - Condensed Financial Information of the Registrant.
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.
None.
44
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)*
45
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 - Credit Agreement dated as of April 28, 1995 among Industries, the Company and First Union
National Bank of North Carolina, as agent and lender, and the other lenders' party
thereto.(7)
10.22 - Security and Pledge Agreement dated as of April 28, 1995, among Industries, the Company
and First Union National Bank of North Carolina, as Collateral Agent.(7)
10.23 - Letter of Intent dated September 22, 1995 between the Company and Triarc Companies, Inc. (8)
10.24 - First Amendment to Credit Agreement dated October 19, 1995 between Industries, the Company
and First Union National Bank of North Carolina, as agent and lender. (9)
10.25 - Fifth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated August 29, 1995.(10)*
10.26 - 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)
10.27 - 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)
10.28 - Third Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated June 7,
1996.(13)*
10.29 - Sixth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated June 7, 1996. (13)*
10.30 - Seventh Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated September 30, 1996. (13)*
46
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
10.31 - 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)
10.32 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated February 7,
1995.(15)*
10.33 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated February 11,
1997.(15)*
10.34 - 1996 Restricted Stock Plan of the Company.(16)*
10.35 - 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)
11 - Statement Regarding Computation of Per Share Earnings.
21 - Subsidiaries of the Company.
23 - Consent of Ernst & Young LLP.
27 - Financial Data Schedule
(1) Filed as an Exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-45895) which was declared effective by
the Securities and Exchange Commission on April 30, 1992 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 2, 1993 and incorporated
herein by reference.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended April 2, 1994 and incorporated herein
by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on
Form S-8 (File No. 33-52248) dated August 25, 1994 and
incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended October 1, 1994 and incorporated
herein by reference.
(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.
47
(8) Filed as an Exhibit to the Company's Form 8K 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.
(11) Filed as an Exhibit to the Company's Form 8K dated May 20, 1996 and
incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the period ended June 29, 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.
* Management contract or compensatory plan or arrangement identified
pursuant to item 14(a)3 of this report.
48
Schedule I
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GALEY & LORD, INC.
The Company conducts all of its operating activities through its
wholly-owned domestic subsidiaries, Galey & Lord Industries, Inc. and G&L
Service Company, North America, Inc., and wholly-owned foreign subsidiary,
Dimmit Industries, S.A. de C.V.
Other than the parent's investment in its subsidiaries, it maintains a de
minimis cash balance and has minor operating accruals.
49
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 27, 1997
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances........... $ 1,434 $3,478 $ - $ 225 $4,687
------- ------ ----- ------- ------
Totals................................... $ 1,434 $3,478 $ - $ 225 $4,687
======= ====== ===== ======= ======
YEAR ENDED SEPTEMBER 28, 1996
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances........... $ 1,492 $ 172 $ - $ 230 $1,434
------- ------ ----- ------- ------
Totals................................... $ 1,492 $ 172 $ - $ 230 $1,434
======= ====== ===== ======= ======
YEAR ENDED SEPTEMBER 30, 1995
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances........... $ 1,456 $ 538 $ - $ 502 $1,492
------- ------ ----- ------- ------
Totals................................... $ 1,456 $ 538 $ - $ 502 $1,492
======= ====== ===== ======= ======
(1)Uncollectible accounts written off.
50
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 18, 1997 /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 18, 1997 /s/ Michael R. Harmon December 18, 1997
- ------------------------------------------------ -------------------------------------------------------
Arthur C. Wiener Date Michael R. Harmon Date
Chairman of the Board Executive Vice President,
and President (Principal Executive Officer) Chief Financial Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary
/s/ Lee Abraham December 18, 1997 /s/ William M.R. Mapel December 18, 1997
- ------------------------------------------------ -------------------------------------------------------
Lee Abraham Date William M.R. Mapel Date
Director Director
/s/ Paul G. Gillease December 18, 1997 /s/ Stephen C. Sherrill December 18, 1997
- ------------------------------------------------ -------------------------------------------------------
Paul G. Gillease Date Stephen C. Sherrill Date
Director Director
/s/ William deR. Holt December 18, 1997 /s/ David F. Thomas December 18, 1997
- ------------------------------------------------ -------------------------------------------------------
William deR. Holt Date David F. Thomas Date
Director Director
/s/ Howard S. Jacobs December 18, 1997
- ------------------------------------------------
Howard S. Jacobs Date
Director
51