UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20080
GALEY & LORD, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1593207
(State or other jurisdiction of (IRS Employer
incorporation or organization) (Identification No.)
980 Avenue of the Americas
New York, New York 10018
(Address of principal executive offices) Zip Code
212/465-3000
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ] .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 11,826,987 shares as of August 11, 1998.
Exhibit Index at page 27
1
<PAGE>
INDEX
GALEY & LORD, INC.
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
June 27, 1998, June 28, 1997
and September 27, 1997
Consolidated Statements of Income -- 4
Three and nine months ended June 27, 1998
and June 28, 1997
Consolidated Statements of Cash Flows -- 5
Nine months ended June 27, 1998
and June 28, 1997
Notes to Consolidated Financial Statements -- 6-16
June 27, 1998
Item 2. Management's Discussion and Analysis of 17-24
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 24
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security 25
Holders
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
June 27, June 28, September 27,
1998 1997 1997
(Unaudited) (Unaudited) *
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 25,271 $ 3,040 $ 2,277
Trade accounts receivable ............................... 189,347 86,416 80,633
Sundry notes and accounts receivable .................... 11,151 191 206
Inventories ............................................. 180,946 82,782 92,517
Income taxes receivable ................................. -- -- 1,412
Deferred income taxes ................................... 3,946 602 --
Prepaid expenses and other current
assets ................................................ 4,017 4,048 3,894
----------- ----------- -----------
Total current assets ................................ 414,678 177,079 180,939
Property, plant and equipment, at cost ..................... 500,383 184,362 197,184
Less accumulated depreciation and
amortization ............................................ (88,374) (64,436) (67,739)
----------- ----------- -----------
412,009 119,926 129,445
Notes receivable from associated
companies ............................................... 3,068 -- --
Investment in associated companies ......................... 21,625 -- --
Deferred charges ........................................... 15,667 895 820
Other non current assets ................................... 4,177 -- --
Intangibles ................................................ 168,359 38,372 37,987
----------- ----------- -----------
$ 1,039,583 $ 336,272 $ 349,191
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ....................... $ 3,533 $ 13,318 $ 13,281
Trade accounts payable .................................. 58,416 22,252 23,488
Accrued salaries and employee
benefits .............................................. 26,303 8,382 9,450
Accrued liabilities ..................................... 77,297 3,211 3,582
Deferred income taxes ................................... -- -- 633
Income taxes payable .................................... 468 2,398 --
----------- ----------- -----------
Total current liabilities ........................... 166,017 49,561 50,434
Commitments
Long-term debt ............................................. 686,740 167,866 176,755
Other long-term liabilities ................................ 21,593 84 --
Deferred income taxes ...................................... 50,317 16,575 17,685
Stockholders' equity:
Common stock ............................................ 122 120 121
Contributed capital in excess of
par value ............................................. 38,968 35,722 35,877
Retained earnings ....................................... 78,749 68,395 70,566
Treasury stock, at cost ................................. (2,247) (2,051) (2,247)
Currency translation adjustment ......................... (676) -- --
----------- ----------- -----------
Total stockholders' equity .......................... 114,916 102,186 104,317
----------- ----------- -----------
$ 1,039,583 $ 336,272 $ 349,191
=========== =========== ===========
</TABLE>
* Condensed from audited financial statements.
See accompanying notes to consolidated financial statements.
3
<PAGE>
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ........................................... $ 275,296 $ 135,113 $ 640,089 $ 375,470
Cost of sales ....................................... 238,034 118,839 558,915 332,766
--------- --------- --------- ---------
Gross profit ........................................ 37,262 16,274 81,174 42,704
Selling, general and
administrative expenses ........................... 13,013 5,958 26,923 13,503
Amortization of goodwill ............................ 1,234 421 2,607 1,258
--------- --------- --------- ---------
Operating income .................................... 23,015 9,895 51,644 27,943
Interest expense .................................... 15,883 3,112 32,012 9,225
Income from associated companies .................... (1,046) -- (1,878) --
Bridge financing interest expense ................... -- -- 3,928 --
Loss on foreign currency hedges ..................... -- -- 2,745 --
--------- --------- --------- ---------
Income before income taxes and
extraordinary loss ................................ 8,178 6,783 14,837 18,718
Income tax expense (benefit)
Current ........................................... 3,935 2,765 6,245 7,003
Deferred .......................................... (478) (166) (115) 209
--------- --------- --------- ---------
Income before extraordinary loss ................... 4,721 4,184 8,707 11,506
Extraordinary loss from debt
refinancing, net of taxes of $332 ................. -- -- (524) --
--------- --------- --------- ---------
Net income .......................................... $ 4,721 $ 4,184 $ 8,183 $ 11,506
========= ========= ========= =========
Net income per common share:
Basic:
Average common shares outstanding ................. 11,781 11,625 11,710 11,600
Income per share before
extraordinary loss .............................. $ .40 $ .36 $ .74 $ .99
Extraordinary loss from debt
refinancing ..................................... -- -- (.04) --
--------- --------- --------- ---------
Net income per common share -
basic ........................................... $ .40 $ .36 $ .70 $ .99
========= ========= ========= =========
Diluted:
Average common shares outstanding ................. 12,368 12,004 12,216 11,966
Income per share before
extraordinary loss .............................. $ .38 $ .35 $ .71 $ .96
Extraordinary loss from debt
refinancing ..................................... -- -- (.04) --
--------- --------- --------- ---------
Net income per common share -
diluted ......................................... $ .38 $ .35 $ .67 $ .96
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
June 27, June 28,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 8,183 $ 11,506
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment ................ 21,293 10,028
Amortization of intangible assets ............................ 2,607 1,258
Amortization of deferred charges ............................. 3,395 224
Deferred income taxes ........................................ (478) 209
Non-cash compensation ........................................ 1,170 522
(Gain)/loss on disposals of property, plant and
equipment ................................................. 210 122
Undistributed income from associated companies ............... (1,878) --
Dividends received from associated companies ................. 253 --
Foreign currency translation adjustment ...................... (8) --
Extraordinary loss from debt refinancing ..................... 524 --
Changes in assets and liabilities (net of acquisition):
(Increase)/decrease in accounts receivable - net ............. (32,701) (12,236)
(Increase)/decrease in sundry notes & accounts
receivable ................................................ 15,237 (27)
(Increase)/decrease in inventories ........................... (7,480) (5,848)
(Increase)/decrease in prepaid expenses and other
current assets ............................................ 7,035 (2,195)
(Increase)/decrease in other non current assets .............. 548 --
(Decrease)/increase in accounts payable - trade .............. (7,604) 1,295
(Decrease)/increase in accrued liabilities ................... 21,756 (3,205)
(Decrease)/increase in income taxes payable .................. 595 1,283
(Decrease)/increase in other long-term liabilities ........... (3,803) --
----------- -----------
Net cash provided by (used in) operating activities .............. 28,854 2,936
Cash flows from investing activities:
Acquisition of business - net of cash acquired ................. (456,908) --
Property, plant and equipment expenditures ..................... (23,759) (23,537)
Proceeds from sale of property, plant and equipment ............ 1,668 1,202
Other .......................................................... -- (163)
----------- -----------
Net cash provided by (used in) investing activities .............. (478,999) (22,498)
Cash flows from financing activities:
(Decrease)/ increase in revolving line of credit ............... (12,300) 30,800
Issuance of long-term debt ..................................... 1,319,157 --
Principal payments on long-term debt ........................... (817,398) (12,387)
Net proceeds from issuance of common stock ..................... 1,770 513
Payment of bank fees and loan costs ............................ (18,242) (64)
Other .......................................................... 152 (59)
----------- -----------
Net cash provided by (used in) financing activities .............. 473,139 18,803
----------- -----------
Net (decrease)/increase in cash and cash equivalents ............. 22,994 (759)
Cash and cash equivalents at beginning of period ................. 2,277 3,799
----------- -----------
Cash and cash equivalents at end of period ....................... $ 25,271 $ 3,040
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly owned subsidiaries. Intercompany items have been
eliminated in consolidation.
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position as of June 27, 1998 and the results of operations and
cash flows for the periods ended June 27, 1998 and June 28, 1997. Such
adjustments consisted only of normal recurring items. Interim results are not
necessarily indicative of results for a full year. These financial statements
should be read in conjunction with the financial statements and footnotes
included in the Company's annual report on Form 10-K for the fiscal year ended
September 27, 1997.
NOTE B - BUSINESS ACQUISITIONS
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary of
Polymer, Dominion Textile, Inc. ("Dominion") and certain other parties thereto,
pursuant to which the Company acquired (the "Acquisition") the apparel fabrics
business (the "Acquired Business") of Dominion from DTA for a cash purchase
price of $466.1 million including certain costs related to the Acquisition. The
Acquired Business primarily consists of several subsidiaries and operating
divisions of Dominion, which are comprised of Swift Denim, Klopman
International, S.p.A.("Klopman") and Swift Europe. Swift Denim is the second
largest supplier of denim in the world, Klopman is one of the largest suppliers
of uniform fabrics in Europe and Swift Europe is a major international supplier
of denim to Europe, North Africa and Asia. The total purchase price of the
Acquisition was funded with borrowings under the Company's credit facilities
(described in Note C below). The Company used the net proceeds from the private
placement on February 24, 1998 of $300.0 million aggregate principal amount of
9 1/8% Senior Subordinated Notes Due 2008 (the "Initial Notes") to repay
portions of such credit facilities. In connection with the Acquisition, which
has been accounted for as a purchase transaction, the Company acquired assets
with a fairvalue of approximately $519.4 million and assumed liabilities of
approximately $186.3 million. The Company has made a preliminary allocation of
the purchase price and has recorded goodwill of approximately $133.0 million for
the excess of purchase price (including assumed liabilities) over the fair
market value of the assets acquired. Goodwill is being amortized over a 40-year
period.
6
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE B - BUSINESS ACQUISITIONS (CONTINUED)
The following pro forma unaudited results of operations assume the Acquisition
of the apparel fabrics business of Dominion Textiles, Inc. had occurred at the
beginning of fiscal 1998 and fiscal 1997, respectively. These pro forma results
give effect to certain adjustments, including depreciation of property, plant
and equipment of the Acquired Business, amortization of the cost of the
Acquisition in excess of net assets acquired, elimination of duplicate corporate
overhead expenses and other costs and increased interest expense resulting from
the Acquisition and related financings.
Nine Months Ended
---------------------------------
June 27, 1998 June 28, 1997
------------- -------------
(in thousands except per share data)
Net sales ................................... $803,401 $667,715
Income/(loss) before extraordinary item ..... $ (185) $ 2,978
Income/(loss) before extraordinary item
per share - diluted ....................... $ (.02) $ .25
Net income/(loss) ........................... $ (709) $ 2,978
Net income/(loss) per share - diluted ....... $ (.06) $ .25
NOTE C - LONG-TERM DEBT
On February 24, 1998 the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008. Net
proceeds from the offering, estimated to be $288.0 million (net of Initial
Purchaser's discount and estimated offering expenses), were used to repay (i)
$275.0 million principal amount of borrowings under a Senior Subordinated Credit
Agreement (the "Bridge Financing") incurred to partially finance the Acquisition
and (ii) a portion of the outstanding amount under a revolving line of credit
provided for under the Senior Credit Facility (as defined herein).
On May 21, 1998 the Company completed an exchange offer (the "Exchange Offer")
pursuant to which it exchanged publicly registered 9 1/8% Senior Subordinated
Notes Due 2008 (the "Notes") for the Initial Notes pursuant to the terms and
conditions set forth in a prospectus (the "Prospectus") dated April 22, 1998 and
filed as part of a Registration Statement on Form S-4 with the United States
Securities and Exchange
7
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
Commission which was declared effective on April 22, 1998. The terms of the
Notes are identical in all material respects to those of the Initial Notes
except that the Notes are freely transferable by holders and are not subject to
any covenant regarding registration under the Securities Act of 1933, as
amended. Interest on the Notes will be paid March 1 and September 1 of each
year, commencing September 1, 1998.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc. and other future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
On January 29, 1998 the Company entered into a new credit agreement, (the
"Senior Credit Facility") with First Union National Bank ("FUNB")as amended, as
agent and lender and, as of March 27, 1998, with a syndicate of lenders. The
Senior Credit Facility provides for (i) a revolving line of credit under which
the Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million or a borrowing
base (comprised of eligible accounts receivable and eligible inventory, as
defined in the Senior Credit Facility), (ii) a term loan in the principal amount
of $155.0 million ("Term Loan B") and (iii) a term loan in the principal amount
of $110.0 million ("Term Loan C").
Under the Senior Credit Facility borrowings were used to refinance the Company's
prior senior credit facility with FUNB, to fund the Acquisition, to pay for
certain closing costs and expenses related to the Acquisition and for general
corporate and working capital purposes. Under the Senior Credit Facility, the
revolving line of credit expires on March 27, 2004 and the principal amount of
(i) Term Loan B is repayable in 24 quarterly payments of $387,500 until March
27, 2004 and, thereafter, four quarterly payments of $36,425,000 until Term Loan
B's maturity on April 2, 2005 and (ii) Term Loan C is
8
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
repayable in 28 quarterly payments of $275,000 until April 2, 2005 and,
thereafter, four quarterly payments of $25,575,000 until Term Loan C's maturity
on April 1, 2006. Under the Senior Credit Facility, the interest rate on the
Company's borrowings under its revolving line of credit and term loans initially
is fixed at a per annum rate, at the Company's option, of either LIBOR plus
2.25%, LIBOR plus 2.75% and LIBOR plus 3.00%, respectively, or the greater of
the prime rate or the federal funds rate plus .50% plus a margin of 1.00% for
revolving loans, 1.5% for Term Loan B and 1.75% for Term Loan C for at least two
full fiscal quarters following the closing of the Acquisition. Thereafter, the
revolving line of credit borrowings will bear interest at a per annum rate, at
the Company's option, of either (i) (a) the greater of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%, .75% or 1.00%,
based on the Company achieving certain leverage ratios (as defined in the Senior
Credit Facility) or (ii) LIBOR plus a margin of .75%, 1.00%, 1.25%, 1.50%,
1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios.
Term Loan B and Term Loan C will bear interest at a per annum rate, at the
Company's option, of (A) with respect to Term Loan B either (i) (a) the greater
of the prime rate or federal funds rate plus .50%, plus (b) a margin of .25%,
.50%, .75%, 1.00%, 1.25% or 1.50%, based on the Company achieving certain
leverage ratios or (ii) LIBOR plus a margin of 1.50%, 1.75%, 2.00%, 2.25%, 2.50%
or 2.75%, based on the Company achieving certain leverage ratios or (B) with
respect to Term Loan C, either (i) (a)the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of .50%, .75%, 1.00%, 1.25%, 1.50% or
1.75%, based on the Company achieving certain leverage ratios, or (ii) LIBOR
plus a margin of 1.75%, 2.00%, 2.25%, 2.50%, 2.75%, or 3.00%, based on the
Company's achieving certain leverage ratios.
The Company's obligations under the Senior Credit Facility are secured by all of
the assets (other than real property) of the Company and each of its domestic
subsidiaries, a pledge by the Company and each of its subsidiaries of all the
outstanding capital stock of its respective domestic subsidiaries and a pledge
of 65% of the outstanding voting capital stock, and 100% of the outstanding
non-voting capital stock, of certain of its respective foreign subsidiaries. In
addition, payment of all obligations under the Senior Credit Facility is
guaranteed by each of the Company's domestic subsidiaries. Under the Senior
Credit Facility, the Company is required to make mandatory prepayments of
principal annually in an amount equal to 50% of Excess Cash Flow (as defined in
the Senior Credit Facility), and also in the event of certain dispositions of
9
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
assets or debt or equity issuances (all subject to certain exceptions) in an
amount equal to 100% of the net proceeds received by the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
On December 19, 1997, the Company entered into a $470.0 million credit agreement
(the "Interim Credit Agreement") with FUNB, as agent and lender. Initial
revolving credit line borrowings under the Interim Credit agreement were used to
refinance the existing term loan and revolving credit facility. The Interim
Credit Agreement was replaced on January 29, 1998 when the Company entered into
the Senior Credit Facility.
On December 19, 1997, the Company entered into a Senior Subordinated Credit
Agreement (the "Bridge Financing") with First Union Corporation, as agent and
lender, which was amended on January 29, 1998 and provided for borrowings of
$275.0 million, of which $145.6 million was initially borrowed on December 19,
1997 and the remainder of which was borrowed on January 29, 1998. All borrowings
under the Bridge Financing were used to fund the Acquisition (including fees and
expenses). The Bridge Financing was repaid on February 24, 1998 when the Company
closed its private offering of $300.0 million aggregate principal amount of
Initial Notes.
During January 1996, the Company entered into an interest rate swap on $25.0
million of its outstanding bank debt to fix the LIBOR interest rate on which
those borrowings are based. The interest rate swap assures that the Company
under its current credit agreement will pay a maximum rate of 8.53% (LIBOR fixed
at 5.53% plus the maximum spread allowed under the Senior Credit Facility of
3.0%) on the $25.0 million of bank debt for a five-year period.
10
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE D - INVENTORIES
The components of inventory at June 27, 1998, June 28, 1997 and September 27,
1997 consisted of the following (in thousands):
June 27, June 28, September 27,
1998 1997 1997
--------- --------- ---------
Raw materials .................. $ 15,367 $ 4,098 $ 2,353
Stock in process ............... 31,194 16,349 13,359
Produced goods ................. 134,548 65,159 79,611
Dyes, chemicals and supplies ... 13,303 4,890 5,448
--------- --------- ---------
194,412 90,496 100,771
Less LIFO and other reserves ... (13,466) (7,714) (8,254)
--------- --------- ---------
$ 180,946 $ 82,782 $ 92,517
========= ========= =========
11
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE E - 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.
Effective December 16, 1997, the Company adopted Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" (FAS 128). This statement replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. FAS 128 also requires all periods
presented to be restated after adoption of the statement.
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 7,000 shares and
19,950 shares of common stock were outstanding during the three months ended
June 28, 1997 and the nine months ended June 28, 1997, respectively, but were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. Options to purchase 12,000 shares of common stock were outstanding
during the three months ended June 27, 1998 and options to purchase 12,000
shares and 317,000 shares of common stock were outstanding during the nine
months ended June 27, 1998 and June 28, 1997, respectively, but were not
included in the computation of diluted earnings per share pursuant to the
contingent share provisions of FAS 128. Vesting of these options is contingent
upon the market price of common shares reaching certain target prices, which
were greater than the average market price of the common shares for the periods
presented.
12
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE F - STOCKHOLDERS' EQUITY
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
CURRENCY
COMMON CONTRIBUTED RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 27, 1997 .......................... $ 121 $ 35,877 $ 70,566 $ (2,247) -- $ 104,317
Tax benefit from exercise of stock options ............. -- 6 -- -- -- 6
Compensation earned related to stock options ........... -- 97 -- -- -- 97
Net income (loss) for December 27,1997 ................. -- -- (634) -- -- (634)
--------- --------- --------- --------- --------- ---------
Balance at December 27, 1997 ........................... $ 121 $ 35,980 $ 69,932 $ (2,247) $ -- $ 103,786
--------- --------- --------- --------- --------- ---------
Issuance of 56,115 shares of common stock upon
exercise of options .................................. -- 488 -- -- -- 488
Issuance of 7,686 shares of restricted common stock .... -- 140 -- -- -- 140
Tax benefit from exercise of stock options ............. -- 7 -- -- -- 7
Compensation earned related to stock options ........... -- 666 -- -- -- 666
Currency translation adjustment ........................ -- -- -- -- (477) (477)
Net income for March 28, 1998 .......................... -- -- 4,096 -- -- 4,096
--------- --------- --------- --------- --------- ---------
Balance at March 28, 1998 .............................. $ 121 $ 37,281 $ 74,028 $ (2,247) $ (477) $ 108,706
--------- --------- --------- --------- --------- ---------
Issuance of 98,696 shares of common stock upon
exercise of options .................................. 1 1,141 -- -- -- 1,142
Tax benefit from exercise of stock options ............. -- 139 -- -- -- 139
Compensation earned related to stock options ........... -- 407 -- -- -- 407
Currency translation adjustment ........................ -- -- -- -- (199) (199)
Net income for June 27, 1998 ........................... -- -- 4,721 -- -- 4,721
--------- --------- --------- --------- --------- ---------
Balance at June 27, 1998 ............................... $ 122 $ 38,968 $ 78,749 $ (2,247) $ (676) $ 114,916
========= ========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE G - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following summarizes condensed consolidating financial information for the
Company, segregating Galey and Lord, Inc. (the "Parent") and guarantor
subsidiaries from non-guarantor subsidiaries. The guarantor subsidiaries are
wholly-owned subsidiaries of the Company and guarantees are full, unconditional
and joint and several. Separate financial statements of each of the guarantor
subsidiaries are not presented because management believes that these financial
statements would not be material to investors.
<TABLE>
<CAPTION>
June 27, 1998
--------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Trade accounts receivable ................. $ -- $ 143,136 $ 46,211 $ -- $ 189,347
Inventories ............................... -- 143,397 38,288 (739) 180,946
Other current assets ...................... 26,795 50,366 19,275 (52,051) 44,385
----------- ----------- ----------- ----------- -----------
Total current assets ................. 26,795 336,899 103,774 (52,790) 414,678
Property, plant and equipment, net .......... -- 300,780 111,229 -- 412,009
Intangibles ................................. 4,952 163,407 -- -- 168,359
Investments in subsidiaries and other
assets .................................... 811,773 2,799 39,029 (809,064) 44,537
----------- ----------- ----------- ----------- -----------
$ 843,520 $ 803,885 $ 254,032 $ (861,854) $ 1,039,583
=========== =========== =========== =========== ===========
Current liabilities:
Trade accounts payable .................... $ 378 $ 32,654 $ 25,384 $ -- $ 58,416
Accrued liabilities ....................... 38,874 38,738 25,878 110 103,600
Other current liabilities ................. 11,353 $ 47,325 $ 15,880 (70,557) 4,001
----------- ----------- ----------- ----------- -----------
Total current liabilities ............. 50,605 118,717 67,142 (70,447) 166,017
Long-term debt .............................. 677,999 560,395 12,538 (564,192) 686,740
Other non-current liabilities ............... -- 69,944 2,479 (513) 71,910
Stockholders'equity ......................... 114,916 54,829 171,873 (226,702) 114,916
----------- ----------- ----------- ----------- -----------
$ 843,520 $ 803,885 $ 254,032 $ (861,854) $ 1,039,583
=========== =========== =========== =========== ===========
</TABLE>
14
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE G - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended June 27, 1998
(in thousands)
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales .............................................. $ 192 $ 226,179 $ 65,490 $ (16,565) $ 275,296
Gross profit ....................................... 112 27,077 10,279 (206) 37,262
Operating income ................................... (97) 17,448 6,171 (507) 23,015
Interest expense, income taxes and other, net ...... 331 17,875 1,655 (1,567) 18,294
Net income ......................................... $ (428) $ (427) $ 4,516 $ 1,060 $ 4,721
Nine Months Ended June 27, 1998
(in thousands)
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ---------- ------------- ------------- ------------ ------------
Sales .............................................. $ 685 $ 541,175 $ 117,320 $ (19,091) $ 640,089
Gross profit ....................................... 595 64,549 16,797 (767) 81,174
Operating income ................................... (141) 41,667 10,200 (82) 51,644
Interest expense, income taxes and other, net ...... 1,061 41,135 2,832 (1,567) 43,461
Net income ......................................... $ (1,202) $ 532 $ 7,368 $ 1,485 $ 8,183
</TABLE>
15
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 27, 1998
(UNAUDITED)
NOTE G - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
(CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended June 27, 1998
(in thousands)
--------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in ) operating activities ........... $ 13,003 $ (14,769) $ 30,620 $ -- $ 28,854
Cash provided by (used in) investing activities ............ (466,051) (20,499) 7,551 -- (478,999)
Cash provided by (used in) financing activities ............ 453,310 34,795 (14,966) -- 473,139
--------- --------- --------- ------------ ---------
Net change in cash and cash equivalents .................... 262 (473) 23,205 -- 22,994
Cash and cash equivalents at beginning of period ........... -- 2,221 56 -- 2,277
--------- --------- --------- ------------ ---------
Cash and cash equivalents at end of period ................. $ 262 $ 1,748 $ 23,261 $ -- $ 25,271
========= ========= ========= ============ =========
</TABLE>
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIGNIFICANT EVENTS
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a subsidiary of
Polymer, Dominion Textile, Inc. ("Dominion") and certain other parties thereto,
pursuant to which the Company acquired ("the Acquisition") the apparel fabrics
business (the "Acquired Business") of Dominion from DTA for a cash purchase
price of approximately $466.1 million including certain costs related to the
Acquisition. The Acquired Business primarily consists of several subsidiaries
and operating divisions of Dominion, which are comprised of Swift Denim, Klopman
International, S.p.A. ("Klopman") and Swift Europe. Swift Denim is the second
largest supplier of denim in the world, Klopman is one of the largest suppliers
of uniform fabrics in Europe and Swift Europe is a major international supplier
of denim to Europe, North Africa and Asia. The total purchase price of the
Acquisition was funded with borrowings under the Company's credit facilities
(see "Liquidity and Capital Resources" below). The Company used the net proceeds
from the private placement on February 24, 1998 of $300.0 million aggregate
principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the "Initial
Notes") to repay portions of such credit facilities. In connection with the
Acquisition, which has been accounted for as a purchase transaction, the Company
acquired assets with a fair market value of approximately $519.4 million and
assumed liabilities of approximately $186.3 million. The Company has made a
preliminary allocation of the purchase price and has recorded goodwill of
approximately $133.0 million for the excess of purchase price (including assumed
liabilities) over the fair market value of the assets acquired. Goodwill is
being amortized over a 40-year period.
17
<PAGE>
RESULTS OF OPERATIONS
The Company's operations are classified into two business segments, apparel
fabrics and home fabrics. Results for the three and nine month periods ended
June 27, 1998 and June 28, 1997 for each segment are shown below:
Three Months Ended Nine Months Ended
------------------ ------------------
06/27/98 06/28/97 06/27/98* 06/28/97
-------- -------- -------- --------
(dollar amounts in millions)
Net Sales Per Segment
Apparel fabrics .................. $ 264.9 $ 124.7 $ 603.7 $ 348.3
Home fabrics ..................... 10.4 10.4 36.4 27.2
-------- -------- -------- --------
Total net sales .............. $ 275.3 $ 135.1 $ 640.1 $ 375.5
======== ======== ======== ========
Operating Income (Loss) Per Segment
Apparel fabrics .................. $ 22.4 $ 11.6 $ 49.5 $ 29.6
% of Apparel Fabrics Net Sales . 8.5% 9.3% 8.2% 8.5%
Home fabrics ..................... .6 $ (1.7) 2.1 $ (1.7)
% of Home Fabrics Net Sales .... 5.8% (16.3)% 5.8% (6.3)%
-------- -------- -------- --------
Total ............................ $ 23.0 $ 9.9 $ 51.6 $ 27.9
% of Total Net Sales ........... 8.4% 7.3% 8.1% 7.4%
* Includes results of operations of the Acquired Business for the five month
period from January 30, 1998 through June 27, 1998.
Net sales for the June quarter 1998 (the third quarter of fiscal 1998) were
$275.3 million as compared to $135.1 million for the June quarter 1997 (third
quarter of fiscal 1997). Net sales for the first nine months of fiscal 1998 were
$640.1 million as compared to $375.5 million for the first nine months of fiscal
1997. Apparel fabrics net sales increased $140.2 million during the June quarter
1998 as compared to the same period in fiscal 1997 and $255.4 million during the
first nine months of fiscal 1998 as compared to the same period in fiscal 1997
while home fabrics net sales did not change during the June quarter 1998 as
compared to the same period in fiscal 1997 but increased $9.2 million or 33.8%
during the first nine months of fiscal 1998 as compared to the same period in
fiscal 1997. The apparel fabrics increase resulted from net sales from the
Acquired Business of $142.3 million for the June quarter 1998 and $237.9 million
for the nine months of fiscal 1998, and from increased net sales of woven
sportswear offset by lower sales of corduroy. The increased sales includes net
sales from the Acquired Business for the five month period from January 30, 1998
to June 27, 1998. The increase in home fabrics sales for the first nine months
of fiscal 1998 was due to a stronger market for home decorative fabrics.
Operating income was $23.0 million or 8.4% of net sales for the third quarter of
fiscal 1998 as compared to $9.9 million or 7.3% of net sales for the third
quarter of fiscal 1997. Apparel fabrics operating income increased $10.8 million
for the third quarter of fiscal 1998 as
18
<PAGE>
compared to the third quarter of fiscal 1997 primarily due to the addition of
operating income from the Acquired Business partially offset by decreased
operating income from the other areas of the Company's apparel fabrics business
mostly due to lower net sales resulting from a weaker corduroy market in 1998.
Home fabrics operating income increased $2.3 million for the third quarter of
fiscal 1998 as compared to the third quarter of fiscal 1997. Operating income
for the first nine months of fiscal 1998 was $51.6 million or 8.1% of net sales
as compared to $27.9 million or 7.4% of net sales for the first nine months of
fiscal 1997. Apparel fabrics operating income increased $19.9 million for the
first nine months of fiscal 1998 as compared to the first nine months of fiscal
1997 primarily due to the addition of operating income from the Acquired
Business. The home fabrics operating income improvement for the third quarter of
fiscal 1998 and the first nine months of fiscal 1998 was attributable to a $2.0
million pre-tax bad debt reserve taken in the June quarter 1997 as a result of a
major home fabrics customer filing for bankruptcy protection and a strong demand
for home fabrics goods which resulted in increased sales volume, improved
selling prices and improved margins.
Interest expense was $15.9 million for the June quarter 1998 and $35.9 million
for the first nine months of fiscal 1998 as compared to $3.1 million for the
March quarter 1997 and $9.2 million for the first nine months of fiscal 1998.
The increase in interest expense for the June quarter 1998 was primarily due to
added interest expense on additional indebtedness incurred as a result of the
Acquisition of $12.0 million. The increase in interest expense for the first
nine months of fiscal 1998 was primarily due to added interest expense on
additional indebtedness incurred from the Acquired Business of $20.5 million,
interest expense of $1.8 million (pre-tax) related to borrowings under the
Bridge Financing and a charge of $2.1 million (pre-tax) of loan cost related to
the Bridge Financing (as defined herein). The remaining interest expense
increase was due to increased working capital requirements (See "Liquidity and
Capital Resources" below).
The Company's tax rate for the June quarter 1998 was higher than the statutory
rate primarily due to the effect on pre-tax income of nondeductible goodwill
resulting from the Acquisition.
Net income for the June quarter 1998 was $4.7 million or $.38 per common share
on a diluted basis as compared to $4.2 million or $.35 per common share for the
June quarter 1997. The Company had net income for the first nine months of
fiscal 1998 of $8.2 million or $.67 per common share on a diluted basis as
compared to net income for the first nine months of fiscal 1997 of $11.5 million
or $.96 per common share. Net income for the first nine months of fiscal 1998
was adversely impacted by nonrecurring charges of $7.5 million pre-tax or $.38
per common share related to the Acquisition. These charges
19
<PAGE>
included (i) a $2.7 million pre-tax or $.14 per common share charge related to
hedging the Canadian dollar against currency fluctuations, allowing the Company
to fix the purchase price for the Acquired Business which was based in Canadian
dollars, (ii) a $1.8 million pre-tax or $.09 per common share charge for
interest on the Bridge Financing, (iii) a $0.9 million pre-tax ($0.5 million
after tax) or $.04 per common share extraordinary charge due to the write-off of
fees and expenses related to the Company's old credit facility which was
refinanced in December in order to provide funds for the Acquisition, and (iv) a
$2.1 million pre-tax or $.11 per common share charge for loan costs related to
the Bridge Financing. Excluding these charges, net income for the first nine
months of fiscal 1998 would have been $12.8 million or $1.05 per common share on
a diluted basis.
Effective December 16,1997, the Company adopted Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share" (FAS 128). This statement replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. FAS 128 also requires all periods
presented to be restated after adoption of the statement.
The Company's order backlog at June 27, 1998 was $245.9 million, a 14.2%
decrease compared to the June 28, 1997 backlog of $286.5 million on a pro forma
basis including the Acquired Business. Apparel fabrics backlog was down 14.5%
compared to the June 28, 1997 level on a pro forma basis including the Acquired
Business. Home fabrics backlog was 7.0% lower than the previous year. The
apparel fabrics backlog was lower primarily due to a weaker corduroy market in
1998 as compared to an abnormally high corduroy backlog at the end of June
quarter 1997. The decrease in home fabrics backlog was primarily due to normal
fluctuations in the timing of booking orders.
LIQUIDITY AND CAPITAL RESOURCES
On February 24, 1998 the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008. Net
proceeds from the offering, estimated to be $288.0 million (net of Initial
Purchaser's discount and estimated offering expenses), were used to repay (i)
$275.0 million principal amount of borrowings under a Senior Subordinated Credit
Agreement (the "Bridge Financing") incurred to partially finance the Acquisition
and (ii) a portion of the outstanding amount under a revolving line of credit
provided for under the Senior Credit Facility (as defined herein).
On May 21, 1998 the Company completed an exchange offer (the "Exchange Offer")
pursuant to which it exchanged publicly registered 9 1/8%
20
<PAGE>
Senior Subordinated Notes Due 2008 (the "Notes") for the Initial Notes pursuant
to the terms and conditions set forth in a prospectus (the "Prospectus") dated
April 22, 1998 and filed as part of a Registration Statement on Form S-4 with
the United States Securities and Exchange Commission which was declared
effective on April 22, 1998. The terms of the Notes are identical in all
material respects to those of the Initial Notes except that the Notes are freely
transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
will be paid March 1 and September 1 of each year, commencing September 1, 1998.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc. and other future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
On January 29, 1998 the Company entered into a new credit agreement, (the
"Senior Credit Facility") with First Union National Bank ("FUNB")as amended, as
agent and lender and, as of March 27, 1998, with a syndicate of lenders. The
Senior Credit Facility provides for (i) a revolving line of credit under which
the Company may borrow up to an amount (including letters of credit up to an
aggregate of $30.0 million) equal to the lesser of $225.0 million or a borrowing
base (comprised of eligible accounts receivable and eligible inventory, as
defined in the Senior Credit Facility), (ii) a term loan in the principal amount
of $155.0 million ("Term Loan B") and (iii) a term loan in the principal amount
of $110.0 million ("Term Loan C").
Under the Senior Credit Facility borrowings were used to refinance the Company's
prior senior credit facility with FUNB, to fund the Acquisition, to pay for
certain closing costs and expenses related to the Acquisition and for general
corporate and working capital purposes.
Under the Senior Credit Facility, the revolving line of credit expires on March
27, 2004 and the principal amount of (i) Term Loan B is repayable in 24
quarterly payments of $387,500 until March 27, 2004 and, thereafter, four
quarterly payments of $36,425,000 until Term Loan B's maturity on April 2, 2005
and (ii) Term Loan C is
21
<PAGE>
repayable in 28 quarterly payments of $275,000 until April 2, 2005 and,
thereafter, four quarterly payments of $25,575,000 until Term Loan C's maturity
on April 1, 2006. Under the Senior Credit Facility, the interest rate on the
Company's borrowings under its revolving line of credit and term loans initially
is fixed at a per annum rate, at the Company's option, of either LIBOR plus
2.25%, LIBOR plus 2.75% and LIBOR plus 3.00%, respectively, or the greater of
the prime rate or the federal funds rate plus .50% plus a margin of 1.00% for
revolving loans, 1.5% for Term Loan B and 1.75% for Term Loan C for at least two
full fiscal quarters following the closing of the Acquisition. Thereafter, the
revolving line of credit borrowings will bear interest at a per annum rate, at
the Company's option, of either (i) (a) the greater of the prime rate or the
federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%, .75% or 1.00%,
based on the Company achieving certain leverage ratios (as defined in the Senior
Credit Facility) or (ii) LIBOR plus a margin of .75%, 1.00%, 1.25%, 1.50%,
1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios.
Term Loan B and Term Loan C will bear interest at a per annum rate, at the
Company's option, of (A) with respect to Term Loan B either (i) (a) the greater
of the prime rate or federal funds rate plus .50%, plus (b) a margin of .25%,
.50%, .75%, 1.00%, 1.25% or 1.50%, based on the Company achieving certain
leverage ratios or (ii) LIBOR plus a margin of 1.50%, 1.75%, 2.00%, 2.25%, 2.50%
or 2.75%, based on the Company achieving certain leverage ratios or (B) with
respect to Term Loan C, either (i) (a)the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of .50%, .75%, 1.00%, 1.25%, 1.50% or
1.75%, based on the Company achieving certain leverage ratios, or (ii) LIBOR
plus a margin of 1.75%, 2.00%, 2.25%, 2.50%, 2.75%, or 3.00%, based on the
Company's achieving certain leverage ratios.
The Company's obligations under the Senior Credit Facility are secured by all of
the assets (other than real property) of the Company and each of its domestic
subsidiaries, a pledge by the Company and each of its subsidiaries of all the
outstanding capital stock of its respective domestic subsidiaries and a pledge
of 65% of the outstanding voting capital stock, and 100% of the outstanding
non-voting capital stock, of certain of its respective foreign subsidiaries. In
addition, payment of all obligations under the Senior Credit Facility is
guaranteed by each of the Company's domestic subsidiaries. Under the Senior
Credit Facility, the Company is required to make mandatory prepayments of
principal annually in an amount equal to 50% of Excess Cash Flow (as defined in
the Senior Credit Facility), and also in the event of certain dispositions of
assets or debt or equity issuances (all subject to certain exceptions) in an
amount equal to 100% of the net proceeds received by the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries'
22
<PAGE>
ability to incur indebtedness, incur liens, sell or acquire assets or
businesses, change the nature of its business, make certain investments or pay
dividends. In addition, the Senior Credit Facility requires the Company to meet
certain financial ratio tests and limits the amount of capital expenditures
which the Company and its subsidiaries may make in any fiscal year.
On December 19, 1997, the Company entered into a $470.0 million credit agreement
(the "Interim Credit Agreement") with FUNB, as agent and lender. Initial
revolving credit line borrowings under the Interim Credit agreement were used to
refinance the existing term loan and revolving credit facility. The Interim
Credit Agreement was replaced on January 29, 1998 when the Company entered into
the Senior Credit Facility.
On December 19, 1997, the Company entered into a Senior Subordinated Credit
Agreement (the "Bridge Financing") with First Union Corporation, as agent and
lender, which was amended on January 29, 1998 and provided for borrowings of
$275.0 million, of which $145.6 million was initially borrowed on December 19,
1997 and the remainder of which was borrowed on January 29, 1998. All borrowings
under the Bridge Financing were used to fund the Acquisition (including fees and
expenses). The Bridge Financing was repaid on February 24, 1998 when the Company
closed its private offering of $300.0 million aggregate principal amount of
Initial Notes.
During January 1996, the Company entered into an interest rate swap on $25.0
million of its outstanding bank debt to fix the LIBOR interest rate on which
those borrowings are based. The interest rate swap assures that the Company
under its current credit agreement will pay a maximum rate of 8.53% (LIBOR fixed
at 5.53% plus the maximum spread allowed under the Senior Credit Facility of
3.0%) on the $25.0 million of bank debt for a five-year period.
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company will
provide $5.0 million in additional funding to three defined benefit pension
plans previously sponsored by Dominion, $3.0 million of which was paid at the
closing of the Acquisition and the remaining $2.0 million of which is to be paid
in installments over the succeeding two years. The Pension Funding Agreement
also gives the PBGC a first priority lien of $10.0 million on certain land and
building assets of the Company to secure payment of any liability to the PBGC
that might arise if one or more of the pension plans were terminated. The
Company's obligations under the Pension Funding Agreement terminate upon either
the termination of the plans in accordance with ERISA, the plans being fully
funded as defined by the PBGC or the Company achieving an investment grade
rating on its debt.
23
<PAGE>
For the first nine months of fiscal 1998, the Company spent approximately $23.8
million for capital expenditures. The Company expects to spend approximately
$33.0 million on capital expenditures in fiscal 1998, including expenditures for
the Acquired Business subsequent to the 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. The Company expects to fund these expenditures through funds from
operations and borrowings under its Senior Credit Facility.
Borrowing availability under the Company's revolving line of credit under its
Senior Credit Facility was $77.6 million as of June 27, 1998.
Working capital increased approximately $121.1 million to $248.7 million at June
27, 1998 as compared to $127.5 million at June 28, 1997. Approximately $83.2
million of the increase occurred as a result of the Acquisition and related
refinancings. The remaining $37.9 million of the increase reflects changes in
the Company's existing business and changes since January 29, 1998 for the
Acquired Business including a $26.9 million increase in accounts receivable and
a $17.2 million increase in inventories, partially offset by a $5.5 million
increase in accrued liabilities. The increase in accounts receivable was
primarily a result of higher net sales since the Acquisition for Swift Denim
than the period comprising the January 1998 accounts receivable balance. The
$17.2 million increase in inventories primarily resulted from an increase in raw
materials, produced goods (primarily corduroy) and an increase in G&L Service
Company inventory levels as it continues building its customer base. The
increased accrued liabilities were due to increased interest payable from the
Notes.
The Company anticipates that cash requirements including working capital and
capital expenditure needs will be met through funds generated from operations
and through borrowings under the Company's revolving line of credit under its
Senior Credit Facility. In addition, from time to time, the Company uses
borrowings under secured and unsecured bank loans, through capital leases or
through operating leases for various equipment purchases.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (not applicable)
Item 2. Changes in Securities and Use of Proceeds (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders (not applicable)
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The exhibits to this Form 10-Q are listed in the
accompanying Exhibit Index
(b) Reports on Form 8-K - None
25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Galey & Lord, Inc.
(Registrant)
/s/ Michael R. Harmon
Michael R. Harmon
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting
Officer), Treasurer
and Secretary
August 11, 1998
Date
26
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
11 Statement Regarding Computation
of Per Share Earnings
27 Financial Data Schedule
27
Exhibit 11
GALEY & LORD, INC.
STATEMENT REGARDING COMPUTATION OF
PER SHARE EARNINGS
Computation of Average Shares Outstanding (In Thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic Average Common Shares Outstanding ......... 11,781 11,625 11,710 11,600
Add Dilutive Options ............................ 587 378 506 366
------ ------ ------ ------
Diluted Average Shares .......................... 12,368 12,003 12,216 11,966
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Oct-3-1998
<PERIOD-START> Sep-28-1997
<PERIOD-END> Jun-27-1998
<CASH> 25,271
<SECURITIES> 0
<RECEIVABLES> 189,347
<ALLOWANCES> 0
<INVENTORY> 180,946
<CURRENT-ASSETS> 414,678
<PP&E> 500,383
<DEPRECIATION> 88,374
<TOTAL-ASSETS> 1,039,583
<CURRENT-LIABILITIES> 166,017
<BONDS> 686,740
0
0
<COMMON> 122
<OTHER-SE> 114,794
<TOTAL-LIABILITY-AND-EQUITY> 1,039,583
<SALES> 640,089
<TOTAL-REVENUES> 640,089
<CGS> 558,915
<TOTAL-COSTS> 558,915
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,940
<INCOME-PRETAX> 14,837
<INCOME-TAX> 6,130
<INCOME-CONTINUING> 8,707
<DISCONTINUED> 0
<EXTRAORDINARY> 524
<CHANGES> 0
<NET-INCOME> 8,183
<EPS-PRIMARY> .70
<EPS-DILUTED> .67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-27-1997
<PERIOD-START> Sep-29-1996
<PERIOD-END> Jun-28-1997
<CASH> 3,040
<SECURITIES> 0
<RECEIVABLES> 86,416
<ALLOWANCES> 0
<INVENTORY> 82,782
<CURRENT-ASSETS> 177,079
<PP&E> 184,362
<DEPRECIATION> 64,436
<TOTAL-ASSETS> 336,272
<CURRENT-LIABILITIES> 49,561
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 35,722
<TOTAL-LIABILITY-AND-EQUITY> 336,272
<SALES> 375,470
<TOTAL-REVENUES> 375,470
<CGS> 332,766
<TOTAL-COSTS> 332,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,225
<INCOME-PRETAX> 18,718
<INCOME-TAX> 7,212
<INCOME-CONTINUING> 11,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,506
<EPS-PRIMARY> .99
<EPS-DILUTED> .96
</TABLE>
