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 December 27, 1997
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 - 11,666,376 shares as of February 2, 1998.
Exhibit Index at page 23
1
<PAGE>
INDEX
GALEY & LORD, INC.
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
December 27, 1997, December 28, 1996
and September 27, 1997
Consolidated Statements of Income -- 4
Three months ended December 27, 1997
and December 28, 1996
Consolidated Statements of Cash Flows -- 5
Three months ended December 27, 1997
and December 28, 1996
Notes to Consolidated Financial Statements -- 6-12
December 27, 1997
Item 2. Management's Discussion and Analysis of 13-19
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 20
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security 21
Holders
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28, SEPTEMBER 27,
1997 1996 1997
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,198 $ 2,797 $ 2,277
Trade accounts receivable 86,570 76,615 80,633
Sundry notes and accounts receivable 473 166 206
Inventories 95,934 85,240 92,517
Income taxes receivable 2,516 - 1,412
Deferred income taxes 175 - -
Prepaid expenses and other current assets 2,798 2,081 3,894
-------- -------- --------
Total current assets 194,664 166,899 180,939
Property, plant and equipment, at cost 204,939 166,998 197,184
Less accumulated depreciation and
amortization (71,160) (58,321) (67,739)
-------- -------- --------
133,779 108,677 129,445
Notes receivable 141,000 - -
Deferred charges 6,661 1,001 820
Intangibles 37,567 39,052 37,987
-------- -------- --------
$513,671 $315,629 $349,191
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,431 $ 13,526 $ 13,281
Trade accounts payable 21,440 18,246 23,488
Accrued salaries and employee benefits 6,895 7,357 9,450
Accrued liabilities 1,629 1,833 3,582
Deferred income taxes - 456 633
Income taxes payable - 2,074 -
-------- -------- ------
Total current liabilities 31,395 43,492 50,434
Commitments
Long-term debt 360,004 162,846 176,755
Other long-term liabilities - 123 -
Deferred income taxes 18,486 15,886 17,685
Stockholders' equity:
Common stock 121 120 121
Contributed capital in excess of par
value 35,980 34,802 35,877
Retained earnings 69,932 60,411 70,566
Treasury stock, at cost (2,247) (2,051) (2,247)
-------- -------- --------
Total stockholders' equity 103,786 93,282 104,317
-------- -------- --------
$513,671 $315,629 $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
------------------
December 27, December 28,
1997 1996
-------------- -------------
<S> <C> <C>
Net sales $ 127,147 $ 110,928
Cost of sales 117,351 98,360
------------- -------------
Gross profit 9,796 12,568
Selling, general and administrative expenses 3,387 3,361
Amortization of goodwill 421 418
------------- -------------
Operating income 5,988 8,789
Interest expense 3,500 3,052
Senior subordinated interest expense 379 -
Loss on foreign currency hedges 2,745 -
------------- -------------
Income (loss) before income taxes and extraordinary loss (636) 5,737
Income tax expense (benefit):
Current (851) 1,637
Deferred 325 578
------------- -------------
Income (loss) before extraordinary loss (110) 3,522
Extraordinary loss from debt refinancing,
net of taxes of $332 (524) -
-------------- -------------
Net income (loss) $ (634) $ 3,522
============== ==============
Net income (loss) per common share:
Basic:
Average common shares outstanding 11,664 11,576
Income (loss) per share before extraordinary loss (.01) $ .30
Extraordinary loss from debt refinancing $ (.04) -
-------------- -------------
Net income (loss) per common share -
Basic $ (.05) $ .30
============== =============
Diluted:
Average common shares outstanding 12,036 11,839
Income(loss) per share before extraordinary loss $ (.01) $ .30
Extraordinary loss from debt refinancing (.04) -
-------------- -------------
Net income (loss) per common share -
Diluted $ (.05) $ .30
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
December 27, December 28,
1997 1996
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (634) $ 3,522
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 3,698 3,193
Amortization of intangible assets 421 418
Amortization of deferred charges 52 74
Deferred income taxes 325 578
Non-cash compensation 97 115
(Gain)/loss on disposals of property, plant
and equipment 20 68
Extraordinary loss from debt refinancing 524 -
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net (5,937) (2,435)
(Increase)/decrease in sundry notes & accounts
receivable (267) (2)
(Increase)/decrease in inventories (3,417) (8,306)
(Increase)/decrease in prepaid expenses and other
current assets 1,096 (228)
(Decrease)/increase in accounts payable - trade (2,048) (2,711)
(Decrease)/increase in accrued liabilities (4,508) (4,887)
(Decrease)/increase in income taxes payable (1,104) 959
---------- -------
Net cash provided by (used in) operating activities (11,682) (9,642)
Cash flows from investing activities:
Property, plant and equipment expenditures (8,086) (5,747)
Proceeds from sale of property, plant and equipment 34 829
Issuance of notes receivable (141,000) -
Other (107) (3)
--------- ------
Net cash provided by (used in) investing activities (149,159) (4,921)
Cash flows from financing activities:
Increase in revolving line of credit 16,400 17,800
Principal payments on long-term debt (189,509) (4,199)
Issuance of long-term debt 344,508 -
Increase in common stock 6 -
Payment of bank fees and loan costs (6,643) (20)
Other - (20)
-------- -------
Net cash provided by (used in) financing activities 164,762 13,561
-------- -------
Net increase/(decrease) in cash and cash equivalents 3,921 (1,002)
Cash and cash equivalents at beginning of period 2,277 3,799
-------- -------
Cash and cash equivalents at end of period $ 6,198 $ 2,797
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE A - 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. ("G&L Service Company") and
Dimmit Industries, S.A. de C.V. ("Dimmit"). 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 December 27, 1997 and the results of operations and
cash flows for the periods ended December 27, 1997 and December 28, 1996. 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 October 27, 1997, the Company entered into an agreement with Polymer Group,
Inc. ("Polymer") and its affiliate, DT Acquisition, Inc. ("DTA") to acquire from
DTA the apparel fabrics business (the "Acquisition") of Dominion Textiles Inc.
("Dominion"). The Acquisition was contingent upon the successful completion of
DTA's tender offer, which expired at 4 p.m. Toronto time on December 29, 1997,
to purchase the capital stock of Dominion. The final tender offer extended to
Dominion shareholders for Dominion's common stock was CDN $14.50 and for
Dominion's preferred stock was CDN $150.00.
On December 19, 1997, DTA received exemption orders from certain securities
regulatory authorities permitting DTA to take-up and pay for the common shares
and first preferred shares of Dominion that had been tendered. On that same
date, the Company, as part of the above agreement, loaned DTA approximately
$141.0 million to be used for the take-up of Dominion's tendered stock. This
loan was subsequently applied against the purchase price for the Acquisition.
The proceeds for this loan were obtained by the Company from an initial takedown
on the Company's senior subordinated credit agreement described in Note C. As of
December 29, 1997, DTA had taken up 37,422,222 common shares, representing
approximately 98.5% of the common shares held by the public, and 354 first
preferred shares, representing approximately 96% of the outstanding first
preferred shares.
6
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE B - BUSINESS ACQUISITIONS (CONTINUED)
On December 19, 1997, the Company also entered into an operating agreement (the
"Operating Agreement") with Polymer and DTA regarding Dominion. Pursuant to the
Operating Agreement, the Company's management has the authority to manage the
day-to-day affairs (subject to certain limitations, as specified in the
Operating Agreement) of the apparel fabrics business of Dominion until such time
that the Company legally acquired the apparel fabrics business from DTA.
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer, DTA, Dominion and certain other parties thereto, pursuant to which the
Company acquired the apparel fabrics business (the "Acquired Business") of
Dominion from DTA for a cash purchase price of $464.5 million, including the
$141.0 million loan to DTA discussed above (the "Acquisition"). The total
purchase price was funded with borrowings under the Company's credit facilities
(described in Note C below). The Acquired Business manufactures and markets
denim fabrics and fabrics for the commerical uniform market and consists of
Swift Denim, Klopman International, S.p.A. 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.
NOTE C - LONG-TERM DEBT
On June 4, 1996, the Company amended its term loan and revolving credit facility
(the "Old Credit Facility") with its bank group led by First Union National
Bank, 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 principal balance of $48 million and continued to require equal
quarterly principal payments of $3 million through the term loan's expiration on
April 30, 2000. The amended term loan and revolving credit facility bore
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 average interest rate paid
by the Company during the December quarter 1997 was 7.2%.
On December 19, 1997, the Company entered into a $470 million credit agreement
(the "Interim Credit Agreement") with First Union National Bank ("FUNB"), as
agent and lender. Initial revolving credit line borrowings under the Interim
Credit Agreement were used to refinance
7
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
the Old Credit Facility. The Interim Credit Agreement was replaced on January
29, 1998 when the Company entered into a new credit agreement (the "Senior
Credit Facility") with FUNB, as agent and lender. 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, and are
required to be, 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 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
8
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
(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, and 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 any of its respective foreign
subsidiaries. In addition, payment of all obligations under the Senior Credit
Facility is guaranteed by each of the Company's domestic subsidiaries. Under the
Senior Credit Facility, the Company is required to make mandatory prepayments of
principal annually in an amount equal to 50% of Excess Cash Flow (as defined in
the Senior Credit Facility), and also in the event of certain dispositions of
assets or debt or equity issuances (all subject to certain exceptions) in an
amount equal to 100% of the net proceeds received by the Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
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 provides for borrowings of
$275 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 outstanding principal amount of all borrowings under the Bridge
Financing will be due and payable on December 19, 2007; provided, however, that
the Company is required to make certain
9
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
mandatory prepayments of principal in the event of certain dispositions of
assets, capital contributions or other debt or equity issuances. Borrowings
under the Bridge Financing bear interest, which is payable monthly, at a per
annum rate initially of LIBOR plus 4.50% and increasing by .25% for each month
that borrowings under the Bridge Financing remain outstanding. In no event shall
the interest rate on such borrowings exceed 18% (with the maximum interest rate
with respect to interest payable in cash not to exceed 14% and the remainder to
be payable in kind).
All borrowings under the Bridge Financing are unsecured and payment by the
Company of all obligations under the Bridge Financing is subordinated to the
prior payment in full of all obligations under the Senior Credit Facility. The
Bridge Financing contains certain covenants, including, without limitation,
those limiting the Company's ability to incur indebtedness, incur liens, sell or
acquire assets or businesses, change the nature of its business or make
dividends.
The Company expects to replace the Bridge Financing with 10 year senior
subordinated notes during February 1998. The Company has obtained a commitment
regarding the issuance and sale of the 10 year senior subordinated notes.
During January 1996, the Company entered into an interest rate swap on $25
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 million of bank debt for a five-year period.
10
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE D - INVENTORIES
The components of inventory at December 27, 1997, December 28, 1996 and
September 27, 1997 consisted of the following (in thousands):
December 27, December 28, September 27,
1997 1996 1997
---- ---- ----
Raw materials $ 1,729 $ 2,949 $ 2,353
Stock in process 18,582 14,409 13,359
Produced goods 77,157 71,001 79,611
Dyes, chemicals and supplies 5,819 4,626 5,448
------- ------- -------
103,287 92,985 100,771
Less LIFO and other reserves (7,353) (7,745) (8,254)
------- ------- -------
$95,934 $85,240 $92,517
======= ======= =======
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 2,000 shares and
170,950 shares of common stock were outstanding during the periods ended
December 27, 1997 and December 28, 1996, 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 338,000 shares and 475,000 shares of common stock were outstanding
during the periods ended December 27, 1997 and December 28, 1996, 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.
11
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997
(UNAUDITED)
NOTE F - STOCKHOLDERS' EQUITY
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
---------- ------------- ----------- ----------- ----------
<S> <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
==== ======= ======= ======= ========
</TABLE>
12
<PAGE>
Item 2. 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. ("Polymer") and its affiliate, DT Acquisition, Inc. ("DTA") to acquire from
DTA the apparel fabrics business (the "Acquisition") of Dominion Textiles Inc.
("Dominion"). The Acquisition was contingent upon the successful completion of
DTA's tender offer, which expired at 4 p.m. Toronto time on December 29, 1997,
to purchase the capital stock of Dominion. The final tender offer extended to
Dominion shareholders for Dominion's common stock was CDN $14.50 and for
Dominion's preferred stock was CDN $150.00.
On December 19, 1997, DTA received exemption orders from certain securities
regulatory authorities permitting DTA to take-up and pay for the common shares
and first preferred shares of Dominion that had been tendered. On that same
date, the Company, as part of the above agreement, loaned DTA approximately
$141.0 million to be used for the take-up of Dominion's tendered stock. This
loan was subsequently applied against the purchase for the Acquisition. The
proceeds for this loan were obtained by the Company from an initial takedown on
the Company's senior subordinated credit agreement described in "Liquidity and
Capital Resources" below. As of December 29, 1997, DTA had taken up 37,422,222
common shares, representing approximately 98.5% of the common shares held by the
public, and 354 first preferred shares, representing approximately 96% of the
outstanding first preferred shares.
On December 19, 1997, the Company also entered into an operating agreement (the
"Operating Agreement") with Polymer and DTA regarding Dominion. Pursuant to the
Operating Agreement, the Company's management has the authority to manage the
day-to-day affairs (subject to certain limitations, as specified in the
Operating Agreement) of the apparel fabrics business of Dominion until such time
that the Company legally acquired the apparel fabrics business from DTA.
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer, DTA, Dominion and certain other parties thereto, pursuant to which the
Company acquired the apparel fabrics business (the "Acquired Business") of
Dominion from DTA for a cash purchase price of $464.5 million, including the
$141.0 million loan to DTA discussed above (the "Acquisition"). The total
purchase price was funded with borrowings under the Company's credit facilities
(described in "Liquidity and Capital Resources" below). The Acquired Business
manufactures and markets denim fabrics and fabrics for the commerical uniform
market and consists of Swift Denim, Klopman International, S.p.A. 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
13
<PAGE>
in Europe and Swift Europe is a major international supplier of denim to Europe,
North Africa and Asia.
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 January 30, 1998, 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.
RESULTS OF OPERATIONS
The Company's operations are classified into two business segments, apparel
fabrics and home fabrics. Results for the three month periods ended December 27,
1997 and December 28, 1996 for each segment are shown below:
Three Months Ended
------------------
12/27/97 12/28/96
-------- --------
(dollar amounts in millions)
Net Sales Per Segment
Apparel fabrics $113.7 $ 103.1
Home fabrics 13.4 7.8
-------- ------
Total net sales $127.1 $110.9
====== ======
Operating Income (Loss) Per Segment
Apparel fabrics $ 5.1 $ 8.9
% of Apparel Fabrics Net Sales 4.5% 8.7%
Home fabrics $ .9 $ (.1)
% of Home Fabrics Net Sales 6.5% (2.0)%
------ ------
Total $ 6.0 $ 8.8
% of Total Net Sales 4.7% 7.9%
Net sales for the December quarter 1997 (the first quarter of fiscal 1998) were
$127.1 million, a 14.6% increase over December quarter 1996 (first quarter of
fiscal 1997) sales of $110.9 million. Apparel fabrics sales increased $10.6
million or 10.3% during the December quarter 1997 while home fabrics net sales
increased $5.6 million or 71.8% during the December quarter 1997. The increase
in apparel fabrics net sales in December quarter 1997 reflected an increase in
volume and improved selling prices over December quarter 1996. The increase in
home fabrics sales was due to a stronger market for home decorative fabrics as
well as strong demand in the home furnishings market for unfinished fabrics
(greige goods).
Operating income was $6.0 million or 4.7% of net sales for the first quarter of
fiscal 1998 as compared to $8.8 million or 7.9% of net sales for the first
quarter of fiscal 1997. The $3.8 million decline in apparel fabrics operating
income for the first quarter of fiscal 1998 as compared to the first quarter of
fiscal 1997 was primarily a
14
<PAGE>
result of higher sales levels that caused the Company's dyeing and finishing
plant to operate beyond its rated capacity, resulting in manufacturing
inefficiencies and excess cost for overtime. In addition, the decline was
partially attributable to the Company's Mexican garment manufacturing operation
which was impacted by increased labor costs during December quarter 1998 as
compared to December quarter 1997. Home fabrics operating income increased $1.0
million for the first quarter of fiscal 1998 as compared to the first quarter of
fiscal 1997. The home fabrics operating income improvement was attributable to a
strong demand for home fabrics goods which resulted in increased sales volume,
improved selling prices and improved margins.
Interest expense was $3.5 million for the December quarter 1997 as compared to
$3.1 million for the December quarter 1996. The increase in interest expense was
primarily due to higher working capital requirements and capital expenditures in
the first quarter of fiscal 1998 as compared to the first quarter of fiscal
1997. Both of these items increased to support higher sales and the future
growth of the Company. (See "Liquidity and Capital Resources" below)
The Company had a net loss for the first quarter of fiscal 1998 of $0.6 million
or $.05 per common share on a diluted basis as compared to net income for the
first quarter of fiscal 1997 of $3.5 million or $.30 per common share. Net
income for the first quarter of fiscal 1998 was adversely impacted by
nonrecurring charges of $4.0 million pre-tax or $.20 per common share related to
the Acquisition. These charges 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 $0.4 million pre-tax or
$.02 per common share charge for interest on the Bridge Financing, and (iii) a
$0.9 million pre-tax ($0.5 million after tax) 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.
Excluding these charges, net income for the first quarter of fiscal 1998 would
have been $1.8 million or $.15 per common share.
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.
15
<PAGE>
The Company's order backlog at December 27, 1997 was $168.4 million, a 1%
increase over the December 28, 1996 backlog of $166.9 million. Apparel fabrics
backlog was up 2% over the December 28, 1996 level while home fabrics backlog
was 12% lower than the previous year primarily due to a decline in orders from a
Home Fashion Fabrics customer which filed for bankruptcy protection during
fiscal year 1997. The customer was subsequently sold and the Company is selling
to the new owner under standard credit terms.
LIQUIDITY AND CAPITAL RESOURCES
On June 4, 1996, the Company amended its term loan and revolving credit facility
(the "Old Credit Facility") with its bank group led by First Union National
Bank, 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 principal balance of $48 million and continued to require equal
quarterly principal payments of $3 million through the term loan's expiration on
April 30, 2000. The amended term loan and revolving credit facility bore
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.
On December 19, 1997, the Company entered into a $470 million credit agreement
(the "Interim Credit Agreement") with First Union National Bank ("FUNB"), as
agent and lender. Initial revolving credit line borrowings under the Interim
Credit Agreement were used to refinance the Company's Old Credit Facility. The
Interim Credit Agreement was replaced on January 29, 1998 when the Company
entered into a new credit agreement (the "Senior Credit Facility") with FUNB, as
agent and lender. 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, and are required to be, 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
16
<PAGE>
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 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, and 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 any 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.
17
<PAGE>
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 Senior Subordinated Credit
Agreement (the "Bridge Financing") with First Union Corporation, as agent and
lender, which was amended on January 29, 1998 and provides for borrowings of
$275 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 outstanding principal amount of all borrowings under the Bridge
Financing will be due and payable on December 19, 2007; provided, however, that
the Company is required to make certain mandatory prepayments of principal in
the event of certain dispositions of assets, capital contributions or other debt
or equity issuances. Borrowings under the Bridge Financing bear interest, which
is payable monthly, at a per annum rate initially of LIBOR plus 4.50% and
increasing by .25% for each month that borrowings under the Bridge Financing
remain outstanding. In no event shall the interest rate on such borrowings
exceed 18% (with the maximum interest rate with respect to interest payable in
cash not to exceed 14% and the remainder to be payable in kind).
All borrowings under the Bridge Financing are unsecured and payment by the
Company of all obligations under the Bridge Financing is subordinated to the
prior payment in full of all obligations under the Senior Credit Facility. The
Bridge Financing contains certain covenants, including, without limitation,
those limiting the Company's ability to incur indebtedness, incur liens, sell or
acquire assets or businesses, change the nature of its business or make
dividends.
The Company expects to replace the Bridge Financing with 10 year senior
subordinated notes during February 1998. The Company has obtained a commitment
regarding the issuance and sale of the 10 year senior subordinated notes.
During January 1996, the Company entered into an interest rate swap on $25
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 million of bank debt for a five-year period.
18
<PAGE>
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 the
earlier to occur of (a) the termination of the pension plans and (b) on or after
January 30, 2003, either (i) the pension plans are fully funded for two
consecutive years or (ii) the Company receives an investment grade rating on its
debt.
For the first three months of fiscal 1998, the Company spent approximately $8.1
million for capital expenditures. The Company expects to spend approximately $35
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.
Working capital increased approximately $39.9 million to $163.3 million at
December 27, 1997 as compared to $123.4 million at December 28, 1996. The
increase in working capital was primarily attributable to a $12.0 million
decrease in the current portion of long-term debt, a $10.7 million increase in
inventories and a $10.0 million increase in accounts receivable. The $12.0
million decrease in the current portion of long-term debt was due to the early
repayment of the Company's term loan under its previous senior credit facility
which was refinanced on December 19, 1997, then subsequently refinanced on
January 29, 1998 as discussed above. The $10.7 million increase in inventories
primarily resulted from an increase in apparel fabrics inventories to support
higher apparel fabrics sales and an increase in G&L Service Company inventory
levels as it continues building its customer base. The $10.0 million increase in
accounts receivable was primarily a result of higher net sales over the same
period last year.
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 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.
19
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
South Carolina environmental authorities recently approved a
closure plan for an aeration pond at the Company's Society
Hill facility that was formerly used for wastewater treatment.
The Company also intends to undertake the remediation of
environmental conditions at a site near the Erwin, North
Carolina facility of its Acquired Business. The Company does
not expect the expenditures and capital outlays involved in
the implementation of these efforts to be material.
Item 2. Changes in Securities (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 - The Registrant filed a Form 8-K on November
13, 1997 to report that the Company had entered into an agreement with
Polymer Group, Inc. and its affiliate, DT Acquisition Inc., to buy
certain assets of Dominion Textile, Inc. upon the successful completion
of DT Acquisition's tender offer to purchase Dominion.
The Registrant filed a Form 8-K on January 15, 1998 to report, among
other things, that the Company had entered into an operating agreement
with DT Acquisition Inc. The filing also disclosed the terms of the
Company's new debt agreements with First Union.
The Registrant filed a Form 8-K on February 9, 1998 to report that the
Company had completed its acquisition of Dominion Textile's Apparel
Fabrics Business. The filing also disclosed the terms of the Company's
new debt agreements with First Union.
21
<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
February 10, 1998
- -----------------
Date
22
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
11 Statement Regarding Computation
of Per Share Earnings
27 Financial Data Schedule
Exhibit 11
Galey & Lord, Inc.
Statement Regarding Computation of
Per Share Earnings
Computation of Average Shares Outstanding (In Thousands):
Three Months Ended
------------------
Dec. 27, 1997 Dec. 28, 1996
------------- -------------
Basic Average Common Shares Outstanding 11,664 11,576
Add Dilutive Options 372 263
------ ------
Diluted Average Shares 12,036 11,839
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<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<CASH> 6,198
<SECURITIES> 0
<RECEIVABLES> 86,570
<ALLOWANCES> 0
<INVENTORY> 95,934
<CURRENT-ASSETS> 194,664
<PP&E> 204,939
<DEPRECIATION> 71,160
<TOTAL-ASSETS> 513,671
<CURRENT-LIABILITIES> 31,395
<BONDS> 0
0
0
<COMMON> 121
<OTHER-SE> 35,980
<TOTAL-LIABILITY-AND-EQUITY> 513,671
<SALES> 127,147
<TOTAL-REVENUES> 127,147
<CGS> 117,351
<TOTAL-COSTS> 117,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,500
<INCOME-PRETAX> (636)
<INCOME-TAX> (526)
<INCOME-CONTINUING> (110)
<DISCONTINUED> 0
<EXTRAORDINARY> (524)
<CHANGES> 0
<NET-INCOME> (634)
<EPS-PRIMARY> (.05)
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