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 January 1, 2000
---------------
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 - 11,918,399 shares as of February 2, 2000.
Exhibit Index at page 31
1
<PAGE>
INDEX
GALEY & LORD, INC.
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -- 3
January 1, 2000, January 2, 1999,
and October 2, 1999
Consolidated Statements of Income -- 4
Three months ended January 1, 2000
and January 2, 1999
Consolidated Statements of Cash Flows -- 5
Three months ended January 1, 2000 and
January 2, 1999
Notes to Consolidated Financial Statements -- 6-16
January 1, 2000
Item 2. Management's Discussion and Analysis of 17-27
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures About 28
Market Risk
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security 29
Holders
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
- ----------
EXHIBIT INDEX 31
- -------------
2
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 2, OCTOBER 2,
2000 1999 1999
ASSETS (Unaudited) (Unaudited) *
- ------ ----------- ----------- ----------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 13,717 $ 15,716 $ 14,300
Trade accounts receivable 160,414 181,145 176,547
Sundry notes and accounts receivable 7,115 10,752 6,994
Inventories 200,041 185,501 175,101
Income taxes receivable 7,832 3,590 10,586
Deferred income taxes 10,810 11,174 11,776
Prepaid expenses and other current assets 4,182 5,024 4,773
----------- ----------- -----------
Total current assets 404,111 412,902 400,077
Property, plant and equipment, at cost 519,400 519,044 520,383
Less accumulated depreciation and
amortization (146,132) (108,817) (136,682)
----------- ----------- -----------
373,268 410,227 383,701
Investments in and advances to associated
companies 24,382 24,653 22,966
Deferred charges, net 14,787 15,849 15,437
Other non-current assets 2,077 3,349 2,391
Intangibles, net 152,952 154,190 154,144
----------- ----------- -----------
$ 971,577 $ 1,021,170 $ 978,716
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,051 $ 3,849 $ 3,072
Trade accounts payable 63,440 58,645 63,288
Accrued salaries and employee benefits 26,154 21,755 25,278
Accrued liabilities 29,007 46,918 32,931
Income taxes payable 2,521 497 4,790
----------- ----------- -----------
Total current liabilities 124,173 131,664 129,359
Long-term debt 665,027 671,929 658,051
Other long-term liabilities 20,265 26,490 21,561
Deferred income taxes 57,316 61,811 61,008
Stockholders' equity:
Common stock 123 122 123
Contributed capital in excess of par
value 39,424 39,019 39,420
Retained earnings 69,934 85,231 70,825
Treasury stock, at cost (2,247) (2,247) (2,247)
Accumulated other comprehensive income (2,438) 7,151 616
----------- ----------- -----------
Total stockholders' equity 104,796 129,276 108,737
----------- ----------- -----------
$ 971,577 $ 1,021,170 $ 978,716
=========== =========== ===========
*Condensed from audited financial statements.
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended
----------------------
January 1, January 2,
2000 1999
--------- ---------
Net sales $ 201,144 $ 246,035
Cost of sales 178,435 218,113
--------- ---------
Gross profit 22,709 27,922
Selling, general and administrative expenses 9,270 7,899
Amortization of intangibles 1,192 1,132
--------- ---------
Operating income 12,247 18,891
Interest expense 15,853 14,956
Income from associated companies (1,777) (1,315)
--------- ---------
Income (loss) before income taxes (1,829) 5,250
Income tax expense (benefit):
Current 1,877 2,090
Deferred (2,815) (210)
--------- ---------
Net income (loss) $ (891) $ 3,370
========= =========
Net income (loss) per common share:
Basic:
Average common shares outstanding 11,903 11,841
Net income (loss) per common share - Basic $ (.07) $ .28
========= =========
Diluted:
Average common shares outstanding 11,903 11,968
Net income (loss) per common share - Diluted $ (.07) $ .28
========= =========
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
--------------------------
January 1, January 2,
2000 1999
---------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (891) $ 3,370
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 10,080 10,643
Amortization of intangible assets 1,192 1,132
Amortization of deferred charges 707 588
Deferred income taxes (2,815) (210)
Non-cash compensation 4 20
(Gain)/loss on disposals of property, plant
and equipment 8 (187)
Undistributed income from associated companies (1,777) (1,315)
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable - net 15,174 1,588
(Increase)/decrease in sundry notes & accounts receivable (362) 1,351
(Increase)/decrease in inventories (26,165) 386
(Increase)/decrease in prepaid expenses and other
current assets 412 (712)
(Increase)/decrease in other non current assets 263 (280)
(Decrease)/increase in accounts payable - trade 1,370 (7,433)
(Decrease)/increase in accrued liabilities (2,317) 998
(Decrease)/increase in income taxes payable 680 (472)
(Decrease)/increase in other long-term liabilities (683) (311)
-------- --------
Net cash provided by (used in) operating activities (5,120) 9,156
Cash flows from investing activities:
Property, plant and equipment expenditures (3,271) (7,440)
Proceeds from sale of property, plant and equipment 17 3,453
Distributions received from associated companies -- 2,972
Other 293 (97)
-------- --------
Net cash provided by (used in) investing activities (2,961) (1,112)
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit 6,500 (3,500)
Principal payments on long-term debt (712) (10,436)
Issuance of long-term debt 1,936 2,830
Increase in common stock -- 12
Payment of bank fees and loan costs -- (1,252)
-------- --------
Net cash provided by (used in) financing activities 7,724 (12,346)
Effect of exchange rate changes on cash and cash equivalents (226) 72
-------- --------
Net increase/(decrease) in cash and cash equivalents (583) (4,230)
Cash and cash equivalents at beginning of period 14,300 19,946
-------- --------
Cash and cash equivalents at end of period $ 13,717 $ 15,716
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Galey & Lord, Inc.
(the "Company") and its wholly-owned subsidiaries. Investments in affiliates in
which the Company owns 20 to 50 percent of the voting stock are accounted for
using the equity method. Intercompany items have been eliminated in
consolidation.
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 January 1, 2000 and the results of operations and
cash flows for the periods ended January 1, 2000 and January 2, 1999. 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
October 2, 1999.
NOTE B - INVENTORIES
The components of inventory at January 1, 2000, January 2, 1999, and October 2,
1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 1, January 2, October 2,
2000 1999 1999
----------------- ----------------- --------------
<S> <C> <C> <C>
Raw materials $ 6,147 $ 11,974 $ 7,503
Stock in process 29,087 29,456 28,413
Produced goods 164,740 146,114 139,949
Dyes, chemicals and supplies 11,715 13,055 11,050
---------------- ---------------- --------------
211,689 200,599 186,915
Less LIFO and other reserves (11,648) (15,098) (11,814)
---------------- ---------------- --------------
$ 200,041 $ 185,501 $ 175,101
================ ================ ==============
</TABLE>
NOTE C - LONG-TERM DEBT
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with First Union National Bank ("FUNB"), as agent and
lender and its syndicate of lenders. The amendment became effective as of July
3, 1999 (the "Amendment"). Under the Amendment, for the period beginning July 4,
1999 through February 15, 2001, the revolving line of credit borrowings bear
interest at a per annum rate, at the Company's option, of either (i) (a) the
greater of the prime rate or the federal funds rate plus .50% plus (b) a margin
of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bear
interest at a per annum rate, at the
6
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE C - LONG-TERM DEBT (CONTINUED)
Company's option, of (A) with respect to Term Loan B either (i)(a) the greater
of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25% or
(ii) LIBOR plus a margin of 3.50% or (B) with respect to Term Loan C, either
(i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a
margin of 2.50% or (ii) LIBOR plus a margin of 3.75%. In addition, the Company
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million.
The repayment of the Term Loan B and Term Loan C principal balances ratably
reduces the remaining quarterly principal payments.
NOTE D - NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands):
Quarters Ended
------------------------
January 1, January 2,
2000 1999
---------- -----------
Numerator:
Net income (loss) $ (891) $ 3,370
======== ========
Denominator:
Denominator for basic earnings per share -
weighted average shares 11,903 11,841
Effect of dilutive securities:
Stock options -- 127
-------- --------
Diluted potential common shares
denominator for diluted earnings per
share - adjusted weighted average shares
and assumed exercises 11,903 11,968
======== ========
Incremental shares for diluted earnings per share represent the dilutive effect
of options outstanding during the quarter. Options to purchase 874,499 shares
and 246,849 shares of common stock were outstanding during the periods ended
January 1, 2000 and January 2, 1999, 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 15,000 shares of common stock were outstanding during the periods ended
January 1, 2000 and January 2, 1999, respectively, but were not included in the
computation of diluted earnings per share pursuant to the contingent share
provisions of Financial Accountant Standards Board Statement No. 128, "Earnings
Per Share". Vesting of
7
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE D - NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
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.
NOTE E - STOCKHOLDERS' EQUITY
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income." FAS 130 requires that the Company report comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income represents the change in stockholders' equity during the period from
non-owner sources. Currently, changes from non-owner sources consist of net
income and foreign currency translation adjustments. Total comprehensive income
(loss) for the quarters ended January 1, 2000 and January 2, 1999 was $(3.9)
million and $1.4 million, respectively.
Activity in Stockholders' Equity is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Accumulated
Current Year Other
Comprehensive Common Contributed Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income Total
------ ----- ------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 2, 1999 $123 $39,420 $70,825 $(2,247) $616 $ 108,737
Compensation earned
related to stock
options - 4 - - - 4
Comprehensive income:
Net loss for
January 1, 2000 $(891) - - (891) - - (891)
Foreign currency
translation
adjustment (3,054) - - - - (3,054) (3,054)
------ ---- ------- ---------- ------ ------- -------
Total comprehensive
income $(3,945)
=======
Balance at
January 1, 2000 $ 123 $39,424 $ 69,934 $(2,247) $(2,438) $ 104,796
======= ======= ========== ======= ======= ==========
</TABLE>
8
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE F - INCOME TAXES
The components of income tax expense (benefit) are as follows (in thousands):
Three months ended
----------------------------------------
January 1, January 2,
2000 1999
----------------- -----------------
Current tax provision:
Federal $ - $ -
State 14 18
Foreign 1,863 2,072
----------------- -----------------
Total current tax provision 1,877 2,090
Deferred tax provision:
Federal (4,071) (1,175)
State (215) (76)
Foreign 1,471 1,041
----------------- -----------------
Total deferred tax provision (2,815) (210)
----------------- -----------------
Total provision for income taxes $ (938) $ 1,880
================= =================
The Company's overall tax rate for the December quarter 1999 was approximately
51.3% as compared to 35.8% for the December quarter 1998. The difference from
the statutory rate resulted primarily from changes in the relative amounts of
domestic and foreign earnings in the December quarter 1999 as compared to the
December quarter 1998. In the December quarter 1999, higher domestic losses are
partially offset by foreign earnings.
At January 1, 2000, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $37.4 million.
Of this amount, approximately $13.4 million will be carried back to recover
federal taxes paid in prior years. Approximately $24 million will be carried
forward to offset future taxable income and will expire in 2019 if unused. In
addition, the Company has Italian NOLs of approximately $8.4 million that expire
in fiscal 2000. Management has reviewed the Company's operating results for
recent years as well as the outlook for its businesses in concluding it is more
likely than not that the deferred tax assets of $32.2 million at January 1, 2000
will be realized. This review, along with the timing of the reversal of the
Company's temporary differences and the expiration dates of the NOLs, were
considered in reaching this conclusion. The Company's ability to generate future
taxable income is dependent on numerous factors, including the state of the
apparel industry, general economic conditions and other factors beyond
management's control. Accordingly, there can be no assurance that the Company
will meet its expectation of future taxable income.
9
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE G - SEVERANCE CHARGE
During the June quarter 1999, the Company recognized a $1.8 million charge
associated with the termination of 46 salaried employees. The charge was
recorded as a component of selling, general and administrative expenses. All
affected employees have been terminated with cash payments expected to be spread
over a period not to exceed two years. At January 1, 2000, there remained a
balance of $0.7 million which is equal to the expected future cash expenditures
to such terminated employees.
NOTE H - SEGMENT INFORMATION
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", which was adopted by the Company during its
September quarter 1999. FAS 131 requires that a public company report financial
and descriptive information about its reportable operating segments pursuant to
criteria that differ from previous accounting practice. Operating segments, as
defined, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The financial information to be reported includes segment profit or
loss, certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements. FAS 131
also requires information about products and services, geographic areas of
operation, and major customers. The Company is principally organized around
differences in products; however, one segment exists primarily due to geographic
location. The business segments are managed separately and distribute products
through different marketing channels.
The Company's operations are classified into four business segments: Galey &
Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. Galey
& Lord Apparel manufactures and sells woven cotton and cotton blended apparel
fabrics and garment packages. Swift Denim manufactures and markets a wide
variety of denim products for apparel and non-apparel uses. Klopman
International manufactures principally workwear and careerwear fabrics as well
as woven sportswear apparel fabrics primarily for consumption in Europe. Home
Fashion Fabrics manufactures and sells dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories as
well as greige fabrics (undyed and unfinished) which it sends to independent
contractors for dyeing and finishing.
The Company evaluates performance and allocates resources based on operating
income; therefore, certain expenses principally net interest expense and income
taxes are excluded from the chief operating decision
10
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE H - SEGMENT INFORMATION (CONTINUED)
makers' assessment of segment performance. Accordingly, such expenses have not
been allocated to segment results. The corporate segment's operating income
(loss) represents principally the administrative expenses from the Company's
various holding companies. Additionally the corporate segment assets consist
primarily of corporate cash, deferred bank charges and investments in and
advances to associated companies.
Information about the Company's operations in its different industry segments
for the three months ended January 1, 2000 and January 2, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
January 1, January 2,
2000 1999
----------------- ------------------
<S> <C> <C>
Net Sales to External Customers
Galey & Lord Apparel $ 98,709 $ 116,102
Swift Denim 63,665 82,218
Klopman International 33,191 38,984
Home Fashion Fabrics 5,579 8,731
---------------- -----------------
Consolidated $ 201,144 $ 246,035
================ =================
Operating Income (Loss)
Galey & Lord Apparel $ 5,496 $ 8,572
Swift Denim 4,069 6,997
Klopman International 3,921 2,556
Home Fashion Fabrics (426) 569
Corporate (813) 197
---------------- -----------------
12,247 18,891
Interest expense 15,853 14,956
Income from associated companies(1) (1,777) (1,315)
---------------- -----------------
Income (loss) before income taxes $ (1,829) $ 5,250
================ =================
Assets(2)
Galey & Lord Apparel $ 333,876 $ 340,304
Swift Denim 426,918 433,302
Klopman International 128,456 154,107
Home Fashion Fabrics 32,389 35,094
Corporate 49,938 58,363
---------------- -----------------
$ 971,577 $ 1,021,170
================ =================
</TABLE>
(1)Net of amortization of $153 and $174, respectively.
(2)Excludes intercompany balances and investments in subsidiaries which are
eliminated in consolidation.
11
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following summarizes condensed consolidating financial information for the
Company, segregating Galey & 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>
January 1, 2000
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
<S> <C> <C> <C> <C> <C>
Current assets:
Trade accounts
Receivable $ - $ 119,080 $ 41,334 $ - $ 160,414
Inventories - 160,271 40,587 (817) 200,041
Other current
Assets 3,191 101,929 21,783 (83,247) 43,656
------------ -------------- -------------- ------------------ ----------------
Total current
Assets 3,191 381,280 103,704 (84,064) 404,111
Property, plant and
equipment, net - 275,946 97,322 - 373,268
Intangibles - 152,952 - - 152,952
Other assets 857,886 8,857 107,418 (932,915) 41,246
------------ -------------- -------------- ------------------ ----------------
$ 861,077 $ 819,035 $ 308,444 $ (1,016,979) $ 971,577
=========== ============== ============== ================== ================
Current liabilities:
Trade accounts
Payable $ 25 $ 39,758 $ 23,657 $ - $ 63,440
Accrued
Liabilities 24,481 17,021 13,016 643 55,161
Other current
Liabilities 85,667 2,145 11,729 (93,969) 5,572
------------ -------------- -------------- ------------------ ----------------
Total current
Liabilities 110,173 58,924 48,402 (93,326) 124,173
Long-term debt 644,056 682,968 10,066 (672,063) 665,027
Other non-current
Liabilities 2,052 66,213 9,068 248 77,581
Stockholders' equity 104,796 10,930 240,908 (251,838) 104,796
----------- -------------- -------------- ------------------ ----------------
$ 861,077 $ 819,035 $ 308,444 $ (1,016,979) $ 971,577
=========== ============== ============== ================== ================
</TABLE>
12
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
January 2, 1999
----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Financial Position
- ------------------
<S> <C> <C> <C> <C> <C>
Current assets:
Trade accounts
receivable $ - $ 129,325 $ 51,820 $ - $ 181,145
Inventories - 144,983 41,479 (961) 185,501
Other current
assets 4,547 67,407 23,922 (49,620) 46,256
------------ -------------- -------------- --------------- ----------------
Total current
assets 4,547 341,715 117,221 (50,581) 412,902
Property, plant and
equipment, net - 295,704 114,523 - 410,227
Intangibles - 154,190 - - 154,190
Other assets 832,198 1,964 55,033 (845,344) 43,851
------------ -------------- -------------- -------------- ----------------
$ 836,745 $ 793,573 $ 286,777 $ (895,925) $ 1,021,170
=========== ============== ============== ============== ================
Current liabilities:
Trade accounts
payable $ 601 $ 33,114 $ 24,930 $ - $ 58,645
Accrued
liabilities 28,786 19,388 19,316 1,183 68,673
Other current
liabilities 17,702 25,646 29,351 (68,353) 4,346
------------ -------------- -------------- -------------- ----------------
Total current
liabilities 47,089 78,148 73,597 (67,170) 131,664
Long-term debt 652,563 598,413 11,603 (590,650) 671,929
Other non-current
liabilities 7,817 65,233 17,937 (2,686) 88,301
Stockholders' equity 129,276 51,779 183,640 (235,419) 129,276
------------ -------------- -------------- -------------- ----------------
$ 836,745 $ 793,573 $ 286,777 $ (895,925) $ 1,021,170
=========== ============== ============== ============== ================
</TABLE>
13
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended January 1, 2000
----------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
<S> <C> <C> <C> <C> <C>
Sales $ - $ 159,559 $ 56,758 $ (15,173) $ 201,144
Gross profit 29 15,001 7,625 54 22,709
Operating income (417) 7,846 4,764 54 12,247
Interest expense,
income taxes and
other, net (1,744) 13,443 1,570 (131) 13,138
Net income (loss) $ 1,327 $ (5,597) $ 3,194 $ 185 $ (891)
Three Months Ended January 2, 1999
----------------------------------------------------------------------------------------------
(in thousands)
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Results of Operations
- ---------------------
Sales $ - $ 191,460 $ 64,709 $ (10,134) $ 246,035
Gross profit - 20,088 7,809 25 27,922
Operating income 133 13,506 5,227 25 18,891
Interest expense,
income taxes and
other, net (1,267) 14,496 2,798 (506) 15,521
Net income (loss) $ 1,400 $ (990) $ 2,429 $ 531 $ 3,370
</TABLE>
14
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended January 1, 2000
-----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
<S> <C> <C> <C> <C> <C>
Cash provided by
(used in) operating
activities $ 9,262 $ (16,788) $ 2,542 $ (136) $ (5,120)
Cash provided by
(used in) investing
activities 3,920 (2,660) (1,306) (2,915) (2,961)
Cash provided by
(used in) financing
activities (13,130) 17,228 575 3,051 7,724
Effect of exchange
rate change on cash
and equivalents - - (226) - (226)
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents 52 (2,220) 1,585 - (583)
Cash and cash
equivalents at
beginning of period - 6,089 8,211 - 14,300
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 52 $ 3,869 $ 9,796 $ - $ 13,717
=========== =============== =============== ============= ===============
</TABLE>
15
<PAGE>
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2000
(UNAUDITED)
NOTE I - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
<TABLE>
Three Months Ended January 2, 1999
-----------------------------------------------------------------------------------------------
(in thousands)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Cash Flows
- ----------
<S> <C> <C> <C> <C> <C>
Cash provided by
(used in) operating
activities $ 11,255 $ 5,390 $ (9,081) $ 1,592 $ 9,156
Cash provided by
(used in) investing
activities (11) (6,487) 6,990 (1,604) (1,112)
Cash provided by
(used in) financing
activities (11,267) 1,252 (2,343) 12 (12,346)
Effect of exchange
rate change on cash
and equivalents - - 72 - 72
----------- --------------- --------------- ------------- ---------------
Net change in cash
and cash equivalents (23) 155 (4,362) - (4,230)
Cash and cash
equivalents at
beginning of period 114 8,326 11,506 - 19,946
----------- --------------- --------------- ------------- ---------------
Cash and cash
equivalents at end
of period $ 91 $ 8,481 $ 7,144 $ - $ 15,716
=========== =============== =============== ============= ===============
</TABLE>
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
During the December quarter 1999, management began to see improvement from the
conditions the Company experienced during fiscal year 1999 and especially the
September quarter 1999. Additionally, the Company's December quarter 1999
results reflect the cost reduction efforts taken in fiscal 1999. Management
continues to review each of its businesses' strategic position for the future in
addition to continuous evaluations of opportunities to streamline operations and
reduce costs.
The Company's operations are primarily classified into four operating segments:
(1) Galey & Lord Apparel, (2) Swift Denim, (3) Klopman International and (4)
Home Fashion Fabrics. Results for the three month periods ended January 1, 2000
and January 2, 1999 for each segment are shown below:
Three Months Ended
------------------------------------
January 1, January 2,
2000 1999
---------------- --------------
(Amounts in thousands)
Net Sales per Segment
Galey & Lord Apparel $ 98,709 $ 116,102
Swift Denim 63,665 82,218
Klopman International 33,191 38,984
Home Fashion Fabrics 5,579 8,731
------------- --------------
Total $ 201,144 $ 246,035
============= ==============
Operating Income (Loss) Per Segment
Galey & Lord Apparel $ 5,496 $ 8,572
Swift Denim 4,069 6,997
Klopman International 3,921 2,556
Home Fashion Fabrics (426) 569
Corporate (813) 197
------------- --------------
12,247 18,891
Interest expense 15,853 14,956
Income from associated companies (1,777) (1,315)
------------- --------------
Income (loss) before income taxes $ (1,829) $ 5,250
============= ==============
NET SALES
Net sales for the December quarter 1999 (first quarter of fiscal 2000) were
$201.1 million as compared to $246.0 million for the December quarter 1998
(first quarter of fiscal 1999).
GALEY & LORD APPAREL Galey & Lord Apparel's net sales for the December quarter
1999 were $98.7 million, a $17.4 million decline as compared to the December
quarter 1998's net sales of $116.1 million. The net sales decline was primarily
attributable to a 15% decline in fabric sales volume, partially offset by a 21%
increase in unit sales
17
<PAGE>
of garment packages. Overall, average selling prices declined approximately 1.9%
principally due to changes in product mix.
SWIFT DENIM Swift Denim's net sales for the December quarter 1999 were $63.7
million as compared to $82.2 million in the December quarter 1998. The $18.5
million decrease was primarily attributable to a 15% decline in sales volume and
a 4% decline in the sales price of denim fabrics with the remainder due to
changes in product mix.
KLOPMAN INTERNATIONAL Klopman International's net sales for the December quarter
1999 were $33.2 million, a $5.8 million decline as compared to the December
quarter 1998's net sales of $39.0 million. The decline was primarily
attributable to a 12% decline in net sales due to exchange rate changes, a 6%
decline in sales volume and a 3% decline in selling prices, partially offset by
changes in product mix.
HOME FASHION FABRICS Net sales for Home Fashion Fabrics for December quarter
1999 were $5.6 million compared to $8.7 million for December quarter 1998. The
$3.1 million decline in net sales primarily resulted from a 38% decline in
volume from December quarter 1998 and lower selling prices, partially offset by
favorable sales mix.
OPERATING INCOME
Operating income for the December quarter 1999 was $12.2 million as compared to
$18.9 million for the December quarter 1998.
GALEY & LORD APPAREL Galey & Lord Apparel's operating income was $5.5 million
for the December quarter 1999 as compared to $8.6 million for the December
quarter 1998. The $3.1 million decline principally reflects the impact of $3.1
million related to lower volume in fabric sales, $2.6 million for changes in
fabric price and product mix, continued start-up costs at the Company's
Monclova, Mexico garment facility and a $0.3 million increase in selling,
general and administrative expenses. These declines were partially offset by
$2.9 million of improvement in raw material prices and manufacturing
efficiencies.
SWIFT DENIM December quarter 1999 operating income for Swift Denim was $4.1
million, a $2.9 million decline as compared to the December quarter 1998
operating income of $7.0 million. The decline in Swift Denim's operating income
principally reflects $1.6 million related to the impact of lower sales volume,
$3.4 million related to declines in selling prices and $2.4 million related to
changes in product mix, partially offset by $2.7 million in improved fixed cost
absorption.
KLOPMAN INTERNATIONAL Klopman International's operating income in the December
quarter 1999 increased $1.3 million to $3.9 million as compared to the December
quarter 1998's operating income of $2.6 million. The increase principally
reflects a $1.2 million improvement
18
<PAGE>
in manufacturing efficiencies, $1.1 million related to product mix changes and
$0.2 million in lower selling, general and administrative expenses, partially
offset by $1.5 million related to the impact of lower selling prices and sales
volume.
HOME FASHION FABRICS Home Fashion Fabrics reported an operating loss for the
December quarter 1999 of $0.4 million as compared to operating income for the
December quarter 1998 of $0.6 million. The decrease in operating income was
principally due to the lower sales volume and selling prices discussed above. In
addition, selling, general and administrative expenses were $0.2 million higher
in December quarter 1999 due to bad debt recoveries in December quarter 1998.
CORPORATE The corporate segment reported an operating loss for the December
quarter 1999 of $0.8 million as compared to operating income for the December
quarter 1998 of $0.2 million. The corporate segment's operating income (loss)
typically represents the administrative expenses from the Company's various
holding companies. In addition to the on-going administrative expenses, during
the December quarter 1999, the corporate segment recorded a $0.3 million foreign
currency exchange loss on its loan to an associated company and $0.2 million of
additional expense related to the Company's July 13, 1999 amendment of its
Senior Credit Facility.
INCOME FROM ASSOCIATED COMPANIES
Income from associated companies was $1.8 million in the December quarter 1999
as compared to $1.3 million in the December quarter 1998. The income represents
amounts from several joint venture interest that manufacture and sell denim
products.
INTEREST EXPENSE
Interest expense was $15.9 million for the December quarter 1999 compared to
$15.0 million for the December quarter 1998. The increase in interest expense
was primarily due to higher interest rates paid by the Company as a result of
increased spreads over LIBOR due to the July 13, 1999 amendment of the Senior
Credit Facility (as defined herein) and higher prime and LIBOR base rates in the
December quarter 1999 as compared to the December quarter 1998. These increases
were partially offset by lower average debt balances in the December quarter
1999 as compared to the December quarter 1998. The average interest paid by the
Company on its bank debt in the December quarter 1999 was 9.3% as compared to
8.5% in the December quarter 1998.
INCOME TAXES
The Company's overall tax rate for the December quarter 1999 was approximately
51.3% as compared to 35.8% for the December quarter 1998. The difference from
the statutory rate resulted primarily from
19
<PAGE>
changes in the relative amounts of domestic and foreign earnings in the December
quarter 1999 as compared to the December quarter 1998. In the December quarter
1999, higher domestic losses are partially offset by foreign earnings.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
The net loss for the December quarter 1999 was $0.9 million or $.07 per common
share, compared to net income for the December quarter 1998 of $3.4 million or
$.28 per common share.
ORDER BACKLOG
The Company's order backlog at January 1, 2000 was $145.4 million, a 13.8%
decrease from the January 2, 1999 backlog of $168.7 million. Many apparel
manufacturers, including many of the Company's customers, have modified their
purchasing procedures and have shortened lead times from order to delivery. The
Company believes that as this trend continues amongst its customers, order
backlogs will decline and may not provide as meaningful information in regards
to the Company's future sales as in the past.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries had cash and cash equivalents totaling $13.7
million and $15.7 million at January 1, 2000 and January 2, 1999, respectively.
The Company had a total of $65.4 million of borrowing availability under its
Senior Credit Facility at January 1, 2000.
During the December quarter 1999, the Company primarily utilized its available
cash and amount available under its Senior Credit Facility to fund the Company's
operating and investing requirements.
SENIOR CREDIT FACILITY
On January 29, 1998 the Company entered into a new credit agreement (as amended,
the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent
and lender, and, 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 (reduced to
$200 million pursuant to the Amendment, as defined below) or a borrowing base
(comprised of eligible accounts receivable and eligible inventory, as defined in
the Senior Credit Facility), (ii) a term loan in the principal amount of $155.0
million ("Term Loan B") and (iii) a term loan in the principal amount of $110.0
million ("Term Loan C"). Portions of Term Loan B and Term Loan C were repaid
pursuant to the Amendment.
20
<PAGE>
On July 13, 1999, the Company amended its credit agreement, dated as of January
29, 1998, as amended, with FUNB, as agent and lender and its syndicate of
lenders. The amendment, which became effective as of July 3, 1999 (the
"Amendment"), replaced the Adjusted Leverage Ratio covenant (as defined in the
Amendment) with a minimum EBITDA covenant (as defined in the Amendment) until
the Company's December quarter 2000, replaced the Consolidated Net Worth
covenant with a Consolidated Retained Earnings covenant (both as defined in the
Amendment), waived compliance by the Company with the Adjusted Fixed Charge
Coverage Ratio until the Company's December quarter 2000 and modified the
Company's covenant related to capital expenditures.
Under the Senior Credit Facility (as amended by the Amendment), for the period
beginning July 4, 1999 through February 15, 2001, the revolving line of credit
borrowings bear interest at a per annum rate, at the Company's option, of either
(i) (a) the greater of the prime rate or the federal funds rate plus .50% plus
(b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term
Loan C bear interest at a per annum rate, at the Company's option, of (A) with
respect to Term Loan B either (i)(a) the greater of the prime rate or federal
funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of
3.50% or (B) with respect to Term Loan C, either (i)(a) greater of the prime
rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR
plus a margin of 3.75%. In addition, pursuant to the Amendment, the Company
repaid $25 million principal amount of its term loan balance using available
borrowings under its revolving line of credit and reduced the maximum amount of
borrowings under the revolving line of credit by $25 million to $200 million.
The repayment of the Term Loan B and Term Loan C principal balances ratably
reduces the remaining quarterly principal payments. In addition, the Company and
each of its domestic subsidiaries granted the lenders, as additional collateral,
a lien on all real property owned in the United States.
Beginning with the quarter ending December 30, 2000, the Company will be subject
to leverage and fixed charge coverage ratios, as amended pursuant to the
Amendment. In addition, under the Senior Credit Facility, the revolving line of
credit expires on March 27, 2004 and the principal amount of (i) Term Loan B is
repayable in quarterly payments of $349,157 through March 27, 2004, three
quarterly payments of $32,820,773 and final amount of $27,854,048 on Term Loan
B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly
payments of $247,687 through April 2, 2005, three quarterly payments of
$23,034,918 and a final amount of $19,511,595 on Term Loan C's maturity of April
1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998 and
July 3, 1999, the revolving line of credit borrowings bear interest at a per
annum rate, at the Company's option, of either (i) (a) the greater of the prime
rate or the federal funds rate plus .50% plus (b) a margin of 0%, .25%, .50%,
.75%, 1.00%
21
<PAGE>
or 1.25%, based on the Company achieving certain leverage ratios (as defined in
the Senior Credit Facility) or (ii) LIBOR plus a margin of 1.25%, 1.50%, 1.75%,
2.00%, 2.25% or 2.50%, based on the Company achieving certain leverage ratios.
Term Loan B and Term Loan C bear interest at a per annum rate, at the Company's
option, of (A) with respect to Term Loan B either (i) (a) the greater of the
prime rate or federal funds rate plus .50%, plus (b) a margin of 1.00%, 1.25%,
1.50% or 1.75%, based on the Company achieving certain leverage ratios or (ii)
LIBOR plus a margin of 2.25%, 2.50%, 2.75% or 3.00%, based on the Company
achieving certain leverage ratios 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 1.25%, 1.50%, 1.75% or 2.00%, based on the Company achieving certain
leverage ratios, or (ii) LIBOR plus a margin of 2.50%, 2.75%, 3.00% or 3.25%,
based on the Company's achieving certain leverage ratios. Pursuant to the
Amendment, borrowings under the Senior Credit Facility will bear interest in
accordance with the foregoing pricing options beginning on February 16, 2001.
The Company's obligations under the Senior Credit Facility, as amended pursuant
to the Amendment, are secured by all of the assets of the Company and each of
its domestic subsidiaries, a pledge by the Company and each of its domestic
subsidiaries of all the outstanding capital stock of its respective domestic
subsidiaries and a pledge of 65% of the outstanding voting capital stock, and
100% of the outstanding non-voting capital stock, of certain of its respective
foreign subsidiaries. In addition, payment of all obligations under the Senior
Credit Facility is guaranteed by each of the Company's domestic subsidiaries.
Under the Senior Credit Facility, the Company is required to make mandatory
prepayments of principal annually in an amount equal to 50% of Excess Cash Flow
(as defined in the Senior Credit Facility), and also in the event of certain
dispositions of assets or debt or equity issuances (all subject to certain
exceptions) in an amount equal to 100% of the net proceeds received by the
Company therefrom.
The Senior Credit Facility contains certain covenants, including, without
limitation, those limiting the Company's and its subsidiaries' ability to incur
indebtedness, incur liens, sell or acquire assets or businesses, change the
nature of its business, make certain investments or pay dividends. In addition,
the Senior Credit Facility requires the Company to meet certain financial ratio
tests and limits the amount of capital expenditures which the Company and its
subsidiaries may make in any fiscal year.
The Company was in full compliance with all of its lenders' covenants as of
January 1, 2000.
22
<PAGE>
SENIOR SUBORDINATED DEBT
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of
Initial Purchaser's discount and offering expenses), were used to repay (i)
$275.0 million principal amount of Bridge Financing (as defined herein)
borrowings under a Senior Subordinated Credit Agreement incurred to partially
finance the acquisition of the apparel fabrics business of Dominion Textile,
Inc. on January 29, 1998 and (ii) a portion of the outstanding amount under a
revolving line of credit provided for under the Senior Credit Facility (as
defined herein).
On May 21, 1998, the Company completed an exchange offer pursuant to which it
exchanged publicly registered 9 1/8% Senior Subordinated Notes Due 2008 (the
"Notes") for the Initial Notes pursuant to the terms and conditions set forth in
a prospectus dated April 22, 1998 and filed as part of a Registration Statement
on Form S-4 with the United States Securities and Exchange Commission which was
declared effective on April 22, 1998. The terms of the Notes are identical in
all material respects to those of the Initial Notes except that the Notes are
freely transferable by holders and are not subject to any covenant regarding
registration under the Securities Act of 1933, as amended. Interest on the Notes
will be paid March 1 and September 1 of each year. The first interest payment on
the Notes was made on September 1, 1998.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future senior indebtedness of the Company
and its subsidiaries and senior in right of payment to any subordinated
indebtedness of the Company. The Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift
Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles,
Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other
future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those
limiting the Company and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
TAX MATTERS
At January 1, 2000, the Company had outstanding net operating loss carryforwards
("NOLs") for US federal and state tax purposes of approximately $37.4 million.
Of this amount, approximately $13.4
23
<PAGE>
million will be carried back to recover federal taxes paid in prior years.
Approximately $24 million will be carried forward to offset future taxable
income and will expire in 2019 if unused. In addition, the Company has Italian
NOLs of approximately $8.4 million that expire in fiscal 2000. Management has
reviewed the Company's operating results for recent years as well as the outlook
for its businesses in concluding it is more likely than not that the deferred
tax assets of $32.2 million at January 1, 2000 will be realized. This review,
along with the timing of the reversal of the Company's temporary differences and
the expiration dates of the NOLs, were considered in reaching this conclusion.
The Company's ability to generate future taxable income is dependent on numerous
factors, including the state of the apparel industry, general economic
conditions and other factors beyond management's control. Accordingly, there can
be no assurance that the Company will meet its expectation of future taxable
income.
OTHER
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29,
1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company will
provide $5.0 million additional funding to three defined benefit pension plans
previously sponsored by Dominion, $3.0 million of which was paid at the closing
of the Acquisition, $1.0 million was paid in the March quarter 1999 and the
remaining $1.0 million is to be paid in the March quarter 2000. The Pension
Funding Agreement also gives the PBGC a priority lien of $10.0 million on
certain land and building assets of the Company to secure payment of any
liability to the PBGC that might arise if one or more of the pension plans were
terminated. The Company's obligations under the Pension Funding Agreement
terminate upon the earlier to occur of (a) the termination of the pension plans
and (b) on or after January 30, 2003, either (i) the pension plans are fully
funded for two consecutive years or (ii) the Company receives an investment
grade rating on its debt.
The Company expects to spend approximately $17.4 million for capital
expenditures in fiscal 2000, of which $3.3 million was spent in the December
quarter 1999. The Company anticipates that approximately $3.0 million will be
used to increase the Company's capacity while the remaining $14.4 million will
be used to maintain existing capacity.
The Company anticipates that cash requirements including working capital and
capital expenditure needs will be met through funds generated from operations
and through revolving credit borrowings under the Company's 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.
24
<PAGE>
YEAR 2000 COMPLIANCE
Historically many computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
have been unable to distinguish properly between the Year 1900 and the Year
2000. This would result in system failures or data corruption for the Company,
its customers or suppliers which could cause disruptions of operations.
The Company developed a comprehensive plan to address Year 2000 issues. As part
of the plan, the Company selected teams to identify, evaluate and implement
remediation efforts aimed at bringing the Company's information technology and
non-information technology systems into Year 2000 compliance prior to December
31, 1999. The Company's remediation efforts were successful and, accordingly,
the Company experienced no interruption in its' business systems.
The total cost of the Company's Year 2000 assessment and remediation efforts has
not been material to the Company's results of operations or liquidity. The total
expenditures in the December quarter 1999 to complete the remediation of the
Company's Year 2000 issues, inclusive of its ongoing systems initiatives, was
$0.2 million. The capitalization or expense of the foregoing expenditures will
be determined using current authoritative guidance.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the Euro. Between
January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash
transactions. During this time period, the Euro will be traded on currency
exchanges and will be the basis of valuing legacy currencies. The legacy
currencies will continue to be legal tender. Beginning January 1, 2002, the
participating countries will issue new Euro-denominated bills and coins for use
in cash transactions, and no later than July 1, 2002, will withdraw all bills
and coins denominated in the legacy currencies. The legacy currencies will then
no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the Participating Countries. The Company
believes that the conversion to the Euro will eliminate much of the advantage or
disadvantage coming from exchange rate fluctuation resulting from transactions
25
<PAGE>
involving legacy currencies in Participating Countries. Accordingly,
competitiveness will be solely based on price, quality and service. While the
Company believes the increased competitiveness based on these factors will
provide the Company with a strategic advantage over smaller local companies, it
cannot assess the magnitude of this impact on its operations.
The Company's Euro conversion plan provides for the invoicing of products in
both local currencies and Euro beginning January 1, 1999. However, the
conversion of the Company's financial reporting and information systems will not
begin until the Company's 2000 fiscal year. The Company believes that the Euro
conversion will be completed prior to the beginning of its 2001 fiscal year and
that the costs related to the conversion will not be material to the Company's
operating results or liquidity although no assurances can be made in this
regard.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 1999. The
effective date has been delayed to June 15, 2000, the Company's fiscal year
2001, as a result of the FASB's issuance in August 1999 of FAS 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
date of FASB Statement No. 133". FAS 133 requires that all derivatives be
recorded on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
would be either offset against the change in the fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value would immediately be
recognized in earnings. The Company has not yet determined what the effect of
FAS 133 will be on the earnings and financial position of the Company.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains statements which constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
include statements regarding the intent, belief or current expectations of the
Company and its management team. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements. Such risks and
uncertainties include, among other things, competitive and economic factors in
the textile, apparel and home
26
<PAGE>
furnishings markets, raw materials and other costs, weather-related delays,
general economic conditions and other risks and uncertainties that may be
detailed herein or in the Company's Annual Report on Form 10-K for the fiscal
year ended October 2, 1999.
27
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information relative to the Company's market risk sensitive instruments by major
category at October 2, 1999 is presented under Item 7a of the registrant's
Annual Report on Form 10-K for the fiscal year ended October 2, 1999.
FOREIGN CURRENCY EXPOSURES
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. As of January 1, 2000, the result of a uniform 10% change in the
value of the U.S. dollar relative to currencies of countries in which the
Company manufactures or sells its products would not be material.
COTTON COMMODITY EXPOSURES
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase contracts. A 10% decline in market
price as of January 1, 2000 would have a negative impact of approximately $7.0
million.
INTEREST RATE EXPOSURES
The Company enters into interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt. The fair values of the
agreements are not materially different from the notional values as of January
1, 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to reduce the effect of fluctuating
foreign currencies on short-term assets and commitments. These short-term assets
and commitments principally relate to accounts receivable and trade payable
positions and fixed asset purchase obligations. Unrealized gains and losses
related to outstanding forward exchange contracts at January 1, 2000 are not
material.
28
<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.
29
<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 7, 2000
- ----------------
Date
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page No.
- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
27 Financial Data Schedule
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-03-1999
<PERIOD-END> JAN-01-2000
<CASH> 13,717
<SECURITIES> 0
<RECEIVABLES> 160,414
<ALLOWANCES> 0
<INVENTORY> 200,041
<CURRENT-ASSETS> 404,111
<PP&E> 519,400
<DEPRECIATION> 146,132
<TOTAL-ASSETS> 971,577
<CURRENT-LIABILITIES> 124,173
<BONDS> 298,774
0
0
<COMMON> 123
<OTHER-SE> 104,673
<TOTAL-LIABILITY-AND-EQUITY> 971,577
<SALES> 201,144
<TOTAL-REVENUES> 201,144
<CGS> 178,435
<TOTAL-COSTS> 178,435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,853
<INCOME-PRETAX> (1,829)
<INCOME-TAX> (938)
<INCOME-CONTINUING> (891)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (891)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
