Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number 0-20080
October 3, 1998 -------
- ---------------
GALEY & LORD, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1593207
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
980 Avenue of the Americas
New York, New York 10018
- ------------------ -----
(Address of principal executive offices) (Zip Code)
212/465-3000
------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on December 21, 1998, was approximately
$55,669,174.
The number of shares outstanding of Common Stock, as of December 21, 1998, was
11,850,187 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for the 1999 annual meeting of
stockholders of the Company are incorporated by reference into Part III.
Exhibit Index at Pages 87-92
PART I
Item 1. BUSINESS
This 1998 Annual Report on Form 10-K contains statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include statements regarding the
intent, belief or current expectations of the Company and its management team.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements. Such risks and uncertainties include, among other
things, competitive and economic factors in the textile, apparel and home
furnishings markets, raw materials and other costs, weather-related delays,
general economic conditions and other risks and uncertainties that may be
detailed herein.
General
Galey & Lord, Inc. (the "Company" or the "Registrant") was incorporated
in Delaware in 1987 for the purpose of acquiring, in February 1988,
substantially all of the assets of the Blends Apparel and Prints divisions of
Burlington Industries, Inc. ("Burlington"). The Company acquired these
businesses through its wholly-owned subsidiary Galey & Lord Industries, Inc.
("Industries") and conducts all of its operations through Industries. Prior to
April 1992, the Company was known as Galey & Lord Holdings, Inc., and Industries
operating subsidiary was known as Galey & Lord, Inc. In June 1996, the Company,
through a subsidiary of Industries, G&L Service Company, North America, Inc.
("G&L Service Company"), acquired the capital stock of Dimmit Industries, S.A.
de C.V. ("Dimmit") and certain related assets from Farah Incorporated. In
January 1998, the Company acquired the apparel fabrics business of Dominion
Textile, Inc. ("Dominion"), which primarily consists of subsidiaries and joint
venture interests, which comprise the Swift Denim Group ("Swift"), the Klopman
International Group ("Klopman") and Swift Textiles Europe, Ltd. ("Swift
Europe"). Unless otherwise specified herein, all references to the Company or
the Registrant include the Company, Industries, G&L Service Company, Dimmit,
Swift and Klopman.
The Company is a leading global manufacturer of textiles for sportswear,
including cotton casuals, denim and corduroy, as well as a major international
manufacturer of workwear fabrics. The Company also is a manufacturer of dyed and
printed fabrics for use in home fashions. In order to offer customers a complete
package of fabrics and garments from one source, the Company has established
garment manufacturing operations, which the Company believes provide a
competitive advantage over other fabric manufacturing companies.
The Company believes that it is the market leader in producing innovative
woven sportswear fabrics as a result of its expertise in sophisticated and
diversified finishing. Fabrics are designed in close partnership with customers
to capture a large share of the middle and high end of the bottomweight woven
market. The Company sells its woven sportswear products to a diversified
customer base.
2
In April 1994, the Company, through Industries, acquired the Decorative
Prints Division of Burlington. This business, which was renamed Galey & Lord
Home Fashion Fabrics, sells greige, dyed and printed fabrics to the home
furnishings trade for use in bedspreads, comforters and curtains.
On September 19, 1995, the Company closed its printed apparel fabrics
businesses, made up of Galey & Lord Prints and Galey & Lord Group II, due to
declining business conditions that the printed apparel fabrics businesses had
experienced since 1992. As a result of the closing, the Company ceased
operations at its Specialty Plant on that date and laid off approximately 450
employees located primarily in Society Hill, South Carolina and New York City.
On June 7, 1996, the Company, through its subsidiary, G&L Service
Company, acquired the capital stock of Dimmit and certain related assets from
Farah Incorporated for approximately $22.8 million in cash including certain
costs related to the acquisition (the "Mexico Acquisition"). Dimmit is composed
of six manufacturing facilities located in Piedras Negras, Mexico and sews and
finishes pants and shorts for the casual wear market. Funding for the Mexico
Acquisition was provided through funds generated by operations, working capital
reductions and by the Company's current bank group through amendments to the
Company's term loan and revolving credit facility. The results of operations of
G&L Service Company and Dimmit have been included in the consolidated financial
statements from the date of acquisition.
On January 29, 1998, the Company entered into a Master Separation
Agreement with Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a
subsidiary of Polymer, Dominion and certain other parties, pursuant to which the
Company acquired (the "Acquisition") the apparel fabrics business (the "Acquired
Business") of Dominion from DTA for a cash purchase price of $466.9 million
including certain costs related to the Acquisition. The Acquired Business
primarily consists of subsidiaries and joint venture interests, which comprise
the Swift Denim Group, the Klopman Group and Swift Europe. Swift Denim is the
second largest producer of denim in the world, Klopman is one of the largest
suppliers of uniform fabrics in Europe and Swift Europe is a major international
supplier of denim to Europe, North Africa and Asia. The total purchase price of
the Acquisition was funded with borrowings under the Company's Senior Credit
Facility (as defined herein) and the Bridge Financing Facility (as defined
herein). The Company used the net proceeds from the private placement on
February 24, 1998 of $300.0 million aggregate principal amount of 9 1/8% Senior
Subordinated Notes Due 2008 to repay the Bridge Financing Facility and a portion
of the Senior Credit Facility. The results of operations of the Acquired
Business have been included in the consolidated financial statements from the
date of the Acquisition.
Strategy
The Company's strategy is (i) to be either first or second in each of the
product categories it offers, (ii) to make products that can be distinguished
from those made by its competitors, (iii) to continue to modernize its
facilities in order to maintain its competitive position, and (iv) to further
integrate the manufacture of garments with the manufacture of fabrics in order
to increase strategic relationships with customers and increase market share.
3
Key tactics of the Company's strategy include:
Emphasizing Innovative Products and Services. Historically, product
development was split between fabric and garment manufacturers. Through its
state-of-the-art facilities, the Company is able to combine these two steps into
one. This permits the Company to present fully developed commercially made
sample garments which assists the Company's customers in reducing their product
development cycle times and allows the Company to develop more innovative
products.
Emphasizing Customer Service. The Company is committed to being and
industry leader in providing superior customer service. The key elements of this
tactic include (i) providing timely and complete order delivery, (ii) building
partnerships with customers, (iii) providing electronic data information
services, and (iv) providing inventory management support.
Capitalizing on the Changing Manufacturing Chain. The Company believes
that a significant change is occurring in the apparel manufacturing chain. Many
of the Company's customers are either dependent on, or increasing their
dependency on, outsourcing their garment manufacturing requirements. The
Company's ability to provide customers with a "package" utilizing Company
fabrics and finished garments allows customers to avoid dealing with multiple
contractors to bring their products to market. By reducing the number of vendors
with which its customers are required to enter into commercial relationships,
the Company has simplified the customers' sourcing process. The Company believes
that this method will be the manufacturing chain of the future and believes that
it is on the cutting edge in supplying these services from its owned and
operated garment facilities located in Mexico.
Expanding International Operations. Through the expansion of
international manufacturing capabilities and sales offices, the Company is
better able to service both local markets in various parts of the world, as well
as its U.S. customers as they expand globally. As a result of the Acquisition,
the Company acquired manufacturing facilities in the U.S., Canada and Italy and
a joint venture interest in a facility in Tunisia, as well as sales offices in
Eastern and Western Europe, South America and Asia, to complement its previously
existing manufacturing facilities in the U.S. and Mexico.
Increasing Manufacturing Efficiencies. The Company has made significant
investments in its manufacturing operations to provide for the flexible
production of its broad line of value-added fabrics and to reduce production
costs.
4
Products and Customers
The following chart sets forth the Company's net sales for both the
apparel fabrics segment, comprised of woven fabrics, G&L Service Company, Swift
Denim and Klopman and the home fabrics segment, comprised of Home Fashion
Fabrics, for each of the last three fiscal years.
Fiscal Year
------------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
(dollar amounts in thousands)
Apparel fabrics...................... $856,547 94.5% $456,597 92.5% $364,157 88.5%
Home fabrics......................... 46,104 5.5% 36,765 7.5% 47,298 11.5%
-------- ----- -------- ----- -------- -----
Totals......................... $902,651 100.0% $493,362 100.0% $411,455 100.0%
======== ===== ======== ===== ======== =====
For additional financial information with respect to the apparel
fabrics segment and home fabrics segment and for geographical segment data, see
Note O to the Company's consolidated financial statements contained herein.
Apparel Fabrics
Cotton Casuals. The Company is the largest domestic producer by
capacity of cotton and cotton blended fabrics used in apparel, with
approximately 35% of U.S. production. These fabrics are primarily used for the
production of men's and women's pants and shorts. Because of its capital
investment in sophisticated dyeing and finishing equipment, the Company is able
to weave a limited number of substrates and to finish each of them into a
variety of esthetics. This enables the Company to work with its customers to
provide new products for the marketplace that are unique. The Company's cotton
casual fabrics are often presented to customers in the form of commercially made
sample garments rather than in the traditional method of just showing fabrics.
The Company believes that by presenting fabrics in this manner customers are
able to make purchasing decisions earlier, thereby enabling them to bring
products to market quicker and more efficiently.
The Company's products are sold principally to manufacturers of men's
and women's wear. Fabrics produced for these markets are predominately 100%
cotton. The Company's leading men's wear customers are Levi's, Haggar, Savane
and Tropical Sportswear Int'l Corporation ("Tropical Sportswear Int'l"). The
Company's women's wear customers include brand name and private label
manufacturers and chain stores. They include Levi's, Polo Ralph Lauren, Calvin
Klein, Gap, Inc. ("Gap"), Banana Republic, Polo Jeans Co. and Liz Claiborne. In
addition, the Company sells to suppliers of mail order catalogs.
Denim. As a result of the Acquisition, the Company is the world's
second largest producer of denim, operating under the tradename Swift Denim. The
Swift division manufactures and markets a wide variety of denim products for
apparel and non-apparel uses, such as home furnishings. These products are
manufactured in a full range of colors, weights and finishes. Swift's product
development concentrates on high value-added products that are developed
primarily for the mid and upper ranges of distribution as determined by retail
selling prices. Swift has established leadership in developing differentiated
denim products such as black denim, ring spun denim, eco denim and rebel ring
products. The Company believes that domestically most of its products are in mid
to upper range of the market and that 52% of its products are in the upper range
of the market.
5
Swift enjoys a wide distribution, and its major customers include
Levi's, Polo Jeans Co., Calvin Klein, Tommy Hilfiger Corporation, Liz Claiborne,
Gap and H.D. Lee Co. Inc. It also is a suppler to private label programs through
Aalfs Manufacturing Inc. ("Aalfs"), Texas Apparel, Inc. and Border Corp. and
sells to mail order suppliers including Land's End, Inc., L.L. Bean Inc., Eddie
Bauer, Inc. and J. Crew Group Inc. Swift's international customers include
Levi's, Revelacion En El Vestir S.A., Fairsound U.S.A. Corp., Hoi Kosher Garment
Fty. Ltd. and Luen Fung (Hop Kee) Garment.
Corduroy. The Company is the only vertically integrated manufacturer of
corduroy in the U.S. and is the largest domestic manufacturer. It manufactures
fabrics in a variety of wales and weights. In addition to the traditional
corduroy fabrics, the Company uses its finishing expertise to differentiate its
products and produce new corduroy fabrics, including corduroy that stretches.
Major customers are Levi's, Haggar, Polo Ralph Lauren, H.D. Lee Co. Inc., as
well as Aalfs, Hagale Industries Inc., Oxford Industries, Inc., and Tropical
Sportswear Int'l who are private label and mail order suppliers.
Workwear. As a result of the Acquisition, the Company is a leading
international supplier of workwear and careerwear fabrics, and the only
manufacturer with facilities in both North America and Europe. The Company
produces high performance workwear fabrics that retain their comfort, appearance
and performance over an extended wear life. In 1995, the Klopman international
division introduced two high performance workwear fabrics, Superbandmaster 2000
and Indestructible 2000, the first significant new products in the market in
several years. These fabrics significantly extend the wear life of the garment
while maintaining comfort and appearance. The workwear and careerwear fabrics
are distributed primarily to the industrial laundry, hospitality and healthcare
markets.
Fitness for use, continuity of color and customer service are the
factors most important to the Company's customers. The Company sells chemically
treated fabrics, including fabrics treated with Flamex TM, a fire retardant
finish, and Bioguard TM, an anti-bacterial finish. Domestic customers for
uniform fabrics include Riverside Manufacturing Co., Garment Corporation of
America, Superior Surgical Mfg. Co., Inc., Landau Uniforms Corp., Cintas
Corporation and Kellwood Company. Klopman's international customers include
Alexandra Workwear plc., CCM Limited, Alsico NV, Mulliez Freres, Amuco
International SpA and Van Moer.
G&L Service Company. In June 1996, the Company acquired garment
manufacturing facilities located in Piedras Negras, Mexico where employees sew
and finish men's and women's pants and shorts. G&L Service Company allows the
Company to offer its customers a finished package of fabric and garments from
one source. This provides customers with logistical and quality benefits that
result in goods reaching the market in a more timely manner. In the first two
years of operations, G&L Service Company has succeeded in attracting customers
such as Levi's, Polo Ralph Lauren, Liz Claiborne, Jones Apparel Group and Calvin
Klein.
Home Fabrics
As a result of the April 1994 acquisition of the Home Fashion Fabrics
Division from Burlington, the Company entered into the non-apparel textile
market. This division manufactures dyed and printed fabrics to the home
furnishing trade for use in bedspreads, comforters, curtains and accessories.
The Company also manufactures greige fabrics (undyed and unfinished) which it
sends to independent
6
contractors for dyeing and finishing. Home Fashion Fabrics' major customers
include Regency Home Fashions Inc., Arley Corp., Burlington Industries, Inc.,
CHF Industries, Inc. and American Home Ensembles Inc.
General
Apparel fabric sales for fiscal year 1998 and fiscal year 1997 to
various divisions of Levi Strauss & Co., Inc. accounted for approximately 19.4%
and 21.6% , respectively, of the Company's total net sales for each year. These
divisions of Levi Strauss & Co. Inc. purchase fabrics from the Company
independently of each other, and the loss of business from any one division
would not necessarily affect the Company's orders from other divisions. No other
customer accounts for more than 5% of the Company's total net sales.
At October 3, 1998, the Company had in excess of 5,000 customer
accounts.
Sales and Marketing
The Company's personnel work continually with customers to develop
product lines well in advance of actual shipment. Sales personnel often present
fabrics to customers in the form of commercially made sample garments rather
than the traditional method of just showing fabrics. The Company believes this
enables customers to bring products to market more quickly and efficiently.
The Company has separate sales and marketing groups for its Galey &
Lord cotton casuals, corduroy and workwear divisions, its Swift Denim U.S.A.
group, Klopman (which supplies workwear in Europe) and Swift Europe (which
markets denim in Europe). The Company believes in training individuals to sell
and market specific products as opposed to marketing fabrics generally.
Manufacturing
Cotton Casuals. The Company is a vertically integrated manufacturer of
woven cotton and cotton blended apparel fabrics with various plants involved in
spinning, weaving and dyeing and finishing. The spun yarn is woven into greige
fabric using high-speed air-jet looms. The Company dyes and finishes all of its
woven cotton casual fabrics at its Society Hill, South Carolina manufacturing
facility. The Company has significant assets devoted to creating value-added
fabrics, including an extensive range of faced finished flannel and suede
finished fabrics. The finishing process used by the Company depends upon the
type and style of fabrics being produced in accordance with customer
specifications. Fabrics are woven by the Company based on projected sales but
are dyed and finished according to customer purchase orders.
In order to operate its dyeing and finishing facility at optimum
capacity, the Company purchases a portion of its greige fabric requirements from
outside sources. During periods of lower demand for dyed and finished fabrics,
the Company reduces its purchases of greige fabrics from outside sources and
uses its internal capacity to supply market demands. The result of this strategy
is that Galey & Lord's spinning and weaving facilities have had only fourteen
days of unplanned curtailment since 1988.
Denim. Swift is the world's second largest producer of denim. The
Company believes that Swift is the world's largest producer of value-added
denim. In manufacturing denim, yarn is spun in its
7
natural state, and then dyed prior to being woven into fabric. The woven fabric
is then finished in variety of ways.
Corduroy. The Company is the only vertically integrated manufacturer of
corduroy in the U.S. The Company's weaving and dyeing and finishing equipment
and processes may be used to produce both corduroy and other woven cotton casual
apparel fabrics. The ability to produce both types of fabric using substantially
the same equipment and processes allows the Company to schedule its production
to both economically and efficiently meet changes in demand which varies
seasonally (corduroy for the fall/winter selling season and cotton casual for
the spring/summer selling season), and to maintain consistent levels of
production throughout the entire year.
Workwear. The Company's domestic workwear division uses a portion of
the Company's spinning, weaving and dyeing and finishing facilities to produce
its products. Klopman operates a spinning, weaving and dyeing and finishing
plant in Frosinone, Italy. The Company's European operations have executed a
strategy to purchase greige fabric worldwide in order to achieve more
competitive costs.
G&L Service Company. Through its garment manufacturing facilities in
Piedras Negras, Mexico, the Company sews and finishes garments for its apparel
customers. The location of the Company's garment manufacturing facilities in
Mexico allows the Company to respond quickly to the needs of its U.S. apparel
customers and to compete effectively with competitors in the Far East who have
longer lead times for delivery of goods to the U.S. To meet increasing demand,
the Company recently opened an additional garment manufacturing facility in
Monclova, Mexico.
Home Fashion Fabrics. The Company operates its own yarn and greige
manufacturing facilities to produce fabrics for the home furnishings trade. The
Home Fashion Fabrics division's weaving facility operates wide Sulzer looms,
which allow it to manufacture fabrics ranging from 48" to 127" in width. The
Company believes that having wide weaving capability is key to being able to
offer the fabrics required by the home furnishing trade for comforters and
bedspreads. The Company distinguishes itself by producing weave effects that
stimulate jacquard loom fabrics which can be sold at lower prices. The Company
purchases outside dyeing and printing services from various suppliers to dye and
print fabrics according to customers' specifications.
General. The Company maintains rigorous quality control throughout each
production process. Testing and inspection occur at various stages in the
spinning, weaving, dyeing, finishing, sewing and laundering processes. The
Company's plants employ computers to monitor and control manufacturing processes
and the flow of products.
Raw Materials and Services
The Company's principal raw materials are cotton and polyester. Cotton
is available from a large number of suppliers. The quantity of plantings, crop
and weather conditions, agricultural policies, domestic uses, exports and market
conditions can significantly affect the cost and availability of cotton, but, to
date, the Company has experienced no difficulty obtaining adequate supplies of
cotton. The Company enters into contracts for cotton several months in advance
of expected delivery to ensure
8
availability. The prices associated with these contracts may be either fixed at
the time the contract is signed or at a later date.
In order to make the price of domestic cotton competitive with prices
quoted in the world market, the United States Department of Agriculture had
adopted a program under which it pays rebates to users of domestically produced
cotton according to a formula based on relative world and domestic cotton prices
when domestic prices exceed world prices, based upon a formula. The domestic
price for cotton did not begin to exceed the world price for cotton until July
1997. From July 1997 until the program's funding was exhausted in December 1998,
the criteria for receiving rebates was met and the Company received the related
rebates. The Company believes that the discontinuance of the program will not
adversely impact its financial position since the Company will be able to
purchase cotton on the world market at comparable prices.
The price of polyester is determined by supply and demand and other
uses of the petroleum used to produce polyester. While the Company currently
purchases polyester from two principal suppliers, polyester is readily available
from other suppliers. The Company has not experienced any difficulty in
obtaining sufficient quantities of polyester, and although no assurances can be
made, does not anticipate any difficulty in meeting its needs in the future.
The Company purchases spun yarn and greige fabric to supplement its own
production. These products are available from a number of suppliers.
The Company purchases its dyes and chemicals from several suppliers.
Dyes and chemicals are available from a large number of suppliers, and the
Company had not experienced any difficulty in obtaining sufficient quantities.
The Company in its home fashions business employs the services of
several outside processors to dye or print greige fabric in accordance with
customers' specifications. The Company has established strong relationships with
the outside processors and has not experienced any difficulty in meeting
customer delivery dates. These services are also available from other providers.
Trademarks and Patents
The Company owns, or has the right to use under license various
patents, trademarks and service marks. The Company's "Galey & Lord, "Swift
Denim" and "Swift Textile" trademarks are registered with many countries
worldwide, including the United States Patent and Trademark Office. In addition,
the Company's "Klopman" trademarks are registered with many European countries.
Other than the "Galey & Lord", "Swift Denim", "Swift Textile" and "Klopman"
trademarks, the Company does not consider any of its patents, licensed
technology, trademarks or service marks to be material to the conduct of its
business.
Backlog
The Company's order backlog consists of orders that are not subject to
cancellation prior to shipment, although the Company has in the past
accommodated customer requests for order deferments due to unusual
circumstances. The Company's order backlog at October 3, 1998 was $214.1
million, a
9
19% decrease from the September 27, 1997 backlog, adjusted for the Acquisition,
of $263.0 million. Apparel fabrics backlog decreased 19% as a result of a weaker
corduroy market in 1998 as compared to an unusually high corduroy backlog at the
end of fiscal 1997 and due to lower denim backlog in 1998 compared to that at
the end of fiscal 1997, which reflects a softness in the denim industry.
Seasonality
The Company's business is not highly seasonal. The apparel fabrics
segment product mix varies seasonally (with demand for corduroy fabric primarily
in the fall/winter selling season and sportswear in the spring/summer selling
season). The Company's weaving, dyeing and finishing equipment and processes are
configured to produce both corduroy and other woven fabrics, allowing the
Company to adapt to seasonal demand and to maintain consistent levels of
production throughout the entire year. The Home Fashion Fabrics Division
experiences a very minimal fluctuation in the demand for the products it
produces.
Competition
General. The Company has numerous competitors in each of the categories
in which it competes.
Purchasing decisions by the Company's customers are influenced by a
number of factors, including quality, price, manufacturing flexibility, delivery
time, customer service, product styling and differentiation. Competition among
U.S. and foreign manufacturers is affected by changing relative labor and raw
material costs, lead times, political instability and infrastructure
deficiencies of newly industrializing countries, ecological concerns, human
resource laws, fluctuating currency exchange rates, individual government
policies and international agreements regarding textile and apparel trade.
U.S. government policy has been favorable to the U.S. textile industry.
The Company's customers receive favorable duty and, in certain instances, quota
treatment by taking advantage of the U.S. "807" and "807A" tariff programs, as
well as NAFTA. Under tariff program "807," garment textile components cut in the
U.S. and assembled offshore can be brought back into the U.S. subject to
existing quotas, with duty only imposed on the value added offshore. Under
tariff program "807A", which falls under the Caribbean Basin Initiative,
garments that are cut in the U.S. using U.S. fabric and trim and then assembled
in a beneficiary country benefit from preferential quota as well as duty
treatment upon import into the U.S.
The Company believes that it has benefited, and will continue to
benefit, from the 1994 implementation of NAFTA, which phase out duties and
quotas on certain textiles and apparel shipped between Mexico, the U.S. and
Canada. NAFTA's yarn forward rule of origin assures that only those textiles
produced in NAFTA countries benefit from the phasing out of duties and quotas.
The Company believes that GATT and the ATC will, for the most part,
have a negative effect on the domestic textile and apparel industry. The
ten-year phaseout of quotas under the ATC, which replaces the existing system of
bilateral import restrictions imposed under the Multifiber Arrangement, will
gradually allow more imports to enter the country. The Company, however, also
believes that there
10
may be some benefits from GATT and the ATC, as they will open foreign markets to
the Company's customers which the Company believes will allow it to supply
customers in such foreign markets.
Cotton Casuals. There are several major competitors in the finished
cotton casual apparel fabrics business, none of which dominates the market. The
Company's major competitors include Delta Woodside Industries, Inc.,
Graniteville Company, a division of Avondale Mills, Inc. and Milliken & Company
Inc. The Company's technical expertise in finishing enables it to provide a
number of value-added fabrics to differentiate itself from its competitors,
including an extensive range of faced finished flannel and suede finished
fabrics.
Denim. The U.S. denim market is highly concentrated with four denim
manufacturers supplying approximately 70% of the market. Cone Mills Corporation,
Avondale Mills, Inc. and Burlington are Swift's major competitors. In Europe,
the Company believes that Swift Europe is the leader in the value-added market
with a rich mix of differentiated products. Its principal competitors include
Kaihara in Japan, Hellenic Fabrics S.A. in Greece, Orta Anadolu in Turkey,
Atlantic Mills Ltd. in Ireland and Tavex Alogodoner, S.A. in Spain.
Corduroy. The Company is the only vertically integrated domestic
producer of corduroy fabrics. Competition to the Company's corduroy business is
mostly from imported garments and, to a lesser extent, a domestic converter of
fabrics.
Workwear. The Company's major domestic competitors in the workwear and
careerwear business are Graniteville Company, Riegel Textile Corp., a division
of Mount Vernon Mills, Inc., Milliken & Company Inc. and Spring Industries, Inc.
Klopman is the leading pan-European manufacturer and distributor of
workwear and careerwear fabrics. It competes with domestic suppliers in each
country it serves. Its major competitors in its principal markets are
Lauffenmuhle GmbH (recently sold to Matfatial Industries of India), Carrington
Career and Workwear Fabrics and Royal Ten-Cate NV.
G&L Service Company. G&L Service Company competes with numerous garment
manufacturers throughout the world. Some of these competitors are larger and
have greater financial resources than G&L Service Company.
Home Fashion Fabrics. The Company's Home Fashion Fabrics division
competes with a number of printers and dyers offering similar services,
including Raytex Finishing Company, Santee Print Works, Inc. and Slater Screen
Print Works.
Employees
At October 3, 1998, the Company had 6,251 U.S. employees, 857 of whom
where covered by a collective bargaining agreement. Of these employees, 5,530
were employed in manufacturing and 721 in administration and sales. The
collective bargaining agreement covering these employees expired in 1998 and was
renewed for a three year term effective January 31, 1998. At October 3, 1998,
G&L Service Company had 2,462 employees in Mexico. The majority of these
employees are covered by a collective bargaining agreement which expires January
1, 1999. In January 1999, the Company will be
11
negotiating the minimum pay scale for its Mexican employees for the upcoming
year with union officials. Also, at October 3, 1998, the Company had 786
Canadian employees and 836 employees in operations elsewhere in the world,
mainly in Europe. Of these employees 695 were covered by collective bargaining
agreements. Substantially all of the Company's employees are full-time. The
Company believes that its employee relations are satisfactory.
Government Regulation
The Company is subject to various environmental laws and regulations in
its operations governing the discharge, storage, handling and disposal of a
variety of substances in the North American and European countries in which it
operates. In particular, such laws include (i) in the United States, the Federal
Water Pollution Control Act, the Federal Clean Air Act, the Resource
Conservation Recovery Act (including amendments relating to underground tanks)
and the Federal "Superfund" program, and (ii) in Canada, the Canadian
Environmental Protection Act, the Hazardous Products Act, the Hazardous Material
Information Review Act, the Fisheries Act, the Environmental Protection Act
(Ontario), the Water Resources Act (Ontario) and the Environmental Quality Act
(Quebec). In addition, the Company's operations are governed by laws and
regulations relating to workplace safety and worker health in the North American
and European countries in which it operates. In particular in the United States,
the Occupational, Safety and Health Act and regulations thereunder, among other
things, establish cotton dust, formaldehyde, asbestos and noise standards, and
regulate the use of hazardous chemicals in the workplace. Additionally, in
Canada the Occupational Health and Safety Act (Ontario), the Act Respecting
Occupational Health and Safety (Quebec) and their respective regulations
establish standards for dust, noise and substances including, among others,
asbestos and formaldehyde and regulate the use of hazardous chemicals in the
workplace.
Year 2000 Compliance
For a discussion of the impact of Year 2000 compliance issues, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Year 2000 Compliance."
12
Item 2. PROPERTIES
The following table sets forth the general location, principal uses and
approximate size of the Company's principal properties and whether such
properties are leased or owned:
Approximate Leased
Area In Or
Facility Name Location Use Square Feet Owned
- ------------- -------- --- ----------- -----
Flint......................... Gastonia, NC Spinning 250,000 Owned
Brighton...................... Shannon, GA Spinning and weaving 877,000 Owned
McDowell...................... Marion, NC Weaving 222,000 Owned
Society Hill.................. Society Hill, SC Dyeing and finishing 527,000 Owned
Society Hill II............... Society Hill, SC Dyeing, finishing and warehousing 250,000 Owned
Asheboro...................... Asheboro, NC Weaving and greige cloth storage 386,000 Owned
Caroleen...................... Caroleen, NC Spinning 375,000 Owned
Corporate Offices............. Greensboro, NC Corporate 24,000 Leased
Executive Offices............. New York, NY Executive and sales office 22,000 Leased
Blue Warehouse................ Society Hill, SC Greige and finished cloth storage 100,000 Owned
Hermitage Warehouse........... Rome, GA Cotton and yarn storage 45,000 Leased
Riverside Warehouse........... Rome, GA Cotton and yarn storage 20,000 Leased
Red Warehouse................. Marion, NC Yarn storage 33,000 Owned
Elm Street Warehouse......... Greensboro, NC Finished cloth storage 108,000 Owned
G&L Service Company
Dimmit Industries........ Piedras Negras, MX 6 sewing & garment finishing facilities 228,000 Leased
Alta Loma................ Monclova, MX Sewing and warehousing facilities 200,000 Leased
Eagle Pass Facilities......... Eagle Pass, TX 1 cutting and 1 warehousing facility 16,000 Leased
Swift Executive Offices....... Atlanta, GA Executive offices 14,000 Leased
Swift Operations Offices...... Columbus, GA Operations and sales 27,000 Leased
Erwin Plant................... Erwin, NC Spinning 1,325,000 Owned
Erwin Plant................... Erwin, NC Weaving, dyeing and finishing 343,000 Owned
6th Avenue Plant.............. Columbus, GA Spinning 963,000 Owned
Boland Plant.................. Columbus, GA Weaving, dyeing and finishing 480,000 Owned
Drummondville Plant........... Drummondville, Quebec Spinning, weaving, dyeing and finishing 523,000 Owned
Klopman Plant................. Frosinone, Italy Spinning, weaving, dyeing and finishing 861,000 Owned
The Company believes that its facilities are suitable to service its
current level of sales and have additional capacity to satisfy its foreseeable
needs.
13
Item 3. LEGAL PROCEEDINGS
During fiscal 1998, South Carolina environmental authorities 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 its Erwin,
North Carolina facility. A remediation plan has been submitted to the State of
North Carolina and the Company is currently awaiting the state's approval. As a
result of the Acquisition, the Company became responsible for a site in
Waynesboro, Virginia in which the groundwater has been contaminated. The Company
has received approval from Virginia environmental authorities regarding its
remediation plan. The Company does not expect the expenditures and capital
outlays involved in the implementation of these efforts to be material.
The Company is involved in various lawsuits incidental to its business
operations, as well as product liability litigation. In the opinion of the
Company, none of such litigation in which it is currently involved will have a
material effect on the Company's financial condition or its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.01 par value, (the "Common Stock") is
traded on the New York Stock Exchange under the symbol "GNL". As of November 30,
1998, the Company had approximately 1,750 stockholders of record. The following
table sets forth the high and low sales prices for the Common Stock for the
periods indicated.
1998 1997
------------------------------ --------------------------------
High Low High Low
---- --- ---- ---
First Quarter......................... $19 3/4 $16 3/4 $14 7/8 $12 1/2
Second Quarter........................ $22 1/4 $15 3/16 $19 $14 3/4
Third Quarter......................... $28 7/8 $14 7/8 $18 $14 1/2
Fourth Quarter........................ $15 1/16 $8 3/4 $20 $15 3/4
No dividend or other distribution with respect to the Common Stock has
ever been paid by the Company. Any payment of future dividends and the amounts
thereof will be dependent upon the Company's earnings, financial requirements
and other factors deemed relevant by the Company's Board of Directors. The
Company currently does not intend to pay any cash dividends in the foreseeable
future; rather, the Company intends to retain earnings to provide for the
operation and expansion of its business. Certain restrictive covenants contained
in the agreement governing the Company's term loan and revolving credit line
currently limit its ability to make dividend and other payments.
15
Item 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands, Except Per Share Data)
FISCAL YEAR
-------------------------------------------------------------------
Statements of Operations Data (1): 1998(2) 1997(3) 1996(4) 1995 (5) 1994 (6)
----------- ---------- --------- --------- --------
Net sales.................................................. $ 902,651 $ 493,362 $ 411,455 $ 502,220 $451,130
Cost of sales.............................................. 787,218 439,207 367,992 451,314 396,911
Gross profit............................................... 115,433 54,155 43,463 50,906 54,219
Selling, general and administrative expenses............... 39,525 18,123 13,526 15,877 14,705
Amortization of goodwill................................... 3,793 1,679 1,298 1,119 549
Business closing charge.................................... - - - 12,065 -
Operating income........................................... 72,115 34,353 28,639 21,845 38,965
Interest expense........................................... 47,566 12,326 11,579 13,103 8,276
Income from associated companies........................... (2,621) - - - -
Bridge financing interest expense.......................... 3,928 - - - -
Loss on foreign currency hedges............................ 2,745 - - - -
Write-off of merger costs.................................. - - 1,600 - -
Income before income taxes and extraordinary items......... 20,497 22,027 15,460 8,742 30,689
Income tax expense......................................... 8,678 8,350 5,982 3,390 11,803
Income before extraordinary items
and accounting change................................... 11,819 13,677 9,478 5,352 18,886
Extraordinary items........................................ (524) - - (1,342) -
Cumulative effect of change in accounting method........... - - - - (1,603)
Net income................................................. $ 11,295 $ 13,677 $ 9,478 $ 4,010 $ 17,283
Weighted average number of shares outstanding(7)........... 12,173 11,986 11,910 12,037 12,066
Net income per common share - diluted(7):
Income before extraordinary items.......................... $ .97 $ 1.14 $ .80 $ .44 $ 1.56
Extraordinary items........................................ (.04) - - (0.11) -
Cumulative effect of change in accounting method........... - - - - (0.13)
Net income - diluted....................................... $ .93 $ 1.14 $ .80 $ .33 $ 1.43
Cash dividends per common share............................ $ - $ - $ - $ - $ -
Balance Sheet Data:
Total assets............................................. $ 1,038,293 $ 349,191 $ 304,876 $ 305,039 $299,015
Long-term debt........................................... 682,926 176,755 149,265 162,084 149,899
Stockholders' equity..................................... 127,877 104,317 89,645 81,879 77,719
(1) The Company uses a 52-53 week fiscal year. Fiscal 1998 was a 53-week year.
All other fiscal years presented were 52-week years.
(2) Includes the acquisition of the apparel fabrics business of Dominion
Textile, Inc. which occurred on January 29, 1998.
(3) Selling, general and administrative expenses include a $3.0 million pre-tax
charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
(4) Includes the write-off of merger costs associated with the termination of
the previously announced merger of the Company and the Graniteville Company.
(5) Includes the business closing charge related to closing the Company's
printed apparel fabrics businesses.
(6) Includes the acquisition of Home Fashion Fabrics which occurred on April 29,
1994.
(7) Restated from previously published results due to the adoption of Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share," in
fiscal 1998.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant Events
On January 29, 1998, the Company entered into a Master Separation Agreement with
Polymer, DTA, Dominion and certain other parties pursuant to which the Company
acquired the Acquired Business of Dominion from DTA for a cash purchase price of
approximately $466.9 million including certain costs related to the Acquisition.
The Acquired Business primarily consists of subsidiaries and joint venture
interests, which comprise the Swift, Klopman and Swift Europe. Swift is the
second largest producer of denim in the world, Klopman is one of the largest
suppliers of uniform fabrics in Europe and Swift Europe is a major international
supplier of denim to Europe, North Africa and Asia. The total purchase price of
the Acquisition was funded with borrowings under the Company's Bridge Financing
Facilty and Senior Credit Facility (see "Liquidity and Capital Resources"
below). The Company used the net proceeds from the private placement on February
24, 1998 of $300.0 million aggregate principal amount of 9 1/8% Senior
Subordinated Notes Due 2008 to repay the Bridge Financing Facility and a portion
of the Senior Credit Facility.
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 April 23, 1998, the
termination date of such program, the Company had acquired 12,201 shares of its
outstanding common stock at an average price of $16.04 per share. Under the
Company's previous stock buy back program, which terminated January 16, 1997,
the Company acquired 197,003 shares of its outstanding common stock at an
average price of $10.07 per share.
On June 7, 1996, the Company, through its subsidiary, G&L Service Company
acquired the capital stock of Dimmit and certain related assets from Farah
Incorporated for approximately $22.8 million in cash including certain costs
related to the acquisition. Dimmit is composed of six manufacturing facilities
located in Piedras Negras, Mexico and sews and finishes pants and shorts for the
casual wear market. Funding for the Mexico Acquisition was provided through
funds generated by operations, working capital reductions and through borrowings
under the Company's then existing term loan and revolving credit facility.
On January 25, 1996, the Company and Triarc Companies, Inc. ("Triarc") mutually
agreed not to go forward with their previously announced merger of the Company
and the Graniteville Company, a subsidiary of Triarc, due to economic conditions
existing at that time in the retail, textile and apparel sectors. The Company
incurred fees and expenses related to the merger of $1.6 million and took a
charge during fiscal 1996 for the write-off of those costs.
17
Results of Operations
The Company's operations are classified into two business segments: apparel
fabrics, comprised of woven fabrics, G&L Service Company, Swift Denim and
Klopman, and home fabrics, comprised of Home Fashion Fabrics. Results for fiscal
1998, 1997 and 1996 for each segment are shown below:
Fiscal Year Ended
--------------------------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
--------------------------------------------------------------
(in millions except percentages)
Net Sales Per Segment
Apparel Fabrics $ 856.6* $ 456.6 $ 364.2
Home Fabrics 46.1 36.8 47.3
Total $ 902.7 $ 493.4 $ 411.5
Operating Income (Loss) Per Segment
Apparel Fabrics $ 69.3* $ 36.8 $ 29.9
% of Apparel Fabrics Net Sales 8.1% 8.1% 8.2%
Home Fabrics $ 2.8 $ (2.4)** $ (1.3)
% of Home Fabrics Net Sales 6.1% (6.8)% (2.7)%
Total $ 72.1 $ 34.4 $ 28.6
% of Total Net Sales 8.0% 7.0% 7.0%
* Net sales and operating income for the apparel fabrics segment include
results for the Acquired Business from January 29, 1998, the date the
Acquisition was completed.
** Operating income for the home fabrics segment for fiscal 1997 includes a
$3.0 million pre-tax charge taken due to the bankruptcy of a Home Fashion
Fabrics customer.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales for fiscal 1998 were $902.7 million compared to $493.4 million for
fiscal 1997. The $409.3 million increase in net sales resulted from the addition
of $375.1 million of net sales from Swift Denim and Klopman as a result of the
Acquisition, a $24.9 million increase in other apparel fabrics net sales and a
$9.3 million increase in home fabrics net sales. The increase in other apparel
fabrics net sales was primarily due to higher sales of woven sportswear,
partially offset by lower net sales of corduroy. The increase in home fabrics
net sales was due to an improving market for home decorative prints as compared
to fiscal 1997. Fiscal 1998 was also a 53-week year as compared to a 52-week
year in fiscal 1997. The Company currently expects the sales of denim to be soft
during the first part of fiscal year 1999.
Operating Income
Operating income for fiscal 1998 was $72.1 million compared to $34.4 million in
fiscal 1997. The increase in apparel fabrics operating income was primarily a
result of the Acquisition in January 1998,
18
partially offset by decreased operating income from the Company's other apparel
fabrics business mostly due to lower net corduroy sales resulting from a weaker
corduroy market in 1998. The increase in home fabrics operating income was
primarily attributable to a $3.0 million pre-tax reserve taken in fiscal 1997 as
a result of a major home fabrics customer filing for bankruptcy protection and a
strong demand for home fabrics goods which resulted in increased sales volume,
improved selling prices and improved margins.
Interest Expense
Interest expense was $51.5 million in fiscal 1998 compared to $12.3 million in
fiscal 1997. The increase was due to higher debt levels and higher interest
rates in fiscal 1998 compared to fiscal 1997. The increase in interest expense
was primarily due to added interest expense on additional indebtedness incurred
to finance the Acquisition of $33.5 million, interest expense of $1.8 million
pre-tax related to borrowings under the Bridge Financing Facility and a charge
of $2.1 million pre-tax of loan cost related to the Bridge Financing Facility.
The remaining interest expense increase was due to additional borrowings
incurred as a result of increased working capital requirements (See "Liquidity
and Capital Resources" below). The average interest rate paid by the Company on
its bank debt in fiscal 1998 was 8.6% as compared to 6.9% in fiscal 1997.
Income Taxes
The Company's tax rate for fiscal year 1998 was higher than the statutory rate
primarily due to the effect on pre-tax income of nondeductible goodwill as a
result of the Acquisition.
Net Income and Net Income Per Share
Net income for fiscal 1998 was $11.3 million, or $.93 per common share on a
diluted basis, as compared to $13.7 million, or $1.14 per common share on a
diluted basis, for fiscal 1997. Net income for fiscal 1998 was adversely
impacted by nonrecurring charges of $7.5 million pre-tax, or $.38 per common
share, related to the Acquisition. These charges included (i) a $2.7 million
pre-tax, or $.14 per common share, charge related to hedging the Canadian dollar
against currency fluctuations, allowing the Company to fix the purchase price
for the Acquired Business which was based in Canadian dollars, (ii) a $1.8
million pre-tax, or $.09 per common share, charge for interest on the Bridge
Financing, (iii) a $0.9 million pre-tax ($0.5 million after-tax), or $.04 per
common share, extraordinary charge due to the write-off of fees and expenses
related to the Company's old credit facility which was refinanced in December in
order to provide funds for the Acquisition, and (iv) a $2.1 million pre-tax, or
$.11 per common share, charge for loan costs related to the Bridge Financing.
Excluding these charges, net income for fiscal year 1998 would have been $15.9
million or $1.30 per common share on a diluted basis. Net income for fiscal 1997
was adversely impacted by the $3.0 million pre-tax, or $.15 per common share,
bad debt charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
Excluding this charge, net income would have been $15.7 million, or $1.27 per
common share, in fiscal 1997.
19
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales for fiscal 1997 were $493.4 million compared to $411.5 million for
fiscal 1996. The $81.9 million increase in net sales resulted from a $92.4
million increase in apparel fabrics net sales, which was partially offset by a
$10.5 million decline in home fabrics net sales. The increase in apparel fabrics
net sales resulted from a stronger business environment during fiscal 1997 as
compared to fiscal 1996 when the Company's customers were adjusting their
inventory levels due to a slow retail environment. The decrease in home fabrics
sales was due to a continued weak market for home decorative prints as well as
the Company's decision to significantly reduce its sales of unfinished fabric
(greige goods) in the home fabrics business because of a lack of profitability
for unfinished fabrics in the home furnishings market.
Operating Income
Operating income for fiscal 1997 was $34.4 million compared to $28.6 million in
fiscal 1996. The increase in apparel fabrics operating income was primarily a
result of higher sales volume. Home fabrics operating income was adversely
impacted by a $3.0 million pre-tax charge taken due to the bankruptcy of a Home
Fashion Fabrics customer. Excluding this charge, home fabrics operating income
would have increased $1.9 million to $.6 million for fiscal 1997. This
improvement resulted from the reduction of sales of unfinished fabrics and
improved gross margins on home fabrics finished goods sales.
Interest Expense
Interest expense was $12.3 million in fiscal 1997 compared to $11.6 million in
fiscal 1996. The increase was due to higher debt levels and higher interest
rates in fiscal 1997 compared to fiscal 1996. The increased debt was due to
higher working capital requirements and capital expenditures in fiscal 1997 as
compared to fiscal 1996. Both of these items increased to support higher sales
and the future growth of the Company. The average interest rate paid by the
Company on its bank debt in fiscal 1997 was 6.9% as compared to 6.7% in fiscal
1996.
Net Income and Net Income Per Share
Net income for fiscal 1997 was $13.7 million, or $1.14 per common share, which
included the $3.0 million pre-tax ($1.8 million after-tax), or $.15 per common
share, bad debt charge taken due to the bankruptcy of a Home Fashion Fabrics
customer. Excluding this charge, net income would have been $15.7 million, or
$1.29 per common share in fiscal 1997. Net income for fiscal 1996 was $9.5
million, or $.80 per common share, which included the pre-tax charge of $1.6
million ($1.0 million after-tax), or $.08 per common share, for the write-off of
fees and expenses related to the termination of the proposed Graniteville
merger. Excluding these charges, net income would have been $10.5 million, or
$.88 per common share, in fiscal 1996.
20
Liquidity and Capital Resources
On February 24, 1998, the Company closed its private offering of $300.0 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the
"Initial Notes"). Net proceeds from the offering of $289.3 million (net of the
initial purchaser's discount and offering expenses) were used to repay (i)
$275.0 million principal amount of borrowings under the Bridge Financing
Facility (as defined below) incurred to partially finance the Acquisition and
(ii) a portion of the outstanding amount under a revolving line of credit
provided for under the Senior Credit Facility (as defined herein).
On May 21, 1998, the Company completed an exchange offer 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. 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's and its subsidiaries' ability to incur indebtedness, pay
dividends, incur liens, transfer or sell assets, enter into transactions with
affiliates, issue or sell stock of restricted subsidiaries or merge or
consolidate the Company or its restricted subsidiaries.
On January 29, 1998, the Company entered into a new credit agreement (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 or a borrowing
base (comprised of eligible accounts receivable and eligible inventory, as
defined in the Senior Credit Facility), (ii) a term loan in the principal amount
of $155.0 million ("Term Loan B") and (iii) a term loan in the principal amount
of $110.0 million ("Term Loan C").
Under the Senior Credit Facility borrowings were used to refinance the Company's
prior senior credit facility with FUNB, to fund the Acquisition, to pay for
certain closing costs and expenses related to the Acquisition and for general
corporate and working capital purposes. Under the Senior Credit Facility, the
revolving line of credit expires on March 27, 2004 and the principal amount of
(i) Term Loan B is repayable in 24 quarterly payments of $387,500 until March
27, 2004 and, thereafter, four quarterly payments of $36,425,000 until Term Loan
B's maturity on April 2, 2005 and (ii) Term Loan C is
21
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, as amended on December 23,
1998, 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% 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.
The Company's obligations under the Senior Credit Facility are secured by all of
the assets (other than real property) of the Company and each of its domestic
subsidiaries, a pledge by the Company and each of its 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.
On December 19, 1997, the Company entered into a $470.0 million credit agreement
(the "Interim Credit Agreement") with FUNB, as agent and lender. Initial
revolving credit line borrowings under the Interim Credit Agreement were used to
refinance the existing term loan and revolving credit facility. The Interim
Credit Agreement was replaced on January 29, 1998 when the Company entered into
the Senior Credit Facility.
On December 19, 1997, the Company entered into a Senior Subordinated Credit
Agreement (the "Bridge Financing Facility") with First Union Corporation, as
agent and lender, which was amended on January 29, 1998 and provided for
borrowings of $275.0 million, of which $145.6 million was initially borrowed on
December 19, 1997 and the remainder of which was borrowed on January 29, 1998.
All borrowings under the Bridge Financing Facility were used to fund the
Acquisition (including fees and expenses). The Bridge Financing Facility was
repaid on February 24, 1998 when the Company closed its private offering of
$300.0 million aggregate principal amount of Initial Notes.
22
On June 4, 1996, the Company amended its term loan and revolving credit facility
with its then current bank group led by First Union National Bank of North
America, as agent and lender. The amendment increased the Company's maximum
allowable borrowings under the revolving credit facility, which expired April
30, 2000, from $150.0 million to $170.0 million. The term loan was restated to
the outstanding balance of $48.0 million and continued to require equal
quarterly principal payments of $3.0 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 May 13, 1997, the Company amended its term loan and revolving credit facility
with its then current bank group. The amendment modified the Company's covenants
relating to debt service, eliminated the covenant limiting the amount of capital
expenditures to be made, and permitted the Company to enter into a trade
receivables securitization transaction.
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 shall be paid
in installments over the succeeding two years. The Pension Funding Agreement
also gives the PBGC a first priority lien of $10.0 million on certain land and
building assets of the Company to secure payment of any liability to the PBGC
that might arise if one or more of the pension plans were terminated. The
Company's obligations under the Pension Funding Agreement terminate upon either
the termination of the plans in accordance with ERISA, the plans being fully
funded as defined by the PBGC or the Company achieving an investment grade
rating on its debt.
In fiscal 1998, the Company spent $33.8 million for capital expenditures, a
significant portion of which was used to expand and modernize the Company's
weaving and dyeing and finishing plants. The Company expects to spend
approximately $27.0 million for capital expenditures in fiscal 1999. The Company
anticipates that approximately $11.7 million will be used to increase the
Company's capacity while the remaining $15.3 million will be used to maintain
existing capacity. The Company expects to fund these expenditures through funds
from operations and borrowings under its revolving line of credit under the
Senior Credit Facility.
Working capital increased approximately $150.9 million to $281.4 million at
October 3, 1998 as compared to $130.5 million at September 27, 1997.
Approximately $110.5 million of the increase occurred as a result of the
Acquisition and related refinancings. The remaining $40.4 million of the
increase reflects a change in the Company's existing business and changes since
January 29, 1998 for the Acquired Business including a $26.0 million increase in
accounts receivable and a $11.7 million increase in inventories. The increase in
accounts receivable was primarily a result of higher net sales since the
Acquisition for Swift Denim than in the period comprising the January 1998
accounts receivable balance. The $11.7 million increase in inventories primarily
resulted from an increase in raw materials, produced goods (primarily corduroy)
and an increase in G&L Service Company inventory levels as it continues building
its customer base.
23
At October 3, 1998, the Company's additional borrowing availability under its
revolving line of credit under the Senior Credit Facility was $74.9 million. The
average interest rate on balances outstanding under the Company's term loans and
revolving line of credit under the Senior Credit Facility was 8.11% at October
3, 1998 as compared to an average rate of 6.88% at September 27, 1997.
The Company anticipates that cash requirements, including working capital and
capital expenditures, will be met through funds generated from operations and
through borrowings under the Company's revolving line of credit under the Senior
Credit Facility. In addition, from time to time, the Company uses borrowings
under secured bank loans, through capital leases or through operating leases for
various equipment purchases.
YEAR 2000 COMPLIANCE
Until recently, computer programs were generally written using two digits rather
than four to define the applicable year. Accordingly, such programs may be
unable to distinguish properly between the Year 1900 and the Year 2000. This
could result in system failures or data corruption for the Company, its
customers or suppliers which could cause disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
business activities or to receive information, services, raw materials and
supplies, or payment from suppliers, customers or business partners or any other
companies with which the Company conducts business.
The Company, including the Acquired Business, has developed a comprehensive plan
intended to address Year 2000 issues. As part of the plan, the Company has
selected a team 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. During fiscal
1998, the team completed its assessment of the Company's information technology
and non-information technology systems. Additionally, the Company has engaged an
independent consulting firm that specializes in implementing and reviewing Year
2000 programs. Such firm has evaluated significant portions of the Company's
remediation plan and has identified improvements to the Company's overall
remediation efforts.
The Company's information technology remediation efforts are substantially
complete and the Company's significant efforts in fiscal 1999 will consist of
testing the updated systems. It is anticipated that additional remediation
efforts resulting principally from the testing procedures will be completed by
the end of the Company's 1999 fiscal year. The Company has also prioritized and
completed the significant steps of its non-information technology systems plan.
The Company's remaining remediation efforts related to non-information
technology systems are expected to be completed during fiscal 1999. If the
Company's remaining remediation efforts are not completed on a timely basis, the
Year 2000 issue could have an adverse effect on the Company's operations.
Based upon the remediation efforts completed, the Company does not believe a
formal contingency plan will be required. Individual locations or business units
will develop informal contingency plans in the event that they do not expect to
be fully Year 2000 compliant within the current time estimates. To date, the
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 fiscal 1999 to remediate the Company's year 2000 issues,
inclusive of its ongoing systems initiatives is not expected to exceed $2.5
24
million. The Company is funding the expenditures related to the Year 2000 plan
with cash flows from operations. The capitalization or expense of the foregoing
expenditures will be determined using current authoritative guidance.
The Company is also communicating with its significant suppliers, customers and
business partners to coordinate Year 2000 conversion efforts. Additionally,
during fiscal 1999 the Company will be contacting second tier suppliers to
assess their Year 2000 readiness. Currently, the Company is unaware of any
material exposures or contingencies in regards to these parties. However, the
Company cannot reasonably estimate the potential impact on its financial
position, results of operations or cash flows in the event these parties do not
become Year 2000 capable on a timely basis.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "Participating Countries") are scheduled to establish fixed conversion
rates between their existing sovereign currencies ("legacy currencies") and the
Euro. Between January 1, 1999 and December 31, 2001, the Euro will be used
solely for non-cash transactions. During this time period, the Euro will be
traded on currency exchanges and will be the basis of valuing legacy currencies.
The legacy currencies will continue to be legal tender. Beginning January 1,
2002, the participating countries will issue new Euro-denominated bills and
coins for use in cash transactions, and no later than July 1, 2002, will
withdraw all bills and coins denominated in the legacy currencies. The legacy
currencies will then no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries
that are Participating Countries. As the European pricing policy has
historically been based on local currencies, the Company believes that as a
result of the Euro conversion the uncertainty of the effect of exchange rate
fluctuations will be greatly reduced. In addition, the Company's principal
competitors are also located within the Participating Countries. The Company
believes that the conversion to the Euro will eliminate much of the advantage or
disadvantage coming from exchange rate fluctuation resulting from transactions
involving legacy currencies in Participating Countries. Accordingly,
competitiveness will be solely based on price, quality and service. While the
Company believes the increased competitiveness based on these factors will
provide the Company with a strategic advantage over smaller local companies, it
cannot assess the magnitude of this impact on its operations.
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 the Euro
conversion will be completed prior to the beginning of its 2001 fiscal year and
the costs related to the conversion will not be material to the Company's
operating results although no assurances can be made in this regard.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997, the
Company's fiscal year 1999. FAS 130 requires that the Company report
comprehensive income and its components in a full set of general-purpose
financial
25
statements. Comprehensive income represents the change in stockholder's equity
during the period from nonowner sources. Currently, changes from nonowner
sources consist of net income and foreign currency translation adjustments.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for years beginning after
December 15, 1997, the Company's fiscal year 1999. FAS 131 requires that a
public company report financial and descriptive information about its reportable
operating segments pursuant to criteria that differ from current accounting
practice. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The financial information to be reported includes segment
profit or loss, certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of FAS 131 will not affect results of
operations or financial position, but may affect the disclosure of segment
information.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," effective for years beginning after June 15, 1999, the
Company's fiscal year 2000. 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.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exposures
The Company's earnings are affected by fluctuations in the value of its
subsidiaries' functional currency as compared to the currencies of its foreign
denominated sales and purchases. Foreign currency options and forward contracts
and natural offsets are used to hedge against the earnings effects of such
fluctuations. The result of a uniform 10% change in the value of the U.S. dollar
relative to currencies of countries in which the Company manufactures or sells
its products would not be material. This calculation assumes that each exchange
rate would change in the same direction relative to the U.S. dollar. In addition
to the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. The Company's analysis of
the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency prices.
Cotton Commodity Exposures
Purchase contracts are used to hedge against fluctuations in the price of raw
material cotton. Increases or decreases in the market price of cotton may effect
the fair value of cotton commodity purchase
26
contracts. As of October 3, 1998, a 10% decline in market price would have a
negative impact of approximately $16.6 million on the value of the contracts.
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 Company currently has
interest rate swap agreements on $25.0 million of its outstanding floating-rate
bank debt. The interest rate swaps assure that the Company will pay a maximum
LIBOR rate of 5.53% (excluding any applicable spread required by the Senior
Credit Facility) for the period ending December 2000. The following table
provides information about the Company's interest rate swap agreements that are
sensitive to changes in interest rates. The table presents notional amounts and
interest rates by contractual maturity date. Notional amounts are used to
calculate the contractual payments to be made under the contracts.
Notional Amount Maturing in Fiscal Year 1998
---------------------------------------------------
1999 2000 2001 Total Fair Value
---- ---- ---- ----- ----------
Interest rate swaps (Dollar amounts in 000's)
Notional amount $ - $ - $ 13,000 $ 13,000 $ (255)
$ - $ - $ 12,000 $ 12,000 $ (234)
Average pay rate 5.31% 5.31% 5.31%
Average receive rate 5.53% 5.53% 5.53%
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 related to accounts receivable and trade payable
positions and fixed asset purchase obligations. The following table provides
information about the Company's foreign currency forward exchange contracts. The
information is provided in U.S. dollar equivalent amounts, as presented in the
Company's financial statements. The table presents the notional amounts at the
current exchange rate and contractual foreign currency exchange rates by
contractual maturity dates. The tables do not include firmly committed
transactions that have not been hedged or transactions that are not firmly
committed even though the probability of certain transactions occurring is high.
1998
1999 Fair Value
---- ----------
(Dollar amounts in 000's)
Forward contracts to sell German mark
Notional amount $ 1,825 $ 6
Average contract rate 1.65
Forward contracts to sell Italian lira
Notional amount $ 5,000 $ (252)
Average contract rate 1,570.9
Forward contracts to purchase Japanese yen
Notional amount $ 139 $ (20)
Average contract rate 134.65
27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Galey & Lord, Inc.
We have audited the accompanying consolidated balance sheets of Galey &
Lord, Inc. as of October 3, 1998 and September 27, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended October 3, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Galey & Lord, Inc. at October 3, 1998 and September 27, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended October 3, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Greensboro, North Carolina
November 4, 1998
28
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par value amounts)
ASSETS
October 3, September 27,
1998 1997
Current assets:
Cash and cash equivalents ...................................................... $ 19,946 $ 2,277
Trade accounts receivable, less deductions for doubtful receivables, discounts,
returns and allowances of $8,215 in 1998 and $4,687 in 1997 .................. 183,192 80,633
Sundry notes and accounts receivable ........................................... 12,166 206
Inventories .................................................................... 185,497 92,517
Income taxes receivable ........................................................ 4,348 1,412
Deferred income taxes .......................................................... 11,370 --
Prepaid expenses and other current assets ...................................... 4,339 3,894
----------- -----------
Total current assets ...................................................... 420,858 180,939
Property, plant and equipment, at cost:
Land ........................................................................... 16,632 1,529
Buildings ...................................................................... 144,129 43,654
Machinery, fixtures and equipment .............................................. 355,138 152,001
----------- -----------
515,899 197,184
Less accumulated depreciation and amortization ................................. (98,334) (67,739)
----------- -----------
417,565 129,445
Investment in and advances to associated companies ............................... 26,327 --
Deferred charges, net ............................................................ 15,148 820
Other non-current assets ......................................................... 3,100 --
Intangibles, net ................................................................. 155,295 37,987
----------- -----------
$ 1,038,293 $ 349,191
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................................. $ 4,051 $ 13,281
Trade accounts payable ......................................................... 66,098 23,488
Accrued salaries and employee benefits ......................................... 28,085 9,450
Accrued liabilities ............................................................ 39,504 3,582
Income taxes payable ........................................................... 1,748 --
Deferred income taxes .......................................................... -- 633
----------- -----------
Total current liabilities ................................................. 139,486 50,434
Long-term debt ................................................................... 682,926 176,755
Other long-term liabilities ...................................................... 26,647 --
Deferred income taxes ............................................................ 61,357 17,685
Stockholders' equity:
Common Stock-$.01 par value, authorized 25,000,000 shares; issued 12,227,391
shares in 1998 and 12,053,694 shares in 1997,
outstanding 11,838,187 shares in 1998 and 11,664,490 shares in 1997 ......... 122 121
Contributed capital in excess of par value ..................................... 38,987 35,877
Retained earnings .............................................................. 81,861 70,566
Less 389,204 Common Stock shares in 1998 and 1997 in treasury, at cost ......... (2,247) (2,247)
Foreign currency translation adjustment ........................................ 9,154 --
----------- -----------
Total stockholders' equity ................................................ 127,877 104,317
----------- -----------
$ 1,038,293 $ 349,191
=========== ===========
See accompanying notes to consolidated financial statements.
29
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
For the Years Ended
-----------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---------- ------------- -------------
Net sales..................................................................... 902,651 $493,362 $411,455
Cost of sales................................................................. 787,218 439,207 367,992
Gross profit.................................................................. 115,433 54,155 43,463
Selling, general and administrative expenses.................................. 39,525 18,123 13,526
Amortization of goodwill...................................................... 3,793 1,679 1,298
------- -------- --------
Operating income.............................................................. 72,115 34,353 28,639
Interest expense.............................................................. 47,566 12,326 11,579
Income from associated companies.............................................. (2,621) - -
Bridge financing interest expense............................................. 3,928 - -
Loss on foreign currency hedges............................................... 2,745 - -
Write-off of merger costs..................................................... - - 1,600
------- -------- --------
Income before income taxes and extraordinary item............................. 20,497 22,027 15,460
Income tax expense:
Current..................................................................... 1,014 5,796 2,449
Deferred.................................................................... 7,664 2,554 3,533
------- -------- --------
8,678 8,350 5,982
------- -------- --------
Income before extraordinary item.............................................. 11,819 13,677 9,478
Extraordinary loss from debt refinancing (net of income tax benefit of $332).. 524 - -
------- -------- --------
Net income.................................................................... $11,295 $ 13,677 $ 9,478
======= ======== ========
Net income per common share:
Basic:
Average common shares outstanding........................................... 11,743 11,610 11,699
Income per share before extraordinary item.................................. $ 1.01 $ 1.18 $ .81
Extraordinary item.......................................................... (.05) - -
------- -------- --------
Net income per common share - basic......................................... $ .96 $ 1.18 $ .81
======= ======== ========
Diluted:
Average common shares outstanding........................................... 12,173 11,986 11,910
Income per share before extraordinary item.................................. $ .97 $ 1.14 $ .80
Extraordinary item.......................................................... (.04) - -
------- -------- --------
Net income per common share - diluted....................................... $ .93 $ 1.14 $ .80
======= ======== ========
See accompanying notes to consolidated financial statements.
30
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended
------------------------------------------
October 3, September 27, September 28,
1998 1997 1996
---------- ------------- -------------
Cash flows from operating activities:
Net income.................................................... $ 11,295 $ 13,677 $ 9,478
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment............... 31,528 13,504 10,340
Amortization of intangible assets........................... 3,793 1,679 1,298
Amortization of deferred charges............................ 3,622 299 221
Deferred income taxes....................................... 7,664 2,554 3,533
Non-cash compensation....................................... 1,180 550 258
Loss on disposals of property, plant and equipment.......... 115 147 22
Undistributed income from associated companies.............. (2,621) - -
Extraordinary loss from debt refinancing.................... 524 - -
Other....................................................... 688 - -
Changes in assets and liabilities (net of acquisition):
Accounts receivable - net................................. (25,959) (6,453) 12,903
Sundry notes and accounts receivable...................... 4,788 (42) 5
Inventories............................................... (11,690) (15,583) 9,298
Prepaid expenses and other current assets................. 3,445 (2,041) (1,190)
Other non-current assets.................................. (848) - -
Trade accounts payable.................................... (1,248) 2,531 2,392
Accrued liabilities....................................... 6,192 (1,766) (1,532)
Income taxes payable...................................... (2,542) (2,527) 2,590
Other long-term liabilities............................... 1,017 - -
----------- --------- ---------
Total adjustments...................................... 19,648 (7,148) 40,138
----------- --------- ---------
Net cash provided by (used in) operating activities......... 30,943 6,529 49,616
----------- --------- ---------
Cash flows from investing activities:
Acquisition of business - net of cash acquired................ (457,078) - (22,823)
Property, plant and equipment expenditures.................... (33,784) (36,626) (13,524)
Proceeds from sale of property, plant and equipment........... 5,812 1,271 1,608
Other......................................................... 1,617 (199) (23)
----------- --------- ---------
Net cash provided by (used in) investing activities......... (483,433) (35,554) (34,762)
----------- --------- ---------
Cash flows from financing activities:
Increase/(decrease) in revolving line of credit............... (22,900) 42,900 (1,400)
Principal payments on long-term debt.......................... (813,983) (15,635) (11,588)
Issuance of long-term debt.................................... 1,323,490 - -
Net proceeds from issuance of Common Stock.................... 1,779 534 9
Tax benefit from exercise of stock options.................... 152 107 5
Purchase of treasury stock.................................... - (196) (1,984)
Payment of bank fees and loan costs........................... (18,719) (64) (465)
Other......................................................... - (143) (69)
----------- --------- ---------
Net cash provided by (used in) financing activities......... 469,819 27,503 (15,492)
Effect of exchange rate changes on cash and cash equivalents.. 340 - -
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 17,669 (1,522) (638)
Cash and cash equivalents at beginning of period.............. 2,277 3,799 4,437
----------- --------- ---------
Cash and cash equivalents at end of period.................... $ 19,946 $ 2,277 $ 3,799
=========== ========= =========
See accompanying notes to consolidated financial statements.
31
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
Foreign
Currency
Common Contributed Retained Treasury Translation
Stock Capital Earnings Stock Adjustment Total
----- ------- -------- ----- ---------- -----
Balance at September 30, 1995.................... $ 119 $ 34,416 $ 47,411 $ (67) $ - $ 81,879
Issuance of 10,100 shares of Common Stock
upon exercise of options...................... 1 8 - - - 9
Tax benefit from exercise of stock options....... - 5 - - - 5
Compensation earned related to issuance of
stock options................................. - 258 - - - 258
Purchase of 197,003 shares of Treasury Stock..... - - - (1,984) - (1,984)
Net income for fiscal 1996....................... - - 9,478 - - 9,478
----- -------- --------- ------- --------- ----------
Balance at September 28, 1996.................... $ 120 $ 34,687 $ 56,889 $(2,051) $ - $ 89,645
Issuance of 85,466 shares of Common Stock
upon exercise of options...................... 1 263 - - - 264
Issuance of 16,384 shares of Restricted
Common Stock.................................. - 270 - - - 270
Tax benefit from exercise of stock options....... - 107 - - - 107
Compensation earned related to issuance of
stock options................................. - 550 - - - 550
Purchase of 12,201 shares of Treasury Stock...... - - - (196) - (196)
Net income for fiscal 1997....................... - - 13,677 - - 13,677
----- -------- --------- ------- --------- ----------
Balance at September 27, 1997.................... $ 121 $ 35,877 $ 70,566 $(2,247) $ - $ 104,317
Issuance of 166,011 shares of Common Stock
upon exercise of options...................... 1 1,638 - - - 1,639
Issuance of 7,686 shares of Restricted
Common Stock.................................. - 140 - - - 140
Tax benefit from exercise of stock options....... - 152 - - - 152
Compensation earned related to issuance -
of stock options.............................. - 1,180 - - - 1,180
Foreign currency translation adjustment.......... - - - - 9,154 9,154
Net income for fiscal 1998....................... - - 11,295 - - 11,295
----- -------- --------- ------- --------- ----------
Balance at October 3, 1998....................... $ 122 $ 38,987 $ 81,861 $(2,247) $ 9,154 $ 127,877
===== ======== ========= ======= ========= ==========
See accompanying notes to consolidated financial statements.
32
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE A - Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the
accounts of Galey & Lord, Inc. (the "Company") and its wholly-owned
subsidiaries. Investments in affiliates in which the Company owns 20 to 50
percent of the voting stock are accounted for using the equity method.
Intercompany items have been eliminated in consolidation.
Cash Equivalents: The Company considers investments in marketable
securities with an original maturity of three months or less to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost or market. The
last-in, first-out (LIFO) method is used to cost the majority of domestic
inventories. The cost of other inventories is determined by the first-in,
first-out method.
Income Taxes: The Company uses the liability method of accounting for
deferred income taxes which requires the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
Property, Plant and Equipment: Depreciation is provided over the estimated
useful lives of the respective assets using straight-line methods. Estimated
useful lives are 40 years for buildings and 5 to 15 years for machinery,
fixtures and equipment.
Deferred Charges: Deferred debt charges are being amortized over the lives
of related debt as an adjustment to interest expense. Accumulated amortization
at October 3, 1998 and September 27, 1997 was $1.3 million and $.4 million,
respectively.
Intangibles: The excess of the purchase cost over the fair value of assets
acquired is being amortized over 20 to 40 years. Accumulated amortization at
October 3, 1998 and September 27, 1997 was $9.2 million and $5.4 million,
respectively. The Company evaluates whether events and circumstances have
occurred that indicate that the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining life to determine whether goodwill is recoverable.
The Company believes that no material impairment of goodwill existed at October
3, 1998.
Accounting for Stock-Based Compensation: The Company follows the
accounting provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which require that the Company
recognize expense for the fair value of stock-based compensation awarded during
the year.
Foreign Currency Translation: The assets and liabilities of the Company's
foreign operations are translated into U.S. dollars at current exchange rates,
and revenues and expenses are translated at average exchange rates for the year.
Resulting translation adjustments are reflected as a separate component of
stockholders' equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency, except those transactions which operate effectively as a hedge of an
identifiable foreign currency commitment or as a hedge of a foreign currency
investment position, are included in the consolidated statements of operations.
Foreign currency transaction losses included in the consolidated statement of
operations are not material.
Derivative Financial Instruments: The Company utilizes derivative
financial instruments principally to manage market risks and reduce its exposure
resulting from fluctuations in foreign currency exchange rates, interest rates
and raw material cotton prices. Derivative instruments include swap agreements,
futures and option contracts and forward exchange and purchase contracts. Gains
and losses relating to qualifying hedges are deferred and are recognized in
income or as an adjustment to carrying amounts when the hedged transaction
occurs. The Company does not utilize derivative financial instruments for
trading or other speculative purposes. The Company actively evaluates the
creditworthiness of the financial institutions that are counterparties to
derivative financial instruments, and it does not expect any counterparties to
fail to meet their obligations.
Revenue Recognition: The Company recognizes revenues from product sales
when goods are shipped or when ownership is assumed by the customer.
33
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE A - Summary of Significant Accounting Policies (Continued)
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. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings Per Share", ("FAS
128") which was adopted by the Company on December 27, 1997. At that time, the
Company was required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the requirements for calculating
basic earnings per share, the dilutive effect of stock options is excluded.
Under the new requirements for calculating diluted earnings per share, the
dilutive effect of certain target stock price performance options was excluded.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Reclassification: Certain prior period amounts have been reclassified to
conform to current year presentation.
Fiscal Year: The Company uses a 52-53 week fiscal year. The year ended
October 3, 1998 was a 53-week year. The years ended September 27, 1997 and
September 28, 1996 were 52-week years.
Recently Issued Accounting Pronouncements: In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income", effective for
fiscal years beginning after December 15, 1997, the Company's fiscal year 1999.
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 stockholder's equity during the period from nonowner
sources. Currently, changes from nonowner sources consist of net income and
foreign currency translation adjustments.
In June 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information", effective for years beginning after
December 15, 1997, the Company's fiscal year 1999. FAS 131 requires that a
public company report financial and descriptive information about its reportable
operating segments pursuant to criteria that differ from current accounting
practice. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The financial information to be reported includes segment
profit or loss, certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of FAS 131 will not affect results of
operations or financial position, but may affect the disclosure of segment
information.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for years beginning after June
15, 1999, the Company's fiscal year 2000. 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
are 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 will be immediately 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.
NOTE B - Business Acquisitions
On January 29, 1998, the Company entered into a Master Separation
Agreement with Polymer Group, Inc. ("Polymer"), DT Acquisition, Inc. ("DTA"), a
subsidiary of Polymer, Dominion Textile, Inc. ("Dominion") and certain other
parties pursuant to which the Company acquired (the "Acquisition") the apparel
fabrics business (the "Acquired Business") of Dominion from DTA for a cash
purchase price of approximately $466.9 million including certain costs related
to the Acquisition. The Acquired Business primarily consists of subsidiaries and
joint venture interests, which comprise the Swift Denim Group, the Klopman Group
34
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE B - Business Acquisitions (Continued)
and Swift Europe. Swift Denim is the second largest supplier of denim in the
world, Klopman is one of the largest suppliers of uniform fabrics in Europe and
Swift Europe is a major international supplier of denim to Europe, North Africa
and Asia. The total purchase price of the Acquisition was funded with borrowings
under the Company's credit facilities (see Note D - Long-term Debt below). The
Company used the net proceeds from the private placement on February 24, 1998 of
$300.0 million aggregate principal amount of 9 1/8% Senior Subordinated Notes
Due 2008 (the "Initial Notes") to repay portions of such credit facilities. In
connection with the Acquisition, which has been accounted for as a purchase
transaction, the Company acquired assets with a fair value of approximately
$539.2 million and assumed liabilities of approximately $193.4 million. The
Company has made a preliminary allocation of the purchase price and has recorded
goodwill of approximately $121.1 million for the excess of purchase price
(including assumed liabilities) over the fair market value of the assets
acquired. Goodwill is being amortized over a 40-year period. The results of
operations of the Acquired Business have been included in the consolidated
financial statements from the date of the Acquisition.
The following unaudited pro forma results of operations assumes that the
Acquisition had occurred at the beginning of fiscal 1998 and fiscal 1997,
respectively. These pro forma results give effect to certain adjustments,
including depreciation of property, plant and equipment, amortization of the
cost of the Acquisition in excess of net assets acquired and interest expense
resulting from the acquisition and related financing. The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations that would actually have occurred had the combination been
in effect on the dates indicated or which may occur in the future.
For the Years Ended
--------------------------------------
October 3, 1998 September 27, 1997
--------------- ------------------
(in thousands except per share data)
Net sales........................................................$1,065,964 $1,103,583
Income (loss) before extraordinary item..........................$ 2,927 $ (4,042)
Income (loss) before extraordinary item per share - diluted......$ .24 $ (.34)
Net income (loss)................................................$ 2,403 $ (4,042)
Net income (loss) per share - diluted............................$ .20 $ (.34)
On June 7, 1996, the Company, through its subsidiary, G&L Service
Company, North America, Inc. ("G&L Service Company") acquired the capital stock
of Dimmit Industries, S.A. de C.V. ("Dimmit") and certain related assets from
Farah Incorporated for $22.8 million in cash including certain costs related to
the acquisition (the "Mexico Acquisition"). Dimmit is composed of six
manufacturing facilities located in Piedras Negras, Mexico and sews and finishes
pants and shorts for the men's casual wear market. Funding for the Mexico
Acquisition was provided through funds generated by operations, working capital
reductions and through amendments to the Company's then existing term loan and
revolving credit facility. These amendments increased the Company's borrowing
capacity by $20 million. In connection with the Mexico Acquisition, which has
been accounted for as a purchase transaction, the Company acquired assets with
an estimated fair value of approximately $12.7 million and assumed liabilities
of approximately $1.1 million. The Company has allocated the purchase price and
has recorded goodwill of approximately $11.2 million for the excess of the
purchase price over the fair value of the net assets acquired. The goodwill
amount is being amortized over a 20-year period. The results of operations of
G&L Service Company and Dimmit have been included in the consolidated financial
statements from the date of the Mexico Acquisition.
On January 25, 1996, the Company and Triarc Companies, Inc. ("Triarc")
mutually agreed not to go forward with their previously announced merger of the
Company and the Graniteville Company, a subsidiary of Triarc, due to economic
conditions existing at that time in the retail, textile and apparel sectors. The
Company incurred fees and expenses related to the proposed merger of $1.6
million and took a charge during fiscal year 1996 for the write-off of those
costs.
35
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE C - Inventories
Inventories at October 3, 1998 and September 27, 1997 are summarized as
follows (in thousands):
1998 1997
---- ----
Raw materials....................................... $ 13,029 $ 2,353
Stock in process.................................... 51,244 17,885
Produced goods...................................... 125,325 75,085
Dyes, chemicals and supplies........................ 13,011 5,448
---------- -------
Total inventory at first-in, first-out (FIFO) cost.. 202,609 100,771
Less LIFO and other reserves........................ (17,112) (8,254)
---------- -------
$ 185,497 $92,517
========== =======
Inventories valued using the LIFO method comprised approximately 71% and 97% of
domestic inventories at October 3, 1998 and September 27, 1997. Inventory held
at foreign locations was $41.1 million at October 3, 1998.
NOTE D - Long-term Debt
Long-term debt consists of the following (in thousands):
1998 1997
---- ----
Senior Credit Facility:
Revolving Credit Note.......................... $ 106,500 $ 151,100
Term Loan B.................................... 154,225 -
Term Loan C.................................... 109,450 -
Term Loan...................................... - 31,000
Senior Subordinated Notes........................... 298,587 -
Other borrowings with various rates and maturities... 18,215 7,936
---------- -----------
686,977 190,036
Less Current portion................................ (4,051) (13,281)
---------- -----------
$ 682,926 $ 176,755
========== ===========
At October 3, 1998, the annual maturities of the principal amounts of
long-term debt were (in thousands):
1999.......................................................... $ 4,051
2000.......................................................... 3,335
2001.......................................................... 3,336
2002.......................................................... 3,370
2003.......................................................... 3,406
Thereafter.................................................... 669,479
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 and (ii) a portion of the outstanding amount under a
revolving line of credit provided for under the Senior Credit Facility (as
defined herein).
36
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE D - Long-term Debt (Continued)
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. and other future direct and indirect domestic
subsidiaries of the Company.
The Notes are subject to certain covenants, including, without
limitation, those limiting the Company and its subsidiaries' ability to incur
indebtedness, pay dividends, incur liens, transfer or sell assets, enter into
transactions with affiliates, issue or sell stock of restricted subsidiaries or
merge or consolidate the Company or its restricted subsidiaries.
On January 29, 1998 the Company entered into a new credit agreement (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 or a borrowing
base (comprised of eligible accounts receivable and eligible inventory, as
defined in the Senior Credit Facility), (ii) a term loan in the principal amount
of $155.0 million ("Term Loan B") and (iii) a term loan in the principal amount
of $110.0 million ("Term Loan C").
Under the Senior Credit Facility borrowings were used to refinance the
Company's prior senior credit facility with FUNB, to fund the Acquisition, to
pay for certain closing costs and expenses related to the Acquisition and for
general corporate and working capital purposes. Under the Senior Credit
Facility, the revolving line of credit expires on March 27, 2004 and the
principal amount of (i) Term Loan B is repayable in 24 quarterly payments of
$387,500 until March 27, 2004 and, thereafter, four quarterly payments of
$36,425,000 until Term Loan B's maturity on April 2, 2005 and (ii) Term Loan C
is 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, based
on the terms of the Senior Credit Facility at October 3, 1998, 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 certainleverage 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.
37
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE D - Long-term Debt (Continued)
The Company's obligations under the Senior Credit Facility are secured by
all of the assets (other than real property) of the Company and each of its
domestic subsidiaries, a pledge by the Company and each of its 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.
On December 19, 1997, the Company entered into a $470.0 million credit
agreement (the "Interim Credit Agreement") with FUNB, as agent and lender.
Initial revolving credit line borrowings under the Interim Credit agreement were
used to refinance the existing term loan and revolving credit facility. The
Interim Credit Agreement was replaced on January 29, 1998 when the Company
entered into the Senior Credit Facility.
On December 19, 1997, the Company entered into a Senior Subordinated
Credit Agreement (the "Bridge Financing") with First Union Corporation, as agent
and lender, which was amended on January 29, 1998 and provided for borrowings of
$275.0 million, of which $145.6 million was initially borrowed on December 19,
1997 and the remainder of which was borrowed on January 29, 1998. All borrowings
under the Bridge Financing were used to fund the Acquisition (including fees and
expenses). The Bridge Financing was repaid on February 24, 1998 when the Company
closed its private offering of $300.0 million aggregate principal amount of
Initial Notes.
At October 3, 1998, the Company's term loan and revolving credit
borrowings were based on one and three-month market LIBOR rates averaging 5.37%
and on a prime rate of 8.25%. The Company's weighted average borrowing rate on
these loans at October 3, 1998 was 8.11%, which includes spreads ranging from
2.25% to 3.0% on the LIBOR borrowings and a spread of 1.0% on the prime rate
borrowings.
Previous Credit Agreement
On June 4, 1996, the Company amended its term loan and revolving credit
facility with a bank group led by First Union National Bank of North America, as
agent and lender. The amendment increased the Company's maximum allowable
borrowings under the revolving credit facility, which expired April 30, 2000,
from $150 million to $170 million. The term loan was restated to the outstanding
balance of $48 million and continued to require equal quarterly principal
payments of $3 million through the term loan's expiration on March 31, 2000. The
amended term loan and revolving credit facility 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 1.5%, in accordance with a pricing grid based on
certain financial ratios.
On May 13, 1997, the Company amended its term loan and revolving credit
facility with its bank group. The amendment modified the Company's covenants
related to debt service, eliminated the covenant limiting the amount of capital
expenditures to be made and permitted the Company to enter into a trade
receivables securitization.
The Company's obligations under the previous credit facility were
secured by all of the Company's inventory, equipment, accounts receivable and
general intangibles, and a pledge by the Company of all the outstanding capital
stock of its wholly-owned domestic subsidiaries and a pledge of 65% of the
outstanding capital stock of its foreign subsidiary.
38
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE E - Financial Instruments
The Company utilizes the following methods in determining the fair value
of its financial instruments:
Cash and cash equivalents, trade receivables and trade payables - Due
to the short maturity of these instruments, the carrying value approximates fair
value.
Long-term debt - For the Company's publicly traded debt instruments,
fair value is determined based on quoted market prices of those instruments. For
the remaining debt instruments, management believes the carrying values
approximate fair value.
Interest rate swap agreements - The fair value of the Company's
interest rate swap agreements is determined by comparing the agreements'
anticipated cash flows based on current interest rates to the cash flows of a
similar interest rate swap agreement which could be obtained as of October 3,
1998.
Forward exchange contracts - The fair value of outstanding forward
exchange contracts is determined based on quotes obtained from public-trading
currency markets.
Publicly Traded Debt
At October 3, 1998, the fair value of the Company's 9 1/8% Senior
Subordinated Notes Due 2008 was approximately $259.5 million as compared to the
carrying value of $298.6 million.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to reduce the impact
of changes in interest rates on its floating rate debt. The Company currently
has interest rate swap agreements on $25 million of its outstanding
floating-rate bank debt. The interest rate swaps assure that the Company will
pay a maximum LIBOR rate of 5.53% (excluding any applicable spread required by
the Senior Credit Facility) for a period ending December 2000. The amount paid
or received under the swap agreements is based on the changes in actual interest
rates and is recorded as an adjustment to interest expense. At October 3, 1998,
the fair value of the Company's interest rate swaps was $(489,000).
Forward Exchange Contracts
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 related to accounts receivable and
trade payable positions and fixed asset purchase obligations.
The table below summarizes by currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars. The purchased amounts
represent the net U.S. dollar equivalent of commitments to purchase foreign
currencies and the sold amounts represent the net U.S dollar equivalent of
commitments to sell foreign currencies. The foreign currency amounts have been
translated into a U.S. dollar equivalent value using the exchange rate at the
reporting date. Forward exchange contracts mature at the anticipated cash
requirement date of the hedged transaction, generally within one year. All
contracts are scheduled to be settled in fiscal year 1999. No significant
forward exchange contracts existed at September 27, 1997.
Contractual Contractual Unrealized
Currency Value Purchases Value Sold Gain/(Loss)
-------- --------------- ---------- -----------
(in thousands)
Italian lira $ - $ 5,000 $ (252)
Japanese yen 139 - (20)
German mark - 1,825 6
39
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE F - Income Taxes
Income from continuing operations before the provision of income taxes and
the extraordinary item consisted of (in thousands):
1998 1997 1996
---- ---- ----
Domestic............. $ 3,786 $ 20,448 $ 15,388
Foreign.............. 16,711 1,579 72
--------- --------- ---------
$ 20,497 $ 22,027 $ 15,460
========= ========= =========
The components of income tax expense (benefit) from continuing operations
before the extraordinary item are as follows (in thousands):
1998 1997 1996
---- ---- ----
Current tax provision:
Federal......................... $ (2,703) $ 4,861 $ 1,939
State........................... (7) 731 454
Foreign......................... 3,724 204 56
--------- --------- ---------
Total current tax provision.......... 1,014 5,796 2,449
--------- --------- ---------
Deferred tax provision:
Federal ........................ 4,021 2,202 3,194
State........................... 1,213 352 339
Foreign......................... 2,430 - -
--------- --------- ---------
Total deferred tax provision......... 7,664 2,554 3,533
--------- --------- ---------
Total provision for income taxes..... $ 8,678 $ 8,350 $ 5,982
========= ========= =========
Following is a reconciliation of the United States statutory tax rate to
the effective rate expressed as a percentage of income before income taxes and
extraordinary item:
1998 1997 1996
---- ---- ----
Federal statutory rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit................. 3.8 3.2 3.2
Goodwill amortization............................... 3.8 0.7 0.9
Foreign sales corporation........................... (2.7) - -
Foreign taxes in excess of federal statutory rate... 1.5 0.9 0.4
Other............................................... 0.9 (1.9) (0.8)
---- ---- ----
Effective rate...................................... 42.3% 37.9% 38.7%
==== ==== ====
40
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE F - Income Taxes (Continued)
Deferred income taxes are provided for temporary differences between
income tax and financial statement recognition of revenues and expenses. At
October 3, 1998 and September 27, 1997, the Company had $31.3 million and $1.5
million, respectively, of deferred income tax assets and $81.3 million and $19.8
million, respectively, of deferred income tax liabilities which have been netted
for financial statement presentation purposes. The significant components of
these amounts as shown on the balance sheet are as follows (in thousands):
October 3, 1998 September 27, 1997
---------------------------- ----------------------------
Current Noncurrent Current Noncurrent
Asset Asset Asset Asset
(Liability) (Liability) (Liability) (Liability)
----------- ----------- ----------- -----------
Inventory valuation.............. $ (1,684) $ - $ (1,947) $ -
Accruals and allowances.......... 13,054 1,750 1,437 -
Property, plant and equipment.... - (67,030) - (16,116)
Goodwill......................... - (1,965) - (1,592)
Net operating loss carryforward.. - 10,792 - -
Postretirement benefits.......... - 3,505 - -
Other............................ - 2,186 (123) 23
Valuation allowance.............. - (10,595) - -
----------- ----------- ---------- -----------
Total.......................... $ 11,370 $ (61,357) $ (633) $ (17,685)
=========== =========== ========== ===========
The Company has foreign income tax loss carryforwards from the Acquired
Business of approximately $29.9 million expiring in years 1999 through 2001.
Statement of Financial Accounting Standards No. 109 requires that deferred
income tax assets be reduced by a valuation allowance if it is more likely than
not that some portion or all of the deferred income tax asset will not be
realized. During 1998, a valuation allowance of $10.6 million attributable to
foreign deferred income tax assets was established against the acquired loss
carryforward and any future benefit derived from such carryforwards will be
credited to goodwill.
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately $10.6 million at October 3, 1998. The foreign undistributed
earnings are either permanently reinvested or distribution will not result in
incremental U.S. taxes. Accordingly, no provision for U.S. federal and state
income taxes has been provided thereon. It is not practical to estimate the
additional tax that would be incurred, if any, if the permanently reinvested
earnings were repatriated.
NOTE G - Supplemental Cash Flow Information
Cash paid (received) for interest and income taxes is as follows (in
thousands):
1998 1997 1996
---- ---- ----
Interest............... $ 31,328 $ 11,213 $ 12,137
Income taxes........... $ 1,044 $ 8,287 $ (70)
41
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE H - Benefit Plans
Defined Benefit Pension Plans
The Company and its U.S. subsidiaries sponsor noncontributory defined
benefit pension plans covering substantially all domestic employees. The plans
provide retirement benefits for all qualified salaried employees and qualified
non-union wage employees based generally on years of service and average
compensation. Retirement benefits for qualified union wage employees are based
generally on a flat dollar amount for each year of service. The Company's
funding policy is to contribute annually the amount recommended by the plan's
actuary. Plan assets, which consist of common stocks, bonds and cash
equivalents, are maintained in trust accounts.
The Company also has a nonqualified, unfunded supplementary retirement
plan under which the Company will pay supplemental pension benefits to key
executives in addition to the amount participants will receive under the
Company's retirement plan. The annual cost of this plan has been included in the
determination of the net periodic pension cost shown below and amounted to
$307,240, $241,025 and $179,500 for 1998, 1997 and 1996, respectively.
The following sets forth the funded status of the plans at October 3, 1998
and September 27, 1997 (in thousands):
Actuarial Present Value of Benefit Obligations:
Defined Benefit Plan Supplemental Plan
---------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Accumulated benefit obligation, including vested
benefits of $49,465, $18,142, $729 and $493, respectively...... $ 51,105 $ 19,836 $ 729 $ 493
======== ======== ======= ======
Projected benefit obligation for service rendered to date.......... $ 60,496 $ 23,911 $ 1,782 $1,195
Less plan assets at fair value..................................... 56,699 23,074 - -
-------- -------- ------- ------
Projected benefit obligation in excess of plan assets.............. 3,797 837 1,782 1,195
Unrecognized prior service cost.................................... 1,134 1,221 (165) (188)
Unrecognized net loss.............................................. (6,111) (2,203) (631) (328)
-------- -------- ------- ------
Pension liability (asset) recognized in the balance sheet.......... $ (1,180) $ (145) $ 986 $ 679
======== ======== ======= ======
Net pension cost for the plans for the years ended October 3, 1998,
September 27, 1997 and September 28, 1996 included the following components (in
thousands):
1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period... $4,842 $ 3,217 $ 3,227
Interest cost on projected benefit obligation...... 3,315 1,558 1,470
Return on assets................................... (674) (3,789) (1,258)
Net amortization and deferral...................... (3,031) 2,178 (257)
Net periodic pension cost.......................... $4,452 $ 3,164 $ 3,182
42
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE H - Benefit Plans (Continued)
The projected benefit obligation for both plans at October 3, 1998 and
September 27, 1997 was determined using assumed discount rates of 6.95% and
7.5%, respectively. The assumed long-term rate of increase in compensation was
5.5% for all years presented, and the assumed long-term rate of return on plan
assets was 8.5% for 1998 and 1997 and 9% for 1996.
Pursuant to an agreement with the Pension Benefit Guaranty Corporation
("PBGC"), the Company has given the PBGC a first priority lien of $10 million on
certain land and building assets of the Company to secure payment of any
liability to the PBGC that might arise if one or more pension plans are
terminated.
Defined Contribution Plans
The Company has various retirement savings and profit sharing plans
covering qualified U.S. employees. The plans include a provision which allows
employees to make pre-tax contributions under Section 401(k) of the Internal
Revenue Code. Certain plans provide for the Company to make a guaranteed match
of the employee's contributions while all plans allow the Company to also make
discretionary profit-sharing contributions. The Company contributions for 1998,
1997 and 1996 were approximately $3.1 million, $1.7 million and $1.6 million,
respectively.
In addition, the Company provides life and health benefits to
substantially all U.S. employees. Employees contribute a fixed amount weekly or
monthly as set forth in the plan with the balance paid by the Company. The
Company contributions for 1998, 1997 and 1996 were approximately $13.8 million,
$6.3 million, and $8.4 million, respectively.
Deferred Compensation Plan
The Company has a nonqualified, unfunded deferred compensation plan which
provides certain key executives with a deferred compensation award which will
earn interest at the United States Treasury Bill rate. The award, which is based
on the year's operating results, was $307,000, $344,000 and $247,000 for 1998,
1997 and 1996, respectively. The plan participants will be vested in the awards
upon the completion of five years of service after the date of the award, upon
normal retirement, upon involuntary termination subject to certain limitations,
upon permanent and total disability or death, whichever occurs first. In the
event of retirement or disability, any unpaid deferred awards will be paid on
the normal five-year maturity schedule. Upon the death of a participant, the
Company has the option to either immediately pay the award to the participant's
estate or pay the award on the normal five-year maturity schedule.
Foreign Employee Plans
A significant number of the Company's European employees participate in a
government mandated deferred compensation plan. This plan provides benefits to
employees upon termination of service with the Company. Employees accrue
benefits under the plan based on compensation levels and length of service.
Accrued benefits are adjusted upward annually for interest earned on accumulated
balances and cost of living increases. Approximately $1.5 million has been
recognized as expense related to the plan in the accompanying statements of
operations for the year ended October 3, 1998. A liability of approximately
$12.3 million is included within other long-term liabilities in the Company's
consolidated balance sheets as of October 3, 1998, to provide for payment of
accrued benefits under the plan. Employees are 100% vested in the benefits
accrued.
Many of the Company's European employees participate in government
sponsored healthcare and pension plans. Annually, the Company and its employees
contribute an amount equal to approximately 45% (35% by the Company; 10% by the
employees) of the Company's gross salaries and wages to the government for
administration of these plans and other social programs. For the year ended
October 3, 1998, the Company's portion of the funding totaled $4.8 million.
The Company's Canadian employees participate in a government sponsored
pension plan. The plan requires contributions from the employer and the
employee. The Company's required contributions paid for the year ended October
3, 1998, totaled approximately $0.4 million. The Company's qualified Canadian
employees also are eligible to participate in various retirement savings plans.
The plans provide for voluntary pre-tax contributions from employees and
guaranteed Company contributions ranging from 2% to 10% of an employee's annual
salary. Contributions made to these plans for the year ended October 3, 1998
were $0.4 million.
43
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE I - Postretirement Benefits Other Than Pensions
The Company provides health care and life insurance benefits to certain
retired employees and their dependents. The plans are unfunded and approved
claims are paid by the Company. The Company's cost is partially offset by
retiree premium contributions.
The following sets forth the funded status of the plans at October 3, 1998
(in thousands):
Accumulated postretirement benefit obligation for:
Retired participants.................................... $ 2,261
Fully eligible participants............................. 1,574
Other active employees.................................. 5,188
----------
9,023
Unrecognized net loss........................................ 81
----------
Postretirement liability recognized in the balance sheet..... $ 9,104
==========
Net pension cost for the plans for the year ended October 3, 1998 included
the following components (in thousands):
Service cost - benefits earned during the period......... $ 227
Interest cost on projected benefit obligation............ 415
------
Net periodic postretirement benefit cost................. $ 642
======
The assumed health care cost trend rate was 10% for 1998, decreasing to
5% by the year 2003 and remaining at that level thereafter. The discount rate
was 6.95% at October 3, 1998. A one percentage point increase in the assumed
health care cost trend rate would increase the accumulated postretirement
benefit obligation by approximately $866,000.
NOTE J - Commitments and Contingencies
Future minimum commitments for operating leases at October 3, 1998 are as
follows (in thousands):
1999.................................................. $ 8,046
2000.................................................. 5,759
2001.................................................. 4,627
2002.................................................. 3,735
2003.................................................. 1,681
Thereafter............................................ 929
-----------
Total minimum lease payments.......................... $ 24,777
===========
Approximately 15.4% of minimum lease payments on operating leases
pertain to real estate as of October 3, 1998. The remainder covers a variety of
machinery and equipment. Rental expense for all operating leases was
approximately $9.1 million, $5.5 million and $4.3 million in 1998, 1997 and
1996, respectively.
The Company is involved in various litigation arising in the ordinary
course of business. Although the final outcome of these matters cannot be
determined, based on the facts presently known, it is Management's opinion that
the final resolution of these matters will not have a material adverse effect on
the Company's financial position or results of operations.
44
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE K - Stockholders' Equity
The authorized capital stock of the Company consists of (i) 25,000,000
shares of Common Stock, par value $.01 per share, of which 11,838,187 shares are
outstanding at October 3, 1998, (ii) 5,000,000 shares of Nonvoting Common Stock,
par value $.01 per share, none of which is issued or outstanding, and (iii)
5,000,000 shares of Preferred Stock, par value $.01 per share, none of which is
issued or outstanding.
The Company has a Stock Option Plan (the "Plan") authorizing the granting
of qualified and non-qualified stock options to officers, directors, consultants
and key employees of the Company. Effective February 11, 1997, the Plan was
amended to increase the number of shares of Company common stock available for
issuance from 1.6 million to 1.85 million. Options may be granted through the
plan's expiration in February 1999 at an exercise price of not less than fair
market value. Currently, the Company has both fixed stock options and target
stock price performance options outstanding under the Plan. As of October 3,
1998, the Company had 118,664 shares available for the issuance of stock options
under the Plan.
Fixed Stock Options
The exercise price of each fixed option granted is equal to the market
price of the Company's Common Stock on the date of grant with a maximum term of
10 years. Options granted to directors vest 12 months from the date of grant
while options granted to certain management employees vest 20% each year over a
five-year period from the date of grant.
The fair value of each option granted after September 30, 1995 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions used for grants in 1998, 1997 and 1996: expected
dividend yield of 0% for all years; expected volatility of 34% for all years;
weighted average risk-free interest rate of 5.45%, 6.17% and 6.55%,
respectively; and expected lives of 5 years for 1998 and 1997 and 5 to 7 years
for 1996.
A summary of the status of the Company's fixed stock options as of
October 3, 1998, September 27, 1997 and September 28, 1996 and changes during
the years are presented below:
1998 1997 1996
----------------------------- ------------------------------ ---------------------------
Weighted
Number of Weighted Average Number of Weighted Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ---------------- --------- --------------
Outstanding, beginning of year........ 582,560 $ 9.22 682,210 $ 8.61 715,310 $ 8.80
Granted............................... 6,500 18.12 4,500 16.46 14,500 10.10
Exercised............................. (80,611) 8.05 (84,800) 3.00 (10,100) .93
Forfeited or Canceled................. (5,200) 13.68 (19,350) 16.48 (37,500) 15.00
------- ------- -------
Outstanding, end of year.............. 503,249 $ 9.48 582,560 $ 9.22 682,210 $ 8.61
======= ======== ======= ========= ======= ========
Options exercisable at year-end....... 450,349 496,060 559,860
======= ======= =======
Weighted average fair value of
options granted during the year
calculated using modified Black-
Scholes model..................... $7.12 $5.75 $4.76
45
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE K - Stockholders' Equity (Continued)
The following table summarizes information about fixed stock options
outstanding at October 3, 1998:
Options Exercisable
-----------------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 10/3/98 Contractual Life Exercise Price at 10/3/98 Exercise Price
--------------- ---------- ---------------- -------------- ---------- --------------
$0.43 25,200 0.5 Yrs. $ 0.43 25,200 $ 0.43
0.93 12,000 1.6 0.93 12,000 0.93
1.75 66,700 1.8 1.75 66,700 1.75
9.38 to 14.00 323,900 4.0 10.67 301,300 10.63
14.25 to 18.31 75,449 6.4 15.58 45,149 15.46
----- ----- ------ --- ----- ------ -----
$0.43 to 18.31 503,249 3.9 $ 9.48 450,349 $ 8.97
Target Stock Price Performance Options
The exercise price of each target stock price performance option granted
is equal to the market price of the Company's common stock on the date of grant
and vests as the Company's common stock price achieves certain pre-established
targets, ranging from $15 to $30, which were set on the date of grant. All
options which have not vested within five years of the date of grant will
expire. All options which have vested within such time expire ten years from the
date of grant.
The fair value of each option granted was estimated on the date of grant
using a modified Black-Scholes option-pricing model which, in addition to the
required inputs, takes into consideration the target stock price (or barrier)
which must be attained. The following assumptions were incorporated into the
model for options granted in 1998, 1997 and 1996: weighted average risk-free
interest rate of 5.53%, 5.84% and 6.57%, respectively; expected dividend yield
of 0% for all years; expected lives ranging from 1.42 months to 2.17 years, 2.25
to 4.25 years and 2 to 5.5 years, respectively; and volatility of 34% for all
years.
A summary of the status of the Company's target stock price performance
options as of October 3, 1998, September 27, 1997 and September 28, 1996 and
changes during the year is presented below:
1998 1997 1996
----------------------------- ----------------------------- ---------------------------
Weighted
Number of Weighted Average Number of Weighted Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding, beginning of year........ 522,334 $10.64 475,000 $10.38 - -
Granted............................... 71,000 16.38 48,000 13.25 475,000 $10.38
Exercised............................. (85,400) 11.61 (666) 13.25 - -
Forfeited or Canceled................. (834) 13.25 - - - -
------- ------ ------- ------ ------- ------
Outstanding, end of year.............. 507,100 $11.27 522,334 $10.64 475,000 $10.38
======= ====== ======= ====== ======= ======
Options exercisable at year-end....... 492,100 221,654 -
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted during the year
calculated using modified Black-
Scholes model..................... $3.53 $4.00 $3.05
As of October 3, 1998, the 507,100 target stock price performance options
outstanding under the Plan have a weighted- average remaining contractual life
of 7.7 years assuming all options vest.
46
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE L - Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
1998 1997 1996
---- ---- ----
Numerator:
Income before extraordinary item................$ 11,819 $ 13,677 $ 9,478
Extraordinary loss.............................. 524 - -
--------- ---------- ----------
Net income......................................$ 11,295 $ 13,677 $ 9,478
========= ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares....................... 11,743 11,610 11,699
Effect of dilutive securities:
Stock options................................. 430 376 211
--------- ---------- ----------
Diluted potential common shares denominator
for diluted earnings per share - adjusted
weighted average shares and assumed
exercises..................................... 12,173 11,986 11,910
========= ========== ==========
NOTE M - Major Customer
Apparel fabrics had sales to Levi Strauss and related companies which
comprised 19.4%, 21.6% and 17.4% of the Company's net sales for fiscal 1998,
1997 and 1996, respectively.
NOTE N - Concentration of Credit Risk
The Company manufactures and sells textile products to companies
located worldwide which are predominantly in the apparel and home fabrics
industries. The Company performs periodic credit evaluations of its customers'
financial condition and, although the Company does not generally require
collateral, it does require cash payments in advance when the assessment of
credit risk associated with a customer is substantially higher than normal. At
October 3, 1998, all trade accounts receivable are from customers in the apparel
and home furnishings industry. Receivables generally are due within 60 days, and
credit losses have consistently been within management's expectations, other
than credit losses resulting from one Home Fashion Fabrics customer which filed
for bankruptcy protection during the June quarter 1997. All credit losses are
provided for in the financial statements.
47
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE O - Segment Information
The Company's operations are classified into two business segments,
apparel fabrics and home fabrics. The apparel fabrics segment sells to clothing
manufacturers worldwide and consists of woven fabrics, G&L Service Company,
Swift Denim and Klopman. The home fabrics segment produces fabrics for the
domestic home furnishing trade through the Home Fashion Fabrics Division.
Information about the Company's operations in its different industry
segments for the past three years is as follows (in thousands) (see Note A).
1998 1997 1996
---- ---- ----
Net Sales
Apparel fabrics $ 856,547 $ 456,597 $ 364,157
Home fabrics 46,104 36,765 47,298
------------ ---------- ----------
Consolidated $ 902,651 $ 493,362 $ 411,455
============ ========== ==========
Operating Income
Apparel fabrics $ 69,280 $ 36,837 $ 29,924
Home fabrics 2,835 (2,484) (1,285)
------------ ---------- ----------
Consolidated 72,115 34,353 28,639
Interest expense 47,566 12,326 11,579
Income from associated companies (2,621) - -
Bridge financing interest expense 3,928 - -
Loss on foreign currency hedges 2,745 - -
Write-off of merger costs - - 1,600
------------ ---------- ----------
Income before income taxes and extraordinary loss $ 20,497 $ 22,027 $ 15,460
============ ========== ==========
Identifiable Assets
Apparel fabrics $ 939,622 $ 279,307 $ 225,247
Home fabrics 61,606 65,885 75,148
Corporate (including cash and income tax assets) 37,065 3,999 4,481
------------ ---------- ----------
Consolidated $ 1,038,293 $ 349,191 $ 304,876
============ ========== ==========
Depreciation and Amortization
Apparel fabrics $ 35,601 $ 12,129 $ 8,666
Home fabrics 3,342 3,353 3,193
------------ ---------- ----------
Consolidated $ 38,943 $ 15,482 $ 11,859
============ ========== ==========
Capital Expenditures
Apparel fabrics $ 33,579 $ 35,871 $ 11,259
Home fabrics 205 755 2,265
------------ ---------- ----------
Consolidated $ 33,784 $ 36,626 $ 13,524
============ ========== ==========
48
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE O - Segment Information (Continued)
Geographical Segment Information:
1998 1997 1996
---- ---- ----
Net Sales
United States $ 756,762 $ 493,362 $ 411,455
Europe 97,813 - -
Canada 48,076 - -
Other - - -
------------ ---------- ----------
Consolidated $ 902,651 $ 493,362 $ 411,455
============ ============ ============
Operating Income
United States $ 58,248 $ 34,163 $ 28,589
Europe 5,245 - -
Canada 8,215 - -
Other 407 190 50
------------ ---------- ----------
Consolidated 72,115 34,353 28,639
Interest expense 47,566 12,326 11,579
Income from associated companies (2,621) - -
Bridge financing interest expense 3,928 - -
Loss on foreign currency hedges 2,745 - -
Write-off of merger costs - - 1,600
------------ ---------- ----------
Income before income taxes and extraordinary loss $ 20,497 $ 22,027 $ 8,742
============ ============ ============
Identifiable Assets
United States $ 786,248 $ 347,990 $ 304,293
Europe 173,316 - -
Canada 70,004 - -
Other 8,725 1,201 583
------------ ---------- ----------
Consolidated $ 1,038,293 $ 349,191 $ 304,876
============ ============ ============
Depreciation and Amortization
United States $ 31,948 $ 15,446 $ 11,849
Europe 4,305 - -
Canada 2,621 - -
Other 69 36 10
------------ ---------- ----------
Consolidated $ 38,943 $ 15,482 $ 11,859
============ ============ ============
Capital Expenditures
United States $ 29,040 $ 36,258 $ 13,101
Europe 2,766 - -
Canada 1,928 - -
Other 50 368 423
------------ ---------- ----------
Consolidated $ 33,784 $ 36,626 $ 13,524
============ ============ ============
49
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE P - Investments in and Advances to Associated Companies
At October 3, 1998, investments in and advances to associated companies
were $26.3 million, representing several 50% joint venture interests. Included
in the investments in and advances to associated companies are secured loans to
Swift Europe of $5.7 million. The secured loans outstanding at October 3, 1998
bear interest at rates between 5% and 8% and are payable in installments through
2009.
The excess of the Company's investment over its equity in the
underlying net assets of its joint venture interests is approximately $12.3
million (net of accumulated amortization of $.4 million) and is being amortized
on a straight-line basis over 20 years as a component of the equity in earnings
of unconsolidated associated companies. The following table presents condensed
balance sheet and income statement information as of October 3, 1998 and for the
eight months ended October 3, 1998. The financial information has been derived
from statutory financial statements and has been adjusted to conform to U.S.
generally accepted accounting principles.
In thousands
Selected Balance Sheet Data:
Current assets $ 33,764
Noncurrent assets 11,998
Current liabilities 32,446
Noncurrent liabilities 10,668
Stockholders' equity 2,648
Selected Income Statement Data:
Net sales $ 40,901
Gross profit 16,333
Operating income 6,880
Net income $ 6,246
50
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE Q - Quarterly Results of Operations (Unaudited)
The Company's unaudited consolidated results of operations are presented
below (in thousands except per share data):
Fiscal 1998 Quarters
------------------------------------------------------------
December March June September
---------- ---------- ---------- ----------
Net sales...................................................... $ 127,147 $ 237,645 $ 275,296 $ 262,563
Cost of sales.................................................. 117,351 203,529 238,034 228,304
---------- ---------- ---------- ----------
Gross profit................................................... 9,796 34,116 37,262 34,259
Income tax expense (benefit)................................... (526) 3,199 3,457 2,548
Income (loss) before extraordinary loss........................ (110) 4,096 4,721 3,112
Extraordinary loss from debt refinancing....................... (524) - - -
Net income (loss).............................................. $ (634) $ 4,096 $ 4,721 $ 3,112
========== ========== ========== ========
Per share data - basic:
Average common shares outstanding.............................. 11,664 11,682 11,781 11,833
Income (loss) before extraordinary loss........................ (.01) .35 .40 .26
Net income (loss) - basic...................................... $ (.05) $ .35 $ .40 $ .26
========== ========== ========== ========
Per share data - diluted:
Average common shares outstanding.............................. 12,036 12,088 12,368 12,011
Income (loss) before extraordinary loss........................ (.01) .34 .38 .26
Net income (loss) - diluted.................................... $ (.05) $ .34 $ .38 $ .26
========== ========== ========== ========
Fiscal 1997 Quarters
------------------------------------------------------------
December March June September
---------- ---------- ---------- ----------
Net sales...................................................... $ 110,928 $ 129,429 $ 135,113 $117,892
Cost of sales.................................................. 98,360 115,567 118,839 106,441
---------- ---------- ---------- ----------
Gross profit................................................... 12,568 13,862 16,274 11,451
Income tax expense ............................................ 2,215 2,398 2,599 1,138
Net income .................................................... $ 3,522 $ 3,800 $ 4,184 $ 2,171
========== ========== ========== =========
Per share data - basic:
Average common shares outstanding.............................. 11,576 11,598 11,625 11,642
Net income - basic............................................. $ .30 $ .33 $ .36 $ .19
========== ========== ========== =========
Per share data - diluted:
Average common shares outstanding.............................. 11,839 12,006 12,004 12,031
Net income - diluted........................................... $ .30 $ .32 $ .35 $ .18
========== ========== ========== =========
The quarter ended October 3, 1998 was a 14-week period. All other quarters
presented are 13-week periods.
51
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE R - Supplemental Condensed Consolidating Financial Information
The following summarizes condensed consolidating financial information
for the Company, segregating Galey & Lord, Inc. (the "Parent") and subsidiaries
that are guarantors of the Notes ("Guarantor Subsidiaries") from subsidiaries
that are not guarantors of the Notes ("Non-Guarantor Subsidiaries"). The
Guarantor Subsidiaries are wholly-owned subsidiaries of the Company and
guarantees are full, unconditional and joint and several. Separate financial
statements of each of the Guarantor Subsidiaries are not presented because
Management believes that these financial statements would not be material to
investors.
October 3, 1998
------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------ ------------ ------------ ------------ ------------
Current assets:
Trade accounts receivable $ - $ 137,220 $ 45,972 $ - $ 183,192
Inventories - 145,128 41,355 (986) 185,497
Other current assets 4,886 58,569 25,755 (37,041) 52,169
---------- ----------- ----------- ----------- -----------
Total current assets 4,886 340,917 113,082 (38,027) 420,858
Property, plant and equipment, net - 297,625 119,940 - 417,565
Intangibles, net - 155,295 - - 155,295
Investments in subsidiaries and other assets 831,769 1,376 56,710 (845,280) 44,575
---------- ----------- ----------- ----------- -----------
$ 836,655 $ 795,213 $ 289,732 $ (883,307) $ 1,038,293
========== =========== =========== =========== ===========
Current liabilities:
Trade accounts payable $ 675 $ 40,329 $ 25,094 $ - $ 66,098
Accrued liabilities 19,729 27,068 20,114 678 67,589
Other current liabilities 14,474 19,497 27,605 (55,777) 5,799
---------- ----------- ----------- ----------- -----------
Total current liabilities 34,878 86,894 72,813 (55,099) 139,486
Long-term debt 666,112 587,719 19,995 (590,900) 682,926
Other non-current liabilities 7,788 65,460 18,651 (3,895) 88,004
Stockholders' equity 127,877 55,140 178,273 (233,413) 127,877
---------- ----------- ----------- ----------- -----------
$ 836,655 $ 795,213 $ 289,732 $ (883,307) $ 1,038,293
========== =========== =========== =========== ===========
For the year ended October 3, 1998
------------------------------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------ ------------ ------------ ------------ ------------
Sales $ - $ 766,641 $ 175,084 $ (39,074) $ 902,651
Gross profit - 90,674 24,749 10 115,433
Operating income (loss) (222) 58,470 13,944 (77) 72,115
Interest expense, income taxes and other, net 2,240 58,122 5,544 (5,086) 60,820
Net income (loss) $ (2,462) $ 348 $ 8,400 $ 5,009 $ 11,295
52
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998, September 27, 1997 and September 28, 1996
NOTE R - Supplemental Condensed Consolidating Financial Information (Continued)
For the year ended October 3, 1998
---------------------------------------------------------------
(in thousands)
Guarantor Non-Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Consolidated
- ---------- ------ ------------ ------------ ------------
Cash provided by (used in) operating activities $ 9,126 $ 3,704 $ 18,113 $ 30,943
Cash provided by (used in) investing activities (466,877) (26,780) 10,224 (483,433)
Cash provided by (used in) financing activities 457,863 29,180 (17,224) 469,819
Effect of exchange rate change on cash and cash
equivalents - - 340 340
----------- ----------- ----------- -----------
Net change in cash and cash equivalents 112 6,104 11,453 17,669
Cash and cash equivalents at beginning of period 2 2,222 53 2,277
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 114 $ 8,326 $ 11,506 $ 19,946
=========== =========== =========== ===========
53
INDEPENDENT AUDITORS' REPORT
To Boards of Directors and Stockholders of Galey & Lord, Inc. and Polymer
Group, Inc.
We have audited the accompanying combined balance sheets of the Apparel
Fabrics Business of Dominion Textile Inc. (the "Business") as of June 30, 1996
and 1997, and the related combined statements of income and deficit and cash
flows for the years ended June 30, 1995, 1996 and 1997. These financial
statements are the responsibility of the Business' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits. We did not audit the financial statements of Swift
Textiles Europe Limited, the Business' investment which is accounted for using
the equity method. The Business' equity of $3.2 million and $2.8 million in the
Swift Textiles Europe Limited net assets at June 30, 1996 and 1997,
respectively, and of $6.3 million, $8.3 million and $7.4 million in the net
income for the years ended June 30, 1995, 1996 and 1997, respectively are
included in the accompanying combined financial statements. The financial
statements of Swift Textiles Europe Limited were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for such company, is based solely on the report of such
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such combined financial statements present fairly, in all material respects,
the combined financial position of the Business as of June 30, 1996 and 1997,
and the combined results of its operations and its cash flows for the years
ended June 30, 1995, 1996 and 1997, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying combined financial statements have been prepared from the
separate records maintained by the Business and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if the Business had been operated as a separate entity for all
periods presented. Portions of certain income, expenses, assets and liabilities
represent allocations made from Dominion Textile Inc.'s headquarters, as
explained in the basis of presentation.
DELOITTE & TOUCHE
Chartered Accountants
January 29, 1998
54
APPAREL FABRICS BUSINESS
COMBINED STATEMENTS OF INCOME AND DEFICIT
For the Years Ended
---------------------------------------------------------
June 30, June 30, June 30,
1995 1996 1997
----------------- ----------------- -----------------
Sales ...................................................... $ 633,690,769 $ 650,862,549 $ 610,573,010
Cost of goods sold ......................................... 529,723,906 577,238,622 552,669,567
Restructuring charges (Note 1) ............................. -- 3,558,000 17,816,145
-------------- -------------- --------------
Gross profit ............................................... 103,966,863 70,065,927 40,087,298
-------------- -------------- --------------
Selling expenses ........................................... 20,267,232 23,024,674 20,265,482
Administrative expenses .................................... 32,183,500 32,745,972 32,046,918
Goodwill amortization ...................................... 1,990,263 1,991,969 1,988,145
-------------- -------------- --------------
54,440,995 57,762,615 54,300,545
-------------- -------------- --------------
Operating income (loss) .................................... 49,525,868 12,303,312 (14,213,247)
Interest expense, net ...................................... (28,732,689) (18,736,557) (17,412,760)
Share in net income of associated companies ................ 6,308,424 8,325,611 7,409,584
Other expense, net (Note 2) ................................ (1,497,313) (711,651) (73,495)
-------------- -------------- --------------
Income (loss) before provision for (recovery of) income
taxes .................................................... 25,604,290 1,180,715 (24,289,918)
Provision for (recovery of) income taxes (Note 3) .......... 6,577,499 (3,587,550) (10,183,601)
-------------- -------------- --------------
Net income (loss) before extraordinary loss ................ 19,026,791 4,768,265 (14,106,317)
Extraordinary loss on early extinguishment of debt ......... -- (2,223,007) --
-------------- -------------- --------------
Net income (loss) .......................................... 19,026,791 2,545,258 (14,106,317)
-------------- -------------- --------------
Deficit, at beginning ...................................... (137,499,011) (118,472,220) (115,926,962)
-------------- -------------- --------------
Deficit, at end ............................................ (118,472,220) (115,926,962) (130,033,279)
============== ============== ==============
See notes to the combined financial statements.
55
APPAREL FABRICS BUSINESS
COMBINED BALANCE SHEETS
June 30, June 30,
1996 1997
----------------- -----------------
Assets
Current assets
Cash and cash equivalents ............................................. $ 17,696,400 $ 36,797,072
Receivables
Trade, net of allowance for doubtful accounts of $2,214,213
(1996 -- $2,423,183) ............................................... 124,535,410 118,459,831
Other ............................................................... 9,763,297 17,987,082
Inventories (Note 4) .................................................. 93,141,222 84,972,495
Other current assets .................................................. 24,487,994 11,392,840
-------------- --------------
269,624,323 269,609,320
Investments and advances (Note 5) ...................................... 8,136,681 6,576,251
Property, plant and equipment, net (Note 6) ............................ 273,060,797 244,025,312
Intangible assets, net (Note 7) ........................................ 64,783,364 62,213,219
Other assets (Note 8) .................................................. 17,346,872 8,688,738
-------------- --------------
Total assets ........................................................... 632,952,037 591,112,840
============== ==============
Liabilities and stockholders' equity
Current liabilities
Accounts payable ...................................................... 31,580,971 32,999,742
Payroll, related taxes and other employee related liabilities ......... 19,053,253 15,951,978
Other accrued liabilities ............................................. 22,544,038 37,578,824
Interest payable ...................................................... 5,933,779 5,656,732
Income taxes payable .................................................. 4,623,042 4,320,246
Long-term debt due within one year (Note 9) ........................... 916,297 1,535,908
-------------- --------------
84,651,380 98,043,430
Long-term debt (Note 9) ................................................ 247,897,323 197,971,915
Deferred income taxes (Note 3) ......................................... 41,245,274 30,291,948
Other non-current liabilities .......................................... 47,520,476 43,293,000
-------------- --------------
Total liabilities ...................................................... 421,314,453 369,600,293
-------------- --------------
Stockholders' equity
Additional paid-in capital ............................................ 334,205,229 370,598,557
Deficit ............................................................... (115,926,962) (130,033,279)
Cumulative translation adjustment (Note 11) ........................... (6,640,683) (19,052,731)
-------------- --------------
Total stockholders' equity ............................................. 211,637,584 221,512,547
-------------- --------------
Total liabilities and stockholders' equity ............................. 632,952,037 591,112,840
============== ==============
See notes to the combined financial statements.
56
APPAREL FABRICS BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended
--------------------------------------------------------
June 30, June 30, June 30,
1995 1996 1997
---------------- ----------------- -----------------
Operating activities
Net income (loss) ........................................... $ 19,026,791 $ 2,545,258 $ (14,106,317)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of debt ..... -- 2,223,007 --
Depreciation and amortization .......................... 32,142,141 34,402,833 35,471,104
Deferred income taxes .................................. (5,467,126) (457,006) (10,953,325)
Loss on disposal of property, plant and equipment ...... 2,048,236 3,238,143 2,454,532
Share in net income of associated companies ............ (6,308,424) (8,325,611) (7,409,584)
Dividends received from associated companies ........... 7,105,000 9,283,126 7,621,617
Changes in assets and liabilities:
Receivables, net .......................................... (8,317,959) 2,258,602 (2,912,386)
Inventories ............................................... 4,092,963 (15,105,401) 5,426,948
Other current assets ...................................... (6,140,899) (4,117,510) 12,729,080
Other assets .............................................. 1,213,408 11,101,967 8,198,519
Current liabilities ....................................... (10,155,921) (4,258,069) 5,805,026
Other liabilities ......................................... 2,951,519 (2,754,030) (3,284,321)
Other, net ................................................ (2,589,795) (1,675,400) 18,325
-------------- -------------- -------------
Net cash provided by operating activities ................... 29,599,934 28,359,909 39,059,218
-------------- -------------- -------------
Investing activities
Capital expenditures ........................................ (27,061,662) (52,580,250) (17,164,366)
Proceeds from sale of property, plant and equipment ......... 3,728,894 2,763,172 3,328,188
Investments in associated companies and other ............... (2,948,045) 489,997 1,772,462
Other, net .................................................. (7,532,631) 1,656,072 5,944,680
-------------- -------------- -------------
Net cash used in investing activities ....................... (33,813,444) (47,671,009) (6,119,036)
-------------- -------------- -------------
Financing activities
Repayment of short-term borrowings .......................... (12,034,909) -- (12,922,743)
Repayment of long-term debt ................................. (120,238,155) (206,783,360) (49,880,066)
Issue of short-term borrowings .............................. -- -- 12,922,743
Issue of long-term debt ..................................... 97,915,928 220,695,364 822,389
Debt issue costs ............................................ -- (3,373,158) --
Changes in additional paid-in capital ....................... 24,764,445 (3,990,150) 36,393,328
-------------- -------------- -------------
Net cash (used in) provided by financing activities ......... (9,592,691) 6,548,696 (12,664,349)
-------------- -------------- -------------
Effect of changes in exchange rates on cash and cash
equivalents ............................................... 1,702,437 439,027 (1,175,161)
-------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents ........ (12,103,764) (12,323,377) 19,100,672
Cash and cash equivalents, beginning of year ................ 42,123,542 30,019,778 17,696,400
-------------- -------------- -------------
Cash and cash equivalents, end of year ...................... 30,019,778 17,696,401 36,797,072
============== ============== =============
Supplemental disclosure of cash flow information
Net cash paid (received) during the year for:
Interest ................................................. 30,840,440 21,248,309 18,841,124
-------------- -------------- -------------
Income taxes ............................................. (1,464,625) 2,145,272 (2,695,072)
-------------- -------------- -------------
See notes to the combined financial statements.
57
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION
Years ended June 30, 1995, 1996 and 1997
General
The consolidated financial statements of Dominion Textile Inc. (the
"Corporation"), a Canadian company, have been issued to stockholders.
All dollar amounts in the combined financial statements are stated in US
dollars.
The combined financial statements of the Apparel Fabrics Business of
Dominion Textile Inc. (the "Business") include the operations of Swift Denim,
Inc., Klopman International S.p.A. and Swift Textiles Europe Limited which were
operated as subsidiaries or associated companies of Dominion Textile Inc. On
December 19, 1997, pursuant to a takeover offer, DT Acquisition Inc., an
affiliate of Polymer Group, Inc. ("PGI") acquired all shares tendered which
approximated 98% of the outstanding common stock of the Corporation. In
connection with the change of control, PGI entered into a preliminary agreement
with Galey & Lord, Inc., to sell it certain operations. In contemplation of the
change in control and the subsequent sale of certain operations, the operations
and the net assets of the Corporation have been essentially divided into two
groups: the Apparel Fabrics Business and the Nonwovens Business.
The combined financial statements have been prepared using the
Corporation's historical basis in the assets and liabilities and historical
results of operations related to the Business. Changes in additional paid-in
capital represent the Corporation's contribution of its net operating
investment plus net cash transfers to or from the Corporation. The combined
financial statements reflect the results of operations, financial position and
cash flows of the Business as if it had operated as a separate entity for all
periods presented and may not be indicative of actual results of operations and
financial position of the Business under different ownership.
Additionally, the combined financial statements include allocations of
certain corporate headquarters assets, liabilities (excluding deferred income
taxes), and net expenses. All significant intergroup transactions and balances
have been eliminated.
Allocations
The liabilities of the Business include outstanding direct third-party
indebtedness and the amount of debt based on the ratio of the Business' average
net operating investment to the aggregate net operating investment of the two
groups. Interest expense shown in the combined financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of the Corporation's long-term weighted
average interest rates for the applicable period.
General corporate overhead related to the Corporation's headquarters has
been allocated to the Business based on the ratio of the Business' sales to the
aggregate sales of the Corporation. The costs of the services charged to the
Business are not necessarily indicative of the costs that would have been
incurred if the Business had performed these functions as a stand-alone entity.
Additionally, income taxes on allocated general corporate overhead are
calculated using the Corporation's statutory tax rate.
Management believes that the basis of allocation is reasonable.
58
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION -- Continued
The following table illustrates the results of applying the allocation
method described above on various financial statement items:
For the years ended June 30,
------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
Net impact on gross profit ................................. $ (656,376) $ (1,053,173) $ (3,453,504)
General corporate overhead, net ............................ (12,101,010) (4,381,800) (7,454,020)
Recovery of income taxes ................................... 4,949,866 3,143,589 4,293,493
Extraordinary loss on early extinguishment of debt ......... -- (2,223,007) --
------------- ------------ ------------
(7,807,520) (4,514,391) (6,614,031)
============= ============ ============
As of June 30,
--------------------------------
1996 1997
-------------- ---------------
Net assets excluding long-term debt ......... 457,385 14,539,529
Long-term debt .............................. 245,247,741 197,049,432
Cumulative translation adjustment ........... (575,472) (4,252,709)
59
APPAREL FABRICS BUSINESS
SIGNIFICANT ACCOUNTING POLICIES
Years Ended June 30, 1995, 1996 and 1997
The combined financial statements have been prepared in accordance with US
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The most significant accounting policies are as follows:
The combined financial statements include the accounts of Swift Denim,
Inc. and of Klopman International S.p.A., plus certain allocations from the
corporate headquarters as explained in the basis of presentation. The
investment in associated companies is carried at the Business' equity therein.
All significant intercompany transactions are eliminated.
The business acquisitions are accounted for using the purchase method. The
assets and liabilities of the acquired entities are adjusted to appropriate
carrying values.
Nature of operations
The Business produces denim and polycotton fabrics for careerwear and
markets these products on a worldwide basis.
Fiscal year
The Business' fiscal year is the 52- or 53-week period ending on the last
Saturday in June. Fiscal 1995 includes operations for a 52-week period, whereas
fiscal 1996 includes operations for a 53-week period and fiscal 1997 inludes
operations for a 52-week period.
Translation of foreign currencies
Unrealized translation gains and losses on assets and liabilities
denominated in foreign currencies are reflected in income of the period.
Unrealized translation gains or losses on debt designated as a hedge of foreign
self-sustaining operations are included in the cumulative translation
adjustment in stockholders' equity.
The assets and liabilities of foreign operations, all of which are
self-sustaining, are translated at exchange rates in effect at the balance
sheet dates. Revenue and expense items are translated at average exchange rates
prevailing during the period. The resulting gains and losses are accumulated in
the cumulative translation adjustment in stockholders' equity.
60
APPAREL FABRICS BUSINESS
SIGNIFICANT ACCOUNTING POLICIES -- Continued
Financial instruments
The Business enters into a variety of financial instruments to manage its
exposure to foreign currency rates and market risk related to its cotton
purchase requirements. These instruments are used for hedging purposes and are
employed in connection with an underlying asset, liability, firm commitment or
anticipated transaction.
Gains and losses on hedges of existing assets and liabilities are included
in the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses
related to qualifying hedges of firm commitments or anticipated transactions
are also deferred and recognized in income or as adjustments of carrying
amounts when the hedged transaction occurs. Gains and losses on financial
instruments that do not qualify as hedges for accounting purposes are
recognized in income.
Cash equivalents
Cash equivalents include all highly liquid short-term instruments
purchased with a maturity of three months or less.
Inventory valuation
Inventories are valued at the lower of cost (determined substantially on
the first-in, first-out method) and net realizable value or replacement value
for certain supplies. The cost of work in process and finished goods includes
raw materials, direct labor and certain manufacturing overhead expenses.
Adequate provision is made for slow moving and obsolete inventories.
Depreciation and amortization
Property, plant and equipment are stated at historical cost. Depreciation
is provided on a straight-line basis at varying rates which allocate the cost
of the assets over their estimated economic lives. Buildings are amortized
primarily over 25 years and machinery and equipment over 3 to 15 years.
Goodwill which represents, at the acquisition date, the excess of cost
over the fair value of companies acquired, is amortized on a straight-line
basis over a maximum of 40 years. The Business evaluates the carrying value of
goodwill for potential permanent impairment on an ongoing basis. In order to
determine if such a permanent impairment exists, the Business' management
considers each business unit's financial condition and expected future cash
flows, using projected financial performance. A permanent impairment in the
value of goodwill is written off against income in the year such impairment is
recognized.
Other intangible assets are amortized over their respective estimated
useful lives for periods ranging from 4 to 25 years. Deferred refinancing costs
are amortized over the term of the related debt.
Adoption of new accounting standard
During 1997, the Business adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 establishes
accounting standards for recording the impairment of long-lived assets, certain
identifiable intangibles, goodwill and assets to be disposed of. The management
determined that no impairment loss was needed to be recognized for applicable
assets of its operations. Such determination does not envisage the change of
control described in the basis of presentation.
61
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
1. Restructuring charges
In the fourth quarter of 1997, the Business recorded provisions totaling
$17.8 million for the restructuring of its Klopman International unit and for
its share in a company-wide cost reduction program.
The Klopman charge totaled $15.1 million and primarily covered severance
payments and the writedown of assets to net realizable value in connection with
the shutdown of a greige mill located in Tralee, Ireland and the
rationalization of manufacturing operations at a plant located in Frosinone,
Italy. Cash payments related to the Klopman charge are expected to approximate
$8.6 million with spending primarily taking place in 1998 and to be financed
through working capital.
The Business' share in the charge related to the company-wide cost
reduction program amounted to $2.7 million and provided for severance payments
and rationalization costs in the general and administrative areas to be
implemented in 1998.
In 1996, a provision of $3.6 million in connection with an earlier
rationalization program at Klopman's Tralee, Ireland plant was fully utilized
during the year.
2. Other expense, net
1995 1996 1997
---------------- ---------------- ----------------
Loss on disposal of property, plant and equipment .......... $ (2,048,236) $ (3,238,143) $ (2,454,532)
Business' share in gain realized upon termination of
pension plan .............................................. -- 2,550,648 2,797,173
Other items, net ........................................... 550,923 (24,156) (416,136)
------------ ------------ ------------
(1,497,313) (711,651) (73,495)
============ ============ ============
3. Income taxes
The Business follows Statement of Financial Accounting Standards No. 109
in accounting for income taxes.
Dominion Textile Inc., as a Canadian company, is subject to Canadian tax
legislation. The combined income taxes differ from the income taxes calculated
using the Canadian statutory rates for the following reasons:
1995 1996 1997
---------------- --------------- -----------------
Income (loss) before income taxes ............................ $ 25,604,290 $ 1,180,715 $ (24,289,918)
------------- ------------ -------------
Statutory income tax rates in Canada ......................... 38.80% 38.95% 38.83%
Income taxes based on combined basic Canadian federal
and provincial rates ........................................ $ 9,934,465 $ 459,888 $ (9,431,775)
Increase (decrease) in income taxes resulting from: ..........
Losses incurred in the year not tax affected ................ 1,702,709 4,979,532 4,018,342
Share in net income of associated companies ................. (2,447,669) (3,242,826) (2,877,142)
Utilization of tax benefits carried forward ................. (3,687,267) (3,807,516) (1,281,954)
Other ....................................................... 1,075,261 (1,976,628) (611,072)
------------- ------------ -------------
6,577,499 (3,587,550) (10,183,601)
============= ============ =============
Income taxes (recovery)
Current ..................................................... 2,622,110 4,182,050 (5,225,610)
Deferred .................................................... 3,955,389 (7,769,600) (4,957,991)
------------- ------------ -------------
Total income taxes ........................................... 6,577,499 (3,587,550) (10,183,601)
============= ============ =============
62
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
3. Income taxes (continued)
At June 30, 1996 and 1997, the deferred tax assets (included in other
current assets), the deferred tax liabilities and the valuation allowances are
as follows:
1996 1997
--------------- ----------------
Deferred tax assets
Accounts receivable ................... $ 1,092,933 $ 1,252,468
Non-deductible items .................. 1,982,689 3,034,626
Revenue not currently taxable ......... (1,024,112) (711,499)
Net operating losses .................. 11,680,972 12,277,698
------------- -------------
13,732,482 15,853,293
============= =============
Deferred tax liabilities
Postretirement obligation ............. 4,339,684 4,339,684
Other non-deductible accruals ......... (638,043) 5,068,225
Property, plant and equipment ......... (44,946,915) (39,699,857)
------------- -------------
(41,245,274) (30,291,948)
============= =============
Valuation allowances ................... (11,680,972) (12,277,698)
============= =============
As of June 30, 1997, the Business has unused income tax losses pertaining
to 1997 and prior years of approximately $33.2 million, which may be used to
reduce future years' taxable income. The benefit resulting from these income
tax losses has not been recognized in the accounts. The amount, the form and
the timing of the benefit resulting from these income tax losses could be
affected by the change in control discussed in the basis of presentation. These
losses expire as follows:
(in thousands
of dollars)
--------------
1998 ........... $ 8,481
1999 ........... 15,357
2000 ........... --
2001 ........... 9,345
-------
33,183
=======
The Internal Revenue Service is examining the income tax returns of
Dominion Textile (USA) Inc., a company under common control, for the years 1987
through 1989. Management is of the opinion that it has adequately provided for
any additional income taxes that may be assessed as a result of this
examination.
Foreign tax credits would offset the amount of undistributed income of
international subsidiaries and affiliates which would be subject to additional
income taxes if distributed.
63
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
4. Inventories
1996 1997
-------------- --------------
Finished goods ........................................................... $37,189,428 $40,863,615
Work in process, including greige fabric for further processing .......... 33,086,176 29,674,463
Raw materials and supplies ............................................... 22,865,618 14,434,417
----------- -----------
93,141,222 84,972,495
=========== ===========
5. Investments and advances
1996 1997
------------- -------------
Investment in associated companies (a) .......... $3,156,324 $2,751,447
Other investments and advances (b) .............. 4,980,357 3,824,804
---------- ----------
8,136,681 6,576,251
========== ==========
(a) Summarized information, derived from the latest audited financial
statements of Swift Textiles Europe Limited is presented below:
For the years ended March 31
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Sales .................... $68,573,890 $74,762,092 $69,570,334
Operating income ......... 5,994,852 8,430,129 7,991,862
As of March 31
-------------------------------
1996 1997
-------------- --------------
Current assets ......... $21,752,158 $23,481,778
Fixed assets ........... 8,715,812 7,482,574
Net assets ............. 1,289,050 1,159,568
(b) Other investments and advances include secured loans to Swift Textiles
Europe Limited of $2.4 million, $3.2 million and $3.7 million in 1995,
1996 and 1997, respectively. The loans outstanding at June 30, 1997 bear
interest at 8% and are payable in installments through 2007.
6. Property, plant and equipment, net
1996 1997
---------------- ----------------
Land .......................................... $ 1,084,818 $ 868,519
Buildings and leasehold improvements .......... 125,677,367 123,851,835
Less: Accumulated depreciation ................ (52,847,179) (56,504,736)
-------------- --------------
73,915,006 68,215,618
-------------- --------------
Machinery and equipment ....................... 387,296,973 372,649,745
Less: Accumulated depreciation ................ (188,151,182) (196,840,051)
-------------- --------------
199,145,791 175,809,694
-------------- --------------
273,060,797 244,025,312
============== ==============
Depreciation and amortization of property, plant and equipment amounts to
$30,362,520, $32,412,514 and $33,482,826 in 1995, 1996 and 1997, respectively.
64
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
7. Intangible assets, net
1996 1997
---------------- ----------------
Goodwill ................................ $ 83,221,796 $ 82,492,240
Other ................................... 407,870 347,964
------------- -------------
83,629,666 82,840,204
Less: Accumulated amortization .......... (18,846,302) (20,626,985)
------------- -------------
64,783,364 62,213,219
============= =============
Total intangible asset amortization charged to income amounts to
$1,779,621, $1,990,318 and $1,988,278 in 1995, 1996 and 1997, respectively.
8. Other assets
1996 1997
------------- -------------
Deferred refinancing and other costs .......... $7,224,213 $6,777,166
Pension asset ................................. 2,368,273 1,911,572
Note receivable(a) ............................ 7,754,386 --
---------- ----------
17,346,872 8,688,738
========== ==========
(a) The $10.0 million note received on the sale of Wayn-Tex Inc., a former
subsidiary of the Corporation, and due in August 1999, was prepaid
subsequent to year-end and accordingly has been reclassified in other
current receivables at June 30, 1997. The Business was allocated a portion
of the note based on the allocation method explained in the basis of
presentation. The interest rate on the note was 11.75%.
9. Long-term debt
The Business' long-term debt is as follows:
1996 1997
--------------- ---------------
Secured
Term notes (3.7 billion lira) due June 1998 at 8.65% ............ $ 3,118,903 $ 2,458,391
Other ........................................................... 446,976 --
Unsecured
Business' share in general corporate long-term debt (a) ......... 245,247,741 197,049,432
------------ ------------
248,813,620 199,507,823
Long-term debt due within one year .............................. (916,297) (1,535,908)
------------ ------------
247,897,323 197,971,915
============ ============
(a) As of June 30, 1997 and 1996, the general corporate long-term debt is
as follows:
1996 1997
--------------- ---------------
Unsecured and Guaranteed Senior Notes, Due
November 2003(i) ................................................. $150,000,000 $150,000,000
Unsecured and Guaranteed Senior Notes, Due April 2006 (ii) ......... 125,000,000 125,000,000
Unsecured Revolving Credit Facility (ii)............................ 57,000,000 --
Other .............................................................. 685,997 --
------------ ------------
332,685,997 275,000,000
Long-term debt due within one year ................................. (55,866) --
------------ ------------
332,630,131 275,000,000
============ ============
65
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
9. Long-term debt (cont'd)
(i) These notes were issued by Dominion Textile (USA) Inc. and are
unconditionally guaranteed by the Corporation.
(ii) In 1996, the Corporation completed a refinancing plan which included
the issue by Dominion Textile (USA) Inc. of $125 million of Guaranteed
Senior Notes and the concurrent arrangement of the Revolving Credit
Facility. Proceeds of the senior notes and from certain simultaneous
borrowings under the Revolving Credit Facility were used to prepay
secured loans outstanding (including prepayment premiums and accrued
interest).
The Revolving Credit Facility of $100 million will mature on April 1,
2001 and bears interest at a floating rate equal to, at the borrower's
option (i) the higher of the prime rate or Federal Funds Rate plus 0.5%;
or (ii) LIBOR plus a margin which is subject to change within a range of
0.5% and 2.0% depending on the consolidated debt to cash flow ratio of
the Corporation. Interest payment dates vary in accordance with the
maturity period selected for each borrowing made under the facility. The
facility also provides for availability of letters of credit.
The credit facilities governing the long-term indebtedness of the
Corporation contain covenants which include, among others, covenants
restricting certain investments, capital expenditures, other
indebtedness, disposition of assets, mergers and acquisitions, liens and
encumbrances, and also set out certain financial covenants. These
financial covenants include, among others, requirements for the
Corporation to maintain various consolidated financial ratios and net
worth levels in excess of predefined levels.
In addition, the change of control, discussed in the basis of
presentation, will cause Dominion Textile (USA) Inc. to offer, within 30
days after the change of control, to repurchase all outstanding senior
notes at a predefined price.
As of June 30, 1997, letters of credit aggregating $4.3 million were
issued, representing contingent liabilities of the Corporation under the
Revolving Credit Facility and $95.7 million was unutilized and
available.
(b) The payments required on the long-term debt are as follows:
General
corporate
long-term Business'
debt share
-------------- --------------
1998 .............................. $ -- $ 1,535,908
1999 .............................. -- 922,483
2000 .............................. -- --
2001 .............................. -- --
2002 .............................. -- --
2003 and subsequent years ......... 275,000,000 197,049,432
----------- -----------
275,000,000 199,507,823
=========== ===========
(c) Interest expense related to long-term debt totaled $24.3 million, $19.4
million, and $19.5 million in 1995, 1996 and 1997, respectively.
66
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
9. Long-term debt (cont'd)
(d) The following table presents the interest rates as of June 30, 1997:
Canadian prime rate .......... 4.75%
US prime rate ................ 8.50%
Federal Funds rate ........... 5.63%
LIBOR-3 month-period ......... 5.81%
(e) As of June 30, 1997, the Business maintained other available bank lines
of credit for general corporate purposes, at the bank's prime rate of
interest or equivalents, to meet normal operating requirements.
10. Financial instruments
Risk management
The Business operates internationally and is exposed to market risks from
changes in foreign exchange rates and in the cost of cotton, its principal raw
material.
Foreign currency hedging
During the period, the Business used forward contracts to hedge certain
operating and capital cash flows. As of June 30, 1997, $20.9 million notional
amount of forward exchange contracts were outstanding.
Cotton hedging
For hedging purposes, the Business enters principally into futures
contracts and option positions to reduce the impact of changes in the cost of
cotton used in its manufacturing process. The option positions primarily
include long-calls that qualify for hedge accounting. As of June 30, 1997, the
Business had aggregate open futures contracts and long-call options to purchase
approximately 24 million pounds of cotton.
Interest rates
Substantially all long-term debt is issued at fixed interest rates.
Fair values
Fair values approximate amounts at which financial instruments could be
exchanged between willing parties, based on current markets for instruments of
the same risk, principal and remaining maturities. Fair values are based on
estimates using present value and other valuation techniques which are
significantly affected by the assumptions used concerning the amount and timing
of future cash flows and discount rates which reflect varying degrees of risk.
Therefore, due to the use of subjective judgment and uncertainties, the
aggregate fair value amount should not be interpreted as being realizable in an
immediate settlement of the instruments.
As of June 30, 1997 and 1996 the carrying value of all financial
instruments approximates fair value with the following exceptions:
1996 1997
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
Long-term debt .................................. $248,813,620 $243,474,606 $199,507,823 $205,659,328
Derivatives, asset (liability) position
Futures and forward exchange contracts ......... -- (1,155,800) -- (606,055)
Options ........................................ 4,027,400 2,114,500 637,900 402,200
67
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
10. Financial instruments (cont'd)
Credit risk
The Business is exposed to credit-related losses in the event of
non-performance by counterparties to financial instruments, but it does not
expect any counterparties to fail to meet their obligations, given their high
credit ratings. Where appropriate, the Business obtains collateral in the form
of rights to securities or arranges master netting agreements. The credit
exposure of the financial instruments is represented by the fair value of
contracts with a positive fair value at the reporting date, reduced by the
effects of master netting agreements.
The Business is exposed to credit risk from customers. However, the
Business has a large number of diverse customers which minimizes the
concentration of this risk. Sales to two customers represented 35% in 1997
(1996 - 38% and 1995 - 33%) of the Business' combined sales.
Guarantees
As of June 30, 1997, the Corporation had outstanding guarantees of $4.3
million (1996 - nil) representing financial guarantees issued in the normal
course of business.
11. Cumulative translation adjustment
The changes in the cumulative translation adjustment are as follows:
1996 1997
---------------- ----------------
Balance at beginning ............. $ (7,130,922) $ (6,640,683)
Changes during the year .......... 490,239 (12,412,048)
------------ -------------
Balance at end ................... (6,640,683) (19,052,731)
============ =============
12. Employee benefits
Defined benefit pension plans
The Corporation maintains defined benefit pension plans that provide for
pensions for both hourly and salaried employees based on length of service and
rate of pay. The Corporation funding policy is to make contributions to its
pension funds based on various actuarial cost methods as permitted by pension
regulatory bodies. The companies are responsible to adequately fund the plans.
Plan assets at June 30, 1996 and 1997 consisted primarily of listed stocks,
mutual funds and bonds. Contributions reflect actuarial assumptions concerning
future investment returns, salary projections and future service benefits.
The cost of pensions is accrued and charged to income over employees'
working lives. Pension expense was calculated using a value of assets adjusted
to market over periods of up to five years. The weighted average discount rate
was 7.75% in 1995, 1996 and 1997, the rate of increase in future compensation
levels used in determining the actuarial present value of the accrued pension
benefits was 5.0% in 1997 (1996 and 1995 - 5.0% to 6.5%), and the expected
long-term rate of return on plan assets was 8.0% in 1996 and 1997.
68
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. Employee benefits (cont'd)
The funded status of the Corporation's defined benefit pension plans as of
the most recent valuation dates for June 30, 1996 and 1997, is as follows:
1996 1997
(in thousands of dollars) ----------------------------- ----------------------------
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
benefits assets benefits asset
------------- ------------- ------------- ------------
Actuarial present value of benefit obligation ............ $ (38,794) $ (29,374) $ (22,174) $ (30,166)
--------- --------- --------- ---------
Accumulated benefit obligation ........................... (39,116) (29,905) (22,331) (30,846)
--------- --------- --------- ---------
Projected benefit obligation
for service rendered to date ............................ (39,998) (31,659) (23,277) (33,828)
Plan assets at fair value ................................ 53,957 23,115 32,742 26,339
--------- --------- --------- ---------
Projected benefit obligation less than (in excess of)
plan assets ............................................. 13,959 (8,544) 9,465 (7,489)
Unrecognized net (gain) loss ............................. (13,200) 1,854 (9,210) 353
Additional minimum liability recognized .................. (105) (2,263) -- (1,912)
Prior service cost not yet recognized in net periodic
pension cost ............................................ 413 3,088 370 2,753
Unrecognized net (asset) liability at transition ......... (596) 425 (263) 1,719
--------- --------- --------- ---------
Pension asset (liability) ................................ 471 (5,440) 362 (4,576)
========= ========= ========= =========
The Corporation's net pension cost for 1995, 1996 and 1997 includes the
following:
1995 1996 1997
(in thousands of dollars) ------------ ----------- -----------
Service cost - benefits earned during the year .......... $ 2,026 $ 1,665 $ 1,726
Interest cost on projected benefit obligation ........... 8,034 2,891 3,183
Actual return on plan assets ............................ (14,907) (7,235) (5,254)
Settlement loss ......................................... -- -- 466
Net amortization and deferral ........................... 7,560 5,492 2,752
--------- -------- --------
2,713 2,813 2,873
========= ======== ========
Termination of pension plans
In 1996, Dominion Textile Inc. terminated the Staff Retirement Income Plan
for Employees at Locations in a Province Other Than Quebec (the "Ontario Plan")
and proposed to its members to share the surplus equally between the members
and the Corporation. The proposal was approved in 1997 by the members and by
the Pension Commission of Ontario. A gain of $2.8 million representing the
Business' share of the Ontario Plan surplus has been recorded and included
under the caption "Other expense, net", in the combined statements of income.
In 1995, Dominion Textile Inc. terminated the Staff Retirement Income Plan
for Employees at Locations in the Province of Quebec (the "Quebec Plan") and
proposed to its members to share the surplus equally between the members and
the Corporation. The proposal was approved by the members in 1996 and Dominion
Textile Inc. received $17.5 million, representing its share of the Quebec Plan
surplus. A gain of $2.6 million representing the Business' share of proceeds
received in excess of the net pension asset was recorded.
69
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. Employee benefits (cont'd)
Capital accumulation plans
The Business maintains capital accumulation plans covering approximately
1,800 employees. The Business' expense with respect to those plans amounted to
$1.5 million in 1995, $3.0 million in 1996 and $2.7 million in 1997.
Other benefits
In addition to its pension plans, the Corporation provides certain health
care and life insurance benefits for a large number of its retired employees in
North America who have met the eligibility conditions. The cost of the other
benefits is charged to income as expenditures are incurred.
The following table sets forth the status of the Corporation's plan based
on the latest actuarial valuations:
1996 1997
--------- ---------
(in thousands of dollars)
Retirees ........................................ $ 9,194 $ 7,626
Fully eligible active plan participants ......... 2,125 1,772
Other active plan participants .................. 4,439 4,490
------- -------
15,758 13,888
Unrecognized gain ............................... 518 1,112
------- -------
Postretirement obligation ....................... 16,276 15,000
======= =======
The Corporation's net periodic postretirement benefit cost for 1995, 1996
and 1997 consisted of the following components:
1995 1996 1997
-------- -------- ---------
(in thousands of dollars)
Service cost - benefits earned during the period ...................... $ 537 $ 407 $ 414
Interest cost on accumulated postretirement benefit obligation ........ 1,526 1,146 983
Net gain (including $0.7 million in 1997 for settlements).............. (306) (112) (724)
------ ------ ------
1,757 1,441 673
====== ====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 14%, 14% and 10%, gradually declining to
5% and 6% by 2003 in 1995, 1996 and 1997, respectively, after which it remains
constant. A one-percentage-point increase in the assumed health care cost trend
rate would increase the accumulated postretirement benefit obligation by
approximately 11%, 9%, and 8% and would increase the periodic service and
interest costs by approximately 17%, 16% and 9% during fiscal 1995, 1996 and
1997, respectively. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% during fiscal 1997, 1996
and 1995.
Summary
The Business' share in the Corporation's employee benefit plans, based on
its proportionate number of employees, is as follows:
1995 1996 1997
--------- --------- ---------
(in thousands of dollars)
Net benefit costs
Pension plans ...................................... $2,119 $2,197 $2,244
Postretirement benefit other than pensions ......... 1,372 1,126 526
70
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
12. Employee benefits (cont'd)
1996 1997
--------- ---------
(in thousands of dollars)
Unfunded obligation, net
Pension plans ..................................... $ 3,959 $ 3,291
Postretirement benefit other than pension ......... 12,711 11,714
13. Commitments and contingent liabilities
Lease commitments
As of June 30, 1997, the future minimum payments for building and
equipment leases with initial non-cancelable lease terms in excess of one year
are as follows:
1998 ................................ $3,166,897
1999 ................................ 2,768,942
2000 ................................ 1,814,464
2001 ................................ 1,334,072
2002 ................................ 1,077,019
2003 and subsequent years ........... 115,000
----------
10,276,394
==========
Other commitments
As of June 30, 1997, the Business had outstanding purchase contracts for
cotton and other fibers of approximately $80.0 million and commitments for
capital expenditures of approximately $1.7 million.
Environmental matters
The Business, primarily as a result of its manufacturing operations, is
subject to numerous environmental laws and regulations and exposed to
liabilities and compliance costs arising from its past and current generation,
management and disposition of hazardous substances and wastes. Based on
information presently available, management believes that the existing accruals
are sufficient to satisfy probable and reasonably estimable environmental
liabilities related to known environmental matters.
Litigation
In the normal course of operations, the Business becomes involved in
various claims and legal proceedings. While the final outcome with respect to
claims and legal proceedings pending at June 30, 1997 cannot be predicted with
certainty, it is the opinion of management that their resolution will not have
a material adverse effect on the Business' combined financial position or
results of operations.
71
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
14. Segmented information
The Apparel Fabrics Business produces denim, polycotton fabrics for
careerwear and industrial applications and markets these products on a
worldwide basis.
United
Canada States International Eliminations Total
(in thousands of dollars) ---------- ----------- --------------- -------------- -----------
1995
Sales to customers (a) ......................... $72,498 $393,603 $ 167,590 $ $ 633,691
Transfers between geographic areas (b) ......... 7,644 10,559 -- (18,203) --
------- -------- --------- --------- ---------
80,142 404,162 167,590 (18,203) 633,691
Operating income ............................... 422 46,723 2,381 49,526
Identifiable assets ............................ 62,828 394,161 169,284 626,273
1996
Sales to customers (a) ......................... 88,385 410,640 151,838 650,863
Transfers between geographic areas (b) ......... 7,968 13,055 -- (21,023) --
------- -------- --------- --------- ---------
96,353 423,695 151,838 (21,023) 650,863
Operating income (loss) ........................ 3,157 20,200 (11,054) 12,303
Identifiable assets ............................ 71,577 407,514 153,861 632,952
------- -------- --------- ---------- ---------
1997
Sales to customers(a) .......................... 85,758 373,015 151,800 610,573
Transfers between geographic areas(b) .......... 6,711 17,093 -- (23,804) --
------- -------- --------- --------- ---------
92,469 390,108 151,800 (23,804) 610,573
Operating income (loss) ........................ 968 866 (16,047) (14,213)
Identifiable assets ............................ 53,009 391,869 146,235 591,113
------- -------- --------- ---------- ---------
- ----------
(a) Canadian sales include export sales of $43.3 million (1996 - $42.5 million,
1995 - $31.9 million) made primarily to the United States.
(b) Transfers between geographic areas are accounted for at prices comparable
to open market prices for similar products and services.
72
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
15. Quarterly financial information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
1996
Sales ..................... $152,505,770 $162,755,768 $148,039,142 $187,561,869
Gross profit .............. 14,850,987 18,690,952 15,711,525 20,812,463
Operating income .......... 628,008 3,505,390 2,494,310 5,675,604
Net income (loss) ......... (175,110) 1,974,470 (3,034,944) 3,780,842
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------
1997
Sales ........................... $152,521,204 $152,353,791 $139,890,867 $ 165,807,148
Gross profit .................... 15,109,688 16,099,677 7,870,519 1,007,414
Operating income (loss) ......... 1,770,457 2,364,174 (5,600,638) (12,747,240)
Net income (loss) ............... (369,887) 1,378,119 (7,208,793) (7,905,756)
16. Supplemental Condensed Combined Consolidated Financial Information
In connection with the note offering, each of Apparel Fabrics Business'
operating subsidiaries located in the United States ("the Guarantor
Subsidiaries") will fully and unconditionally guarantee Galey & Lord, Inc.'s
("Galey") performance under the Notes on a joint and several basis. The
Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of
Galey. The remaining subsidiaries are direct or indirect foreign subsidiaries
of Galey. The following condensed combined financial data provides information
regarding the financial position, results of operations and cash flows of the
Guarantor Subsidiaries prior to their acquisition by Galey.
June 30, 1995
(In thousands of dollars) ------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- ----------
Sales ..................... $403,426 $247,732 $ (17,467) $633,691
-------- -------- --------- --------
Gross profit .............. 62,344 42,279 (656) 103,967
-------- -------- --------- --------
Operating income
(loss) ................... 55,157 7,096 (12,727) 49,526
Interest expense,
income taxes and
other, net ............... 29,911 5,507 (4,919) 30,499
-------- -------- --------- --------
Net income (loss) ......... 25,246 (1,589) (7,808) 19,027
======== ======== ========= ========
June 30, 1996 June 30, 1997
(In thousands of dollars) ------------------------------------------------------ -------------------------------------------
Non- Elimination Apparel Non- Elimination
Guarantor Guarantor and Fabrics Guarantor Guarantor and
Subsidiaries Subsidiaries Allocations Combined Subsidiaries Subsidiaries Allocations
-------------- -------------- ------------- ---------- -------------- -------------- -------------
Sales ..................... $423,695 $248,190 $ (21,022) $650,863 $389,494 $ 244,269 $ (23,190)
-------- -------- --------- -------- -------- --------- ---------
Gross profit .............. 44,680 26,439 (1,053) 70,066 29,464 13,712 (3,089)
-------- -------- --------- -------- -------- --------- ---------
Operating income
(loss) ................... 28,668 (3,771) (12,594) 12,303 16,912 (17,713) (13,412)
Interest expense,
income taxes and
other, net ............... 16,140 3,874 (10,256) 9,758 17,247 (10,330) (7,024)
-------- -------- --------- -------- -------- --------- ---------
Net income (loss) ......... 12,528 (7,645) (2,338) 2,545 (335) (7,383) (6,388)
======== ======== ========= ======== ======== ========= =========
June 30,
1997
(In thousands of dollars) -----------
Apparel
Fabrics
Combined
-----------
Sales ..................... $610,573
--------
Gross profit .............. 40,087
--------
Operating income
(loss) ................... (14,213)
Interest expense,
income taxes and
other, net ............... (107)
--------
Net income (loss) ......... (14,106)
========
73
APPAREL FABRICS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
Years Ended June 30, 1995, 1996 and 1997
16. Supplemental Condensed Combined Consolidated Financial Information
(continued)
June 30, 1996
(in thousands of dollars) ------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- ----------
Assets
Current assets ...................................... $139,148 $111,752 $18,724 $269,624
Investments and other advances ...................... -- 8,137 -- 8,137
Property, plant and equipment, net .................. 175,249 95,099 2,713 273,061
Intangible assets, net .............................. 61,696 969 2,118 64,783
Other assets ........................................ 3,092 454 13,801 17,347
-------- -------- ------- --------
Total assets ....................................... 379,185 216,411 37,356 632,952
======== ======== ======= ========
Liabilities and stockholders' equity
Current liabilities ................................. 31,514 34,973 18,164 84,651
Long-term debt ...................................... 157,829 90,068 -- 247,897
Other non-current liabilities ....................... 53,122 16,909 18,735 88,766
-------- -------- ------- --------
Total liabilities .................................. 242,465 141,950 36,899 421,314
-------- -------- ------- --------
Stockholders' equity ................................ 136,720 74,461 457 211,638
-------- -------- ------- --------
Total liabilities and stockholders' equity ......... 379,185 216,411 37,356 632,952
======== ======== ======= ========
June 30, 1997
(in thousands of dollars) -------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- -----------
Assets
Current assets ...................................... $118,997 $107,602 $43,010 $269,609
Investments and other advances ...................... -- 6,576 -- 6,576
Property, plant and equipment, net .................. 157,233 84,813 1,979 244,025
Intangible assets, net .............................. 59,639 897 1,677 62,213
Other assets ........................................ 2,493 398 5,798 8,689
-------- -------- ------- --------
Total assets ....................................... 338,362 200,286 52,464 591,112
======== ======== ======= ========
Liabilities and stockholders' equity
Current liabilities ................................. 29,443 48,184 20,416 98,043
Long-term debt ...................................... 165,564 32,408 -- 197,972
Other non-current liabilities ....................... 42,722 13,536 17,327 73,585
-------- -------- ------- --------
Total liabilities .................................. 237,729 94,128 37,743 369,600
-------- -------- ------- --------
Stockholders' equity ................................ 100,633 106,158 14,721 221,512
-------- -------- ------- --------
Total liabilities and stockholders' equity ......... 338,362 200,286 52,464 591,112
======== ======== ======= ========
June 30, 1995
(in thousands of dollars) --------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- ------------
Cash flows
Net cash provided
by (used in)
operating
activities ................. $ 40,788 $ (3,438) $ (7,750) $ 29,600
Net cash provided
by (used in)
investing
activities ................. (21,645) (13,521) 1,353 (33,813)
Net cash provided
by (used in)
financing
activities ................. (22,658) 14,838 (71) (7,891)
---------- --------- -------- ----------
Net change in cash
and cash
equivalents ................ (3,515) (2,121) (6,468) (12,104)
Cash and cash
equivalents, at
beginning .................. 3,537 14,610 23,977 42,124
---------- --------- -------- ----------
Cash and cash
equivalents, at
end ........................ 22 12,489 17,509 30,020
========== ========= ======== ==========
June 30, 1996 June 30, 1997
(in thousands of dollars) -------------------------------------------------------- -------------------------------------------
Non- Elimination Apparel Non- Elimination
Guarantor Guarantor and Fabrics Guarantor Guarantor and
Subsidiaries Subsidiaries Allocations Combined Subsidiaries Subsidiaries Allocations
-------------- -------------- ------------- ------------ -------------- -------------- -------------
Cash flows
Net cash provided
by (used in)
operating
activities ................. $ 7,025 $ 3,073 $ 18,262 $ 28,360 $11,583 $ 10,890 $16,586
Net cash provided
by (used in)
investing
activities ................. (24,701) (22,682) (289) (47,671) (3,352) (2,026) (742)
Net cash provided
by (used in)
financing
activities ................. 17,676 12,598 (23,285) 6,987 (8,233) (7,587) 1,981
--------- ---------- ---------- ---------- ------- -------- -------
Net change in cash
and cash
equivalents ................ (1) (7,011) (5,312) (12,324) (2) 1,278 17,825
Cash and cash
equivalents, at
beginning .................. 22 12,489 17,509 30,020 21 5,480 12,197
----------- ---------- ---------- ---------- --------- -------- -------
Cash and cash
equivalents, at
end ........................ 21 5,478 12,197 17,696 19 6,758 30,022
=========== ========== ========== ========== ========= ======== =======
June 30, 1997
(in thousands of dollars) -------------
Apparel
Fabrics
Combined
------------
Cash flows
Net cash provided
by (used in)
operating
activities ................. $ 39,059
Net cash provided
by (used in)
investing
activities ................. (6,120)
Net cash provided
by (used in)
financing
activities ................. (13,839)
----------
Net change in cash
and cash
equivalents ................ 19,100
Cash and cash
equivalents, at
beginning .................. 17,696
----------
Cash and cash
equivalents, at
end ........................ 36,796
==========
74
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED STATEMENTS OF INCOME AND DEFICIT
For the Three-Month and the Six-Month Periods Ended December 31, 1996 and 1997
Three-month periods Six-month periods
------------------------------------- -------------------------------------
1996 1997 1996 1997
----------------- ----------------- ----------------- -----------------
Sales ........................................ $ 152,353,791 $ 134,195,565 $ 304,874,995 $ 286,364,569
Cost of goods sold ........................... 136,214,962 118,358,594 273,626,477 250,731,480
-------------- -------------- -------------- --------------
Gross profit ................................. 16,138,829 15,836,971 31,248,518 35,633,089
-------------- -------------- -------------- --------------
Selling expenses ............................. 5,310,798 4,533,586 10,290,758 8,858,607
Administrative expenses ...................... 7,935,518 6,163,811 15,796,796 13,414,229
Goodwill amortization ........................ 528,339 517,175 1,026,332 1,014,211
-------------- -------------- -------------- --------------
13,774,655 11,214,572 27,113,886 23,287,047
-------------- -------------- -------------- --------------
Operating income ............................. 2,364,174 4,622,399 4,134,632 12,346,042
Interest expense, net ........................ (4,339,389) (4,268,838) (9,121,657) (8,692,628)
Share in net income of associated
companies .................................. 2,003,359 796,513 3,983,112 2,035,811
Other income (expense), net .................. (685,357) 685,671 (1,158,347) 742,517
Costs related to the change of control
(Note 1) ................................... -- (16,469,871) -- (16,469,871)
-------------- -------------- -------------- --------------
Loss before recovery of income taxes ......... (657,213) (14,634,126) (2,162,260) (10,038,129)
Recovery of income taxes ..................... 2,035,332 2,539,587 3,170,492 2,717,211
-------------- -------------- -------------- --------------
Net income (loss) ............................ 1,378,119 (12,094,539) 1,008,232 (7,320,918)
Deficit, at beginning ........................ (116,296,849) (125,259,658) (115,926,962) (130,033,279)
-------------- -------------- -------------- --------------
Deficit, at end .............................. (114,918,730) (137,354,197) (114,918,730) (137,354,197)
============== ============== ============== ==============
See notes to the unaudited condensed combined financial statements.
75
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED BALANCE SHEETS
June 30, December 31,
1997 1997
----------------- -----------------
Assets
Current assets
Cash and cash equivalents ............................................. $ 36,797,072 $ 16,655,525
Receivables
Trade, net of allowance for doubtful accounts of $1,361,534
($2,214,213 as of June 30, 1997).................................... 118,459,831 96,149,682
Other ................................................................. 17,987,082 13,451,431
Inventories ........................................................... 84,972,495 83,317,621
Other current assets .................................................. 11,392,840 9,009,039
-------------- --------------
269,609,320 218,583,298
Investments and other advances .......................................... 6,576,251 7,317,448
Property, plant and equipment, net ...................................... 244,025,312 229,884,523
Intangible assets, net .................................................. 62,213,219 61,076,663
Other assets ............................................................ 8,688,738 13,116,581
-------------- --------------
Total assets ............................................................ 591,112,840 529,978,513
============== ==============
Liabilities and stockholders' equity
Current liabilities
Short-term borrowings ................................................. -- 789,275
Accounts payable ...................................................... 32,999,742 25,305,670
Payroll, related taxes and other employee related liabilities ......... 15,951,978 10,302,273
Other accrued liabilites .............................................. 37,578,824 26,406,498
Interest payable ...................................................... 5,656,732 5,782,054
Income taxes payable .................................................. 4,320,246 6,723,110
Long-term debt due within one year .................................... 1,535,908 191,108,417
-------------- --------------
98,043,430 266,417,297
Long-term debt .......................................................... 197,971,915 144,231
Deferred income taxes ................................................... 30,291,948 28,656,976
Other non-current liabilities ........................................... 43,293,000 38,567,062
-------------- --------------
Total liabilities ....................................................... 369,600,293 333,785,565
-------------- --------------
Stockholders' equity
Additional paid-in capital ............................................ 370,598,557 355,285,490
Deficit ............................................................... (130,033,279) (137,354,197)
Cumulative translation adjustment ..................................... (19,052,731) (21,738,345)
-------------- --------------
Total stockholders' equity .............................................. 221,512,547 196,192,948
-------------- --------------
Total liabilities and stockholders' equity .............................. 591,112,840 529,978,513
============== ==============
See notes to the unaudited condensed combined financial statements.
76
APPAREL FABRICS BUSINESS
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
For the Three-Month and Six-Month Periods ended December 31, 1996 and 1997
Three-month periods
----------------------------------
1996 1997
---------------- -----------------
Operating activities
Net income (loss) ................................................ $ 1,378,119 $ (12,094,539)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Depreciation and amortization ................................. 8,776,267 8,378,941
Deferred income taxes ......................................... 968,293 (666,497)
Loss (gain) on disposal of property
plant and equipment .......................................... (190,984) 457,751
Share in net income of associated companies ................... (2,003,359) (796,513)
Other non-cash items .......................................... (2,787,897) --
Changes in assets and liabilities
Receivables, net ................................................ 6,103,685 17,911,977
Inventories ..................................................... 6,061,116 (1,911,081)
Other current assets ............................................ 3,215,512 2,220,738
Other assets .................................................... (336,776) (4,559,354)
Current liabilities ............................................. (20,740,831) (23,870,136)
Other liabilities ............................................... (199,907) (4,053,475)
Other, net ....................................................... 44,807 (4,589,847)
-------------- -------------
Net cash provided by (used in) operating activities .............. 288,045 (23,572,035)
-------------- -------------
Investing activities
Capital expenditures ............................................. (2,691,268) (2,897,947)
Proceeds from sale of property, plant and equipment .............. 1,788,267 3,452,041
Investment in associated companies and other ..................... (4,834,158) 771,160
Other, net ....................................................... (208,119) 1,619,415
-------------- -------------
Net cash used in (provided by) investing activities .............. (5,945,278) 2,944,669
-------------- -------------
Financing activities
Repayment of short-term borrowings ............................... (1,100,434) --
Repayment of long-term debt ...................................... (407,256) (2,901,296)
Issue of short-term borrowings ................................... -- 226,466
Issue of long-term debt .......................................... -- 29,237
Changes in additional paid-in capital ............................ (651,687) (6,942,826)
-------------- -------------
Net cash (used in) provided by financing activities .............. (2,159,377) (9,588,419)
-------------- -------------
Effect of changes in exchange rates on cash and cash
equivalents ..................................................... (170,712) (268,005)
-------------- -------------
Net increase (decrease) in cash and cash equivalents ............. (7,987,322) (30,483,790)
Cash and cash equivalents, at beginning .......................... 30,959,123 47,139,315
-------------- -------------
Cash and cash equivalents, at end ................................ 22,971,801 16,655,525
============== =============
Supplemental disclosure of cash flow information
Net cash paid during the period for:
Interest ...................................................... 8,386,132 8,936,049
-------------- -------------
Income taxes .................................................. 1,296,300 2,018,107
-------------- -------------
Six-month periods
---------------------------------
1996 1997
---------------- ----------------
Operating activities
Net income (loss) ................................................ $ 1,008,232 $ (7,320,918)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Depreciation and amortization ................................. 17,732,103 16,709,296
Deferred income taxes ......................................... (2,748,132) (1,634,790)
Loss (gain) on disposal of property
plant and equipment .......................................... (319,177) 167,363
Share in net income of associated companies ................... (3,983,112) (2,035,811)
Other non-cash items .......................................... (2,787,897) --
Changes in assets and liabilities
Receivables, net ................................................ 17,811,073 27,027,251
Inventories ..................................................... (1,565,963) 1,374,936
Other current assets ............................................ 7,791,346 2,724,557
Other assets .................................................... 29,919 (4,348,216)
Current liabilities ............................................. (22,876,380) (22,169,366)
Other liabilities ............................................... 503,554 (4,182,787)
Other, net ....................................................... 4,674,064 (2,968,162)
-------------- -------------
Net cash provided by (used in) operating activities .............. 15,269,630 3,343,353
-------------- -------------
Investing activities
Capital expenditures ............................................. (7,005,000) (6,379,161)
Proceeds from sale of property, plant and equipment .............. 2,542,367 3,851,385
Investment in associated companies and other ..................... (5,199,258) 2,010,003
Other, net ....................................................... (686,933) 394,152
-------------- -------------
Net cash used in (provided by) investing activities .............. (10,348,824) (123,621)
-------------- -------------
Financing activities
Repayment of short-term borrowings ............................... (1,100,434) --
Repayment of long-term debt ...................................... (45,888,632) (8,284,412)
Issue of short-term borrowings ................................... 1,162,401 789,275
Issue of long-term debt .......................................... 773,143 29,237
Changes in additional paid-in capital ............................ 45,739,654 (15,313,067)
-------------- -------------
Net cash (used in) provided by financing activities .............. 686,132 (22,778,967)
-------------- -------------
Effect of changes in exchange rates on cash and cash
equivalents ..................................................... (331,536) (582,312)
-------------- -------------
Net increase (decrease) in cash and cash equivalents ............. 5,275,402 (20,141,547)
Cash and cash equivalents, at beginning .......................... 17,696,400 36,797,072
-------------- -------------
Cash and cash equivalents, at end ................................ 22,971,802 16,655,525
============== =============
Supplemental disclosure of cash flow information
Net cash paid during the period for:
Interest ...................................................... 9,268,666 9,325,864
-------------- -------------
Income taxes .................................................. 2,834,697 2,062,095
-------------- -------------
See notes to the unaudited condensed combined financial statements.
77
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION
For the Three-Month and Six-Month Periods Ended December 31, 1996 and 1997
General
The consolidated financial statements of Dominion Textile Inc. (the
"Corporation"), a Canadian company, have been issued to the stockholders.
All dollar amounts in the combined financial statements are stated in US
dollars.
The combined financial statements of the Apparel Fabrics Business of
Dominion Textile Inc. (the "Business") include the operations of Swift Denim,
Inc., Klopman International S.p.A. and Swift Textiles Europe Limited which were
operated as subsidiaries or associated companies of Dominion Textile Inc. On
December 19, 1997, pursuant to a takeover offer, DT Acquisition Inc., an
affiliate of Polymer Group, Inc. ("PGI") acquired all shares tendered which
approximated 98% of the outstanding common stock of the Corporation. In
connection with the change of control, PGI entered into a preliminary agreement
with Galey & Lord, Inc., to sell it certain operations. In contemplation of the
change in control and the subsequent sale of certain operations, the operations
and the net assets of the Corporation have been essentially divided into two
groups: the Apparel Fabrics Business and the Nonwovens Business.
The combined financial statements have been prepared using the
Corporation's historical basis in the assets and liabilities and historical
results of operations related to the Business. Changes in additional paid-in
capital represent the Corporation's contribution of its net operating
investment plus net cash transfers to or from the Corporation. The combined
financial statements reflect the results of operations, financial position and
cash flows of the Business as if it had operated as a separate entity for all
periods presented and may not be indicative of actual results of operations and
financial position of the Business under different ownership.
Allocations
The basis of allocation selected herein is not necessarily indicative of
the application of the provisions contained in the separation agreement entered
into by PGI and Galey & Lord, Inc. and dated January 29, 1998.
The combined financial statements include allocations of certain corporate
headquarters' assets, liabilities (excluding deferred income taxes), and net
expenses. All significant intergroup transactions and balances have been
eliminated.
The liabilities of the Business include outstanding direct third-party
indebtedness and the amount of debt based on the ratio of the Business' average
net operating investment to the aggregate net operating investment of the two
groups. Interest expense shown in the combined financial statements reflects
the interest expense associated with the aggregate borrowings for each period
presented principally based on a blend of the Corporation's long-term weighted
average interest rates for the applicable period.
General corporate overhead related to the Corporation's headquarters has
been allocated to the Business based on the ratio of the Business' sales to the
aggregate sales of the Corporation. The costs of the services charged to the
Business are not necessarily indicative of the costs that would have been
incurred if the Business had performed these functions as a stand-alone entity.
Additionally, income taxes on allocated general corporate overhead are
calculated using the Corporation's statutory tax rate.
Management believes that the basis of allocation is reasonable.
78
APPAREL FABRICS BUSINESS
BASIS OF PRESENTATION (Continued)
For the Three-Month and Six-Month Periods Ended December 31, 1996 and 1997
The following table illustrates the results of applying the allocation
method described above on various financial statement items:
Three-month periods Six-month periods
ended December 31 ended December 31
----------------------------------- ---------------------------------
1996 1997 1996 1997
---------------- ---------------- -------------- ----------------
Net impact on gross profit .............. $ (1,377,374) $ (470,109) $ (531,285) $ (1,591,959)
General corporate overhead, net ......... (2,818,459) (2,012,564) (5,463,328) (4,834,297)
Costs related to the change of
control ................................ -- (14,510,565) -- (14,510,565)
Recovery of income taxes ................ 1,627,983 2,432,684 2,325,910 3,962,794
------------ ------------- ------------ -------------
(2,567,850) (14,560,554) (3,668,703) (16,974,027)
============ ============= ============ =============
June 30, December 31,
1997 1997
-------------- ----------------
Net assets excluding long-term debt .................................. $14,539,529 $ (5,631,557)
Long-term debt, inclusive of the portion due within one year ......... 197,049,432 189,557,867
Cumulative translation adjustment .................................... (4,252,709) (2,237,144)
79
APPAREL FABRICS BUSINESS
NOTES TO THE UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
For the Three-Month and Six-Month Periods Ended December 31, 1996 and 1997
1. COSTS RELATED TO THE CHANGE OF CONTROL
In fiscal 1997, as part of its strategy to provide added-value to its
stockholders, Dominion Textile Inc. together with its financial advisers,
considered different growth opportunities for its core businesses. The takeover
offer discussed in the basis of presentation was among those opportunities.
This offer was recommended by the Board of Directors for acceptance on November
17, 1997.
The change of control triggered among other things, the accelerated
funding of certain benefit plans for executives and the payments under benefits
programs. As a result, Dominion Textile Inc. recorded a $26.1 million charge
which includes professional fees amounting to $11.2 million. The Business'
share of this charge is $16.5 million.
2. SUBSEQUENT EVENTS
Pursuant to a Master Separation Agreement dated January 29, 1998, Galey &
Lord, Inc. acquired from DT Acquisition Inc. the Apparel Fabrics Business and
certain other assets and assumed certain related liabilities.
Also on January 29, 1998, Dominion Textile (USA) Inc. redeemed all of its
outstanding $275.0 million senior notes at a price of $310.4 million.
Consequently, they were reclassified within current liabilities.
3. SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION
In connection with the note offering, each of the Apparel Fabrics
Business' operating subsidiaries located in the United States ("the Guarantor
Subsidiaries") will fully and unconditionally guarantee Galey & Lord, Inc.'s
("Galey") performance under the Notes on a joint and several basis. The
Guarantor Subsidiaries are direct or indirect wholly-owned subsidiaries of
Galey. The remaining subsidiaries are direct or indirect foreign subsidiaries
of Galey. The following condensed combined financial data provides information
regarding the financial position, results of operations and cash flows of the
Guarantor Subsidiaries prior to their acquisition by Galey.
Three-month period ended December 31, 1996
(in thousands of dollars) ----------------------------------------------------------
Non- Apparel
Guarantor Guarantor Elimination and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ----------------- ----------
Sales ...................... $ 94,020 $ 62,275 $ (3,941) $152,354
Gross Profit ............... 9,282 8,234 (1,377) 16,139
-------- -------- -------- --------
Operating income (loss)..... 3,222 3,277 (4,135) 2,364
Interest expense, income
taxes and other, net ...... 4,730 (2,177) (1,567) 986
-------- -------- -------- --------
Net income (loss) .......... (1,508) 5,454 (2,568) 1,378
======== ======== ======== ========
Three-month period ended December 31, 1997
(in thousands of dollars) -----------------------------------------------------------
Non- Apparel
Guarantor Guarantor Elimination and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ----------------- -----------
Sales ...................... $78,092 $58,817 $ (2,713) $134,196
Gross Profit ............... 8,542 7,765 (470) 15,837
------- ------- --------- --------
Operating income (loss)..... 3,551 3,785 (2,714) 4,622
Interest expense, income
taxes and other, net ...... 4,213 656 11,848 16,717
------- ------- --------- --------
Net income (loss) .......... (662) 3,129 (14,562) (12,095)
======= ======= ========= ========
Six-month period ended December 31, 1996
------------------------------------------------------
Non- Apparel
Guarantor Guarantor Fabrics
Subsidiaries Subsidiaries Elimination Combined
-------------- -------------- ------------- ----------
Sales ........................... $197,422 $115,905 $ (8,452) $304,875
Gross profit .................... 17,756 14,025 (532) 31,249
-------- -------- -------- --------
Operating income (loss) ......... 5,396 4,655 (5,916) 4,135
Interest expenses, income
taxes and other, net .......... 8,714 (3,328) (2,259) 3,127
-------- -------- -------- --------
Net income (loss) ............... (3,318) 7,983 (3,657) 1,008
======== ======== ======== ========
Six-month period ended December 31, 1997
-------------------------------------------------------
Non- Apparel
Guarantor Guarantor Fabrics
Subsidiaries Subsidiaries Elimination Combined
-------------- -------------- ------------- -----------
Sales ........................... $180,073 $112,485 $ (6,193) $286,365
Gross profit .................... 22,216 15,009 (1,592) 35,633
-------- -------- --------- --------
Operating income (loss) ......... 11,679 7,002 (6,335) 12,346
Interest expenses, income
taxes and other, net .......... 6,392 1,883 11,392 19,667
-------- -------- --------- --------
Net income (loss) ............... 5,287 5,119 (17,727) (7,321)
======== ======== ========= ========
80
APPAREL FABRICS BUSINESS
NOTES TO THE UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
For the Three-Month and Six-Month Periods Ended December 31, 1996 and 1997
3. SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION --
Continued
(in thousands of dollars)
June 30, 1997
------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- ----------
Assets
Current assets .............. $118,997 $107,602 $43,010 $269,609
Property, plant and
equipment, net ............. 157,233 84,813 1,979 244,025
Investments and other
advances ................... -- 6,576 -- 6,576
Intangible assets, net ...... 59,639 897 1,677 62,213
Other assets ................ 2,493 398 5,798 8,689
Total assets ............... 338,362 200,286 52,464 591,112
Liabilities and
stockholders' equity
Current liabilities ......... 29,443 48,184 20,416 98,043
Long-term debt .............. 165,564 32,408 -- 197,972
Other non-current
liabilities ................ 42,722 13,536 17,327 73,585
-------- -------- ------- --------
Total liabilities .......... 237,729 94,128 37,743 369,600
-------- -------- ------- --------
Stockholders' equity ........ 100,633 106,158 14,721 221,512
-------- -------- ------- --------
Total liabilities and
stockholders' equity ....... 338,362 200,286 52,464 591,112
======== ======== ======= ========
(in thousands of dollars)
December 31, 1997
-------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
-------------- -------------- ------------- -----------
Assets
Current assets .............. $ 97,914 $ 96,839 $ 23,830 $218,583
Property, plant and
equipment, net ............. 150,748 78,937 200 229,885
Investments and other
advances ................... -- 7,317 -- 7,317
Intangible assets, net ...... 58,660 884 1,533 61,077
Other assets ................ 7,344 1,701 4,072 13,117
Total assets ............... 314,666 185,678 29,635 529,979
Liabilities and
stockholders' equity
Current liabilities ......... 149,978 95,237 21,203 266,418
Long-term debt .............. 144 -- -- 144
Other non-current
liabilities ................ 40,855 13,408 12,961 67,224
-------- -------- -------- --------
Total liabilities .......... 190,977 108,645 34,164 333,786
-------- -------- -------- --------
Stockholders' equity ........ 123,689 77,033 (4,529) 196,193
-------- -------- -------- --------
Total liabilities and
stockholders' equity ....... 314,666 185,678 29,635 529,979
======== ======== ======== ========
(in thousands of dollars)
Three-month period ended December 31, 1996
-------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
Cash flows
Net cash provided by
(used in) operating
activities ................. $ 3,344 $ (2,865) $ (191) $ 288
Net cash provided by
(used in) investing
activities ................. (1,088) (5,031) 174 (5,945)
Net cash provided by
(used in) financing
activities ................. (2,246) 1,395 (1,479) (2,330)
--------- -------- --------- ---------
Net change in cash and
cash equivalents ........... 10 (6,501) (1,496) (7,987)
Cash and cash
equivalents, at
beginning .................. 29 8,405 22,525 30,959
--------- -------- --------- ---------
Cash and cash
equivalents, at end ........ 39 1,904 21,029 22,972
========= ======== ========= =========
(in thousands of dollars)
Three-month period ended December 31, 1997
---------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
Cash flows
Net cash provided by
(used in) operating
activities ................. $ 16,800 $ (17,087) $ (23,285) $ (23,572)
Net cash provided by
(used in) investing
activities ................. (3,644) 5,461 1,128 2,945
Net cash provided by
(used in) financing
activities ................. (12,160) 9,958 (7,655) (9,857)
--------- --------- --------- ---------
Net change in cash and
cash equivalents ........... 996 (1,668) (29,812) (30,484)
Cash and cash
equivalents, at
beginning .................. (1,004) 5,467 42,677 47,140
--------- --------- --------- ---------
Cash and cash
equivalents, at end ........ (8) 3,799 12,865 16,656
============ ========= ========= =========
81
APPAREL FABRICS BUSINESS
NOTES TO THE UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
For the Three-Month and Six-Month Periods Ended December 31, 1996 and 1997
3. SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION --
Continued
(in thousands of dollars)
Six-month period ended December 31, 1996
--------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
Cash flows
Net cash provided by
(used in) operating
activities ................. $ 220 $ 5,828 $ 9,222 $ 15,270
Net cash provided by
(used in) investing
activities ................. (4,435) (7,400) 1,486 (10,349)
Net cash provided by
(used in) financing
activities ................. 4,233 (2,003) (1,875) 355
--------- --------- --------- ----------
Net changes in cash and
cash equivalents ........... 18 (3,575) 8,833 5,276
Cash and cash
equivalents, at
beginning .................. 21 5,479 12,196 17,696
--------- --------- --------- ----------
Cash and cash
equivalents, at end ........ 39 1,904 21,029 22,972
========= ========= ========= ==========
(in thousands of dollars)
Six-month period ended December 31, 1997
--------------------------------------------------------
Non- Elimination Apparel
Guarantor Guarantor and Fabrics
Subsidiaries Subsidiaries Allocations Combined
Cash flows
Net cash provided by
(used in) operating
activities ................. $ 22,770 $ (12,144) $ (7,283) $ 3,343
Net cash provided by
(used in) investing
activities ................. (3,553) 264 3,165 (124)
Net cash provided by
(used in) financing
activities ................. (19,244) 8,920 (13,038) (23,361)
--------- --------- --------- ----------
Net changes in cash and
cash equivalents ........... (27) (2,960) (17,156) (20,143)
Cash and cash
equivalents, at
beginning .................. 19 6,759 30,021 36,799
--------- --------- --------- ----------
Cash and cash
equivalents, at end ........ (8) 3,799 12,865 16,656
============ ========= ========= ==========
82
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
83
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the headings "Proposal 1 - Election of
Directors," "Executive Officers" and "Security Ownership."
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Executive Compensation."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Security Ownership."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the portion of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or prior to 120 days following the end
of the Company's fiscal year under the heading "Related Transactions."
84
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of Galey & Lord, Inc. are included
under Item 8. of this report:
Report of Independent Auditors.
Consolidated Balance Sheets as of October 3, 1998 and September
27, 1997.
Consolidated Statements of Operations for the fiscal years ended
October 3, 1998, September 27, 1997 and September 28, 1996.
Consolidated Statements of Cash Flows for the fiscal years ended
October 3, 1998, September 27, 1997 and September 28, 1996.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended October 3, 1998, September 27, 1997 and September 28,
1996.
Notes to Consolidated Financial Statements.
The following financial statements of the Acquired Business are
included under Item 8. of this report:
Audited Combined Financial Statements
Independent Auditors' Report
Combined Statements of Income and Deficit for each of the three
years ended June 30, 1997
Combined Balance Sheets at June 30, 1996 and 1997
Combined Statements of Cash Flows for each of the three years
ended June 30, 1997
Basis of Presentation
Significant Accounting Policies
Notes to the Combined Financial Statements
85
Unaudited Condensed Combined Interim Financial Statements
Unaudited Condensed Combined Statements of Income and Deficit for
the three-month and the six-month periods ended December 31, 1996
and 1997
Unaudited Condensed Combined Balance Sheets at June 30, 1997 and
December 31, 1997
Unaudited Condensed Combined Statements of Cash Flows for the
three-month and six-month periods ended December 31, 1997 and 1997
Basis of Presentation
Notes to the Unaudited Condensed Combined Financial Statements
2. Financial Statement Schedules
The following schedule is filed as a part of this Item 14:
Schedule II - Valuation and Qualifying Accounts.
All other schedules have been omitted because they are not applicable
or are not required or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as a
part of this Report.
(b) 1. Reports on Form 8-K Filed During the Last Quarter.
None.
86
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
3.1 - Form of Restated Certificate of Incorporation of the Company.(1)
3.2 - Form of Amended and Restated Bylaws of the Company.(1)
4.1 - Form of Common Stock Certificate.(1)
10.1 - Form of Registration Rights Agreement, by and among the Company, Arthur C. Wiener,
Burlington and Citicorp Venture Capital, Ltd. ("CVC").(1)
10.2 - Amended and Restated 1989 Stock Option Plan of the Company. (1)*
10.3 - Agreement, dated February 11, 1991, between Burlington and Industries.(1)
10.4 - Service Agreement, dated as of March 2, 1991, between Burlington and Industries.(1)
10.5 - Form of Voting Agreement, by and among the Company, Arthur C. Wiener and CVC.(1)
10.6 - The Retirement Plan of Galey & Lord, Inc.(1)*
10.7 - The Retirement Plan of Galey & Lord Industries, Inc. as Amended and Restated Effective
April 1, 1992.(2)*
10.8 - The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc. as Amended and
Restated April 1, 1992.(2)*
10.9 - Form of Purchase Agreement dated as of March 29, 1994 between Burlington and Industries.(3)
10.10 - Assumption Agreement dated as of April 29, 1994 between Burlington and Industries.(3)
10.11 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated August 25,
1994.(4)*
10.12 - Second Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated April 27, 1994.(5)*
10.13 - Loan Agreement dated as of May 1, 1994 between South Carolina Jobs - Economic Development
Authority and Industries.(5)
10.14 - Reimbursement and Security Agreement dated as of May 1, 1994 between Industries and
Wachovia.(5)
10.15 - Guaranty Agreement dated as of May 1, 1994 from the Company to Wachovia.(5)
10.16 - The Supplemental Executive Retirement Plan of Galey & Lord Industries, Inc.(5)*
87
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
10.17 - The Deferred Compensation Plan of Galey & Lord Industries, Inc.(5)*
10.18 - First Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated April 27,
1994.(6)*
10.19 - Second Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated April 25,
1995.(7)*
10.20 - Fourth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated April 25, 1995.(7)*
10.21 - Letter of Intent dated September 22, 1995 between the Company and Triarc Companies, Inc. (8)
10.22 - Fifth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated August 29, 1995.(10)*
10.23 - Asset Purchase Agreement, dated as of May 20, 1996, among the Company, Industries, Farah
Incorporated, Farah U.S.A., Inc. and Dimmit (excluding Schedules and Exhibits).(11)
10.24 - Amended and Restated Credit Agreement dated as of June 4, 1996 between Industries, the
Company and certain subsidiaries and First Union National Bank of North Carolina, as agent
and lender and the other lender's party thereto.(12)
10.25 - Third Amendment to The Retirement Plan of Galey & Lord Industries, Inc. dated June 7,
1996.(13)*
10.26 - Sixth Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated June 7, 1996. (13)*
10.27 - Seventh Amendment to The Savings and Profit Sharing Plan of Galey & Lord Industries, Inc.
dated September 30, 1996. (13)*
10.28 - Amended and Restated Reimbursement and Security Agreement, dated as of June 4, 1996, among
Galey & Lord Industries, Inc., Galey & Lord, Inc. and Wachovia Bank of North Carolina,
N.A.(14)
10.29 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated February 7,
1995.(15)*
10.30 - Amendment to Amended and Restated 1989 Stock Option Plan of the Company dated February 11,
1997.(15)*
10.31 - 1996 Restricted Stock Plan of the Company.(16)*
88
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
10.32 - First Amendment to the Amended and Restated Credit Agreement dated May 13, 1997 between
Galey & Lord Industries, Inc., the Company and certain subsidiaries and First Union
National Bank of North Carolina, as agent and lender.(16)
10.33 - Agreement, dated October 27, 1997, between Polymer Group, Inc. ("Polymer"), DT Acquisition,
Inc. ("DTA") and the Company.(17)
10.34 - Amendment to the Agreement between Polymer, DTA and the Company, dated November 16,
1997.(17)
10.35 - Operating Agreement, dated December 19, 1997, between Polymer, DTA and the Company. (17)
10.36 - Credit Agreement dated as of December 19, 1997 among Galey & Lord Industries, Inc.
("Industries"), the Company, G&L Service Company, North America, Inc. ("Service Company") and
First Union National Bank, as agent and lender, and the other lenders' party thereto. (17)
10.37 - Security Agreement dated as of December 19, 1997, among Industries, the Company, Service
Company and First Union National Bank, as Collateral Agent. (17)
10.38 - Pledge Agreement dated as of December 19, 1997, among Industries, the Company, Service
Company and First Union National Bank, as Collateral Agent. (17)
10.39 - Senior Subordinated Credit Agreement dated as of December 19, 1997 among Industries, the
Company and First Union Corporation, as agent and lender.(17)
10.40 - Master Separation Agreement, dated January 29, 1998, among the Company, Polymer, DTA,
Dominion Textile, Inc. ("Dominion") and certain other parties thereto.(18)
10.41 - Credit Agreement dated as of January 29, 1998 among the Company, Industries, Service
Company, Swift Textiles Inc. ("Textiles"), Swift Denim Services Inc. ("Denim") and First
Union National Bank, as agent and lender, and the other lenders' party thereto. (18)
10.42 - Security Agreement dated as of January 29, 1998, among the Company, Industries, Service
Company, Textiles, Denim and First Union National Bank, as Collateral Agent. (18)
10.43 - Pledge Agreement dated as of January 29, 1998, among the Company, Industries, Service
Company, Textiles, Denim and First Union National bank, as Collateral Agent. (18)
89
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
10.44 - Foreign Subsidiary Pledge Agreement dated as of January 29, 1998, among the Company, certain
of its subsidiaries party thereto and First Union National Bank, as Collateral Agent. (18)
10.45 - First Amendment to Senior Subordinated Credit Agreement dated as of January 29, 1998 among
Industries, the Company and First Union Corporation, as agent and lender. (18)
10.46 - Second Amendment to Senior Subordinated Credit Agreement dated as of January 29, 1998 among
the Company, Industries, Service Company, Textiles, Denim and First Union Corporation, as
agent and lender. (18)
10.47 - Waiver, Release and First Amendment to the Credit Agreement dated March 19, 1998 among the
Company, Industries, Service Company, Textiles, Denim and First Union National Bank, as
agent and lender.(19)
10.48 - Second Amendment to the Credit Agreement dated March 27, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union Nation Bank, as agent and
lender, and the other lenders' party thereto. (19)
10.49 - Indenture, dated as of February 24, 1998 among the Company, Industries, Service Company,
Textiles, Denim and Suntrust Bank, Atlanta.(20)
10.50 - Note Purchase Agreement, dated February 19, 1998 among the Company, Industries, Service
Company, Textiles, Denim and First Union Capital Markets, a division of Wheat First
Securities, Inc. (20)
10.51 - Form of Initial Global Note.(20)
10.52 - Form of Initial Certificated Note.(20)
10.53 - Registration Rights Agreement, dated February 24, 1998, by and among the Company,
Industries, Service Company, Textiles, Denim and First Union Capital Markets, a dviision of
Wheat First Securities, Inc.(21)
10.54 - Third Amendment, Consent and Release, to the Credit Agreement dated September 15, 1998,
among the Company, Industries, Service Company, Textiles, Denim and First Union Nation
Bank, as agent and lender, and the other lenders' party thereto.
10.55 - Fourth Amendment to the Credit Agreement dated December 23, 1998, among the Company,
Industries, Service Company, Textiles, Denim and First Union Nation Bank, as agent and
lender, and the other lenders' party thereto.
10.56 - Agreement dated April 29, 1996, between Dominion and John J. Heldrich.*
11 - Statement Regarding Computation of Per Share Earnings.
21 - Subsidiaries of the Company.
90
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
23.1 - Consent of Ernst & Young LLP.
23.2 - Consent of Deloitte & Touche.
23.3 - Consent of KPMG
27 - Financial Data Schedule
99.1 - Opinion of KPMG
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-45895)
which was declared effective by the Securities and Exchange Commission on April 30, 1992 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
October 2, 1993 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended April
2, 1994 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-8 (File No. 33-52248)
dated August 25, 1994 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1994 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1994 and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended April
1, 1995 and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Form 8K dated September 22, 1995 and incorporated
herein by reference.
(9) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March
30, 1996 and incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Form 8K dated May 20, 1996 and incorporated herein by
reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June
29, 1996 and incorporated herein by reference.
(13) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996 and incorporated herein by reference.
91
EXHIBIT INDEX
Exhibit Sequential
Number Description Page No.
- ------ ----------- --------
(14) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended
December 28, 1996 and incorporated herein by reference.
(15) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March
29, 1997 and incorporated herein by reference.
(16) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June
28, 1997 and incorporated herein by reference.
(17) Filed as an Exhibit to the Company's Form 8K dated December 19, 1997 and incorporated herein
by reference.
(18) Filed as an Exhibit to the Company's Form 8K dated January 29, 1998 and incorporated herein
by reference.
(19) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March
28, 1998 and incorporated herein by reference.
(20) Filed as an Exhibit to the Company's Form 8K dated February 24, 1998 and incorporated herein
by reference.
(21) Filed as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-49503)
dated April 22, 1998 and incorporated herein by reference.
* Management contract or compensatory plan or arrangement identified pursuant to item 14(a)3 *
of this report.
92
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALEY & LORD, INC.
(in thousands)
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions- End of
Classification of Period Expenses Accounts Describe(1) Period
- ------------------------------------------------------ -------------- -------------- -------------- ---------------- --------------
YEAR ENDED OCTOBER 3, 1998
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $ 4,687 $1,052 $5,433(2) $2,957 $8,215
------- ------ ----- ------ ------
Totals.................................... $ 4,687 $1,052 $5,433 $2,957 $8,215
======= ====== ===== ====== ======
YEAR ENDED SEPTEMBER 27, 1997
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $ 1,434 $3,478 $ - $ 225 $4,687
------- ------ ----- ------- ------
Totals.................................... $ 1,434 $3,478 $ - $ 225 $4,687
======= ====== ===== ======= ======
YEAR ENDED SEPTEMBER 28, 1996
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts,
discounts, returns and allowances............ $ 1,492 $ 172 $ - $ 230 $1,434
------- ------ ----- ------- ------
Totals.................................... $ 1,492 $ 172 $ - $ 230 $1,434
======= ====== ===== ======= ======
(1) Uncollectible accounts written off.
(2) Includes reserves for the Acquired Business as of the date of Acquisition.
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GALEY & LORD, INC.
January 4, 1999 /s/ Arthur C. Wiener
--------------- ------------------------
Date Arthur C. Wiener
Chairman of the Board
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
/s/ Arthur C. Wiener January 4, 1999 /s/ Michael R. Harmon January 4, 1999
- -------------------------------------------------------- ---------------------------------------------------------
Arthur C. Wiener Date Michael R. Harmon Date
Chairman of the Board Executive Vice President,
and President (Principal Executive Officer) Chief Financial Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary
/s/ Lee Abraham January 4, 1999 /s/ Howard S. Jacobs January 4, 1999
- --------------------------------------------------------- ---------------------------------------------------------
Lee Abraham Date Howard S. Jacobs Date
Director Director
/s/ Michael T. Bradley January 4, 1999 /s/ William M.R. Mapel January 4, 1999
- ---------------------------------------------------------- ---------------------------------------------------------
Michael T. Bradley Date William M.R. Mapel Date
Director Director
/s/ Paul G. Gillease January 4, 1999 /s/ Stephen C. Sherrill January 4, 1999
- ---------------------------------------------------------- ---------------------------------------------------------
Paul G. Gillease Date Stephen C. Sherrill Date
Director Director
/s/ William deR. Holt January 4, 1999 /s/ David F. Thomas January 4, 1999
- ----------------------------------------------------------- ----------------------------------------------------------
William deR. Holt Date David F. Thomas Date
Director Director
94