Item 1. BUSINESS - -----------------
This 2001 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 and belief of 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, the level of the Company's indebtedness, interest rate fluctuations, weather-related delays, general economic conditions, governmental legislation and regulatory changes, the long-term implications of regional trade blocs and the effect of quota phase-out and lowering of tariffs under the WTO trade regulations and other risks and uncertainties that may be detailed herein, and from time-to time, in Galey & Lord's other reports filed with the Securities and Exchange.
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"). 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"). The Company conducts all of its operations through its subsidiaries and joint venture interests. Unless otherwise specified herein, all references to the Company or the Registrant include the Company, Industries, G&L Service Company, and the subsidiaries and joint venture interests that comprise Dimmit, Swift, Swift Europe 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 markets dyed and printed fabrics for use in home fashions.
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.
The Company believes that it is the world's largest producer of value-added denim which it achieved through development of differentiated denim products. Accordingly, the Company believes that domestically most of its denim products are in the mid to upper range of the market.
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 was composed of six manufacturing facilities located in Piedras Negras, Mexico for the purpose of sewing and finishing pants and shorts for the casual wear market. As discussed below, the Company discontinued all of G&L Service Company's operations in the fourth quarter of fiscal 2001.
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 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 and Swift Europe. Swift Denim is one of the largest producers 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources").
The Company on August 18, 2000 completed a transaction which formed a 50/50 joint venture (the "Joint Venture") in Mexico, Swift Denim-Hidalgo, pursuant to which the Company received a 50% equity interest in a newly formed Mexican entity which simultaneously acquired an existing denim manufacturing business (the "Existing Business") from a group which included the Company's partner in the Joint Venture. The Existing Business is a "state-of-the-art" denim fabric factory built within the past four years. In exchange for a $14 million contribution comprised of cash, inventory and equipment, the Company received a 50% interest in the ownership of this joint venture. The Company contributed $7.8 million in cash and inventory in fiscal 2000 and $5.0 million in inventory and equipment in fiscal 2001. The equipment is from the Company's Erwin facility which closed in December 2000. The remaining equipment will be transferred in fiscal 2002.
In the fourth quarter of fiscal 2000, the Company announced a series of strategic initiatives aimed at increasing the Company's competitiveness and profitability by reducing costs. The principal manufacturing initiatives included (1) the completion of the Swift Denim-Hidalgo joint venture (discussed above), (2) the closing of the Company's denim manufacturing facility in Erwin, North Carolina in December 2000 and (3) the closing of the Company's yarn spinning operation at its Brighton Plant in Shannon, Georgia in December 2000. In addition, the Company provided for the elimination of duplicate personnel at the Company's Klopman operation in Italy. Approximately 1,370 employees were terminated as a result of the initiatives, including production workers, administrative support and management.
In the fourth quarter of fiscal 2001, the Company announced additional actions due to a continuing difficult business environment. These actions included (1) the discontinuation of G&L Service Company, the Company's garment making operations in Mexico and (2) the consolidation of its greige fabrics operations which includes the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility. In addition, the Company provided for the reduction of approximately 5% of its salaried overhead employees. The above actions resulted in the termination of approximately 3,300 Mexican employees and 500 U.S. employees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Events".
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, and (iii) to continue to modernize its facilities in order to maintain its competitive position.
Key tactics of the Company's strategy include:
Emphasizing Customer Service. The Company is committed to being an 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.
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 through a joint venture has an 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. During fiscal 1999, the Company began operations through a leased facility in Tunisia. During fiscal 2000, the Company closed a transaction which formed a 50/50 joint venture in Mexico, Swift Denim-Hidalgo, which acquired an existing "state-of-the-art" denim factory from a group which included the Company's partner in the Joint Venture. As of September 29, 2001, approximately 32% of the Company's long lived assets were located outside of the United States.
The Company also has a marketing and product development partnership with Litton Mills in the Phillippines whereby product produced by Litton is sold under the Swift Denim name to customers throughout the Pacific Rim.
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.
Products and Customers
The following chart sets forth the Company's net sales for Galey & Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics, for each of the last three fiscal years.
For additional financial information with respect to the four segments and for geographical segment data, see Note N to the Company's consolidated financial statements contained herein.
Galey & Lord Apparel
Galey & Lord Apparel manufactures and sells woven cotton and cotton blended apparel, uniform and corduroy fabrics. From January 1997 to September 2001, the Company also sold garment packages to its customers.
The Company believes it is the largest domestic producer by capacity of cotton and cotton blended fabrics used in apparel. 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 is a vertically integrated manufacturer of woven cotton and cotton blended apparel fabrics with plants involved in spinning, weaving and dyeing and finishing. The Company supplements its spinning production with purchased yarn. 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 and uniform 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 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 has historically purchased 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. As part of its Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company consolidated certain of its greige fabrics operations, which included the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility.
The Company maintains rigorous quality control throughout each production process. Testing and inspection occur at various stages in the spinning, weaving, dyeing and finishing processes. The Company's plants use computers to monitor and control manufacturing processes and the flow of products.
The Company's cotton and cotton blended fabrics are sold principally to manufacturers of men's and women's wear. Fabrics produced for these markets are predominantly 100% cotton. The Company's customers include brand name and private label manufacturers and chain stores. They include Levi's, Haggar, Savane and Tropical Sportswear Int'l Corporation, VF Services, Polo Ralph Lauren, GAP, Inc., Liz Claiborne, American Trouser, Inc., and Oxford Industries. In addition, the Company sells to suppliers of mail order catalogs.
The Company's uniform fabrics are distributed to the government, the industrial laundry market, the hospitality market and the healthcare market. Durability of fabric, compliance with strict specifications for use, continuity of color and customer service are the factors most important to the Company's customers. Domestic customers for uniform fabrics include Riverside Manufacturing Co., Garment Corporation of America, Superior Surgical Mfg. Co., Inc., Landau Uniforms Corp., and Kellwood Company.
The Company is the only vertically integrated manufacturer of corduroy in the U.S. and is the largest domestic manufacturer. The Company's weaving, dyeing and finishing equipment and processes used to produce woven cotton, cotton-blended, and uniform fabrics may also be used to produce corduroy. The ability to produce both types of fabric using substantially the same equipment and processes allows the Company to schedule its production both economically and efficiently to 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.
The Company manufactures corduroy 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 corduroy customers are Levi's, Haggar, GAP, Inc., Savane and Tropical Sportswear Int'l Corporation, Azteca Production International Inc., and VF Services.
In June 1996, the Company acquired garment manufacturing facilities located in Piedras Negras, Mexico and later opened an additional garment manufacturing facility in Monclova, Mexico. This allowed the Company to offer its customers a finished package of fabric and garments from one source. Due to pricing pressures associated with a worldwide overcapacity of garment production, a strong U.S. dollar relative to Asian currencies and the impact of the Caribbean Basin Initiative ("CBI"), the Company closed all of its garment manufacturing facilities as part of its Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The Company's customers for garment packages included Levi's, Liz Claiborne and Calvin Klein.
Swift Denim
The Company is one of the world's largest producers of denim, operating under the tradename Swift Denim. Swift 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. In manufacturing denim, yarn is spun in its natural state, and then dyed prior to being woven into fabric. The woven fabric is then finished in a variety of ways.
Swift, recognized in the industry for product innovation, concentrates on product development on high value-added products that are developed primarily for the mid and upper ranges of distribution as determined by retail selling prices. The Company believes that Swift is the world's largest producer of value-added denim. Swift has established leadership in developing differentiated denim products such as black denim, ring spun denim and character yarn products such as rough spun denim and rebel ring products. The Company believes that domestically most of its products are in the mid to upper range of the market and that over 50% of its products are in the upper range of the market.
Through its joint venture, Swift Denim-Hidalgo, the Company is producing basic denim fabric in Mexico. The Company believes that the lower cost of production in Mexico will enable it to maintain its market share in all price points of denim fabric.
Swift enjoys a wide distribution, and its major customers include Levi's, Polo Jeans Co., Tommy Hilfiger Corporation, GAP, Inc., Old Navy, Nautica, Guess, Inc., Abercrombie and Fitch, American Eagle Outfitters, Eddie Bauer, H.D. Lee Co. Inc. and Wrangler. It also is a supplier to private label programs through major apparel contractors including Aalfs Manufacturing Inc., PL Industries, Kentucky Apparel and Border Apparel and sells to mail order suppliers including Land's End, Inc., L.L. Bean Inc., J. Crew Group Inc. and Eddie Bauer, Inc. Swift's international customers include Levi's, Revelacion En El Vestir S.A., Western Glove, Jack Spratt, Hoi Kosher Garment Fty. Ltd. and Luen Fung (Hop Kee) Garment.
Klopman International
The Company is a leading supplier of polyester and cotton blended fabrics in Europe. Klopman is unique in being Europe's only manufacturer dedicated solely to the production of fabrics for workwear, protectivewear and casual apparel. Klopman produces two high performance workwear fabrics, Superbandmaster 2000 and Indestructible 2000. 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. Klopman has continued to expand its production and marketing of woven casual wear fabric.
Klopman operates a spinning, weaving and dyeing and finishing plant in Frosinone, Italy and a spinning and weaving facility in Tunisia. The Company's European operations have executed a strategy to purchase greige fabric worldwide in order to achieve more competitive costs.
Klopman's customers include the Kansas Group, Alexandra Workwear plc., Apparelmaster, CCM Limited, Alsico NV, Mulliez Freres, Amuco International SpA, Van Moer, Dickies, Haniel/Eurodress, Levi's, Carhartt and G-Star.
Home Fashion Fabrics
The Company's Home Fashion Fabrics Division sells dyed and printed fabrics to the home furnishing market for use in bedspreads, comforters, curtains, accessories and certain upholstery applications. Prior to September 2001, the Company operated its own yarn and greige manufacturing facilities to produce home fashions greige fabric (undyed and unfinished) that was dyed and printed for its customers. Home fashions greige fabric was also sold to independent contractors for dyeing and finishing. However, as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the yarn and greige manufacturing plants were closed and in the future, the Company will purchase the greige fabric it requires to meet sales demand. The Company uses various suppliers to dye and print fabrics according to customers' specifications. Home Fashion Fabrics' major customers include Regency Home Fashions Inc., Burlington Industries, Inc., V.K.O. Incorporated and Design Craft.
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 quicker and more efficiently.
The Company has separate sales and marketing groups for Galey & Lord Apparel, Swift, Klopman 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.
Sales for fiscal 2001 and fiscal 2000 to various divisions of Levi Strauss & Co., Inc. accounted for approximately 21% and 24% of the Company's total net sales, respectively. 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 10% of the Company's total net sales.
At September 29, 2001, the Company had approximately 3,000 customer accounts.
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 not experienced any difficulty obtaining adequate supplies of cotton. The Company traditionally enters into contracts for cotton several months in advance of expected delivery to ensure availability. The prices associated with these contracts may be either fixed at the time the contract is signed or at a later date.
In order to make the price of domestic cotton competitive with prices quoted in the world market, the U.S. Department of Agriculture had adopted a program under which it paid 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 initial program's funding was exhausted in December 1998, the criteria for receiving rebates was met and the Company received the related rebates. In October 1999, the U.S. Congress approved funding to reestablish the rebate program effective as of October 1, 1999. The Company is currently receiving rebates under the criteria established in the program. The Company believes that any future discontinuance of the program could adversely impact its financial position.
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. As part of the Fiscal 2000 Strategic Initiatives, the Company has entered into a long-term strategic partnership with Parkdale Mills, Inc. to purchase yarn. Parkdale Mills, Inc. is a highly modernized, state of the art yarn spinner that has the capability to supply the Company with high quality, cost competitive, ring and open end yarns.
The Company purchases its dyes and chemicals from several suppliers. Dyes and chemicals are available from a large number of suppliers, and the Company has not experienced any difficulty in obtaining sufficient quantities.
The Company in its Home Fashions business employs the services of several outside processors to dye or print greige fabric in accordance with customer 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.
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 suppliers 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.
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 Textiles" trademarks are registered with many countries worldwide, including the U.S. 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 Textiles" 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 at September 29, 2001 was $83.8 million, a 53% decrease from the September 30, 2000 backlog of $178.4 million. The decline in order backlog is due to lower demand as a result of the difficult domestic retail environment, as well as decreased visibility due to shortened lead times. Over the past several years, many apparel manufacturers, including many of the Company's customers, have modified their purchasing procedures and have shortened lead times from order to delivery. Accordingly, the Company believes that order backlogs may not be as meaningful as they have in the past with regard to the Company's future sales.
Seasonality
The Company's business is not highly seasonal. Galey & Lord Apparel's product mix varies seasonally (with demand for corduroy fabric primarily in the fall/winter selling season and sportswear in the spring/summer selling season). Galey & Lord Apparel'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. Swift's sales, consistent with the denim industry, are historically lower in the March quarter; however, to meet June and September customer demand, production is generally unaffected. Klopman's sales are historically lower in the September quarter due to the European vacation period in August. The Home Fashion Fabrics Division experiences a very minimal fluctuation in the demand for the products it sells.
Competition
The United States textile industry has been and continues to be negatively impacted by existing worldwide trade practices. The establishment of the World Trade Organization in 1995 has resulted in the phase out of quotas on textiles and apparel through 2005. This phase out will gradually allow more low cost imports to enter the U.S.
U.S. government policy on an overall basis has not been favorable to the U.S. textile industry. The Company believes that the increasing flow of imports in the United States is partly due to the U.S. government's strong dollar monetary policy that allows foreign manufacturers to sell in the U.S. while a significant portion of their production costs are denominated in devalued local currencies. Further, the Company believes that as a result of the September 11, 2001 tragic events, the U.S. government may grant trade concessions to textile producing nations providing assistance in its war on terrorism. These trade concessions would further harm the U.S. textile industry.
Certain U.S. government trade programs do provide some benefit to the U.S. textile industry as outlined below:
. 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 the North American Free Trade Agreement ("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 the Caribbean Basin Initiatives the U.S. Congress has established several incentives that allow garments manufactured in the Caribbean to be imported into the U.S. with favorable quota and duty treatment as long as the fabric is made in the U.S. beginning with
U.S. yarn. While the Company to date has not experienced any increased fabric sales related to Caribbean Basin Initiatives it does expect that the initiatives will positively impact its future sales.
. The Company believes that it has benefited, and will continue to benefit, from the 1994 implementation of NAFTA, which phased 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.
Galey & Lord Apparel
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. 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 suede finished fabrics. 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.
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 and Springs Industries, Inc.
Swift 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., Riegel Textile Corp., a division of Mount Vernon Mills, Inc. and Burlington are Swift's major competitors.
Klopman International
Klopman is the leading pan-European manufacturer and marketer of fabric for workwear and protectivewear. It competes with domestic suppliers in each country it serves. Its major competitors in its principal markets are Lauffenmuhle GmbH, Carrington Career and Workwear Fabrics and Royal Ten-Cate NV.
Home Fashion Fabrics
The Company's Home Fashion Fabrics Division competes with a number of printers and dyers offering similar services, including Dan River, Santee Print Works Inc. and Slater Screen Print Works.
Other
In Europe, the Company believes that its joint venture, Swift Europe, is the leader in the value-added denim 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 and Tavex Alogodoner, S.A. in Spain.
Employees
At September 29, 2001, the Company had approximately 4,121 U.S. employees. Of these U.S. employees, approximately 3,872 were employed in manufacturing and 249 in administration and sales. At September 29, 2001, G&L Service Company had approximately 36 employees in Mexico. Also, at September 29, 2001, the Company had approximately 820 Canadian employees and 858 employees in operations elsewhere in the world, mainly in Europe. The majority of these employees are covered by collective bargaining agreements, none of which expire in the next fiscal year. 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.
Item 2.
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:
(1) As a result of the Fiscal 2000 Strategic Initiatives, operations at the yarn spinning facility at the Brighton Plant were ceased. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Events".
(2) As a result of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, G&L Service Company discontinued its garment making operations in August 2001 and Industries closed its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility in September 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Events".
The Company believes that its facilities are suitable to service its current level of sales and have additional capacity to satisfy its foreseeable needs.
Item 3.
Item 3. LEGAL PROCEEDINGS - --------------------------
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.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
None.
PART II
Item 5.
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, 2001, the Company had approximately 2,321 stockholders of record. The following table sets forth the high and low sales prices for the Common Stock for the periods indicated.
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.
The Company was notified by the New York Stock Exchange (the "NYSE") that it is not in compliance with the NYSE's continued listing standards because the average closing price of the Company's common stock has fallen below $1.00 per share over a consecutive 30 trading day period and the Company's market capitalization has fallen below $15 million over a 30 trading day period.
In accordance with NYSE rules, the Company has submitted to the NYSE a business plan to remedy the deficiencies. After reviewing the plan, the NYSE may accept the plan (following which the Company will be subject to periodic monitoring for compliance with the plan), or the Company's common stock will be subject to trading suspension and delisting.
If the Company's common stock were to be delisted from trading on the NYSE, trading, if any in the common stock may continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq over-the-counter market in the likely event that the Company was unable to list its Common Stock on Nasdaq, the American Stock Exchange or other alternative stock exchange. Delisting of the Company's common stock would result in limited availability of market price information and limited news coverage. In addition, delisting could restrict investors' interest in the common stock as well as materially adversely affect the trading market and prices for the common stock and the Company's ability to issue additional securities.
Item 6.
Item 6. SELECTED FINANCIAL DATA - --------------------------------
SUMMARY OF SELECTED FINANCIAL DATA (Amounts in thousands, except per share data)
/(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 $71.8 million (pre-tax) of charges related to the Company's Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives announced in July 2001 and $7.9 million (pre-tax) of costs associated with the Company's Fiscal 2000 Strategic Initiatives. Excluding these charges, the net loss would have been $0.4 million or $.04 per common share. See Notes I and J to the Company's consolidated financial statements. /(3)/ Includes $63.7 million (pre-tax) of charges related to the Company's Fiscal 2000 Strategic Initiatives announced in September 2000. Excluding charges related to the strategic initiatives, net income would have been $3.2 million or $.27 per common share. See Note J to the Company's consolidated financial statements. /(4)/ Includes the acquisition of the apparel fabrics business of Dominion Textile, Inc. which occurred on January 29, 1998. /(5)/ Selling, general and administrative expenses include a $3.0 million pre-tax charge taken due to the bankruptcy of a Home Fashion Fabrics customer.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------------------------------------------------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
Significant Events
Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
Throughout fiscal 2001, the Company has continued to operate in a very difficult business environment which resulted in the July 2001 announcement of certain actions (the "Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives"). The Company's goal in taking these actions is future loss avoidance, cost reduction, production capacity rationalization and increased cash flow. The principal manufacturing initiatives include:
(1) Discontinuation of G&L Service Company, the Company's garment making operations in Mexico, which includes the closure of the Dimmit facilities in Piedras Negras, Mexico, the Alta Loma facilities in Monclova, Mexico and the Eagle Pass Warehouse in Eagle Pass, Texas.
(2) Consolidation of its greige fabrics operations which includes the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility.
In addition to the principal manufacturing initiatives above, the Company also provided for the reduction of approximately 5% of its salaried overhead employees.
In the fourth quarter of fiscal 2001, the Company recorded $63.4 million before taxes of plant closing and impairment charges and $4.9 million before taxes of losses related to completing garment customer orders all related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The components of the plant closing and impairment charges included $30.4 million for goodwill impairments, $20.3 million for fixed asset impairments, $7.5 million for severance expense and $5.2 million for the write-off of leases and other exit costs. Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as a result of the initiatives. All production at the affected facilities ceased in early September 2001 by which time substantially all the affected employees were terminated. The Company expects that the sale of real estate and equipment in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives could take 12 months or longer to complete.
The table below summarizes the activity related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives plant closing accruals for the year ended September 29, 2001 (in thousands):
The Company expects to incur run-out expenses related to the plant closings of approximately $4.0-$6.0 million before taxes, $3.1 million of which were incurred in the September quarter 2001. These expenses, which include efficiency losses, equipment relocation, losses on inventories of discontinued styles, plant carrying costs and other costs, are included in cost of sales in the consolidated statement of operations.
As a result of the employees terminated due to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company recognized a net benefit curtailment loss of $0.1 million in the September quarter of 2001 related to its defined benefit pension plan.
In August 2001, the Company amended its Senior Credit Facility (as defined herein) to, among other things, exclude from covenant calculations the charges related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives discussed above. See "Management's Discussion and Analysis of Financial Condition - Liquidity and Capital Resources".
Fiscal 2000 Strategic Initiatives
The Company operates in an extremely competitive environment. Imports of foreign-made textile and apparel products are a significant source of competition and have increased significantly over the last few years. This surge of lower priced imports made it necessary for the Company to permanently reduce its cost of goods sold to remain competitive and profitable. In the September quarter 2000, the Company announced a series of strategic initiatives (the "Fiscal 2000 Strategic Initiatives") aimed at increasing the Company's competitiveness and profitability by reducing the cost of products manufactured. The principal manufacturing initiatives included:
(1) Completion of a joint venture, Swift Denim-Hidalgo, in Mexico to produce denim (see further discussion below). This operation is being expanded and is expected to be at full capacity by June 2002.
(2) Closed the Company's denim manufacturing facility in Erwin, North Carolina in December 2000. Value added denim produced by this plant was transferred to the Company's Columbus, Georgia plant. The remaining volume, mostly basic denim, has shifted to the Company's Swift Denim-Hidalgo joint venture in Mexico.
(3) Closed the Company's yarn spinning operation at its Brighton Plant in Shannon, Georgia in December 2000. The yarn produced by this plant has been outsourced to Parkdale Mills, Inc., the world's largest supplier of sales yarn.
In addition to the principal manufacturing initiatives above, the Company also provided for the elimination of duplicate personnel in its Klopman operation in Italy that impacted 34 positions.
The total of all of the Fiscal 2000 Strategic Initiatives resulted in plant closing and impairment charges totaling $63.6 million before taxes in the fourth quarter of fiscal 2000. The components of the plant closing and impairment charges included $49.3 million for fixed asset impairments, $10.8 million for severance expense and $3.5 million for the write-off of leases and other exit costs.
The table below summarizes the activity related to Fiscal 2000 Strategic Initiatives plant closing accruals for the year ended September 29, 2001 (in thousands):
As of September 29, 2001, substantially all of the 1,370 employees affected by the Fiscal 2000 Strategic Initiatives were terminated and were principally production workers, administrative support and management. All production at the affected facilities ceased during the December quarter 2000 at which time substantially all
of the affected employees were terminated. During fiscal 2001, the Company sold a portion of the Erwin facility as well as substantially all of the equipment at that facility and the Brighton facility. The Company expects that the sale of the remaining real estate and equipment related to the Fiscal 2000 Strategic Initiatives could take 12 months or longer to complete.
In connection with the Fiscal 2000 Strategic Initiatives, the Company has incurred run-out expenses related to the plant closings of $10.8 million before taxes in fiscal 2001. Run-out expenses include efficiency losses, equipment relocation, losses on inventories of discontinued styles, plant carrying costs and other costs charged to operations as incurred.
As a result of the employees terminated due to the Fiscal 2000 Strategic Initiatives, the Company recognized a net curtailment gain of $2.4 million in fiscal 2001 related to its defined benefit pension and post-retirement medical plans.
RESULTS OF OPERATIONS
The Company's operations are classified into four operating segments: (1) Galey & Lord Apparel, (2) Swift Denim, (3) Klopman International and (4) Home Fashion Fabrics. Results for fiscal 2001, 2000 and 1999 for each segment are shown below:
* Corporate operating income (loss) consists principally of administrative expenses from the Company's various holding companies.
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales
Net sales for fiscal 2001 were $850.0 million as compared to $957.8 million for fiscal 2000. The $107.8 million decrease in net sales primarily resulted from decreased sales volume due to the Erwin, North Carolina facility closure and poor retail environment and lower selling prices.
Galey & Lord Apparel
Galey & Lord Apparel's net sales for fiscal 2001 were $402.0 million, a $57.4 million decrease over fiscal 2000 net sales of $459.4 million. The net sales decrease is primarily attributable to a 10% decline in fabric sales volume due to the difficult domestic retail environment during the period and an 8% decline in unit sales of garment packages principally as a result of the discontinuation in September 2001 of the Company's garment making operations in Mexico announced as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. Average selling prices, inclusive of product mix changes, declined approximately 3.8%.
Swift Denim
Swift's net sales for fiscal 2001 were $299.1 million as compared to $348.6 million in fiscal 2000. The $49.5 million decrease in net sales is primarily due to a 19% decrease in volume and a 0.4% decline in selling prices, partially offset by improvements in product mix. The volume decrease is primarily due to the reduction in manufacturing capacity resulting from the closure of the Erwin, North Carolina facility in December 2000.
Klopman International
Klopman's net sales for fiscal 2001 were $135.4 million, a $6.5 million increase compared to fiscal 2000's net sales of $128.9 million. The net sales increase is primarily a result of a 15% increase in sales volume, partially offset by changes in product mix and a 3% decrease in selling prices. The decline in the value of the Euro against the U.S. dollar in fiscal 2001 over fiscal 2000 negatively impacted net sales by approximately 8%.
Home Fashion Fabrics
Net sales for Home Fashion Fabrics for fiscal 2001 were $13.5 million compared to $20.9 million in fiscal 2000. The $7.4 million decline in net sales has principally resulted from changes in product mix and a 4% decline in average selling prices, partially offset by an 8% increase in volume.
Operating Income (Loss)
The Company reported an operating loss of $28.7 million for fiscal 2001 compared to an operating income of $1.0 million in fiscal 2000. Excluding the charges related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and run-out costs related to the Fiscal 2000 Strategic Initiatives, fiscal 2001 operating income would have been $51.0 million. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, fiscal 2000 operating income would have been $64.7 million.
Galey & Lord Apparel
Galey & Lord Apparel's operating loss for fiscal 2001 was $12.8 million as compared to an operating income of $25.9 million for fiscal 2000. Excluding the costs related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, Galey & Lord Apparel's fiscal 2001 and fiscal 2000 operating income would have been $22.5 million and $37.3 million, respectively. The operating income decrease,
excluding the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, principally reflects lower selling prices, reduced sales and manufacturing volume and change in product mix. Operating income decreases were partially offset by a $3.5 million improvement in the Company's garment production facilities in Mexico prior to closure in September 2001.
In addition, during fiscal 2000 the Company received a $1.9 million recovery from the arbitration settlement of a claim with a supplier. The claim resulted from the delivery of defective chemicals which rendered inventory produced unsuitable for the intended customer's use.
Swift Denim
Swift's operating income for fiscal 2001 was $16.4 million compared to a fiscal 2000 operating loss of $33.6 million. Excluding the run-out costs related to the Fiscal 2000 Strategic Initiatives, Swift's fiscal 2001 operating income would have been $23.1 million. Excluding the costs related to the Fiscal 2000 Strategic Initiatives, Swift's fiscal 2000 operating income would have been $18.0 million. The increase in Swift's operating income, excluding the Fiscal 2000 Strategic Initiatives, principally reflects positive changes in product mix and improvement in raw material costs, partially offset by the impact of lower sales volume and selling prices.
Klopman International
Klopman's operating income in fiscal 2001 was $11.0 million as compared to $11.2 million in fiscal 2000. Excluding the costs related to the Fiscal 2000 Strategic Initiatives, Klopman's fiscal 2000 operating income would have been $11.9 million. The operating income decrease, excluding the Fiscal 2000 Strategic Initiatives, principally reflects a $6.4 million decline related to changes in product mix and lower selling prices, partially offset by higher volume. In addition, Klopman's results were negatively impacted by $0.9 million of foreign currency translation due to the weakness of the Euro to the U.S. Dollar.
Home Fashion Fabrics
Home Fashion Fabrics reported an operating loss for fiscal 2001 of $41.8 million as compared to an operating loss for fiscal 2000 of $2.2 million. Excluding the costs related to the Fiscal 2001 Strategic Initiatives, Home Fashion Fabrics' fiscal 2001 operating loss would have been $4.5 million. The increase in operating loss was principally due to lower selling prices, volume and changes in product mix.
Income from Associated Companies
Income from associated companies was $8.7 million in fiscal 2001 as compared to $6.3 million in fiscal 2000. The income represents amounts from several joint venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $60.2 million in fiscal 2001 compared to $66.1 million in fiscal 2000. The decrease in interest expense was primarily due to lower average debt balances as well as lower prime and LIBOR base rates in fiscal 2001 as compared to fiscal 2000, partially offset by increased spreads over prime and LIBOR due to the August 9, 2001 amendment of the Senior Credit Facility (as defined herein) in fiscal 2001 as compared to fiscal 2000. The average interest rate paid by the Company on its bank debt in fiscal 2001 was 8.9% per annum as compared to 9.4% per annum in fiscal 2000.
Income Taxes
The Company's overall tax rate for fiscal 2001 was approximately 12.6% as compared to 34.9% for fiscal 2000. For 2001, the difference from the statutory rate resulted primarily from the U.S. tax impact of the European reorganization whereby the Company changed its foreign subsidiary ownership structure due to changes in the tax laws of the Netherlands. The Company's European operations are now functioning through Luxembourg as a result of this reorganization. Additionally, the rate is being impacted by the establishment of a $13.8 million valuation allowance related to domestic operating losses since it is more likely than not that some portion of the deferred tax assets will not be recognized.
Net Income (Loss) and Net Income (Loss) Per Share
The Company reported a net loss for fiscal 2001 of $70.1 million or $5.85 per common share compared to a net loss for fiscal 2000 of $38.3 million or $3.21 per common share. Excluding the costs related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and Fiscal 2000 Strategic Initiatives, the Company's net loss for fiscal 2001 would have been $0.4 million or $0.04 per common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's net income for fiscal 2000 would have been $3.2 million or $0.27 per common share.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
Net sales for fiscal 2000 were $957.8 million as compared to $953.1 million for fiscal 1999. The $4.7 million increase in net sales primarily resulted from improved sales volume partially offset by lower selling prices.
Galey & Lord Apparel
Galey & Lord Apparel's net sales for fiscal 2000 were $459.4 million, a $1.5 million increase over fiscal 1999's net sales of $457.9 million. The net sales increase is primarily attributable to a 1% increase in fabric sales volume and a 35% increase in unit sales of garment packages. The increase in unit sales of garment packages reflected the additional production capacity at the Company's Monclova, Mexico garment facility. Overall, average selling prices, inclusive of product mix changes, declined approximately 1.9%.
Swift Denim
Swift's net sales for fiscal 2000 were $348.6 million as compared to $324.7 million in fiscal 1999. The $23.9 million increase in net sales is primarily due to a 12% increase in volume, partially offset by a 4% decline in selling prices with the remainder due to changes in product mix.
Klopman International
Klopman's net sales for fiscal 2000 were $128.9 million, an $11.9 million decline compared to fiscal 1999's net sales of $140.8 million. The weakening of the Euro resulted in a 13% decline in net sales. The remainder of the decline was due to a 3% decline in selling prices, partially offset by a 5% increase in sales volume.
Home Fashion Fabrics
Net sales for Home Fashion Fabrics for fiscal 2000 were $20.9 million compared to $29.7 million in fiscal 1999. The $8.8 million decline in net sales has principally resulted from a 22% decline in volume and a 3% decline in average selling prices.
Operating Income
Fiscal 2000 operating income was $1.0 million compared to $39.4 million in fiscal 1999. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, fiscal 2000 operating income would have been $64.7 million. Included in consolidated operating income in fiscal 1999 was a $1.8 million charge related to severance.
Galey & Lord Apparel
Galey & Lord Apparel's operating income for fiscal 2000 was $25.9 million as compared to $23.0 million for fiscal 1999. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, Galey & Lord Apparel's operating income would have been $37.3 million. The operating income increase, excluding the Fiscal 2000 Strategic Initiatives, principally reflects the impact of $17.5 million related to lower raw material prices and improved manufacturing efficiencies, a $0.4 million charge related to severance in fiscal 1999 and a $3.0 million improvement in the Company's garment production facilities in Mexico, partially offset by $14.3 million of lower fabric selling prices.
In addition, during fiscal 2000 the Company received a $1.9 million recovery from the arbitration settlement of a claim with a supplier. The claim resulted from the delivery of defective chemicals which rendered inventory produced unsuitable for the intended customer's use.
Swift Denim
Swift's operating loss for fiscal 2000 was $33.6 million compared to fiscal 1999 operating income of $5.2 million. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, Swift's operating income would have been $18.0 million. The increase in Swift's operating income, excluding the Fiscal 2000 Strategic Initiatives, principally reflects a $15.0 million improvement in raw material variances and a $7.8 million improvement in fixed cost spending and absorption, partially offset by a $13.0 million decline in selling prices.
Klopman International
Klopman's operating income in fiscal 2000 was $11.2 million as compared to $11.6 million in fiscal 1999. Excluding the charges related to the Fiscal 2000 Strategic Initiatives, Klopman's operating income would have been $11.9 million. The operating income increase, excluding the Fiscal 2000 Strategic Initiatives, principally reflects a $7.0 million improvement related to manufacturing efficiencies, changes in product mix, lower selling, general and administrative expenses and foreign exchange gains on sales not denominated in Euros, partially offset by $4.6 million related to the impact of lower selling prices. In addition, Klopman's results were negatively impacted by $1.8 million by foreign currency translation due to the weakness of the Euro to the US Dollar.
Home Fashion Fabrics
Home Fashion Fabrics reported an operating loss for fiscal 2000 of $2.2 million as compared to an operating loss for fiscal 1999 of $0.2 million. The decrease in operating income was principally due to the lower sales volume and selling prices discussed above, partially offset by favorable manufacturing variances.
Income from Associated Companies
Income from associated companies was $6.3 million in fiscal 2000 as compared to $4.2 million in fiscal 1999. The income represents amounts from several joint venture interests that manufacture and sell denim products.
Interest Expense
Interest expense was $66.1 million in fiscal 2000 compared to $60.9 million in fiscal 1999. The increase in interest expense was primarily due to higher interest rates paid by the Company as a result of increased spreads over LIBOR due to the July 13, 1999 amendment of the Senior Credit Facility, higher prime and LIBOR base rates and higher average debt balances in fiscal 2000 as compared to fiscal 1999. The average interest rate paid by the Company on its bank debt in fiscal 2000 was 9.4% per annum as compared to 8.5% per annum in fiscal 1999.
Income Taxes
The Company's overall tax rate for fiscal 2000 was approximately 34.9% as compared to 36.0% for fiscal 1999. The difference from the statutory rate resulted primarily from changes in the relative amounts of domestic and foreign earnings in fiscal 2000 as compared to fiscal 1999. In fiscal 2000, domestic losses were partially offset by higher foreign earnings.
Net Income (Loss) and Net Income (Loss) Per Share
The Company reported a net loss for fiscal 2000 of $38.3 million or $3.21 per common share compared to a net loss for fiscal 1999 of $11.0 million or $0.93 per common share. Excluding the Fiscal 2000 Strategic Initiatives, the Company's net income for fiscal 2000 would have been $3.2 million or $0.27 per common share.
Liquidity and Capital Resources
The Company and its subsidiaries had cash and cash equivalents totaling $9.2 million and $9.6 million at September 29, 2001 and September 30, 2000, respectively. At September 29, 2001, the Company had a total of $25.6 million and $5.8 million of borrowing availability under its Senior Credit Facility and Canadian Loan Agreement, respectively.
During fiscal 2001, the Company primarily utilized its available cash and revolving credit borrowings under its Senior Credit Facility and Canadian Loan Facility to fund the Company's operating and investing requirements.
The Company expects to spend approximately $12 million for capital expenditures in fiscal 2002. The Company anticipates that approximately 15% of the forecasted capital expenditures will be used to increase the Company's capabilities while the remaining 85% will be used to maintain existing capabilities.
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 and the Canadian Loan 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.
Senior Credit Facility
On January 29, 1998 the Company entered into a new credit agreement, as amended, (the "Senior Credit Facility") with First Union National Bank ("FUNB"), as agent and lender, and its 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"). In July 1999, the Company amended its Senior Credit Facility (the "July 1999 Amendment") pursuant to which the Company, among other things, repaid $25 million
principal amount of its term loan balance using available borrowings under its revolving line of credit and reduced the maximum amount of borrowings under the revolving line of credit by $25 million to $200 million. As a result of the February 2001 funding of the Company's Canadian Loan Agreement (as defined below), the Company repaid $12.7 million principal amount of its U.S. term loan balance and reduced the maximum amount of borrowings under its U.S. revolving line of credit by $12.3 million to $187.7 million. Both the repayment resulting from the July 1999 Amendment and the February 2001 repayment of the Term Loan B and Term Loan C principal balances ratably reduced the remaining quarterly principal payments. The reduction in the U.S. revolving line of credit facility in February 2001 resulted in a write-off of $0.1 million of deferred debt charges which is included in selling, general and administrative expenses in the March quarter 2001.
In September 2000, the Company amended the Senior Credit Facility to exclude charges related to the Company's Fiscal 2000 Strategic Initiatives from the computation of the covenants. In March 2001, the Company further amended the Senior Credit Facility to allow for a more tax efficient European corporate structure. In August 2001, the Company amended the Senior Credit Facility (the "August 2001 Amendment") which, among other things, replaced the Adjusted Leverage Ratio covenant (as defined in the August 2001 Amendment) with a minimum EBITDA covenant (as defined in the August 2001 Amendment) until the Company's December quarter 2002, waived compliance by the Company with the Adjusted Fixed Charge Coverage Ratio (as defined in the August 2001 Amendment) until the Company's December quarter 2002 and modified the Company's covenant related to capital expenditures. The August 2001 Amendment also excludes, for covenant purposes, charges related to closure of facilities announced on July 26, 2001 as part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The August 2001 Amendment also increased the interest rate spread on all borrowings under the Company's revolving line of credit and term loans by 100 basis points for the remainder of the term of the Senior Credit Facility.
Under the Senior Credit Facility (as amended by the July 1999 Amendment), for the period beginning July 4, 1999 through February 15, 2001 the revolving line of credit borrowings bore interest at a per annum rate, at the Company's option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bore interest at a per annum rate, at the Company's option, of (A) with respect to Term Loan B either (i)(a) the greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% and (B) with respect to Term Loan C, either (i)(a) greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.50% or (ii) LIBOR plus a margin of 3.75%.
Under the Senior Credit Facility, the revolving line of credit expires on March 27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly payments of $304,645 through March 27, 2004, three quarterly payments of $28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111 through April 2, 2005, three quarterly payments of $20,098,295 and a final amount of $17,024,140 on Term Loan C's maturity of April 1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August 9, 2001, the revolving line of credit borrowings bear interest at a per annum rate, at the Company's option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.0%, 1.25%, 1.50%, 1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios (as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75%, 3.00%, 3.25% or 3.50%, 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 2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, based on the Company achieving certain leverage ratios and (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 2.25%, 2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%, 4.00% or 4.25%, based on the Company's achieving certain leverage ratios.
At September 29, 2001, interest on the Company's term loan and revolving credit borrowings were based on one-month market LIBOR rates averaging 2.82% and on a prime rate of 6.0%. The Company's weighted average borrowing rate on these loans at September 29, 2001 was 6.74%, which includes spreads ranging from 3.5% to 4.25% on the LIBOR borrowings and a spread of 2.25% on the prime rate borrowings.
The Company's obligations under the Senior Credit Facility, as amended pursuant to the July 1999 Amendment, are secured substantially by all of the assets of the Company and each of its domestic subsidiaries (including a lien on all real property owned in the United States), 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. Based on fiscal 2001 results, the Company is not required to make an Excess Cash Flow payment with respect to fiscal 2001.
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.
Senior Subordinated Debt
In February 1998, the Company closed its private offering of $300.0 million aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the "Notes"). In May 1998, the Notes were exchanged for freely transferable identical Notes registered under the Securities Act of 1933. Net proceeds from the offerings 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 borrowings incurred to partially finance the acquisition of the apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii) a portion of the outstanding amount under a revolving line of credit provided for under the Senior Credit Facility (as defined herein). Interest on the Notes is payable on March 1 and September 1 of each year.
On August 18, 2000, the Company and its noteholders amended the indenture, dated February 24, 1998 ("the Indenture"), entered into in connection with the Notes to amend the definition of "Permitted Investment" in the Indenture to allow the Company and its Restricted Subsidiaries (as defined in the Indenture) to make additional investments (as defined in the Indenture) totaling $15 million at any time outstanding in one or more joint ventures which conduct manufacturing operations primarily in Mexico. This amendment was completed to allow the Company sufficient flexibility in structuring its investment in the Swift Denim-Hidalgo joint venture discussed herein. See "Item 1. Business - General".
The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and its subsidiaries and senior in right of payment to any subordinated indebtedness of the Company. The Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles, Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those limiting the Company and its subsidiaries' ability to incur indebtedness, pay dividends, incur liens, transfer or sell assets, enter into transactions with affiliates, issue or sell stock of restricted subsidiaries or merge or consolidate the Company or its restricted subsidiaries.
Canadian Loan Agreement
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian Loan Agreement") with Congress Financial Corporation (Canada), as lender. The Canadian Loan Agreement provides for (i) a revolving line of credit under which Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0 million or a borrowing base (comprised of eligible accounts receivable and eligible inventory of Drummondville, as defined in the Canadian Loan Agreement), and (ii) a term loan in the principal amount of U.S. $9.0 million.
Under the Canadian Loan Agreement, the revolving line of credit expires in February 2004 and the principal amount of the term loan is repayable in equal monthly installments of $229,500 CDN with the unpaid balance repayable in February 2004; provided, however, that the revolving line of credit and the maturity of the term loan may be extended at the option of Drummondville for up to two additional one year periods subject to and in accordance with the terms of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest rate on Drummondville's borrowings initially was fixed through the second quarter of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a per annum rate, at Drummondville's option, of either (i) the U.S. prime rate plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for borrowings in U.S. dollars), all based on Drummondville maintaining certain quarterly excess borrowing availability levels under the revolving line of credit or Drummondville achieving certain fixed charge coverage ratio levels (as set forth in the Canadian Loan Agreement).
At September 29, 2001, interest on the Company's term loan and revolving credit borrowings were based on one-month market LIBOR rates averaging 3.58%, on a U.S. prime rate of 6.5% and on a Canadian prime rate of 5.75%. The Company's weighted average borrowing rate on these loans at September 29, 2001 was 6.55%, which includes a spread of 2.25% on the LIBOR borrowings and spreads ranging from 0.25% to 1.00% on the prime rate borrowings.
Drummondville's obligations under the Canadian Loan Agreement are secured by all of the assets of Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting Drummondville's ability to incur indebtedness (other than incurring or paying certain intercompany indebtedness), incur liens, sell or acquire assets or businesses, pay dividends, make loans or advances or make certain investments. In addition, the Canadian Loan Agreement requires Drummondville to maintain a certain level of tangible net worth (as defined in the Canadian Loan Agreement).
Tax Matters
During fiscal 2001, the Company reorganized its European operations due to tax law changes in The Netherlands. As a result of such reorganization, the Company recognized approximately $15.7 million of U.S. taxable income, which reduced the Company's U.S. net operating loss carryforward.
Approximately $5.0 million of undistributed earnings further reduced the U.S. net operating loss carryforward due to the U.S. tax effect of the discontinuation of the garment making operation in Mexico.
At September 29, 2001, the Company had outstanding net operating loss carryforwards ("NOLs") for U.S. federal and state tax purposes of approximately $108.6 million, which will be carried forward to offset future taxable income and will expire in 2019-2021 if unused. As of September 29, 2001, the Company has established a $13.8 million valuation allowance related to domestic operating losses since it is more likely than not that some portion of the deferred tax assets will not be recognized.
Other
Pursuant to an agreement (the "Pension Funding Agreement"), dated January 29, 1998 with the Pension Benefit Guaranty Corporation ("PBGC"), the Company was required to provide $5.0 million additional funding to three defined benefit pension plans previously sponsored by Dominion, $3.0 million of which was paid at the closing of the Acquisition, $1.0 million was paid during the March quarter 1999 and the remaining $1.0 million was paid in the March quarter 2000. The Pension Funding Agreement also gives the PBGC a priority lien of $10.0 million on certain land and building assets of the Company to secure payment of any liability to the PBGC that might arise if one or more of the pension plans were terminated. The Company's obligations under the Pension Funding Agreement terminate upon the earlier to occur of (a) the termination of the pension plans and (b) on or after January 30, 2003, if (i) the pension plans are fully funded for two consecutive years and (ii) the Company receives an investment grade rating on its debt.
On November 7, 2001, due to the current economic environment and the limited visibility in the apparel marketplace, the Company announced that it had engaged Houlihan, Lokey, Howard & Zukin to evaluate the strategic alternatives available to the Company.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union (the "Participating Countries") established fixed conversion rates between their existing sovereign currencies ("legacy currencies") and the Euro. Between January 1, 1999 and December 31, 2001, the Euro will be used solely for non-cash transactions. During this time period, the Euro will be traded on currency exchanges and will be the basis of valuing legacy currencies. The legacy currencies will continue to be legal tender. Beginning January 1, 2002, the participating countries will issue new Euro-denominated bills and coins for use in cash transactions, and no later than July 1, 2002, will withdraw all bills and coins denominated in the legacy currencies. The legacy currencies will then no longer be legal tender for any transactions.
The Company's European operations export the majority of its sales to countries that are Participating Countries. As the European pricing policy has historically been based on local currencies, the Company believes that as a result of the Euro conversion the uncertainty of the effect of exchange rate fluctuations will be greatly reduced. In addition, the Company's principal competitors are also located within the Participating Countries. The Company believes that the conversion to the Euro will eliminate much of the advantage or disadvantage coming from exchange rate fluctuation resulting from transactions 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.
As contemplated by the Company's Euro conversion plan, invoicing of products in both local currencies and the Euro began January 1, 1999. The conversion of the Company's financial reporting and information systems was completed during the Company's 2001 fiscal year. The costs related to the conversion were not material to the Company's operating results or liquidity.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). For all business combinations initiated after June 30, 2001, FAS 141 eliminates the pooling-of-interests method of accounting and requires the purchase method of accounting, including revised recognition criteria for intangible assets other than goodwill. Under FAS 142, which is effective for years beginning after December 15,
2001, the Company's fiscal year 2003, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Intangible assets that have finite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," ("FAS 121"). The Company has not yet determined what the effect of FAS 142 will be on the earnings and financial position of the Company.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"), which is effective for years beginning after June 15, 2002, the Company's fiscal year 2003. FAS 143 addresses legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Any associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset and expensed over the life of the asset. The Company has not yet determined what the effect of FAS 143 will be on the earnings and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which is effective for fiscal years beginning after December 15, 2001, the Company's fiscal year 2003. FAS 144 clarifies accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment loss related to the carrying value of long-lived assets. The Company has not yet determined what the effect of FAS 144 will be on earnings and financial position of the Company.
Item 7a.
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 contracts. As of September 29, 2001, a 10% decline in market price would have a negative impact of approximately $2.6 million on the value of the contracts.
Interest Rate Exposures
In prior years, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. In January 2001, interest rate swap agreements on $25.0 million of the Company's outstanding floating-rate bank debt expired. The interest rate swaps assured that the Company would pay a maximum LIBOR rate of 5.53% (excluding any applicable spread required by the Senior Credit Facility) until its expiration. At September 29, 2001, the Company did not have any interest rate swap agreements outstanding.
Derivative Financial Instruments
Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("FAS 133"), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting FAS 133 as of October 1, 2000 was not material to the Company's financial statements.
The Company uses forward exchange contracts to reduce the effect of fluctuating foreign currencies on sales, purchases, 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 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.
Cash Flow Hedging Strategy
The Company conducts its business in various foreign currencies and, as a result, is exposed to movements in foreign currency exchange rates. To protect against the volatility of forecasted foreign currency cash flows resulting from sales or purchases denominated in other than the Company's functional currencies over the next year, the Company has instituted a foreign currency hedging program. The Company hedges portions of its forecasted sales and purchases denominated in foreign currencies with forward contracts.
Foreign currency forward contracts that hedge forecasted sales and purchases are designated as cash flow hedges. The amount of gain or loss resulting from hedge ineffectiveness for these contracts is attributable to the difference in the
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Derivative Financial Instruments (Continued)
spot exchange rates and forward contract rates. The net loss was not material for the year ended September 29, 2001 and is included in cost of sales in the consolidated statement of income.
At September 29, 2001, the Company expects to reclassify approximately $50,000 of pre-tax gains ($20,000 after-tax) on derivative instruments from accumulated other comprehensive income to earnings over the next twelve months. This reclassification will be made when the forecasted transactions occur.
Fair Value Hedging Strategy
The Company also maintains foreign currency forward contracts to hedge receivables and payables denominated in foreign currencies. These contracts are designated as fair value hedges. The gain or loss resulting from hedge ineffectiveness for these contracts is attributable to the difference in spot exchange rates and forward contract rates. The net loss was not material for the year ended September 29, 2001 and is included in cost of sales in the consolidated statement of income.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders Galey & Lord, Inc.
We have audited the accompanying consolidated balance sheets of Galey & Lord, Inc. as of September 29, 2001 and September 30, 2000 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended September 29, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Galey & Lord, Inc. at September 29, 2001 and September 30, 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 29, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Greensboro, North Carolina November 5, 2001
GALEY & LORD, INC.
CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share and share data)
ASSETS
See accompanying notes to consolidated financial statements.
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data)
See accompanying notes to consolidated financial statements.
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
See accompanying notes to consolidated financial statements.
GALEY & LORD, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except share data)
See accompanying notes to consolidated financial statements.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
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 (FIFO) 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 the straight-line method. 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 September 29, 2001 and September 30, 2000 was $9.2 million and $6.3 million, respectively.
Goodwill: The Company has $67.1 million and $100.8 million of goodwill at September 29, 2001 and September 30, 2000, respectively, which represents the excess of the purchase cost over the fair value of assets acquired and is being amortized over 20 to 40 years. Accumulated amortization at September 29, 2001 and September 30, 2000 was $8.6 million and $15.4 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. As part of the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, goodwill of $8.4 million related to G&L Service Company and $22.0 million related to the greige fabrics operations was determined to be completely impaired and was written off in the September 2001 quarter. The Company believes that no impairment of the remaining goodwill existed at September 29, 2001.
Other Intangibles: The Company has $47.3 million and $48.6 million of other intangibles at September 29, 2001 and September 30, 2000, respectively. The other intangibles represent the value of certain trademarks acquired in the January 1998 acquisition of the apparel assets of Dominion Textile, Inc. These trademarks are amortized over 40 years. Accumulated amortization at September 29, 2001 and September 30, 2000 was $4.7 million and $3.4 million, respectively.
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 the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average monthly exchange rates established during 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.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2001, September 30, 2000 and October 2, 1999
NOTE A - Summary of Significant Accounting Policies (Continued)
Derivative Financial Instruments: The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended ("FAS 133"), effective October 1, 2000. 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, forward exchange and purchase contracts. Under FAS 133, the Company is required to recognize all derivatives 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 will either be offset against the change in fair value of the hedged 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 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. Consistent with recognized practice in the textile industry, the Company records revenues on a bill and hold basis, invoicing goods that have been produced, packaged and made ready for shipment. The goods are effectively segregated from inventory which is available for sale. The risk of ownership of the goods has passed to the customer and remittance terms are consistent with all other sales by the Company. During fiscal 2001, 2000 and 1999, invoices issued under these terms represent 12%, 14% and 20% of revenue, respectively.
The Company classifies amounts billed to customers for shipping and handling in net sales and costs incurred for shipping and handling in cost of sales in the consolidated statements of income.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 years ended September 29, 2001, September 30, 2000 and October 2, 1999 were 52-week years.
Recently Issued Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," ("FAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). For all business combinations initiated after June 30, 2001, FAS 141 eliminates the pooling-of-interests method of accounting and requires the purchase method of accounting, including revised recognition criteria for intangible assets other than goodwill. Under FAS 142, which is effective for years beginning after December 15, 2001, the Company's fiscal year 2003, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Intangible assets that have finite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," ("FAS 121"). The Company has not yet determined what the effect of FAS 142 will be on the earnings and financial position of the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"), which is effective for years beginning after June 15, 2002, the Company's fiscal year 2003. FAS 143 addresses legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Any associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset and expensed over the life of the asset. The Company has not yet determined what the effect of FAS 143 will be on the earnings and financial position of the Company.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE A - Summary of Significant Accounting Policies (Continued)
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which is effective for fiscal years beginning after December 15, 2001, the Company's fiscal year 2003. FAS 144 clarifies accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment loss related to the carrying value of long-lived assets. The Company has not yet determined what the effect of FAS 144 will be on earnings and financial position of the Company.
NOTE B - Inventories
Inventories at September 29, 2001 and September 30, 2000 are summarized as follows (in thousands):
Inventories valued using the LIFO method comprised approximately 69% and 67% of domestic inventories at September 29, 2001 and September 30, 2000, respectively. Inventory held at foreign locations was $36.9 million and $33.8 million at September 29, 2001 and September 30, 2000, respectively.
NOTE C - Long-term Debt
Long-term debt consists of the following (in thousands):
At September 29, 2001, the annual maturities of the principal amounts of long-term debt were as follows (in thousands):
GALEY & LORD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
Senior Credit Facility
The Company's principal credit facility, dated as of January 29, 1998, as amended (the "Senior Credit Facility"), is with First Union National Bank ("FUNB"), as agent and lender, and its 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"). In July 1999, the Company amended its Senior Credit Facility (the "July 1999 Amendment") pursuant to which the Company, among other things, repaid $25 million principal amount of its term loan balance using available borrowings under its revolving line of credit and reduced the maximum amount of borrowings under the revolving line of credit by $25 million to $200 million. As a result of the February 2001 funding of the Company's Canadian Loan Agreement (as defined below), the Company repaid $12.7 million principal amount of its U.S. term loan balance and reduced the maximum amount of borrowings under its U.S. revolving line of credit by $12.3 million to $187.7 million. Both the repayment resulting from the July 1999 Amendment and the February 2001 repayment of the Term Loan B and Term Loan C principal balances ratably reduced the remaining quarterly principal payments. The reduction in the U.S. revolving line of credit facility in February 2001 resulted in a write-off of $0.1 million of deferred debt charges which is included in selling, general and administrative expenses in the March quarter 2001.
In September 2000, the Company amended the Senior Credit Facility to exclude charges related to the Company's Fiscal 2000 Strategic Initiatives from the computation of the covenants. In March 2001, the Company further amended the Senior Credit Facility to allow for a more tax efficient European corporate structure. In August 2001, the Company amended the Senior Credit Facility (the "August 2001 Amendment") which, among other things, replaced the Adjusted Leverage Ratio covenant (as defined in the August 2001 Amendment) with a minimum EBITDA covenant (as defined in the August 2001 Amendment) until the Company's December quarter 2002, waived compliance by the Company with the Adjusted Fixed Charge Coverage Ratio (as defined in the August 2001 Amendment) until the Company's December quarter 2002 and modified the Company's covenant related to capital expenditures. The August 2001 Amendment also excludes, for covenant purposes, charges related to closure of facilities announced on July 26, 2001. The August 2001 Amendment also increased the interest rate spread on all borrowings under the Company's revolving line of credit and term loans by 100 basis points for the remainder of the term of its Senior Credit Facility.
Under the Senior Credit Facility (as amended by the July 1999 Amendment), for the period beginning July 4, 1999 through February 15, 2001 the revolving line of credit borrowings bore interest at a per annum rate, at the Company's option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.75% or (ii) LIBOR plus a margin of 3.00%. Term Loan B and Term Loan C bore interest at a per annum rate, at the Company's option, of (A) with respect to Term Loan B either (i) (a) the greater of the prime rate or federal funds rate plus .50%, plus (b) a margin of 2.25% or (ii) LIBOR plus a margin of 3.50% and (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 2.50% or (ii) LIBOR plus a margin of 3.75%.
Under the Senior Credit Facility, the revolving line of credit expires on March 27, 2004 and the principal amount of (i) Term Loan B is repayable in quarterly payments of $304,645 through March 27, 2004, three quarterly payments of $28,636,594 and final amount of $24,303,053 on Term Loan B's maturity of April 2, 2005 and (ii) Term Loan C is repayable in quarterly payments of $216,111 through April 2, 2005, three quarterly payments of $20,098,295 and a final amount of $17,024,140 on Term Loan C's maturity of April 1, 2006. Under the Senior Credit Facility, as amended on December 22, 1998, July 3, 1999 and August 9, 2001, the revolving line of credit borrowings bear interest at a per annum rate, at the Company's option, of either (i) (a) the greater of the prime rate or the federal funds rate plus .50% plus (b) a margin of 1.0%, 1.25%, 1.50%, 1.75%, 2.00% or 2.25%, based on the Company achieving certain leverage ratios (as defined in the Senior Credit Facility) or (ii) LIBOR plus a margin of 2.25%, 2.50%, 2.75%, 3.00%, 3.25% or 3.50%, 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 2.00%, 2.25%, 2.50% or 2.75%, based on the Company achieving certain leverage ratios or (ii) LIBOR plus a margin of 3.25%, 3.50%, 3.75% or 4.00%, based on the Company achieving certain leverage ratios and (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 2.25%, 2.50%, 2.75% or 3.00%, based on the Company achieving certain leverage ratios, or (ii) LIBOR plus a margin of 3.50%, 3.75%, 4.00% or 4.25%, based on the Company's achieving certain leverage ratios.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
At September 29, 2001, interest on the Company's term loan and revolving credit borrowings were based on one-month market LIBOR rates averaging 2.82% and on a prime rate of 6.0%. The Company's weighted average borrowing rate on these loans at September 29, 2001 was 6.74%, which includes spreads ranging from 3.5% to 4.25% on the LIBOR borrowings and a spread of 2.25% on the prime rate borrowings.
The Company's obligations under the Senior Credit Facility, as amended pursuant to the July 1999 Amendment, are secured substantially by all of the assets of the Company and each of its domestic subsidiaries (including a lien on all real property owned in the United States), 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. Based on fiscal 2001 results, the Company was not required to make an Excess Cash Flow payment with respect to fiscal 2001.
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.
Senior Subordinated Debt
In February 1998, the Company closed its private offering of $300.0 million aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2008 (the "Notes"). In May 1998, the Notes were exchanged for freely transferable identical Notes registered under the Securities Act of 1933. Net proceeds from the offerings 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 borrowings incurred to partially finance the acquisition of the apparel fabrics business of Dominion Textile, Inc. on January 29, 1998 and (ii) a portion of the outstanding amount under a revolving line of credit provided for under the Senior Credit Facility (as defined herein). Interest on the Notes is payable on March 1 and September 1 of each year.
On August 18, 2000, the Company and its noteholders amended the indenture, dated February 24, 1998 ("the Indenture"), entered into in connection with the Notes to amend the definition of "Permitted Investment" in the Indenture to allow the Company and its Restricted Subsidiaries (as defined in the Indenture) to make additional investments (as defined in the Indenture) totaling $15 million at any time outstanding in one or more joint ventures which conduct manufacturing operations primarily in Mexico. This amendment was completed to allow the Company sufficient flexibility in structuring its investment in the Swift Denim-Hidalgo joint venture.
The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior indebtedness of the Company and its subsidiaries and senior in right of payment to any subordinated indebtedness of the Company. The Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, by Galey & Lord Industries, Inc., Swift Denim Services, Inc., G&L Service Company North America, Inc., Swift Textiles, Inc., Galey & Lord Properties, Inc., Swift Denim Properties, Inc. and other future direct and indirect domestic subsidiaries of the Company.
The Notes are subject to certain covenants, including, without limitation, those limiting the Company and its subsidiaries' ability to incur indebtedness, pay dividends, incur liens, transfer or sell assets, enter into transactions with affiliates, issue or sell stock of restricted subsidiaries or merge or consolidate the Company or its restricted subsidiaries.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE C - Long-term Debt (Continued)
Canadian Loan Agreement
In February 2001, the Company's wholly owned Canadian subsidiary, Drummondville Services Inc. ("Drummondville"), entered into a Loan Agreement (the "Canadian Loan Agreement") with Congress Financial Corporation (Canada), as lender. The Canadian Loan Agreement provides for (i) a revolving line of credit under which Drummondville may borrow up to an amount equal to the lesser of U.S. $16.0 million or a borrowing base (comprised of eligible accounts receivable and eligible inventory of Drummondville, as defined in the Canadian Loan Agreement), and (ii) a term loan in the principal amount of U.S. $9.0 million.
Under the Canadian Loan Agreement, the revolving line of credit expires in February 2004 and the principal amount of the term loan is repayable in equal monthly installments of $229,500 CDN with the unpaid balance repayable in February 2004; provided, however, that the revolving line of credit and the maturity of the term loan may be extended at the option of Drummondville for up to two additional one year periods subject to and in accordance with the terms of the Canadian Loan Agreement. Under the Canadian Loan Agreement, the interest rate on Drummondville's borrowings initially was fixed through the second quarter of fiscal year 2001 (March quarter 2001) at a per annum rate, at Drummondville's option, of either LIBOR plus 2.75% or the U.S. prime rate plus .75% (for borrowings in U.S. dollars) or the Canadian prime rate plus 1.5% (for borrowings in Canadian dollars). Thereafter, borrowings will bear interest at a per annum rate, at Drummondville's option, of either (i) the U.S. prime rate plus 0%, .25%, .50%, .75%, or 1.0% (for borrowings in U.S. dollars), (ii) the Canadian prime rate plus .75%, 1.0%, 1.25%, 1.50%, or 1.75% (for borrowings in Canadian dollars), or (iii) LIBOR plus 2.00%, 2.25%, 2.50%, 2.75% or 3.00% (for borrowings in U.S. dollars), all based on Drummondville maintaining certain quarterly excess borrowing availability levels under the revolving line of credit or Drummondville achieving certain fixed charge coverage ratio levels (as set forth in the Canadian Loan Agreement).
At September 29, 2001, interest on the Company's term loan and revolving credit borrowings were based on one-month market LIBOR rates averaging 3.58%, on a U.S. prime rate of 6.5% and on a Canadian prime rate of 5.75%. The Company's weighted average borrowing rate on these loans at September 29, 2001 was 6.55%, which includes a spread of 2.25% on the LIBOR borrowings and spreads ranging from .25% to 1.00% on the prime rate borrowings.
Drummondville's obligations under the Canadian Loan Agreement are secured by all of the assets of Drummondville. The Canadian Loan Agreement contains certain covenants, including without limitation, those limiting Drummondville's ability to incur indebtedness (other than incurring or paying certain intercompany indebtedness), incur liens, sell or acquire assets or businesses, pay dividends, make loans or advances or make certain investments. In addition, the Canadian Loan Agreement requires Drummondville to maintain a certain level of tangible net worth (as defined in the Canadian Loan Agreement).
NOTE D - 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 September 29, 2001.
Forward exchange contracts - The fair value of outstanding forward exchange contracts is determined based on quotes obtained from public-trading currency markets.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE D - Financial Instruments (Continued)
Publicly Traded Debt
At September 29, 2001 and September 30, 2000, the fair value of the Company's 9 1/8% Senior Subordinated Notes Due 2008 was approximately $75.0 million and $192.0 million, respectively, as compared to the carrying values of $299.0 million and $298.9 million, respectively.
Interest Rate Swap Agreements
In prior years, the Company entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. In January 2001, interest rate swap agreements on $25.0 million of the Company's outstanding floating-rate bank debt expired. The interest rate swaps assured that the Company would pay a maximum LIBOR rate of 5.53% (excluding any applicable spread required by the Senior Credit Facility) until its expiration. The amount paid or received under the swap agreements was based on the changes in actual interest rates and was recorded as an adjustment to interest expense. At September 29, 2001, the Company had no interest rate swap agreements outstanding.
Derivative Instruments and Hedging Activities
Effective October 1, 2000, the Company adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("FAS 133"), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting FAS 133 as of October 1, 2000 was not material to the Company's financial statements.
The Company uses forward exchange contracts to reduce the effect of fluctuating foreign currencies on sales, purchases, 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 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.
Cash Flow Hedging Strategy The Company conducts its business in various foreign currencies and, as a result, is exposed to movements in foreign currency exchange rates. To protect against the volatility of forecasted foreign currency cash flows resulting from sales or purchases denominated in other than the Company's functional currencies over the next year, the Company has instituted a foreign currency hedging program. The Company hedges portions of its forecasted sales and purchases denominated in foreign currencies with forward contracts.
Foreign currency forward contracts that hedge forecasted sales and purchases are designated as cash flow hedges. The amount of gain or loss resulting from hedge ineffectiveness for these contracts is attributable to the difference in the spot exchange rates and forward contract rates. The net loss was not material for the year ended September 29, 2001 and is included in cost of sales in the consolidated statement of income.
At September 29, 2001, the Company expects to reclassify approximately $50,000 of pre-tax gains ($20,000 after-tax) on derivative instruments from accumulated other comprehensive income to earnings over the next twelve months. This reclassification will be made when the forecasted transactions occur.
Fair Value Hedging Strategy The Company also maintains foreign currency forward contracts to hedge receivables and payables denominated in foreign currencies. These contracts are designated as fair value hedges. The gain or loss resulting from hedge ineffectiveness for these contracts is attributable to the difference in spot exchange rates and forward contract rates. The net loss was not material for the year ended September 29, 2001 and is included in cost of sales in the consolidated statement of income.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE E - Income Taxes
Income (loss) from continuing operations before the provision of income taxes consisted of (in thousands):
The components of income tax expense (benefit) from continuing operations are as follows (in thousands):
The following is a reconciliation of the United States statutory tax rate to the effective rate expressed as a percentage of income (loss) before income taxes:
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE E - Income Taxes (Continued)
Deferred income taxes are provided for temporary differences between the carrying amounts and the tax bases of assets and liabilities. At September 29, 2001 and September 30, 2000, the Company had $72.4 million and $53.1 million, respectively, of deferred income tax assets and $75.4 million and $75.3 million, respectively, of net 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):
During fiscal 2001, the Company reorganized its European operations due to tax law changes in The Netherlands. As a result of the reorganization, the Company recognized approximately $15.7 million of U.S. taxable income, which reduced the U.S. net operating loss carryforward by the same amount.
Approximately $5.0 million of undistributed earnings further reduced the U.S. net operating loss due to the U.S. tax effect of the discontinuation of the garment making operation in Mexico.
During fiscal 2001, the Company incurred net operating losses for U.S. federal and state income tax purposes of approximately $73.6 million which will be carried forward for U.S. federal income tax purposes to offset future taxable income. At September 29, 2001, the Company has a total of approximately $108.6 million U.S. federal net operating loss carryforwards which will expire in years 2019-2021. All state net operating loss carryforwards will be carried forward and will expire in years 2004-2016.
Deferred income taxes include the tax impact of net operating loss carryforwards. Realization of these assets is contingent on future taxable earnings in the U.S. federal and state tax jurisdictions. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," a valuation allowance of $13.8 million has been established since it is more likely than not that some portion of the deferred tax assets will not be realized.
At September 29, 2001 and September 30, 2000, undistributed earnings of the Company's foreign subsidiaries amounted to approximately $36.1 million and $36.3 million, respectively. 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. During fiscal 2000, the Company, as part of its intent to place debt in foreign operations, incurred additional tax expense to facilitate the February 2001 repatriation of existing cash and loan proceeds from its Canadian operations. During fiscal year 2001, the Company incurred additional tax expense due to the reorganization of its European operations.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE F - Supplemental Cash Flow Information
Cash paid (received) for interest and income taxes is as follows (in thousands):
NOTE G - Benefit Plans
Defined Benefit Pension and Postretirement 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.
On September 20, 2001, the Company froze the accrual of future retirement benefits under its U.S. defined benefit plans effective December 31, 2001. The resulting curtailment gain was offset by unamortized actuarial losses.
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 projected benefit obligation, a reconciliation of plan assets, the funded status of the plans and amounts recognized in the Company's consolidated balance sheets at September 29, 2001 and September 30, 2000 (in thousands):
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
Net pension cost for the plans for the years ended September 29, 2001, September 30, 2000 and October 2, 1999 included the following components (in thousands):
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
The assumed health care cost trend rate was 7% for fiscal 2001, decreasing to 5% by the year 2003 and remaining at that level thereafter. A one-percentage point change in assumed health care cost trend rates have the following effects on fiscal 2001 (in thousands):
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 defined contribution 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. During fiscal 1999, the plans were amended to provide for the Company to make a guaranteed match of the employee's contributions and to eliminate the discretionary profit-sharing contribution plan provision. The Company contributions for fiscal 2001, 2000 and 1999 were approximately $2.2 million, $3.5 million and $2.9 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 fiscal 2001, 2000 and 1999 were approximately $16.5 million, $17.3 million and $16.3 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 $0, $792,000 and $0 for fiscal 2001, 2000 and 1999, 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 $1.4 million, $1.4 million and $1.7 million has been recognized as expense related to the plan in the accompanying statements of operations for fiscal 2001, 2000 and 1999, respectively. A liability of approximately $7.9 million and $7.8 million is included within other long-term liabilities in the Company's consolidated balance sheets as of September 29, 2001 and September 30, 2000, respectively, 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 fiscal 2001, 2000 and 1999, the Company's portion of the funding totaled $5.6 million, $5.7 million and $6.5 million, respectively.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE G - Benefit Plans (Continued)
The Company's Canadian employees participate in government sponsored healthcare and pension plans. The pension plan requires contributions from the employer and the employee while the healthcare plan requires only employer contributions. The Company's required contributions paid for these plans for fiscal 2001, 2000 and 1999 were approximately $1.6 million, $1.4 million and $1.3 million, respectively. In addition, the Company provides supplemental health and life insurance benefits with contributions for fiscal 2001, 2000 and 1999 totaling $0.4 million, $0.4 million and $0.3 million, respectively. The Company's qualified Canadian employees are also 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 fiscal 2001, 2000 and 1999 were $0.7 million, $0.6 million and $0.6 million, respectively.
NOTE H - Commitments and Contingencies
Future minimum commitments for operating leases at September 29, 2001 are as follows (in thousands):
2002 ................................... $ 7,832 2003 ................................... 5,575 2004 ................................... 3,599 2005 ................................... 2,164 2006 ................................... 1,153 Thereafter ............................. 2,160 ----------- Total minimum lease payments ........... $ 22,483 ===========
Approximately 74% of minimum lease payments on operating leases pertain to real estate as of September 29, 2001. The remainder covers a variety of machinery and equipment. Rental expense for all operating leases was approximately $11.8 million, $12.9 million and $11.7 million in fiscal 2001, 2000 and 1999, 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.
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives
Throughout fiscal 2001, the Company has continued to operate in a very difficult business environment which resulted in the July 2001 announcement of additional actions (the "Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives"). The Company's goal in taking these actions is future loss avoidance, cost reduction, production capacity rationalization and increased cash flow. The principal manufacturing initiatives include:
(1) Discontinuation of G&L Service Company, the Company's garment making operations in Mexico, which includes the closure of the Dimmit facilities in Piedras Negras, Mexico, the Alta Loma facilities in Monclova, Mexico and the Eagle Pass Warehouse in Eagle Pass, Texas.
(2) Consolidation of its greige fabrics operations which includes the closure of its Asheboro, North Carolina weaving facility and Caroleen, North Carolina spinning facility.
In addition to the principal manufacturing initiatives above, the Company also provided for the reduction of approximately 5% of its salaried overhead employees.
In the fourth quarter of fiscal 2001, the Company recorded $63.4 million before taxes of plant closing and impairment charges and$4.9 million before taxes of losses related to completing garment customer orders all related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives. The components of the plant closing and impairment charges included $30.4 million for goodwill impairments, $20.3 million for fixed asset impairments, $7.5 million for severance expense and $5.2 million for the write-off of
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE I - Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives (Continued)
leases and other exit costs. Approximately 3,300 Mexican employees and 500 U.S. employees were terminated as a result of the initiatives. All production at the affected facilities ceased in early September 2001 by which time substantially all the affected employees were terminated. The Company expects that the sale of real estate and equipment in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives could take 12 months or longer to complete.
The table below summarizes the activity related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives plant closing accruals for the year ended September 29, 2001 (in thousands):
Accrual Balance at Plant closing Cash September 29, charge payments 2001 ------------- ----------- ------------------
Severance benefits $ 7,508 $ (5,516) $ 1,992 Lease cancellation and other 5,213 (186) 5,027 ------------- ----------- -----------------
$ 12,721 $ (5,702) $ 7,019 ============= =========== =================
The Company expects to incur run-out expenses related to the plant closings of approximately $4-$6 million before taxes, $3.1 million of which was incurred in the September quarter of fiscal 2001. These expenses, which include efficiency losses, equipment relocation, losses on inventories of discontinued styles, plant carrying costs and other costs, are included in cost of sales in the consolidated statement of operations.
As a result of the employees terminated due to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives, the Company recognized a net benefit curtailment loss of $0.1 million in the September quarter of fiscal 2001 related to its defined benefit pension plan.
In August 2001, the Company amended its Senior Credit Facility (as defined herein) to, among other things, exclude from covenant calculations the charges related to the Fiscal 2001 Strategic Initiatives discussed above. See Note C - Long-term Debt.
NOTE J - Fiscal 2000 Strategic Initiatives
During the fourth quarter of fiscal 2000, the Company announced a series of strategic initiatives (the "Fiscal 2000 Strategic Initiatives") aimed at increasing the Company's competitiveness and profitability by reducing costs. The initiatives include completing a joint venture in Mexico, closing two of the Company's plants, consolidating some operations, outsourcing certain yarn production and eliminating excess employees in certain operations. The cost of these initiatives was reflected in a plant closing and impairment charge totaling $63.6 million before taxes in the fourth quarter of fiscal 2000. The original components of the plant closing and impairment charge included $49.3 million for fixed asset write-offs, $10.8 million for severance expense and $3.5 million for the write-off of leases and other exit costs. During fiscal 2001, the Company recorded a change in estimate for severance benefits that reduced the plant closing charge by $0.6 million. All production at the affected facilities ceased during the December quarter of fiscal 2000. Of the 1,370 employees to be terminated as a result of the Fiscal 2000 Strategic Initiatives, substantially all have been terminated as of September 29, 2001. Severance has been paid out in either a lump sum or over a maximum period of up to eighteen months. During fiscal 2001, the Company sold a portion of the Erwin facility as well as substantially all of the equipment at the Erwin facility and the Brighton facility. The Company expects that the sale of the remaining real estate and equipment related to the Fiscal 2000 Strategic Initiatives could take 12 months or longer to complete.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE J - Fiscal 2000 Strategic Initiatives (Continued)
The table below summarizes the activity related to the Fiscal 2000 Strategic Initiatives plant closing accruals for the year ended September 29, 2001 (in thousands):
In connection with the Fiscal 2000 Strategic Initiatives, the Company incurred run-out expenses totaling $10.8 million before taxes in fiscal 2001. These expenses, which include efficiency losses, equipment relocation, losses on inventories of discontinued styles, plant carrying costs and other costs, are included in cost of sales in the consolidated statement of income.
As a result of the employees terminated due to the Fiscal 2000 Strategic Initiatives, the Company recognized a net curtailment gain of $2.4 million in fiscal 2001 related to its defined benefit pension and post-retirement medical plans.
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 11,996,965 shares are outstanding at September 29, 2001, (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.
On February 9, 1999, the Company's stockholders approved the 1999 Stock Option Plan (the "Plan") which replaced the Company's previous 1989 Stock Option Plan that expired on that date. The Plan authorizes the granting of qualified and non-qualified stock options to officers, directors, consultants and key employees of the Company. Effective February 13, 2001, the Plan was amended to increase the number of shares of Company Common Stock available for issuance from 500,000 to 1.3 million. Options may be granted through the Plan's expiration in February 2009 at an exercise price of not less than fair market value. Currently, the Company has both fixed stock options and target stock price performance stock options outstanding under the Plan. As of September 29, 2001, the Company had 415,351 shares available for the issuance of stock options under the Plan.
On September 7, 2000, the Board of Directors approved offering all employees holding outstanding options with an exercise price equal to or in excess of $10.00 per share, the opportunity to cancel all such options (the "Option Cancellation Program") in exchange for a new grant of options in an amount equal to the same number of options cancelled (the "New Options") with an exercise price of $4.1875 per share. The New Options will vest and become exercisable when the Company's Common Stock equals or exceeds $12 per share for a 90 consecutive trading day period and will expire on September 6, 2010, unless terminated earlier pursuant to the terms of the option agreements and the Plan. A total of 27 employees were eligible and elected to participate in the Option Cancellation Program and receive New Options to purchase an aggregate of 785,649 shares of Common Stock. Due to an insufficient number of options available under the Plan, the Option Cancellation Program and issuance of New Options was contingent upon shareholder approval of an increase in the number of shares available for grant. As discussed in the above paragraph, shareholder approval was received at the February 2001 annual meeting; therefore, the actual exchange of options occurred in fiscal year 2001. In connection with the Option Cancellation Program and issuance of New Options, the Company incurred a non-cash charge in 2001 of approximately $1.2 million.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE K - Stockholders' Equity (Continued)
Fixed Stock Options
The exercise price of each fixed stock 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 2001, 2000 and 1999: expected dividend yield of 0% for all years; expected volatility of 105.7%, 130.4% and 34%, respectively; weighted average risk-free interest rate of 4.97%, 6.62% and 4.73%, respectively; and expected lives of 5 years for all years.
A summary of the status of the Company's fixed stock options as of September 29, 2001, September 30, 2000 and October 2, 1999, and changes during the years are presented below:
The following table summarizes information about fixed stock options outstanding at September 29, 2001:
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE K - Stockholders' Equity (Continued)
Target Stock Price Performance Stock Options
The exercise price of each target stock price performance stock 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 $6 to $20, 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 2001 and 2000: weighted average risk-free interest rate of 6.14% and 6.86%, respectively; expected dividend yield of 0% for both years; expected lives ranging from 2.0 to 4.0 years and 2.0 to 3.0 years, respectively; and volatility of 119.9% and 108%, respectively. There were no target stock price performance stock options issued during 1999.
A summary of the status of the Company's target stock price performance stock options as of September 29, 2001, September 30, 2000 and October 2, 1999 and changes during the year is presented below:
As of September 29, 2001, the 798,149 target stock price performance options outstanding under the Plan have a weighted average remaining contractual life of 8.87 years assuming all options vest.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE L - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands):
NOTE M - Concentration of Credit Risk
The Company manufactures and sells textile products to companies located worldwide which are predominantly in the apparel and home fabrics industries. The Company performs periodic credit evaluations of its customers' financial condition and, although the Company does not generally require collateral, it does require cash payments in advance when the assessment of credit risk associated with a customer is substantially higher than normal. At September 29, 2001, 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. All credit losses are provided for in the financial statements.
The Company had sales to Levi Strauss and its related companies which comprised 21%, 24% and 22% of the Company's consolidated net sales for fiscal 2001, 2000 and 1999, respectively.
NOTE N - Segment Information
The Company's operations are classified into four business segments: Galey & Lord Apparel, Swift Denim, Klopman International and Home Fashion Fabrics. The Company is principally organized around differences in products; however, one segment exists primarily due to geographic location. The business segments are managed separately and distribute products through different marketing channels. Galey & Lord Apparel manufactures and sells woven cotton and cotton blended apparel fabrics. Swift Denim manufactures and markets a wide variety of denim products for apparel and non-apparel uses. Klopman International manufactures principally workwear and careerwear fabrics as well as woven apparel fabrics primarily for consumption in Europe. Home Fashion Fabrics sells dyed and printed fabrics to the home furnishing trade for use in bedspreads, comforters, curtains and accessories as well as greige fabrics (undyed and unfinished) which it sends to independent contractors for dyeing and finishing.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE N - Segment Information (Continued)
The Company evaluates performance and allocates resources based on operating income; therefore, certain expenses, principally net interest expense and income taxes, are excluded from the chief operating decision makers' assessment of segment performance. Accordingly, such expenses have not been allocated to segment results. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies (see Note A above). The corporate segment's operating income (loss) represents principally the administrative expenses from the Company's various holding companies. Additionally the corporate segment's assets consist primarily of corporate cash, deferred bank charges and investments in and advances to associated companies.
Information about the Company's operations in its different industry segments for the past three years is as follows (in thousands) (see Note A):
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE N - Segment Information (Continued)
/1)/Fiscal 2001 operating income (loss) includes costs related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives of $35.3 million, $6.8 million, $37.2 million and $0.4 million for Galey & Lord Apparel, Swift Denim, Home Fashion Fabrics and Corporate, respectively.
/(2)/Fiscal 2000 operating income (loss) includes plant closing and impairment charges related to the Fiscal 2000 Strategic Initiatives of $11.4 million, $51.6 million and $0.7 million for Galey & Lord Apparel, Swift Denim and Klopman International, respectively.
/(3)/Fiscal 2001 other non-cash charges exclude fixed asset and goodwill impairment charges related to the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives of $19.8 million, $1.0 million and $29.9 million for Galey & Lord Apparel, Swift Denim, and Home Fashion Fabrics, respectively. Fiscal 2000 other non-cash charges exclude fixed asset impairment charges related to the Fiscal 2000 Strategic Initiatives of $5.8 million and $43.5 million for Galey & Lord Apparel and Swift Denim, respectively.
/(4)/Excludes intercompany balances and investments in subsidiaries which are eliminated in consolidation.
/(5)/Fiscal 2001 assets include long-lived assets to be disposed of in connection with the Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives of $8.6 million and $0.1 million for Galey & Lord Apparel and Swift Denim, respectively. Fiscal 2001 assets also include long-lived assets to be disposed of in connection with the Fiscal 2000 Strategic Initiatives of $5.9 million for Swift Denim.
/(6)/Fiscal 2000 assets include long-lived assets to be disposed of in connection with the Fiscal 2000 Strategic Initiatives of $0.8 million and $12.5 million for Galey & Lord Apparel and Swift Denim, respectively.
/(7)/Revenues are attributed to countries based on geographic origin.
/(8)/Principally all of the European long-lived assets are located in Italy.
The Company has a single customer which exceeds 10% of consolidated net sales. Galey & Lord Apparel net sales to this customer were $142.2 million, $195.5 million and $145.8 million for fiscal 2001, 2000 and 1999, respectively. Swift Denim net sales to this customer were $35.9 million, $33.8 million and $59.2 million for fiscal 2001, 2000 and 1999, respectively. Klopman International's net sales to this customer were $1.3 million, $1.5 million and $5.3 million for fiscal 2001, 2000 and 1999, respectively.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE O - Investments in and Advances to Associated Companies
In the consolidated balance sheets, investments in and advances to associated companies represent several 50% joint venture interests. The Swift Denim-Hidalgo joint venture, which manufactures denim in Mexico, was formed on August 18, 2001 with Grupo Dioral. In exchange for a $14 million contribution comprised of cash, inventory and equipment, the Company received a 50% interest in the ownership of this joint venture. The Company contributed $7.8 million in cash and inventory in fiscal 2000 and $5.0 million in inventory and equipment in fiscal 2001. The equipment is from the Company's Erwin facility which closed in December 2000 and is being transferred as the joint venture prepares its facility. The remaining equipment will be transferred in fiscal 2002. The joint venture is accounted for under the equity method and the results of operations are reported on a one-month lag.
A secured loan to Swift Europe of $3.5 million at September 29, 2001 and $3.7 million at September 30, 2000 is included in investments in and advances to associated companies. This loan bears interest at 5% and is payable in installments through 2009. Also included in investments in and advances to associated companies are advances to Swift Denim-Hidalgo of $2.9 million at September 29, 2001 and $1.2 million at September 30, 2000. These loans are unsecured, bear interest at the prime rate plus 1% and the principal balances are payable in balloon payments with due dates ranging from August 2002 to September 2003.
At September 29, 2001 and September 30, 2000, the excess of the Company's investment over its equity in the underlying net assets of its joint venture interests is approximately $10.4 million and $11.0 million, respectively, (net of accumulated amortization of $2.3 million and $1.7 million, respectively) and is being amortized on a straight-line basis over 20 years as a component of the equity in earnings of the unconsolidated associated companies.
The following table presents condensed balance sheet and income statement information for the Company's associated companies as of September 29, 2001 and September 30, 2000 and for the years ended September 29, 2001 and September 30, 2000. The financial information has been derived from statutory financial statements and has been adjusted to conform to U.S. generally accepted accounting principles.
2001 2000 ---- ---- (In thousands) Selected Balance Sheet Data: Current assets $ 41,493 $ 44,589 Noncurrent assets 53,563 48,615 Current liabilities 46,685 37,749 Noncurrent liabilities 11,394 21,462 Stockholders' equity 36,977 33,993 Selected Income Statement Data: Net sales $ 99,406 $ 74,955 Gross profit 28,311 21,624 Operating income 20,395 15,147 Net income $ 18,746 $ 13,708
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE P - Quarterly Results of Operations (Unaudited)
The Company's unaudited quarterly consolidated results of operations are presented below (in thousands, except per share data):
All quarters presented are 13-week periods.
/(1)/ December quarter of fiscal 2001 includes $1.9 million (pre-tax) of costs related to the Company's Fiscal 2000 Strategic Initiatives. /(2)/ March quarter of fiscal 2001 includes $2.4 million (pre-tax) of costs related to the Company's Fiscal 2000 Strategic Initiatives. /(3)/ June quarter of fiscal 2001 includes $1.3 million (pre-tax) of costs related to the Company's Fiscal 2000 Strategic Initiatives. /(4)/ September quarter of fiscal 2001 includes $74.1 million (pre-tax) of costs related to the Company's Fiscal 2001 Cost Reduction and Loss Avoidance Initiatives and the Fiscal 2000 Strategic Initiatives. /(5)/ September quarter of fiscal 2000 includes $63.7 million (pre-tax) of costs related to the Company's Fiscal 2000 Strategic Initiatives.
_______________________
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - 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.
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
GALEY & LORD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 29, 2001, September 30, 2000 and October 2, 1999
NOTE Q - Supplemental Condensed Consolidating Financial Information (Continued)
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
PART III
Item 10.
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.
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.
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.
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."
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ----------------------------------------------------------------------------
(a) 1. Financial Statements --------------------
The following financial statements of Galey & Lord, Inc. are included under Item 8. of this Report:
Report of Independent Auditors.
Consolidated Balance Sheets as of September 29, 2001 and September 30, 2000.
Consolidated Statements of Operations for the fiscal years ended September 29, 2001, September 30, 2000 and October 2, 1999.
Consolidated Statements of Cash Flows for the fiscal years ended September 29, 2001, September 30, 2000 and October 2, 1999.
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended September 29, 2001, September 30, 2000 and October 2, 1 999.
Notes to Consolidated 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. -------------------------------------------------
The Registrant filed a Form 8-K on July 26, 2001 to report, among other things, a series of strategic initiatives due to the continuing difficult business environment.
EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT INDEX
EXHIBIT INDEX
Exhibit Sequential Number Description Page No. ------ ----------- -------- /(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 8-K 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.
/(13)/ Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1996 and incorporated herein by reference.
/(14)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended December 28, 1996 and incorporated herein by reference.
/(15)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 29, 1997 and incorporated herein by reference.
/(16)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 28, 1997 and incorporated herein by reference.
/(17)/ Filed as an Exhibit to the Company's Form 8-K dated December 19, 1997 and incorporated herein by reference.
/(18)/ Filed as an Exhibit to the Company's Form 8-K 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 8-K dated February 24, 1998 and incorporated herein by reference.
EXHIBIT INDEX
Exhibit Sequential Number Description Page No. ------ ----------- -------- /(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.
/(22)/ Filed as an Exhibit to the Company's Registration Statement on Form S-8 (File No. 333-78809) dated May 19, 1999 and incorporated herein by reference.
/(23)/ Filed as an Exhibit to the Company's Form 8-K dated July 13, 1999 and incorporated herein by reference.
/(24)/ Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended October 3, 1998 and incorporated herein by reference.
/(25)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended April 1, 2000 and incorporated herein by reference.
/(26)/ Filed as an Exhibit to the Company's Form 8-K dated June 1, 2000 and incorporated herein by reference.
/(27)/ Filed as an Exhibit to the Company's Form 10-K for the fiscal year ended September 30, 2000 and incorporated herein by reference.
/(28)/ Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001 and incorporated herein by reference.
* Management contract or compensatory plan or arrangement identified pursuant to item 14(a)3 of this report.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GALEY & LORD, INC.
(in thousands)
___________________ /(1)/Uncollectible accounts written off.
SIGNATURES - ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GALEY & LORD, INC.
December 10, 2001 /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.