UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1999.
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-38951
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GFSI HOLDINGS, INC.
(Exact name of registrant specified in its charter)
Delaware 74-2810744
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
9700 Commerce Parkway
Lenexa, Kansas 66219
(Address of principal executive offices)
Registrant's telephone number, including area code (913) 888-0445
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.01 par value per share - 1,997.5 shares issued and outstanding
as of May 3, 1999.
<PAGE>
Form 10-Q of GFSI Holdings, Inc. for the quarter ended April 2, 1999, filed
with the Securities and Exchange Commission on May 14, 1999, is amended by
amending and restating Item 2 thereof to read in its entirety as set forth
herein.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this Form 10-Q should be read in conjunction
with the financial information included herein and the Company's Annual Report
on Form 10-K for the year ended July 3, 1998. Management's discussion and
analysis of financial condition and results of operations and other sections of
this report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
The following sets forth the amount and percentage of net sales for
each of the periods indicated (dollars in thousands). Certain reclassifications
have been made to the fiscal year 1998 data to conform to the 1999 presentation:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
April 3, 1998 April 2, 1999 April 3, 1998 April 2, 1999
------------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort $ 14,048 28.9% $ 12,629 28.2% $ 48,476 29.3% $ 45,161 28.2%
Corporate 18,328 37.7% 16,487 36.8% 56,614 34.2% 57,690 36.0%
College Bookstore 7,316 15.1% 6,891 15.4% 37,304 22.5% 35,001 21.9%
Sports Specialty 3,164 6.5% 2,895 6.5% 10,614 6.4% 9,724 6.0%
Event 1 3,721 7.7% 4,718 10.6% 6,888 4.2% 8,251 5.2%
Other 1,997 4.1% 1,187 2.5% 5,581 3.4% 4,402 2.7%
-------- ----- -------- ----- --------- ----- --------- -----
Total $ 48,574 $ 44,807 $ 165,477 $ 160,229
======== ======== ========= =========
</TABLE>
Results of Operations
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for the quarters and nine
month periods ended April 3, 1998 and April 2, 1999.
Quarter Ended Nine Months Ended
April 3, April 2, April 3, April 2,
1998 1999 1998 1999
--------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 45.6 44.7 44.0 44.1
EBITDA 17.6 13.6 20.8 17.9
Operating income 16.1 11.9 19.5 16.5
<PAGE>
EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
Comparison of Operating Results for the Quarters and Nine Month Periods Ended
April 2, 1999 and April 3, 1998.
Net Sales. Net sales for the third quarter of fiscal 1999, the three months
ended April 2, 1999, decreased 7.8% to $44.8 million from $48.6 million in the
third quarter of fiscal 1998. Net sales for the first nine months of fiscal 1999
decreased 3.2% to $160.2 million from $165.5 million in the first nine months of
fiscal 1998. The decrease in net sales primarily reflects decreases in net sales
for the nine months ended April 2, 1999 at the Company's Resort and College
Bookstore divisions of 6.8% and 6.2%, respectively. Management believes the
decreases in net sales at the Resort and College Bookstore divisions are
primarily attributable to unseasonably warm fall and winter temperatures in most
of the country. These decreases in net sales were partially offset by an
increase in net sales in the Event 1 subsidiary of 19.8% for the nine months
ended April 3, 1999.
Gross Profit. Gross profit for the third quarter of fiscal 1999 decreased
9.4% to $20.0 million from $22.1 million in the third quarter of fiscal 1998.
Gross profit for the first nine months of fiscal 1999 decreased 2.8% to $70.7
million from $72.7 million in the first nine months of fiscal 1998. The decrease
in gross profit is primarily a result of the sales decreases noted above. For
the third quarter of fiscal 1999, gross profit as a percentage of net sales
decreased to 44.7% compared to 45.6% in the third quarter of fiscal 1998. For
the first nine months of fiscal 1999, gross profit as a percentage of net sales
increased to 44.1% compared to 44.0% in the first nine months of fiscal 1998.
Operating Expenses. Operating expenses for the third quarter of fiscal 1999
increased 3.0% to $14.7 million from $14.3 million in the third quarter of
fiscal 1998. For the first nine months, operating expenses increased 9.5% to
$44.3 million from $40.5 million in the first nine months of fiscal 1998.
Increases in operating expenses are primarily attributable to increased staffing
levels and licensing and site fees associated with Event 1. Operating expenses
as a percentage of net sales increased to 32.9% from 29.4% in the prior year
third quarter. For the first nine months, operating expenses as a percentage of
net sales increased to 27.7% from 24.5% in the prior year period.
EBITDA. EBITDA for the third quarter of fiscal 1999 decreased 28.5% to $6.1
million from $8.5 million in the third quarter of fiscal 1998. For the first
nine months, EBITDA decreased 16.8% to $28.7 million from $34.4 million in the
first nine months of fiscal 1998. The decrease for both periods is primarily a
result of the decrease in net sales and the increase in operating expenses
described above. EBITDA as a percentage of net sales decreased to 13.6% from
17.6% in the third quarter of fiscal 1998. For the nine months, EBITDA as a
percentage of sales decreased to 17.9% from 20.8% in the first nine months of
fiscal 1998.
Operating Income. Operating income for the third quarter of fiscal 1999
decreased 32.1% to $5.3 million from $7.8 million in the third quarter of fiscal
1998. For the first nine months, operating income decreased 18.3% to $26.4
million from $32.3 million in the first nine months of fiscal 1998. The decrease
is attributable to the decrease in net sales and the increase in operating
expenses described above. Operating income as a percentage of net sales
decreased for the third quarter of fiscal 1999 to 11.9% from 16.1% in fiscal
1998, and to 16.5% for the nine month period of fiscal 1999 from 19.5% in the
first nine months of fiscal 1998.
<PAGE>
Other Income (Expense). Other expense for the third quarter of fiscal 1999
increased to $6.1 million from $6.0 million in the third quarter of fiscal 1998.
For the first nine months of fiscal 1999, other expense increased to $18.7
million from $18.1 million in the first nine months of fiscal 1998. The increase
for the nine month period is primarily a result of the issuance of the Holdings
Discount Notes in October 1997.
Income Taxes. The effective tax rates for the nine months ended April 2,
1999 and April 3, 1998 were 41.2% and 40.7%, respectively.
Net Income (Loss). Net loss income for the third quarter of fiscal 1999 was
$.5 million compared to net income of $1.0 million in the third quarter of
fiscal 1998. For the first nine months of fiscal 1999, net income was $4.6
million compared to $8.1 million in the first nine months of fiscal 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the first nine months of fiscal
1999 was $18.9 million compared to $7.6 million in the first nine months of
fiscal 1998. The change in cash used in operating activities between the two
periods primarily resulted from a larger decline in the inventory balance during
the first nine months of fiscal 1999 compared to the first nine months of fiscal
1998.
Cash used by investing activities in the first nine months of fiscal 1999
was $1.2 million compared to $1.6 million in the first nine months of 1998. The
cash used in both periods was related to acquisitions of property, plant and
equipment.
Cash used in financing activities for the first nine months of fiscal 1999
was $9.1 million compared to $5.9 million in the first nine months of fiscal
1998. The increase in cash used in financing activities in the first nine months
of fiscal 1999 is primarily attributable to increased repayments of the
revolving credit agreement balances over the prior period.
The Company believes that cash flow from operating activities and
borrowings under the Credit Agreement will be adequate to meet the Company's
short-term and long-term liquidity requirements prior to the maturity of its
credit facilities in 2007, although no assurance can be given in this regard.
Under the Credit Agreement, the Revolver provides $50 million of revolving
credit availability (of which none was outstanding as of April 2, 1999 and
approximately $15.4 million was utilized for outstanding commercial and stand-by
letters of credit).
The Company is dependent upon the cash flows of GFSI to provide funds to
pay certain ordinary course expenses incurred on behalf of the Company and to
service the indebtedness represented by the $50.0 million of 11.375% Series B
Senior Discount Notes due 2009 (the "Discount Notes"). The Discount Notes will
accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal
amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes
will accrue interest at the rate of 11.375% per annum, payable semi-annually, in
cash on March 15 and September 15 of each year, commencing on March 15, 2005.
The Company will be dependent on GFSI to provide funds to service the
indebtedness. Additionally, the remaining cumulative Holdings Preferred Stock
will accrue dividends totaling approximately $427,000 annually. Holdings
Preferred Stock may be redeemed at stated value (approximately $3.6 million)
plus accrued dividends with mandatory redemption in 2009.
<PAGE>
Derivative and Market Risk Disclosure
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. Derivative financial instruments, including an
interest rate swap and an interest rate cap agreement are used by the Company to
manage its exposure on variable rate debt obligations. The Company enters into
such agreements for hedging purposes and not with a view toward speculating in
the underlying instruments. The Company uses a balanced mix of debt maturities
along with both fixed rate and variable rate debt to manage its exposure to
interest rate changes. The fixed rate portion of the Company's long-term debt
does not bear significant interest rate risk. The variable rate debt would be
affected by interest rate changes to the extent the debt is not matched with an
interest rate swap or cap agreement or to the extent, in the case of the
revolving credit agreement, that balances are outstanding. An immediate 10
percent change in interest rates would not have a material effect on the
Company's results of operations over the next fiscal year, although there can be
no assurances that interest rates will not significantly change.
Year 2000 Compliance
The Company has a program to identify, evaluate and implement changes to
its computer systems as necessary to address the Year 2000 issue. As part of the
program, the Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Based on
management's best estimates, the new MIS will be operational during fiscal year
ending July 2, 1999. The costs associated with the new MIS implementation are
not expected to be material to the Company and are being expensed as incurred.
Any difficulty with the installation, initial operation or untimely resolution
of such issues associated with the new MIS may present an uncertainty that would
be reasonably likely to affect the Company's inventory purchasing control, sales
and customer service which could materially and adversely impact the Company's
future financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition. The Company will continue to consider the likelihood of a material
business interruption due to the Year 2000 issue, and, if necessary, implement
appropriate contingency plans.
Also as part of the Company's Year 2000 program, the Company has initiated
communications with suppliers with which it interacts to determine their plans
for addressing Year 2000 concerns. Based upon management's best estimates, all
Year 2000 issues will be resolved in 1999. However, the Company cannot make any
assurances that its computer systems, or the computer systems of its suppliers
will be Year 2000 ready on schedule, or that management's cost estimates will be
achieved.
Seasonality and Inflation
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
third quarters of its fiscal year. The seasonality of sales and profitability is
primarily due to higher volume at the College Bookstore division during the
first two fiscal quarters. This pattern of sales affects working capital
requirements and liquidity, as the Company generally must finance higher levels
of inventory during these periods prior to fully receiving payment from these
customers. Sales and profitability at the Company's Resort, Corporate and Sports
Specialty divisions typically show no significant seasonal variations. As the
Company continues to expand into other markets in its Resorts, Corporate and
Sports Specialty divisions, seasonal fluctuations in sales and profitability are
expected to decline. Cash requirements of Event 1 are anticipated to be
seasonal, with increasing sales and profitability in the third and fourth
quarters of fiscal years.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GFSI HOLDINGS, INC.
May 21, 1999
/s/ ROBERT G. SHAW
---------------------------------------
Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
