UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2000
( )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
GFSI HOLDINGS, INC.
(Exact name of registrant specified in its charter)
Delaware 74-2810744
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
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 - 1,967 shares issued and outstanding as
of November 1, 2000.
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GFSI HOLDINGS, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended September 29, 2000
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 12
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GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
June 30, September 29,
2000 2000
---- ----
Assets
Current assets:
Cash & cash equivalents $ 1,461 $ 230
Accounts receivable, net 29,801 33,930
Inventories, net 40,140 38,304
Prepaid expenses and other current assets 1,117 1,343
Deferred income taxes 1,122 1,122
-------- --------
Total current assets 73,641 74,929
Property, plant and equipment, net 19,356 18,801
Other assets:
Deferred financing costs, net 6,434 6,139
Other
5 5
-------- --------
Total assets $ 99,436 $ 99,874
======== ========
Liabilities and stockholders' equity
(deficiency)
Current liabilities:
Accounts payable $ 5,317 $ 7,548
Accrued interest expense 4,000 995
Accrued expenses 7,668 7,291
Income taxes payable 308 857
Current portion of long-term debt 6,953 7,380
-------- --------
Total current liabilities 24,246 24,071
Deferred income taxes 1,049 1,049
Revolving credit agreement -- --
Other long-term obligations 552 544
Long-term debt, less current portion 228,474 228,203
Redeemable preferred stock 4,907 5,013
Stockholders' equity (deficiency):
Common stock, $.01 par value
2,105 shares authorized,
2,000 shares issued at June 30, 2000
and September 29, 2000 -- --
Additional paid-in capital 200 200
Accumulated deficiency (159,990) (159,204)
Treasury stock, at cost (33 series A
shares at June 30, 2000 and
September 29, 2000) (2) (2)
-------- --------
Total stockholders' equity (deficiency) (159,792) (159,006)
-------- --------
Total liabilities and stockholders'
equity (deficiency) $ 99,436 $ 99,874
======== ========
NOTE: The consolidated balance sheet at June 30, 2000 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to consolidated financial statements.
3
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GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended
October 1, September 29,
1999 2000
------------ -----------
Net sales $ 54,839 $ 52,450
Cost of sales 33,612 32,327
-------- --------
Gross profit 21,227 20,123
Operating expenses:
Selling 6,424 6,025
General and administrative 6,188 6,570
-------- --------
12,612 12,595
-------- --------
Operating income 8,615 7,528
Other income (expense):
Interest expense (6,157) (6,115)
Other, net 96 50
-------- --------
(6,061) (6,065)
-------- --------
Income before income taxes 2,554 1,463
Provision for income taxes 1,006 571
-------- --------
Net income 1,548 892
Preferred stock dividends (107) (106)
-------- --------
Net income attributable to
common shareholders $ 1,441 $ 786
======== ========
See notes to consolidated financial statements.
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GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Quarter Ended
October 1, September 29,
1999 2000
------------ -----------
Cash flows from operating activities:
Net income $ 1,548 $ 892
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 795 822
Amortization of deferred financing costs 295 295
Gain on sale or disposal of property,
plant and equipment (4) (33)
Amortization of discount on long-term debt 1,695 1,893
Changes in operating assets and liabilities:
Accounts receivable, net (10,485) (4,129)
Inventories, net 1,499 1,835
Prepaid expenses, other current
assets and other assets 319 (226)
Income taxes payable 517 549
Accounts payable, accrued expenses and other
long-term obligations (2,990) (1,159)
------ ------
Net cash provided by (used in) operating activities (6,811) 739
------ ------
Cash flows from investing activities:
Proceeds from sales of property,
plant and equipment 4 64
Purchases of property, plant and equipment (980) (298)
------ ------
Net cash used in investing activities (976) (234)
------ ------
Cash flows from financing activities:
Net changes to short-term borrowings
and revolving credit agreement -- --
Payments on long-term debt (1,637) (1,736)
------ ------
Net cash used in financing activities (1,637) (1,736)
------ ------
Net decrease in cash and cash equivalents (9,424) (1,231)
Cash and cash equivalents at beginning of period 10,278 1,461
------ ------
Cash and cash equivalents at end of period $ 854 $ 230
====== ======
Supplemental cash flow information:
Interest paid $ 7,128 $ 7,221
====== ======
Income taxes paid $ 10 $ 21
====== ======
Supplemental schedule of non-cash
financing activities:
Accrual of preferred stock dividends $ 107 $ 106
====== ======
See notes to consolidated financial statements.
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GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 29, 2000
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of GFSI
Holdings, Inc. ("Holdings" or the "Company") include the accounts of the Company
and the accounts of its wholly owned subsidiary, GFSI, Inc. ("GFSI"). All
intercompany balances and transactions have been eliminated. The unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated
by the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for annual financial statement reporting purposes. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position and operations of
the Company have been included. Operating results for the interim periods are
not necessarily indicative of the results that may be expected for the entire
fiscal year. For further information, refer to the financial statements and
footnotes thereto for the year ended June 30, 2000 included in the Company's
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Commitments and Contingencies
-----------------------------
The Company, in the normal course of business, may be threatened with or
named as a defendant in various lawsuits. It is not possible to determine the
ultimate disposition of these matters, however, management is of the opinion
that there are no known claims or known contingent claims that are likely to
have a material adverse effect on the results of operations, financial
condition, or cash flows of the Company.
3. New Accounting Standard
-----------------------
During the first quarter of fiscal 2001, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement, as amended by
SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
implementation of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
issues Staff Accounting Bulletin No. 101 entitled "Revenue Recognition". The
bulletin, as amended, is to be adopted, if needed, no later than the fourth
fiscal quarter of fiscal years commencing after December 15, 1999, with
retroactive adjustment to the first fiscal quarter of that year. The effect, if
any, of complying with the accounting described in this bulletin has not been
determined by management.
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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 June 30, 2000. 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 fiscal year 2000 amounts to conform to the fiscal year 2001
presentation:
Quarter Ended
October 1, 1999 September 29, 2000
--------------- ------------------
Licensed Apparel $ 23,128 42.3% $ 21,375 40.8%
Resort 14,384 26.2% 13,011 24.8%
Corporate 14,990 27.3% 16,382 31.2%
Event 1 832 1.5% 150 .3%
Other 1,505 2.7% 1,532 2.9%
------- --------
Total $54,839 $ 52,450
======= ========
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 ended
October 1, 1999 and September 29, 2000.
Quarter Ended
October 1, September 29,
1999 2000
---- ----
Net sales 100.0% 100.0%
Gross profit 38.7 38.4
EBITDA 17.2 15.9
Operating income 15.7 14.4
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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 Ended September 29, 2000 and
October 2, 1999
Net Sales. Net sales for the first quarter of fiscal 2001, the three months
ended September 29, 2000, decreased 4.4% to $52.4 million from $54.8 million in
the first quarter of fiscal 2000. The decrease in net sales primarily reflects
decreases in net sales at the Company's Resort and Licensed Apparel divisions of
9.6% and 7.6%, respectively, partially offset by increases at the Company's
Corporate and Other divisions of 9.3% and 1.8%, respectively. The decline in the
Resort Division is attributable to increased competition and the decline in the
Licensed Apparel division is primarily due to the continued unseasonably warm
weather through much of the country which has decreased demand for the Company's
heavier outerwear products. Net sales at the Company's Event 1 subsidiary
declined 82.0% in the first quarter of fiscal 2001 to $150,000 from $832,000 in
the first quarter of fiscal 2000.
Gross Profit. Gross profit for the first quarter of fiscal 2001 decreased
5.2% to $20.1 million from $21.2 million in the first quarter of fiscal 2000.
The decrease in gross profit is primarily a result of the net sales decrease
described above. For the first quarter of fiscal 2001, gross profit as a
percentage of net sales decreased slightly to 38.4% compared to 38.7% in the
first quarter of fiscal 2000.
Operating Expenses. Operating expenses for the first quarter of fiscal 2001
remained consistent with the first quarter of fiscal 2000 at $12.6 million.
Operating expenses as a percentage of net sales increased to 24.0% from 23.0% in
the prior year first quarter as a result of the relatively fixed nature of
certain operating expenses.
EBITDA. EBITDA for the first quarter of fiscal 2001 decreased 11.8% to $8.3
million from $9.4 million in the first quarter of fiscal 2000. The decrease for
the period is primarily a result of the decrease in net sales and related gross
profit described above. EBITDA as a percentage of net sales decreased to 15.9%
from 17.2% in the first quarter of fiscal 2000.
Operating Income. Operating income for the first quarter of fiscal 2001
decreased 12.6% to $7.5 million from $8.6 million in the first quarter of fiscal
2000. The decrease is attributable to the changes in net sales and related gross
profit described above. Operating income as a percentage of net sales deceased
for the first quarter of fiscal 2001 to 14.4% from 15.7% in fiscal 2000.
Other Income (Expense). Other expense for the first quarter of fiscal 2001
remained consistent with the first quarter of fiscal 2000 at $6.1 million due to
the effect of debt payments under the Company's $115 million Credit Agreement
offset by higher interest expense related to amortization of the discount on
Holdings' debt. Interest rate fluctuations and their effect were immaterial for
the periods presented. A reasonable likely change in the underlying rate, price
or index would not have a material impact on the financial position of the
Company.
Income Taxes. The effective income tax rates for the quarters ended
September 29, 2000 and October 1, 1999 were 39.0% and 39.4%, respectively.
Net Income. Net income for the first quarter of fiscal 2001 was $892,000
million compared to $1.5 million in the first quarter of fiscal 2000.
8
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Liquidity and Capital Resources
Cash provided by (used in) operating activities for the first quarter of
fiscal 2001 was $739,000 compared to $(6.8) million in the first quarter of
fiscal 2000. The change in cash provided by operating activities between the two
periods resulted from a decrease in net income for the period offset by changes
in working capital account balances in the first quarter of fiscal year 2001 as
compared to the first quarter of fiscal 2000.
Cash used by investing activities in the first quarter of fiscal 2001 was
$234,000 compared to $976,000 in the first quarter of 2000. The cash used in
both periods was related to acquisitions of property, plant and equipment.
Cash used in financing activities for the first quarter of fiscal 2001 was
$1.7 million compared to $1.6 million in the first quarter of fiscal 2000. The
cash used in financing activities for both periods was primarily related to
scheduled debt repayments.
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 Agreement of 2002 and the Senior Subordinated Notes 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 approximately
$10.9 million was utilized for outstanding commercial and stand-by letters of
credit as of September 29, 2000).
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 $425,000 annually. Holdings
Preferred Stock may be redeemed at stated value (approximately $3.6 million)
plus accrued dividends with mandatory redemption in 2009.
Derivative and Market Risk Disclosure
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. Derivative financial instruments may be used by
the Company to manage its exposure on variable rate debt obligations. 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.
9
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Seasonality and Inflation
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second 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.
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.
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There has been no change to matters discussed in Business-Legal Proceedings in
Holdings' Form 10-K as filed with the Securities and Exchange Commission on
September 29, 2000.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. The following exhibits are included with this report:
Exhibit 27 - Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
reporting period.
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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.
November 13 , 2000
/s/ ROBERT G. SHAW
---------------------------------------
Robert G. Shaw, Sr. Vice President
of Finance and Principal
Accounting Officer
12
