<PAGE>
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 April 3, 1998
-----------------
( ) 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 333-24189
----------------------------
GFSI, INC.
----------
(Exact name of registrant as specified in its charter)
Delaware 74-2810748
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) 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 - 10,000 shares issued and outstanding
as of May 1, 1998.
<PAGE>
GFSI, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended April 3, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
PART II - OTHER INFORMATION 15
SIGNATURE PAGE 16
Page 2
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GFSI, INC.
BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
June 27, April 3,
1997 1998
--------- ----------
Assets
Current assets:
Cash & cash equivalents $ 1,117 $ 1,107
Accounts receivable, net 23,687 31,384
Inventories, net 37,562 34,755
Prepaid expenses and other current assets 1,286 1,035
Deferred income taxes 926 822
--------- ---------
Total current assets 64,578 69,103
Property, plant and equipment, net 21,548 20,992
Other assets:
Deferred financing costs, net 9,661 8,792
Other 4 6
--------- ---------
Total assets $ 95,791 $ 98,893
========= =========
Liabilities and stockholders'
equity (deficit) Current liabilities:
Accounts payable $ 12,199 $ 11,263
Accrued interest expense 4,236 1,496
Accrued expenses 5,543 7,556
Income taxes payable 338 600
Current portion of long-term debt 3,375 4,875
--------- ---------
Total current liabilities 25,691 25,790
Deferred income taxes 1,436 1,436
Revolving credit agreement 3,000 --
Other long-term obligations 450 300
Long-term debt, less current portion 186,625 181,750
Stockholders' equity (deficit):
Common stock, $.01 par value, 10,000 -- --
shares authorized, issued and outstanding
at April 3, 1998 and June 27, 1997
Additional paid-in capital 49,939 51,727
Accumulated deficit (171,350) (162,110)
--------- ---------
Total stockholders' deficit (121,411) (110,383)
--------- ---------
Total liabilities and stockholders' deficit $ 95,791 $ 98,893
========= =========
NOTE: The balance sheet at June 27, 1997 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 financial statements.
Page 3
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GFSI, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 28, April 3, March 28, April 3,
1997 1998 1997 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $39,371 $48,574 $144,182 $165,477
Cost of sales 20,664 26,441 80,122 92,728
-------- -------- --------- ---------
Gross profit 18,707 22,133 64,060 72,749
Operating expenses:
Selling 4,248 6,230 14,654 18,076
General and administrative 6,353 8,071 19,181 22,411
-------- -------- --------- ---------
10,601 14,301 33,835 40,487
-------- -------- --------- ---------
Operating income 8,106 7,832 30,225 32,262
Other income (expense):
Interest expense (1,874) (4,621) (3,339) (14,595)
Other, net 17 7 60 (22)
-------- -------- --------- ---------
(1,857) (4,614) (3,279) (14,617)
-------- -------- --------- ---------
Income before income taxes and extraordinary item 6,249 3,218 26,946 17,645
Provision for income taxes 1,319 1,346 1,319 7,264
-------- -------- --------- ---------
Income before extraordinary item 4,930 1,872 25,627 10,381
Extraordinary item, net of tax benefit of $989 for the period
ended March 28, 1997 1,484 1,484
-------- -------- --------- ---------
Net income $ 3,446 $ 1,872 24,143 $ 10,381
======== ======== ========= =========
</TABLE>
See notes to financial statements.
Page 4
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GFSI, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) Nine Months Ended
March 28, April 3,
1997 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $24,143 $10,381
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,444 2,185
Amortization of deferred financing costs 100 868
(Gain) loss on sale or disposal of property, (25) 15
plant and equipment
Deferred income taxes 994 104
Increase in cash value of life insurance (920)
Extraordinary loss on early extinguishment of
debt 2,473 Changes in operating assets and liabilities:
Accounts receivable, net (2,979) (7,696)
Inventories, net (103) 2,808
Prepaid expenses, other current assets and other assets (208) 249
Income taxes payable (665) 262
Accounts payable, accrued expenses and other
long-term obligations 567 (1,813)
--------- ----------
Net cash provided by operating activities 25,821 7,363
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 946 323
Purchases of property, plant and equipment (2,511) (1,968)
--------- ----------
Net cash used in investing activities (1,565) (1,645)
Cash flows from financing activities:
Net changes to short-term borrowings and revolving credit agreement (4,000) (3,000)
Issuance of senior subordinated notes 125,000
Proceeds from long-term debt 67,000
Payments on long-term debt (24,276) (3,375)
Cash paid for penalties related to early extinguishment of debt (2,390)
Cash paid for financing costs (9,952)
Distributions to stockholders (48,407)
Distributions and recapitalization of Winning Ways, Inc. (173,143)
Issuance of Common Stock to GFSI Holdings, Inc. 49,939
Proceeds from sale of treasury stock 1,402
Capital contribution from GFSI Holdings, Inc. 1,788
Distributions to GFSI Holdings, Inc. (1,141)
--------- ----------
Net cash used in financing activities (18,827) (5,728)
--------- ----------
Net increase (decrease) in cash and cash equivalents 5,429 (10)
Cash and cash equivalents at beginning of period 140 1,117
--------- ----------
Cash and cash equivalents at end of period $5,569 $1,107
========= ==========
Supplemental cash flow information:
Interest paid $ 2,207 $ 16,503
========= ==========
Income taxes paid $ - $ 5,694
========= ==========
Supplemental schedule of non-cash financing activities:
Distributions payable to Winning Ways, Inc.
stockholders $ 10,022
=========
</TABLE>
See notes to financial statements.
Page 5
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GFSI, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
April 3, 1998
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements of GFSI, Inc. (the
"Company") 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 27, 1997, included in the Company's Annual Report on Form
10-K.
Effective January 29, 1998, the Company established a wholly owned
subsidiary, Event 1, Inc., the results of which are included in the accompanying
financial statements.
2. Recapitalization Transaction
----------------------------
On October 31, 1996, the Board of Directors of Winning Ways, Inc.
("Winning Ways") executed a letter of intent to enter into a transaction with
The Jordan Company. The Transaction included the formation of a holding company,
GFSI Holdings, Inc. ("Holdings") and the Company, a wholly owned subsidiary of
Holdings, to effect the acquisition of Winning Ways. On February 27, 1997,
pursuant to the acquisition agreement, Holdings and the Company acquired all of
the issued and outstanding capital stock of Winning Ways, and immediately
thereafter merged Winning Ways with and into the Company with the Company as the
surviving entity. All of the capital stock of Winning Ways acquired by Holdings
in connection with the acquisition was contributed to the Company along with the
balance of the Equity Contribution, as described below.
The aggregate purchase price for Winning Ways was $242.3 million,
consisting of $173.1 million in cash at closing, a post closing payment at April
30, 1997 of $10.0 million and the repayment of $59.2 million of Winning Ways'
existing indebtedness. To finance the Acquisition, including approximately $11.5
million of related fees and expenses: (i) The Jordan Company, its affiliates and
MCIT PLC (collectively the "Jordan Investors") and certain members of management
(the "Management Investors") invested $52.2 million in Holdings and Holdings
contributed $51.4 million of this amount to the Company (the "Equity
Contribution"); (ii) the Company entered into a credit agreement (the "New
Credit Agreement") which provides for borrowings of up to $115.0 million, of
which approximately $68.0 million was outstanding at closing and approximately
$22.9 million was utilized to cover outstanding letters of credit at closing;
and (iii) the Company issued $125.0 million of Senior Subordinated Notes (the
"Senior Subordinated Notes") which were purchased by institutional investors
through a Rule 144A private placement. The Equity Contribution was comprised of
(i) a contribution of $13.6 million from the Jordan Investors to Holdings in
exchange for Holdings Preferred Stock and approximately 50% of the Common Stock
of Holdings; (ii) a contribution of $13.6 million from the Management Investors
to Holdings in exchange for Holdings Preferred Stock and approximately 50% of
the Common Stock of Holdings, and (iii) a contribution of $25.0 million from a
Jordan Investor to Holdings in exchange for subordinated notes of Holdings (the
"Holdings Subordinated Notes"). Approximately $0.8 million of the contribution
from the Management Investors was financed by loans from Holdings.
Page 6
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The transactions are reflected in the accompanying unaudited
financial statements of the Company as of and for the quarter ended April 3,
1998 as a leveraged recapitalization under which the existing basis of
accounting for Winning Ways was continued for financial accounting and reporting
purposes. The historical financial information presented herein includes the
operations and activities of Winning Ways through February 27, 1997 and the
merged entity, GFSI, Inc., subsequent thereto as a result of the merger and the
leveraged recapitalization.
Subsequent to the recapitalization transactions described above, the
Company became a wholly owned subsidiary of Holdings. Holdings is dependent upon
the cash flows of the Company to provide funds to enable Holdings to pay
consolidated income taxes, fees payable under a consulting agreement and certain
other ordinary course expenses incurred on behalf of the Company. In addition,
Holdings is dependent upon the cash flows of the Company to provide funds to
service the indebtedness represented by $50.0 million of 11.375% Holdings
Subordinated Discount Notes due 2009 (the "Subordinated Discount Notes") which
were issued by Holdings in September, 1997 and purchased by institutional
investors through a Rule 144A private placement (the "Old Offering"). In the Old
Offering certain holders of the Holdings Subordinated Notes and Holdings
Preferred Stock issued and sold units (the "Units") consisting of Subordinated
Discount Notes and 11.375% Series D Preferred Stock due 2009 (the "Preferred
Stock") which were exchangeable at the option of Holdings any time on or after
September 29, 1997 into a like amount of 11.375% Series A Senior Discount Notes
due 2009 (the "Old Notes"). On October 23, 1997, the Units were exchanged into
Old Notes (the "Old Exchange"). Holdings did not receive any proceeds from the
sale or exchange of the Units. Holdings' Registration Statement on Form S-4 was
declared effective on December 30, 1997, providing for the exchange (the "New
Exchange") of 11.375% Series B Senior Discount Notes due 2009 (the "Discount
Notes") registered under the Securities Act, for a like amount of the Old Notes.
Holdings did not receive any proceeds from the New Exchange. The Discount Notes
were issued to repay $25.0 million of Holdings Subordinated Notes and $25.0
million of Holdings Preferred Stock and accrued dividends. 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. Holdings will be dependent on the Company 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.
3. Commitments and Contingencies
-----------------------------
The Company, in the normal course of business, is 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.
4. New Accounting Standards
------------------------
SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997. This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement will
become effective for fiscal years beginning after December 15, 1997.
Page 7
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SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued in June 1997. This Statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company is in the process of evaluating the impact or
applicability of this new standard on the presentation of the financial
statements and the disclosures therein. This Statement will become effective for
fiscal years beginning after December 15, 1997.
In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for fiscal years beginning
after December 15, 1998. The Company has not yet determined what effect
implementation of the SOP will have on its financial position, results of
operations or cash flows.
Page 8
<PAGE>
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 27, 1997. The discussions set
forth within and comments made by the Company from time to time may contain
forward-looking comments based on current expectations that involve a number of
risks and uncertainties. Actual results could differ materially from those
projected or suggested in the forward-looking comments. Factors that could cause
the Company's actual results in future periods to differ materially include, but
are not limited to, those which may be discussed herein, as well as those
discussed or identified from time to time in the Company's filings with the
Commission.
OVERVIEW
The Company is a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, colleges and professional sports leagues and
teams. The Company, which was founded in 1974, custom designs and decorates an
extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven
shirts, sweaters, shorts, headwear and sports luggage. The Company markets its
products to over 13,000 active customer accounts through its well-established
and diversified distribution channels, rather than through the price sensitive
mass merchandise, discount and department store distribution channels.
On January 29, 1998, the Company established a wholly owned subsidiary,
Event 1, Inc., to provide a retail outlet for the Company's sportswear and
activewear. Event 1 is anticipated to provide increasing sales for the Company's
products at higher margins. Operating expenses are also anticipated to increase
due to site fees and royalties included in the concessionaire agreement with the
National Collegiate Athletic Association.
On February 27, 1997, GFSI Holdings, Inc. ("Holdings") acquired all of the
issued and outstanding capital stock of Winning Ways, Inc. ("Winning Ways") and
immediately thereafter merged Winning Ways with and into the Company, with the
Company as the surviving entity. All of the capital stock of Winning Ways
acquired by Holdings in connection with the acquisition was contributed to the
Company along with the balance of equity contributions. See Note 2 -
Recapitalization Transaction, included herein, for further information.
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 Statements of Cash Flows of the Company herein
for further information.
SALES DIVISIONS
The Company markets its products, which include custom designed
fleecewear, jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts,
headwear and sports luggage, through five sales divisions.
Page 9
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The Resort Division (29.3% of year-to-date fiscal 1998 net sales) is a
leading marketer of custom logoed sportswear and activewear to destination
resorts, family entertainment companies, hotel chains, golf clubs, cruise
lines, casinos and United States military bases.
The Corporate Division (34.2% of year-to-date fiscal 1998 net sales) is a
leading marketer of corporate identity sportswear and activewear for use
by a diverse group of corporations in incentive and promotional programs
as well as for office casual wear and uniforms.
The College Bookstore Division (22.5% of year-to-date fiscal 1998 net
sales) is a leading marketer of custom designed, embroidered and
silk-screened sportswear and activewear products to nearly every major
college and university in the United States.
The Sports Specialty Division (6.4% of year-to-date fiscal 1998 net
sales), established in 1994, has entered into licensing agreements to
design, manufacture and market sportswear and activewear bearing the
names, logos and insignia of professional sports leagues and teams as well
as major sporting events. The Company's licensors include, among others,
Major League Baseball, the National Basketball Association, the National
Hockey League and NASCAR.
The Event 1 Division (2.3% of year-to-date fiscal 1998 net sales),
established in the third quarter of fiscal 1998, has entered into an
exclusive agreement with the National Collegiate Athletic Association
(NCAA) to become the official concessionaire for all NCAA events.
Additionally, the division has agreements with various conferences in the
NCAA.
THE FOLLOWING SETS FORTH THE AMOUNT AND PERCENTAGE OF NET SALES FOR
EACH OF THE PERIODS INDICATED (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 28, 1997 April 3, 1998 March 28, 1997 April 3, 1998
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort $14,836 37.7% $14,048 28.9% $ 50,836 35.2% $ 48,476 29.3%
Corporate 14,457 36.7% 18,328 37.7% 42,318 29.4% 56,614 34.2%
Bookstore 6,670 16.9% 7,316 15.1% 34,001 23.6% 37,304 22.5%
Sports Specialty 2,513 6.4% 3,164 6.5% 7,899 5.5% 10,614 6.4%
Event 1 3,721 7.7% 3,721 2.3%
Other 895 2.3% 1,997 4.1% 9,128 6.3% 8,748 5.3%
------- -------- -------- --------
Total $39,371 $48,574 $144,182 $165,477
======= ======== ======== ========
</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 March 28, 1997 and April 3, 1998:
Quarter Ended Nine Months Ended
March 28, April 3, March 28, April 3,
1997 1998 1997 1998
--------- -------- --------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 47.5 45.6 44.4 44.0
EBITDA 22.8 17.6 22.7 20.8
Operating income 20.6 16.1 21.0 19.5
Page 10
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COMPARISON OF OPERATING RESULTS FOR THE QUARTERS AND NINE MONTH PERIODS ENDED
APRIL 3, 1998 AND MARCH 28, 1997.
Net Sales. Net sales for the third quarter of fiscal 1998, the three
months ended April 3, 1998, increased 23.4% to $48.6 million from $39.4 million
in the third quarter of fiscal 1997. Net sales for the first nine months of
fiscal 1998 increased 14.8% to $165.5 million from $144.2 million in the first
nine months of fiscal 1997. The increase in net sales for both periods primarily
reflects increases in net sales at the Company's Corporate, Sports Specialty and
Bookstore divisions for the nine months of 33.8%, 34.4% and 9.7%, respectively,
and the net sales for the Company's Event 1 division for the quarter ended April
3, 1998 of $3.7 million. These increases in net sales were partially offset by a
4.6% decrease in net sales for the nine month period at the Resort division.
These increases were driven primarily by volume increases in both periods due to
continued account expansion and the introduction of new product lines through
each distribution channel. The decrease in the Resort division was due to
fluctuations in business with our top 10 Resort customers primarily attributed
to poor climatic conditions.
Gross Profit. Gross profit for the third quarter of fiscal 1998 increased
18.3% to $22.1 million from $18.7 million in the third quarter of fiscal 1997.
Gross profit for the first nine months of fiscal 1998 increased 13.6% to $72.7
million from $64.0 million in the first nine months of fiscal 1997. The increase
in gross profit is primarily a result of the net sales increase described above.
For the third quarter of fiscal 1998, gross profit as a percentage of net sales
slightly decreased to 45.6% compared to 47.5% in the third quarter of fiscal
1997. For the first nine months of fiscal 1998 and fiscal 1997, gross profit as
a percentage of net sales was 44.0% and 44.4%, respectively. The slight decrease
in gross profit for the third quarter reflects an increase in embroidery costs
compared to the third quarter of fiscal 1997.
Operating Expenses. Operating expenses for the third quarter of fiscal
1998 increased 34.9% to $14.3 million from $10.6 million in the third quarter of
fiscal 1997. For the first nine months, operating expenses increased 19.7% to
$40.5 million from $33.8 million in the first nine months of fiscal 1997.
Operating expenses for both periods increased due primarily to increased
staffing levels and the additional site fees and royalities incurred by the
Event 1 division. Operating expenses as a percentage of net sales increased to
29.4% from 26.9% in the prior year third quarter. For the first nine months,
operating expenses increased to 24.5% from 23.5% in the prior year period. The
increase in operating expenses for the first nine months, as a percentage of net
sales, is primarily due to the Event 1 site fees and royalties incurred in the
third quarter of fiscal 1998.
EBITDA. EBITDA for the third quarter of fiscal 1998 decreased 4.9% to $8.5
million from $9.0 million in the third quarter of fiscal 1997. For the first
nine months, EBITDA increased 5.1% to $34.5 million from $32.8 million in the
first nine months of fiscal 1997. The increase for the nine month period is
primarily a result of the net sales and related gross profit increase partially
offset by the increase in operating expenses, as described above. EBITDA as a
percentage of net sales decreased to 17.6% from 22.8% in the third quarter of
fiscal 1997. For the first nine months of fiscal 1998, EBITDA decreased to 20.8%
from 22.7% in the first nine months of fiscal 1997. The decrease in margin for
both periods reflects the changes in gross profit and an increase in operating
expenses, as described above.
Page 11
<PAGE>
Operating Income. Operating income for the third quarter of fiscal 1998
decreased 3.4% to $7.8 million from $8.1 million in the third quarter of fiscal
1997. The decrease is attributable to the changes in gross profit and the
increase in operating expenses described above. For the first nine months,
operating income increased 6.7% to $32.3 million from $30.2 million in the first
nine months of fiscal 1997. The increase for the nine month period is primarily
a result of the net sales increase described above. Operating income as a
percentage of net sales decreased for the third quarter of fiscal 1998 to 16.1%
from 20.6% in fiscal 1997, and to 19.5% for the nine month period of fiscal 1998
from 21.0% in the first nine months of fiscal 1997. The decrease as a percentage
of net sales is due to the decrease in margin as a percentage of sales for the
third quarter in addition to the increase in operating expenses as a percentage
of net sales as noted above.
Other Income (Expense). Other expense for the third quarter of fiscal 1998
increased to $4.6 million from $1.9 million in the third quarter of fiscal 1997.
For the first nine months of fiscal 1998, other expense increased to $14.6
million from $3.3 million in the first nine months of fiscal 1997. The increase
for both periods is primarily a result of increased interest expense associated
with the Company's recapitalization and subsequent issuance of $125 million
Senior Subordinated Notes and borrowings under the Company's $115 million New
Credit Agreement. The effect of derivative financial instruments serves to
minimize unplanned changes in interest expense due to changes in interest rates.
As such, 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 April
3, 1998 and March 28, 1997 were 41.8% and 21.1%, respectively. The fiscal 1997
rate is attributed to the Company's change in tax status from an S-Corporation
to a C-Corporation for income tax reporting purposes which was effective
February 27, 1997. Company earnings subsequent to February 27, 1997 are subject
to corporate income taxes.
Net Income. Net income for the third quarter of fiscal 1998 was $1.9
million compared to $3.4 million in the third quarter of fiscal 1997. For the
first nine months of fiscal 1998, net income was $10.4 million compared to $24.1
million in the first nine months of fiscal 1997. The decrease in net income for
both periods is primarily the result of interest expense and income taxes, as
mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the first nine months of fiscal
1998 was $7.4 million compared to $25.8 million in the first nine months of
fiscal 1997. The decrease in cash provided by operating activities between the
two periods primarily resulted from a decrease in net income, as previously
discussed, in addition to increased accounts receivable due to a 14.8% increase
in sales compared to the prior year period.
Cash used by investing activities in the first nine months of fiscal
1998 was $1.6 million, consistent with cash used by investing activities in the
first nine months of fiscal 1997.
Page 12
<PAGE>
Cash used by financing activities for the first nine months of fiscal 1998
was $5.7 million compared to cash used of $18.8 million in the first nine months
of fiscal 1997. The decrease in cash used compared to the prior year period is
due to Subchapter S distributions to Winning Ways shareholders in the prior year
period. Due to the recapitalization transactions, as previously discussed, the
Company changed from S-Corporation status to C-Corporation status for income tax
reporting purposes.
The Company believes that cash flow from operating activities and
borrowings under the New 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.
While the Company is currently evaluating its future capital requirements, no
material capital commitments existed as of quarter end. Under the New Credit
Agreement, the Revolver provides $50 million of revolving credit availability
(of which no borrowings were outstanding as of April 3, 1998 and approximately
$26.1 million was utilized for outstanding commercial and stand-by letters of
credit).
The Company anticipates paying dividends to Holdings to enable Holdings to
pay corporate income taxes, fees payable under a consulting agreement and
certain other ordinary course expenses incurred on behalf of the Company.
Holdings is dependent upon the cash flows of the Company to provide funds 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.
Holdings will be dependent on the Company 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.
The Company monitors market risk with respect to the derivative
instruments entered into by the Company, including the value of such
instruments, by regularly consulting with its senior financial managers. The
Company enters into such agreements for hedging purposes and not with a view
toward speculating in the underlying instruments. Accordingly, any reasonably
likely change in the level of the underlying rate, price or index would not be
likely to have either a favorable or adverse impact on the Company's business,
operations or financial condition, including with respect to interest expense.
Page 13
<PAGE>
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 Resorts, 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 quarter 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 14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ----------------------------
None
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.
Page 15
<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, INC.
May 18, 1998 /s/ ROBERT G. SHAW
- -------------------- -------------------------------------------------
Date Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GFSI, INC
FORM 10-Q AS OF APRIL 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-03-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> APR-03-1998
<CASH> 1,107
<SECURITIES> 0
<RECEIVABLES> 31,384
<ALLOWANCES> 0
<INVENTORY> 34,755
<CURRENT-ASSETS> 69,103
<PP&E> 36,869
<DEPRECIATION> 15,877
<TOTAL-ASSETS> 98,893
<CURRENT-LIABILITIES> 25,790
<BONDS> 181,750
0
0
<COMMON> 0
<OTHER-SE> (110,383)
<TOTAL-LIABILITY-AND-EQUITY> 98,893
<SALES> 165,477
<TOTAL-REVENUES> 165,477
<CGS> 92,728
<TOTAL-COSTS> 133,215
<OTHER-EXPENSES> 22
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,595
<INCOME-PRETAX> 17,645
<INCOME-TAX> 7,264
<INCOME-CONTINUING> 10,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,381
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
