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 October 1, 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 333-24189
---------------------------------------------
GFSI, INC.
----------------------
(Exact name of registrant specified in its charter)
Delaware 74-2810748
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 share issued and outstanding as of
November 1, 1999.
<PAGE>
GFSI, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended October 1, 1999
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
2
<PAGE>
GFSI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
July 2, October 1,
1999 1999
----------- ----------
<S> <C> <C>
Assets
Current assets:
Cash & cash equivalents $ 10,264 $ 839
Accounts receivable, net 28,381 38,876
Inventories, net 36,323 34,824
Prepaid expenses and other current assets 561 722
Deferred income taxes 1,790 1,790
--------- ---------
Total current assets 77,319 77,051
Property, plant and equipment, net 20,245 20,430
Other assets:
Deferred financing costs, net 7,348 7,059
Other 5 5
--------- ---------
Total assets $ 104,917 $ 104,545
========= =========
Liabilities and stockholder's equity (deficiency)
current liabilities:
Accounts payable $ 8,289 $ 8,143
Accrued interest expense 4,484 1,456
Accrued expenses 7,948 8,296
Income taxes payable 413 2,076
Current portion of long-term debt 6,550 6,930
--------- ---------
Total current liabilities 27,684 26,901
Deferred income taxes 1,183 1,183
Revolving credit agreement -- --
Other long-term obligations 737 574
Long-term debt, less current portion 174,328 172,311
Stockholder's equity (deficiency):
Common stock, $.01 par value, 10,000 shares authorized, one share
issued and outstanding at July 2, 1999 and October 1, 1999. -- --
Additional paid-in capital 54,527 54,527
Accumulated deficiency (153,542) (150,951)
--------- ---------
Total stockholder's deficiency (99,015) (96,424)
--------- ---------
Total liabilities and stockholder's equity (deficiency) $ 104,917 $ 104,545
========= =========
</TABLE>
NOTE: The consolidated balance sheet at July 2, 1999 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
<PAGE>
GFSI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended
October 2, October 1,
1998 1999
----------- ----------
Net sales $ 60,045 $ 54,839
Cost of sales 35,827 33,612
---------- ---------
Gross profit 24,218 21,227
Operating expenses:
Selling 6,422 6,424
General and administrative 7,190 6,178
---------- ---------
13,612 12,602
---------- ---------
Operating income 10,606 8,625
Other income (expense):
Interest expense (4,913) (4,456)
Other, net 35 96
---------- ---------
(4,878) (4,360)
---------- ---------
Income before income taxes 5,728 4,265
Provision for income taxes 2,300 1,674
---------- ---------
Net income $ 3,428 $ 2,591
========== =========
See notes to consolidated financial statements.
4
<PAGE>
GFSI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousand)
<TABLE>
<CAPTION>
Quarter Ended
October 2, October 1,
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,428 $ 2,591
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 765 795
Amortization of deferred financing costs 289 289
Gain on sale or disposal of property, plant and equipment (28) (4)
Deferred income taxes (29) --
Changes in operating assets and liabilities:
Accounts receivable, net (9,499) (10,495)
Inventories, net 892 1,499
Prepaid expenses, other current assets and other assets 137 (160)
Income taxes payable 2,286 1,663
Accounts payable, accrued expenses and other
long-term obligations (3,551) (2,990)
--------- --------
Net cash used in operating activities (5,310) (6,812)
--------- --------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 183 4
Purchases of property, plant and equipment (678) (980)
--------- --------
Net cash used in investing activities (495) (976)
--------- --------
Cash flows from financing activities:
Net changes to short-term borrowings and revolving credit agreement 9,300 --
Payments on long-term debt (1,265) (1,637)
--------- --------
Net cash provided by (used in) financing activities 8,035 (1,637)
--------- --------
Net increase (decrease) in cash and cash equivalents 2,230 (9,425)
Cash and cash equivalents at beginning of period 1,346 10,264
--------- ---------
Cash and cash equivalents at end of period $ 3,576 $ 839
========= =========
Supplemental cash flow information:
Interest paid $ 7,430 $ 7,128
========= =========
Income taxes paid $ 33 $ 10
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GFSI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 1, 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of GFSI,
Inc. (the "Company") include the accounts of the Company and the accounts of its
wholly owned subsidiary, Event 1, Inc. ("Event 1"). 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 July 2, 1999 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. Reclassifications
Certain reclassifications have been made to the fiscal year 1999
statement of income amounts to conform to the fiscal year 2000 presentation.
3. 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.
4. New Accounting Standard
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998. This statement 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. This statement
is effective for all quarters of fiscal years beginning after June 15, 2000. The
Company is in the process of determining what impact the adoption of SFAS No.
133 will have on its financial position and results of operations.
6
<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 July 2, 1999. 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):
Quarter Ended
October 2, 1998 October 1, 1999
-------------------- ------------------
Resort $ 17,256 28.7% $ 16,857 30.8%
Corporate 19,257 32.1% 14,990 27.3%
College Bookstore 18,193 30.3% 17,432 31.8%
Sports Specialty 3,270 5.4% 3,223 5.9%
Event 1 178 .3% 832 1.5%
Other 1,891 3.2% 1,505 2.7%
--------- --------
Total $ 60,045 $ 54,839
========= ========
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 2, 1998 and October 1, 1999.
Quarter Ended
October 2, October 1,
1998 1999
---------- ----------
Net sales 100.0% 100.0%
Gross profit 40.3 38.7
EBITDA 18.9 17.2
Operating income 17.7 15.7
7
<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 Ended October 1, 1999 and October 2, 1998
- --------------------------------------------------
Net Sales. Net sales for the first quarter of fiscal 2000, the three
months ended October 1, 1999, decreased 8.7% to $54.8 million from $60.0
million in the first quarter of fiscal 1999. The decrease in net sales primarily
reflects decreases in net sales at the Company's Resort, Corporate, College
Bookstore and Sports Specialty divisions of 2.3%, 22.1%, 4.2% and 1.4%,
respectively. These declines were attributable to increased competition and
difficulties attributable to the installation of the Company's Enterprise
Resource Planning System. The Corporate division has also experienced a shift in
the buying patterns of its customers from outerwear to other products, and had
some vacancy in its sales representative force during the first quarter of
fiscal 2000. These decreases were partially offset by a 367.4% increase in net
sales by the Company's Event 1 subsidiary.
Gross Profit. Gross profit for the first quarter of fiscal 2000
decreased 12.4% to $ 21.2 million from $24.2 million in the first quarter of
fiscal 1999. The decrease in gross profit is primarily a result of the net sales
decrease described above and a slight increase in production costs during the
first quarter of fiscal year 2000 as a percentage of sales compared to the first
quarter of fiscal 1999. For the first quarter of fiscal 2000, gross profit as a
percentage of net sales decreased to 38.7% compared to 40.3% in the first
quarter of fiscal 1999.
Operating Expenses. Operating expenses for the first quarter of fiscal
2000 decreased 7.4% to $12.6 million from $13.6 million in the first quarter of
fiscal 1999. The decrease in operating expenses is primarily related to costs
incurred in the first quarter of fiscal 1999 associated with the Company's
Management Information System installation that was completed in the fourth
quarter of fiscal 1999. Operating expenses as a percentage of net sales
increased to 23.0% from 22.7% 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 2000 decreased 17.2% to
$9.4 million from $11.4 million in the first quarter of fiscal 1999. The
decrease for the period is primarily a result of the decrease in net sales and
related gross profit as described above. EBITDA as a percentage of net sales
decreased to 17.2% from 18.9% in the first quarter of fiscal 1999.
Operating Income. Operating income for the first quarter of fiscal 2000
decreased 18.7% to $8.6 million from $10.6 million in the first quarter of
fiscal 1999. The decrease is attributable to the changes in gross profit
described above. Operating income as a percentage of net sales deceased for the
first quarter of fiscal 2000 to 15.7% from 17.7% in fiscal 1999.
Other Income (Expense). Other expense for the first quarter of fiscal
2000 decreased to $4.5 million from $4.9 million in the first quarter of fiscal
1999 due to lower revolving loan balances in the first quarter of fiscal 2000
and the effect of scheduled debt payments. 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
October 1, 1999 and October 2, 1998 were 39.2% and 40.2%, respectively.
Net Income. Net income for the first quarter of fiscal 2000 was $2.6
million compared to $3.4 million in the first quarter of fiscal 1999.
8
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Cash used in operating activities for the first quarter of fiscal 2000
was $6.8 million compared to $5.3 million in the first quarter of fiscal 1999.
The change in cash provided by operating activities between the two periods
resulted from a decrease in net income for the period and changes in working
capital account balances in the first quarter of fiscal year 2000 as compared to
the first quarter of fiscal 1999.
Cash used by investing activities in the first quarter of fiscal 2000
was $1.0 million compared to $495,000 in the first quarter of 1999. The cash
used in both periods was related to acquisitions of property, plant and
equipment.
Cash provided by (used in) financing activities for the first quarter
of fiscal 2000 was $(1.6) million compared to $8.0 million in the first quarter
of fiscal 1999. The change in cash used in financing activities was a result of
revolving loan borrowings in the first quarter of fiscal 1999 that did not occur
in the first quarter of fiscal 2000.
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 in 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
$22.0 million was utilized for outstanding commercial and stand-by letters of
credit as of October 1, 1999).
GFSI Holdings, Inc. ("Holdings"), the sole stockholder of the Company,
is dependent upon the cash flows of the Company 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.
Holdings will be dependent on the Company to provide funds to service the
indebtedness. Additionally, the remaining cumulative non-cash preferred stock
issued by Holdings ("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, including an
interest rate swap 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.
9
<PAGE>
Year 2000 Compliance
- --------------------
The Company continues to assess the impact that the year 2000 will have on
its internal computer systems, facilities and production equipment, critical
business partners and business-critical third parties.
The Company has a program to identify, evaluate and implement changes to
all of its internal computer systems as necessary to address the Year 2000
issue. As part of the program, in fiscal year 1999, the Company upgraded and
implemented its Enterprise Resource Planning System ("ERP"), including Year 2000
functionality, 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. It is not practical to
segregate the cost of the Year 2000 functionality from the cost of the upgrade
and implementation of the ERP.
All of the Company's production and operations departments have completed
their inventory, assessment and remediation efforts in regard to all
non-information technology systems which include hardware, software and
associated embedded computer technologies that are used to operate the Company
facilities and equipment.
The Company has identified, prioritized and is continuing to communicate
with all critical business partners, including all third-party suppliers of
goods and services, to ascertain the status of their Year 2000 compliance
programs. The Company intends to monitor the progress of these critical third
parties. Management believes that all third party supplier Year 2000 issues will
be resolved in calendar 1999.
The Company does not anticipate that the Year 2000 issues related to
internally-controllable systems will significantly impact the overall business
operations or financial results of the Company. However, the Company could face
significant disruptions in business operations and financial losses if certain
business- critical, third parties, such as utility providers, telecommunication
systems, transportation service providers or certain government entities, do not
successfully complete their Year 2000 remediation plans. The Company is
currently in the process of identifying and developing contingency plans for the
most reasonable likely worst case scenarios. The Company expects to complete its
analysis and contingency planning by December 1999.
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. 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.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
There has been no change to matters discussed in Business-Legal Proceedings in
the Company's Form 10-K as filed with the Securities and Exchange Commission on
September 30, 1999.
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.
11
<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.
November 12, 1999
/s/ ROBERT G. SHAW
-------------------------------------------------
Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
12
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<ARTICLE> 5
<CIK> 0001036327
<NAME> GFSI, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-03-1999
<PERIOD-END> OCT-01-1999
<EXCHANGE-RATE> 1
<CASH> 839
<SECURITIES> 0
<RECEIVABLES> 38876
<ALLOWANCES> 0
<INVENTORY> 34,824
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<PP&E> 40,453
<DEPRECIATION> 20023
<TOTAL-ASSETS> 104,545
<CURRENT-LIABILITIES> 26,901
<BONDS> 179,241
0
0
<COMMON> 0
<OTHER-SE> (96,424)
<TOTAL-LIABILITY-AND-EQUITY> 104,545
<SALES> 54,839
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