<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 July 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5256
---------------------------
Gerber Childrenswear, Inc.
(Exact name of registrant as specified in its charter)
---------------------------
Delaware 62-1624764
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
---------------------------
7005 Pelham Road
Suite D
Greenville, SC 29615
(Address of principal executive offices)
(864) 987-5200
(Registrant's telephone number, including area code)
---------------------------
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.
[ ] YES [ X ] NO
As of August 14, 1998, there were outstanding 8,317,514 shares of Common Stock
and 8,747,087 shares of Class B Common Stock.
<PAGE> 2
Gerber Childrenswear, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of July 4, 1998
and December 31, 1997............................................. 1
Condensed Consolidated Statements of Operations for the quarter
ended July 4, 1998 and June 28, 1997 and for the six months ended
July 4, 1998 and June 28, 1997.................................... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended July 4, 1998 and June 28,1997.................... 3
Notes to Condensed Consolidated Financial Statements ............ 4-7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8-13
PART II - OTHER INFORMATION
Item 2 - Change in Securities and Use of Proceeds.......................... 14
Item 6 - Exhibits and Reports on Form 8-K.................................. 14
Signatures................................................................. 15
Exhibit - Financial Data Schedule.......................................... 16
<PAGE> 3
Gerber Childrenswear, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) (Audited)
July 4, December 31,
1998 1997
----------- ------------
(In thousands)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents ................................... $ 2,498 $ 536
Accounts receivable, net .................................... 39,640 34,506
Inventories ................................................. 95,113 71,041
Income tax receivable ....................................... 0 4,635
Other ....................................................... 3,554 1,672
-------- --------
Total current assets .................................. 140,805 112,390
-------- --------
Property, Plant and Equipment ................................... 29,881 27,867
Less accumulated depreciation ............................... 5,690 3,219
-------- --------
24,191 24,648
-------- --------
Other Assets
Excess of cost over fair value of net assets acquired, net .. 21,056 22,257
Other ....................................................... 6,250 4,596
-------- --------
Total other assets .................................... 27,306 26,853
-------- --------
$192,302 $163,891
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable ............................................ $ 14,170 $ 14,759
Accrued expenses ............................................ 18,117 24,099
Revolving credit loan payable ............................... 26,200 250
Current portion of long-term debt ........................... 2,385 7,286
Other ....................................................... 2,046 119
-------- --------
Total current liabilities ............................. 62,918 46,513
-------- --------
Non-Current Liabilities
Long-term debt .............................................. 24,424 69,474
Other non-current liabilities ............................... 15,484 13,875
-------- --------
Total non-current liabilities ......................... 39,908 83,349
-------- --------
Redeemable preferred stock, including accrued dividends of $2,965 0 14,610
-------- --------
Shareholders' Equity ............................................ 89,476 19,419
-------- --------
$192,302 $163,891
======== ========
</TABLE>
See accompanying notes
1
<PAGE> 4
Gerber Childrenswear, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
-------------------------- ---------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
-------- -------- --------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ...................................... $ 63,879 $ 40,162 $ 128,526 $ 85,512
Cost of sales ................................. 46,508 28,040 93,720 60,694
-------- -------- --------- --------
Gross margin ............................... 17,371 12,122 34,806 24,818
Expenses:
Selling, general and administrative expenses 9,618 7,254 19,232 13,972
Other ...................................... 0 0 0 514
-------- -------- --------- --------
9,618 7,254 19,232 14,486
-------- -------- --------- --------
Income before interest and income taxes ........ 7,753 4,868 15,574 10,332
Interest expense, net of interest income ....... 1,784 1,418 4,046 2,744
-------- -------- --------- --------
Income before income taxes ..................... 5,969 3,450 11,528 7,588
Income tax expense ............................. 2,086 1,346 4,225 2,960
-------- -------- --------- --------
Income before extraordinary item ............... 3,883 2,104 7,303 4,628
Extraordinary item, net ........................ (266) 0 (266) 0
-------- -------- --------- --------
Net income ..................................... 3,617 2,104 7,037 4,628
Foreign currency translation ............... (166) 0 (354) 0
-------- -------- --------- --------
Comprehensive income ........................... $ 3,451 $ 2,104 $ 6,683 $ 4,628
======== ======== ========= ========
Numerator
- ---------
Income before extraordinary item, net .......... $ 3,883 $ 2,104 $ 7,303 $ 4,628
Preferred stock dividends ...................... (322) (396) (774) (779)
-------- -------- --------- --------
Income available to common shareholders ....... 3,561 1,708 6,529 3,849
Extraordinary item, net ........................ (266) 0 (266) 0
-------- -------- --------- --------
Net income available to common shareholders .... $ 3,295 $ 1,708 $ 6,263 $ 3,849
======== ======== ========= ========
Denominator
- -----------
Weighted average shares - basic ................ 12,490 10,971 11,741 11,137
Effect of dilutive securities:
Warrants ..................................... 2,958 2,958 2,958 2,958
Nonvested stock/stock options ................ 605 557 602 675
-------- -------- --------- --------
Adjusted weighted average shares - diluted ..... 16,053 14,486 15,301 14,770
======== ======== ========= ========
Per share amount:
Earnings per common share:
Income before extraordinary item, net .... $ .28 $ .16 $ .55 $ .35
Extraordinary item, net .................. (.02) 0 (.02) 0
-------- -------- --------- --------
Net income ..................................... $ .26 $ .16 $ .53 $ .35
======== ======== ========= ========
Earnings per common share - diluted:
Income before extraordinary item, net .... $ .23 $ .12 $ .43 $ .26
Extraordinary item, net .................. (.02) 0 (.02) 0
-------- -------- --------- --------
Net income ..................................... $ .21 $ .12 $ .41 $ .26
======== ======== ========= ========
</TABLE>
See accompanying notes
2
<PAGE> 5
Gerber Childrenswear, Inc.
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
----------------------------
July 4, June 28,
1998 1997
--------- ----------
(in thousands)
<S> <C> <C>
Operating Activities
Net income ...................................................... $ 7,037 $ 4,628
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization ................................. 3,033 1,184
Other ......................................................... (2,555) 167
Changes in assets and liabilities
Accounts receivable, net .................................. (5,419) (3,573)
Inventories ............................................... (24,131) (22,922)
Accounts payable .......................................... 576 3,331
Other assets and liabilities, net ......................... 1,459 (1,416)
-------- --------
(20,000) (18,601)
-------- --------
Investing Activities
Purchases of property, plant and equipment ...................... (1,980) (1,268)
Proceeds from sale of property, plant and equipment ............. 29 445
-------- --------
(1,951) (823)
-------- --------
Financing Activities
Borrowings under revolving credit agreement ..................... 48,540 14,134
Repayments under revolving credit agreement ..................... (22,590) (9,293)
Principal payments on long-term borrowings ...................... (50,789) (2,091)
Proceeds from initial public offering, net of expenses .......... 49,053 0
Other ........................................................... (297) (148)
-------- --------
23,917 2,602
-------- --------
Effect of exchange rate changes on cash ......................... (4) 0
-------- --------
Net increase (decrease) in cash and cash equivalents ................ 1,962 (16,822)
Cash and cash equivalents at beginning of period .................... 536 17,592
-------- --------
Cash and cash equivalents at end of period .......................... $ 2,498 $ 770
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 6
Gerber Childrenswear, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have
been prepared by Gerber Childrenswear, Inc. ("the Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations; however, the Company believes
that the disclosures are adequate to make the information presented not
misleading. The interim financial statements are unaudited and, in the opinion
of management, contain all adjustments necessary to present fairly the Company's
financial position and the results of its operations and cash flows for the
interim periods presented. It is suggested that these interim financial
statements be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, which were included as part of
the Company's Registration Statement on Form S-1 (Registration No. 333-47327)
(the "Registration Statement"), as declared effective by the Securities and
Exchange Commission (the "SEC") on June 10, 1998.
2. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. Auburn Holdings,
Inc., a wholly owned subsidiary of the Company, acquired Auburn Hosiery Mills,
Inc. and Sport Socks Co. (Ireland) Limited on December 17, 1997. Sport Socks Co.
(Ireland) Limited has been translated into U.S. dollars based upon the weighted
average exchange rate of U.S. dollars/Irish pounds for the statement of income
and the end of the period rate of U.S. dollars/Irish pounds for the balance
sheet. All significant intercompany balances have been eliminated in
consolidation.
3. SEASONALITY OF BUSINESS
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of the Company's operations.
4. USE OF ESTIMATES
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.
4
<PAGE> 7
5. INVENTORIES
A summary of inventories, by major classification, at July 4, 1998 and
December 31, 1997 is as follows (in thousands):
July 4, 1998 December 31, 1997
------------ -----------------
Raw materials $14,675 $14,192
Work in process 18,573 12,507
Finished goods 61,865 44,342
------- -------
$95,113 $71,041
======= =======
6. INCOME TAXES
The Company's effective income tax rate of 34.9% and 36.6% for the
quarter ended and the six months ended July 4, 1998, respectively, was lower
than the statutory rates due to the impact in 1998 of foreign earnings, certain
of which are taxed at lower rates than in the United States, partially offset by
goodwill amortization, most of which is not deductible for federal and state
income tax purposes.
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information" was issued
in June 1997. This statement is effective for the Company's calendar year ending
December 31, 1998. This statement changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports. Adoption of SFAS 131 is not expected to have a material
effect on the Company's financial statement disclosures.
5
<PAGE> 8
9. RECAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING
Immediately prior to and in connection with the consummation of the
Company's Initial Public Offering ("IPO"), GCIH, Inc. (former parent of Gerber
Childrenswear, Inc.) and Gerber Childrenswear, Inc. consummated a series of
transactions pursuant to which the certificate of incorporation of GCIH, Inc.
was amended and restated ("Recapitalization") to provide for the
reclassification of its authorized common stock into two classes of capital
stock (Common Stock and Class B Common Stock). Each share of the Common Stock
has one vote per share and the Class B Common Stock has no voting rights. The
amended and restated certificate also provides that each share of Class B Common
Stock will be convertible at the option of the holder at any time into one share
of Common Stock and each share of Common Stock held by a holder of Class B
Common Stock will be convertible at the option of the holder at any time into
one share of Class B Common Stock.
Prior to the consummation of the IPO and immediately after giving
effect to the Recapitalization, Gerber Childrenswear, Inc. was merged into GCIH,
Inc. with GCIH, Inc. being the surviving entity (the "Merger"). The amended and
restated certificate provided for the change of the corporate name from GCIH,
Inc. to Gerber Childrenswear, Inc. The Merger resulted in a tax-free liquidation
of the non-surviving entity. The following capital stock transactions occurred
in connection with the Merger. All of the Company's Class A and Class C Common
Stock outstanding as of the Merger were exchanged for either shares of Class B
Common Stock (new Class B) or Common Stock pursuant to a stock split of 15.4693
to 1. All of the outstanding shares of the Company's Class B Common Stock (old
Class B) of the Company were exchanged for shares of the Company's Common Stock
at a specified ratio of 15.4693 to 1. All of the outstanding warrants to
purchase shares of Class D Common Stock of the Company were exchanged into
warrants to purchase shares of the Class B Common Stock (new Class B) of the
Company at a specified ratio of 15.4693 to 1. Upon consummation of the Merger,
113,623.6 shares of the Company's Redeemable Preferred stock were converted into
1,241,537 shares of Common Stock of the Company and 2,828.4 shares were redeemed
for cash equal to the liquidation value per share at the time of the Merger. The
Company retired all shares held in the treasury.
Also, in connection with the IPO, the Company adopted a Long-Term
Equity Incentive Plan (the "Incentive Plan") designed to provide incentives to
present and future key employees of the Company and its subsidiaries as may be
selected by the Compensation Committee of the Board of Directors (the
"Committee"). The Incentive Plan provides for the granting to participants the
following types of incentive awards: stock options, stock appreciation rights,
restricted stock, performance units, performance grants and other awards deemed
appropriate by the Committee. An aggregate of not more than 750,000 shares of
Common Stock will be reserved for issuance under the Incentive Plan. The
Incentive Plan affords the Company latitude in tailoring incentive compensation
for the retention of key employees. This plan also limits the number of shares
each participant shall be entitled to receive to no more than 25,000 shares of
Common Stock in any calendar year and is scheduled to terminate in 2008.
During June 1998, the Company consummated its IPO with 4,140,000
shares (including the exercise of the underwriters' over-allotment option) of
its Common Stock being sold at a price of $13.00 per share. The net proceeds
from the IPO were $49.1 million and were used to: (a) repay $22.5 million of a
senior subordinated note; (b) repay $11.0 million of a junior subordinated note;
(c) repay $15.2 million of other indebtedness of the Company; and (d) redeem
2,828.4 shares of the Company's redeemable preferred stock in the aggregate
amount of approximately $0.4 million held by certain of its officers.
6
<PAGE> 9
10. EXTRAORDINARY ITEM
In June 1998, the Company repaid senior and junior subordinated notes
in the principal amount of $22.5 million and $11.0 million, respectively. The
write-off of unamortized discount and loan costs totaling $266,000 (net of an
income tax benefit of $163,000) is included as an extraordinary item in the
accompanying statements of income for the quarter and six months ended July 4,
1998.
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE-HARBOR STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events that
involve known and unknown risks and uncertainties, including, without
limitation, those associated with the effect of national and regional economic
conditions, the overall level of consumer spending, the performance of the
Company's products within the prevailing retail environment, customer acceptance
of both new designs and newly-introduced product lines, competition and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this quarterly report, including,
without limitation, the statements under Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statement are reasonable, it can give no assurance that such
expectations will prove to have been correct and actual results, performance or
events could differ materially from those expressed in such statements.
RECAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING
Immediately prior to and in connection with the consummation of the
Company's Initial Public Offering ("IPO"), GCIH, Inc. (former parent of Gerber
Childrenswear, Inc.) and Gerber Childrenswear, Inc. consummated a series of
transactions pursuant to which the certificate of incorporation of GCIH, Inc.
was amended and restated ("Recapitalization") to provide for the
reclassification of its authorized common stock into two classes of capital
stock (Common Stock and Class B Common Stock). Each share of the Common Stock
has one vote per share and the Class B Common Stock has no voting rights. The
amended and restated certificate also provides that each share of Class B Common
Stock will be convertible at the option of the holder at any time into one share
of Common Stock and each share of Common Stock held by a holder of Class B
Common Stock will be convertible at the option of the holder at any time into
one share of Class B Common Stock.
Prior to the consummation of the IPO and immediately after giving
effect to the Recapitalization, Gerber Childrenswear, Inc. was merged into GCIH,
Inc. with GCIH, Inc. being the surviving entity (the "Merger"). The amended and
restated certificate provided for the change of the corporate name from GCIH,
Inc. to Gerber Childrenswear, Inc. The Merger resulted in a tax-free liquidation
of the non-surviving entity. The following capital stock transactions occurred
in connection with the Merger. All of the Company's Class A and Class C Common
Stock outstanding as of the Merger were exchanged for either shares of Class B
Common Stock (new Class B) or Common Stock pursuant to a stock split of 15.4693
to 1. All of the outstanding shares of the Company's Class B Common Stock (old
Class B) of the Company were exchanged for shares of the Company's Common Stock
at a specified ratio of 15.4693 to 1. All of the outstanding warrants to
purchase shares of Class D Common Stock of the Company were exchanged into
warrants to purchase shares of the Class B Common Stock (new Class B) of the
Company at a specified ratio of 15.4693 to 1. Upon consummation of the Merger,
113,623.6 shares of the Company's Redeemable Preferred stock were converted into
1,241,537 shares of Common Stock of the Company and 2,828.4 shares were redeemed
for cash equal to the liquidation value per share at the time of the Merger. The
Company retired all shares held in the treasury.
8
<PAGE> 11
Also, in connection with the IPO, the Company adopted a Long-Term
Equity Incentive Plan (the "Incentive Plan") designed to provide incentives to
present and future key employees of the Company and its subsidiaries as may be
selected by the Compensation Committee of the Board of Directors (the
"Committee"). The Incentive Plan provides for the granting to participants the
following types of incentive awards: stock options, stock appreciation rights,
restricted stock, performance units, performance grants and other awards deemed
appropriate by the Committee. An aggregate of not more than 750,000 shares of
Common Stock will be reserved for issuance under the Incentive Plan. The
Incentive Plan affords the Company latitude in tailoring incentive compensation
for the retention of key employees. This plan also limits the number of shares
each participant shall be entitled to receive to no more than 25,000 shares of
Common Stock in any calendar year and is scheduled to terminate in 2008.
During June 1998, the Company consummated its IPO with 4,140,000
shares (including the exercise of the underwriters' over-allotment option) of
its Common Stock being sold at a price of $13.00 per share. The net proceeds
from the IPO were $49.1 million and were used to: (a) repay $22.5 million of a
senior subordinated note; (b) repay $11.0 million of a junior subordinated note;
(c) repay $15.2 million of other indebtedness of the Company; and (d) redeem
2,828.4 shares of the Company's redeemable preferred stock in the aggregate
amount of approximately $0.4 million held by certain of its officers.
RESULTS OF OPERATIONS
The Company operates two business segments: apparel and hosiery. The
apparel segment consists of the production and sale of infant and toddler's
sleepwear, playwear, underwear, bedding and cloth diapers under the Gerber and
Baby Looney Tunes trademarks and private labels. The hosiery segment which was
acquired on December 17, 1997 consists of the production and sale of sport socks
under the Wilson, Coca Cola and Dunlop names to major retailers in the United
States and Europe. The Company's first three quarters always end on the Saturday
closest to the calendar quarter end. The fourth quarter ends on December 31 of
the applicable year. The Company believes that these cutoffs have no significant
impact on the Company's financial results.
The following table sets forth certain unaudited results of
operations and other financial information of the Company by business segments
and geographic areas (in thousands).
Business Segments
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
------------------------ -------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales and revenue:
Apparel ....................... $45,564 $40,162 $ 95,673 $85,512
Hosiery ....................... 18,315 0 32,853 0
------- ------- -------- -------
Total net sales and revenue ... $63,879 $40,162 $128,526 $85,512
======= ======= ======== =======
Income before interest and taxes:
Apparel ....................... $ 6,056 $ 4,868 $ 13,098 $10,332
Hosiery ....................... 1,697 0 2,476 0
------- ------- -------- -------
Total operating income ........ $ 7,753 $ 4,868 $ 15,574 $10,332
======= ======= ======== =======
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
--------------------- ------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------ ---- ------ ------
<S> <C> <C> <C> <C>
Depreciation and amortization:
Apparel ........................... $ 719 $569 $1,402 $1,184
Hosiery ........................... 799 0 1,631 0
------ ---- ------ ------
Total depreciation and amortization $1,518 $569 $3,033 $1,184
====== ==== ====== ======
Capital additions:
Apparel ........................... $ 724 $471 $1,306 $1,268
Hosiery ........................... 534 0 674 0
------ ---- ------ ------
Total capital additions ........... $1,258 $471 $1,980 $1,268
====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
July 4, December 31, June 28,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
Apparel ........................... $139,240 $113,202 $115,045
Hosiery ........................... 53,062 50,689 0
-------- -------- --------
Total assets ...................... $192,302 $163,891 $115,045
======== ======== ========
</TABLE>
Geographic Areas
<TABLE>
<CAPTION>
For the quarter ended For the six months ended
------------------------ ------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales and revenue:
United States ................... $58,615 $40,162 $117,965 $85,512
All other ....................... 5,264 0 10,561 0
------- ------- -------- -------
Total net sales and revenue ..... $63,879 $40,162 $128,526 $85,512
======= ======= ======== =======
Earnings before interest and taxes:
United States ................... $ 6,899 $ 4,868 $ 14,011 $10,332
All other ....................... 854 0 1,563 0
------- ------- -------- -------
Total operating income .......... $ 7,753 $ 4,868 $ 15,574 $10,332
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
July 4, December 31, June 28,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
United States ................... $181,009 $153,944 $115,045
All other ....................... 11,293 9,947 0
-------- -------- --------
Total assets .................... $192,302 $163,891 $115,045
======== ======== ========
</TABLE>
10
<PAGE> 13
Second Quarter Ended July 4, 1998 Compared to Second Quarter Ended June 28, 1997
Net sales. Apparel net sales were $45.6 million for the second
quarter ended July 4, 1998, an increase of $5.4 million or 13.4% over net sales
of $40.2 million for the second quarter of 1997 due to increased unit volume
sales. Hosiery net sales were $18.3 million in the second quarter of 1998.
Gross margin. Gross margin as a percentage of net sales declined from
30.2% in 1997 to 27.2% in 1998. The decrease in gross margin was due to the
effect of Hosiery sales, which typically have lower gross margins than Apparel
sales.
Selling general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales declined to 15.1% in the
second quarter of 1998, from 18.1% in 1997. The decrease is primarily due to the
effect of lower expenses in the acquired Hosiery operations on the overall
Company, plus reduced Apparel bad debts in 1998.
Income before interest and income taxes. Apparel income before
interest and income taxes as a percentage of Apparel sales was 13.3% in the
second quarter of 1998 versus 12.1% in the second quarter of 1997. Hosiery
income before interest and taxes was 9.3% of Hosiery sales in the second quarter
of 1998.
Interest expense, net. Interest expense was $1.8 million in the
second quarter of 1998 versus $1.4 million in the second quarter of 1997. The
increase in interest expense reflects the higher debt levels associated with the
acquisition of the Hosiery operations and higher Apparel inventories.
Provision for income taxes. Provision for income taxes was $2.1
million in the second quarter of 1998, compared to $1.3 million in the second
quarter of 1997. The effective tax rate was 34.9% for 1998 as compared to 39.0%
for 1997. The Company's effective income tax rate differed from the prior period
effective rate due to the impact of foreign earnings, certain of which are taxed
at lower rates than in the United States, partially offset by goodwill
amortization, most of which is not deductible for federal and state income tax
purposes.
Extraordinary item, net. The Company repaid senior and junior
subordinated notes in June 1998 resulting in the write-off of unamortized
discount and loan costs of approximately $0.3 million (net of an income tax
benefit of $0.2 million).
Net income. As a result of the above, second quarter net income was
$3.6 million in 1998, a 72.0% increase over the $2.1 million in 1997.
Six Months Ended July 4, 1998 Compared to Six Months Ended June 28, 1997
Net sales. Apparel net sales were $95.7 million for the first six
months ended July 4, 1998, an increase of $10.2 million or 11.9% over net sales
of $85.5 million for the first six months of 1997 due to increased unit volume
sales. Hosiery net sales were $32.9 million in the first six months of 1998.
11
<PAGE> 14
Gross margin. Gross margin as a percentage of net sales declined from
29.0% in 1997 to 27.1% in 1998. The decrease in gross margin was due to the
effect of Hosiery sales, which typically have lower gross margins than Apparel
sales.
Selling general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales declined to 15.0% in the
first six months of 1998, from 16.3% in the first six months of 1997. The
decrease is primarily due to the effect of lower expenses in the acquired
Hosiery operations on the overall Company, plus reduced Apparel bad debts in
1998.
Other. Other represents the cost of closing and realignment of
facilities aggregating $0.5 million in 1997.
Income before interest and income taxes. Apparel income before
interest and income taxes as a percentage of apparel sales was 13.7% in the
first six months of 1998 versus 12.1% in 1997. Hosiery income before interest
and taxes was 7.5% of Hosiery sales in the first six months of 1998.
Interest expense, net. Interest expense was $4.0 million in the first
six months of 1998 versus $2.7 million in the first six months of 1997. The
increase in interest expense reflects the higher debt levels associated with the
acquisition of the Hosiery operations and higher Apparel inventories.
Provision for income taxes. Provision for income taxes was $4.2
million in the first six months of 1998, compared to $2.9 million in the first
six months of 1997. The effective tax rate was 36.6% for 1998 compared to 39.0%
for 1997. The Company's effective income tax rate differed from the prior period
effective rate due to the impact of foreign earnings, certain of which are taxed
at lower rates than in the United States, partially offset by goodwill
amortization, most of which is not deductible for federal and state income tax
purposes.
Extraordinary item, net. The Company repaid senior and junior
subordinated notes in June 1998 resulting in the write-off of unamortized
discount and loan costs of approximately $.3 million (net of an income tax
benefit of $.2 million).
Net income. As a result of the above, net income for the first six
months was $7.0 million in 1998, a 52.1% increase over the $4.6 million in 1997.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, capital
expenditures and debt service. The Company has financed its cash needs primarily
through internally generated cash flow, in addition to funds borrowed under the
Company's credit agreement.
Net cash used in operating activities for the six months ended July
4, 1998 and June 28, 1997 was $20.0 million and $18.6 million, respectively. The
primary components of cash used in operating activities for the first six months
of 1998 and 1997 were primarily increases in accounts receivable ($5.4 million
and $3.6 million, respectively) and inventories ($24.1 million and $22.9
million, respectively). The increase in the accounts receivable balance for both
periods is due to differences in the timing of shipments and receipts between
the second quarter as compared to the fourth quarter. Shipments in the second
quarter traditionally occur later during the quarter compared to the fourth
quarter when shipment times can vary, resulting in higher accounts receivable
balances at the end of the second quarter. The increase in inventory for the
first six months of 1998 and 1997 reflects the seasonality of the Apparel
business. To support the third and fourth quarter sales volumes of certain
seasonal products (such as blanket sleepers), the Company builds inventory in
the first six months of each year. The Hosiery business is less seasonal, and as
such, while working capital tends to increase slightly during the second half of
the year, the variation is small.
Capital expenditures were $2.0 million and $1.3 million for the first
six months of 1998 and 1997, respectively. These expenditures consisted
primarily of normal replacement of manufacturing equipment, purchases of office
equipment and upgrades of information systems. In addition, during the six
months ended June 28, 1997 the Company sold its Maine facility for approximately
$0.4 million. The Company believes its budget of $5.7 million for capital
expenditures for 1998 ($3.9 million for the Apparel segment and $1.8 million for
the Hosiery segment) should be sufficient for the anticipated capital
expenditure needs of the Company for 1998.
Net cash provided by financing activities for the six months ended
July 4, 1998 was $23.9 million compared to $2.6 million for the six months ended
June 28, 1997. The increase in cash provided by financing activities for the
first six months in 1998 and 1997 consisted of borrowings under the Company's
revolving credit agreement to fund the increased working capital needs. In
addition, for the six months ended July 4, 1998 the Company used the net
proceeds of $49.1 million from its IPO and the exercise of the over-allotment
option to: (a) repay all of a senior subordinated note in the aggregate
principal amount of $22.5 million; (b) repay all of a junior subordinated note
in the aggregate principal amount of $11.0 million; (c) repay certain other
indebtedness of the Company in the aggregate principal amount of $15.2 million;
and (d) redeem 2,828.4 shares of the Company's redeemable preferred stock in the
aggregate amount of approximately $0.4 million held by certain of its officers.
The Company believes that cash generated from operations, together
with amounts available under its credit agreement and the Irish subsidiary's
loan facility with the National Irish Bank, will be adequate to meet its working
capital, capital expenditures and debt service requirements for the next twelve
months.
13
<PAGE> 16
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS
A Registration Statement on Form S-1 (File No. 333-47327) registering
4,140,000 shares of the Company's Common Stock, filed in connection with the
IPO, was declared effective by the Securities and Exchange Commission on June
10, 1998. The IPO terminated after the sale of all 4,140,000 shares of the
Company's Common Stock covered by the Registration Statement, all of which were
sold for the account of the Company. The aggregate offering price of the shares
covered by the Registration Statement was $53,820,000. The net proceeds to the
Company of the offering were $49,052,600 after deducting direct expenses of
$4,767,400 incurred by the Company in connection with the issuance and
distribution of the shares of Common Stock covered by the Registration Statement
(consisting of $3,767,400 of underwriting discounts and commissions and
$1,000,000 of other expenses). The managing underwriters for the IPO were
Merrill Lynch, Pierce Fenner & Smith Incorporated, Bear, Stearns & Co. Inc.,
Lehman Brothers Inc., Furman Selz LLC and Wasserstein Perella Securities, Inc.
None of the expenses incurred constituted direct or indirect payments
to the Company's affiliates, 10% shareholders, directors, officers or general
partners or their respective associates.
From June 10, 1998 through July 4, 1998 the amount of the offering
proceeds to the Company has been used for the following purposes:
(i) Repay all of a senior subordinated note in the aggregate
principal amount of $22.5 million;
(ii) Repay all of a junior subordinated note in the aggregate
principal amount of $11.0 million;
(iii) Repay certain other indebtedness of the Company in the
aggregate principal amount of $15.2 million; and
(iv) Redeem 2,828.4 shares of GCIH, Inc.'s redeemable preferred
stock in the aggregate amount of $374,000 held by certain
officers of the Company
The use of proceeds identified herein does not represent a material
change in the use of proceeds described in the prospectus.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K - None
14
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Gerber Childrenswear, Inc.
(Registrant)
DATE: August 18, 1998 By: /s/ Edward Kittredge
-------------------------
Edward Kittredge
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
DATE: August 18, 1998 By: /s/ Richard L. Solar
-------------------------
Richard L. Solar
Senior Vice President, Assistant
Secretary and Director
(Principal Financial Officer)
DATE: August 18, 1998 By: /s/ David E. Uren
----------------------
David E. Uren
Vice President of Finance, Secretary
and Treasurer
(Principal Accounting Officer)
15
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<FISCAL-YEAR-END> DEC-31-1998
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