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 December 29, 2000.
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-24189
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GFSI, INC.
(Exact name of registrant 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
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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
February 1, 2001.
GFSI, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended December 29, 2000
INDEX
Page
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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 8
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 11
PART II - OTHER INFORMATION 12
SIGNATURE PAGE 13
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GFSI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
June 30, December 29,
2000 2000
-------- ------------
Assets
Current assets:
Cash & cash equivalents $ 1,446 $ 9,850
Accounts receivable, net 29,801 32,763
Inventories, net 40,140 32,561
Prepaid expenses and other current assets 1,117 1,333
Deferred income taxes 1,122 1,122
-------- --------
Total current assets 73,626 77,629
Property, plant and equipment, net 19,356 18,659
Other assets:
Deferred financing costs, net 6,192 5,800
Other 5 7
-------- --------
Total assets $ 99,179 $102,095
======== ========
Liabilities and stockholder's equity (deficiency)
Current liabilities:
Accounts payable $ 5,317 $ 6,726
Accrued interest expense 4,000 3,995
Accrued expenses 7,668 7,544
Income taxes payable 93 1,736
Current portion of long-term debt 6,953 7,823
-------- --------
Total current liabilities 24,031 27,824
Deferred income taxes 1,049 1,049
Revolving credit agreement -- --
Other long-term obligations 552 531
Long-term debt, less current portion 160,356 156,106
Stockholder's equity (deficiency):
Common stock, $.01 par value, 10,000 shares
authorized, one share issued and outstanding
at June 30, 2000 and December 29, 2000 -- --
Additional paid-in capital 58,127 58,127
Accumulated deficiency (144,936) (141,542)
-------- --------
Total stockholder's deficiency (86,809) (83,415)
-------- --------
Total liabilities and stockholder's equity (deficiency) $ 99,179 $102,095
======== ========
NOTE: The consolidated balance sheet at June 30, 2000 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to consolidated financial statements.
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GFSI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended Six Months Ended
-------------------------------- ----------------------------------
December 31, December 29, December 31, December 29,
1999 2000 1999 2000
----------- ------------ ------------ ------------
Net sales $ 51,506 $ 50,136 $ 106,345 $ 102,586
Cost of sales 30,834 30,825 64,446 63,152
--------- --------- --------- ---------
Gross profit 20,672 19,311 41,899 39,434
Operating expenses:
Selling 5,267 5,707 11,691 11,732
General and administrative 5,769 6,972 11,947 13,533
--------- -------- --------- --------
11,036 12,679 23,638 25,265
--------- -------- --------- --------
Operating income 9,636 6,632 18,261 14,169
Other income (expense):
Interest expense (4,401) (4,296) (8,857) (8,512)
Other, net 34 106 130 156
--------- --------- --------- --------
(4,367) (4,190) (8,727) (8,356)
-------- --------- --------- --------
Income before income taxes 5,269 2,442 9,534 5,813
Provision for income taxes 2,048 952 3,722 2,267
-------- --------- --------- ---------
Net income $ 3,221 $ 1,490 $ 5,812 $ 3,546
======== ========= ========= =========
See notes to consolidated financial statements.
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GFSI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousand)
Six Months Ended
December 31, December 29,
1999 2000
------------ ------------
Cash flows from operating activities:
Net income $ 5,812 $ 3,546
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,605 1,603
Amortization of deferred financing costs 578 583
(Gain) loss on sale or disposal of property, plant and equipment (16) (55)
Changes in operating assets and liabilities:
Accounts receivable, net (7,399) (2,962)
Inventories, net (1,214) 7,578
Prepaid expenses, other current assets and other assets (346) (217)
Income taxes payable 3,125 1,643
Accounts payable, accrued expenses and other
long-term obligations (1,694) 1,256
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Net cash provided by operating activities 451 12,975
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Cash flows from investing activities
Proceeds from sales of property, plant and equipment 43 140
Purchases of property, plant and equipment (1,154) (897)
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Net cash used in investing activities (1,111) (757)
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Cash flows from financing activities:
Deferred financing costs -- (190)
Distributions to GFSI Holdings, Inc. -- (151)
Payments on long-term debt and capital lease obligations (6,494) (3,473)
-------- --------
Net cash used in financing activities (6,494) (3,814)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,154) 8,404
Cash and cash equivalents at beginning of period 10,264 1,446
-------- --------
Cash and cash equivalents at end of period $ 3,110 $ 9,850
======== ========
Supplemental cash flow information:
Interest paid $ 8,199 $ 8,518
======== ========
Income taxes paid $ 597 $ 623
======== ========
Non-cash financing activities:
Equipment purchased under capital lease $ 166 $ 94
======== ========
See notes to consolidated financial statements.
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GFSI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 29, 2000
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 results of operations of the
Company have been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the entire fiscal
year. For further information, refer to the financial statements and footnotes
thereto for the year ended June 30, 2000 included in the Company's Annual Report
on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. CREDIT AGREEMENT AMENDMENT
On December 1, 2000, the Company entered into Amendment No. 2 to the Credit
Agreement, dated February 27, 1997, by and among the Company, Bank One (formerly
the First National Bank of Chicago), and the other lenders parties thereto (as
amended, the "Credit Agreement"). The Amendment reduces the secured line of
credit to $40 million from $50 million, adjusts some of the financial ratio
covenants and increases the interest rate margins 1.5% on borrowings under the
Credit Agreement. At December 29, 2000, interest rates on the Company's Term
loan A and Term loan B were 10.0% and 10.5%, respectively. In connection with
the Amendment, the Company recorded $189,922 in deferred financing charges which
will be amortized over the remaining life of the Credit Agreement.
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 STANDARDS
During the first quarter of fiscal 2001, the Company adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities". This statement, as amended by
SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
implementation of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
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In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 entitled "Revenue Recognition". The
bulletin, as amended, is to be adopted, if needed, no later than the fourth
fiscal quarter of fiscal years commencing after December 15, 1999, with
retroactive adjustment to the first fiscal quarter of that year. The effect, if
any, of complying with the accounting described in this bulletin has not been
determined by management.
In September 2000, the FASB's Emerging Issues Task Force released its consensus
on EITF Issue No. 00- 10, "Accounting for Shipping and Handling Fees and Costs".
EITF No. 00-10 sets forth guidance on how a seller of goods should classify in
the income statement: (a) amounts billed to a customer for shipping and handling
and (b) costs incurred for shipping and handling. Currently, the Company
includes both the amounts billed to customers and the costs incurred for
shipping and handling as operating expenses. Under the EITF, the amounts billed
to customers for shipping and handling must be reported as revenues. Management
intends to implement this EITF no later than the fourth quarter of fiscal 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this Form 10-Q should be read in conjunction
with the financial information included herein and the Company's Annual Report
on Form 10-K for the year ended June 30, 2000. Management's discussion and
analysis of financial condition and results of operations and other sections of
this report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
The following sets forth the amount and percentage of net sales for
each of the periods indicated (dollars in thousands). Certain reclassifications
have been made to fiscal year 2000 amounts to conform to the fiscal year 2001
presentation:
Quarter Ended Six Months Ended
December 31, 1999 December 29, 2000 December 31, 1999 December 29, 2000
----------------- ----------------- ----------------- -----------------
Licensed Apparel $ 15,585 30.3% $ 15,484 30.9% $ 38,713 36.4% $ 36,859 35.9%
Resort 12,626 24.5% 11,349 22.6% 27,010 25.4% 24,360 23.7%
Corporate 18,268 35.5% 18,453 36.8% 33,258 31.3% 34,835 34.0%
Event 1 2,983 5.7% 3,023 6.0% 3,815 3.6% 3,173 3.1%
Other 2,044 4.0% 1,827 3.7% 3,549 3.3% 3,359 3.3%
-------- -------- -------- --------
Total $ 51,506 $ 50,136 $106,345 $102,586
======== ======== ======== ========
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 six
month periods ended December 31, 1999 and December 29, 2000.
Quarter Ended Six Months Ended
December 31, December 29, December 31, December 29,
1999 2000 1999 2000
------------ ------------- ------------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 40.1 38.5 39.4 38.4
EBITDA 20.3 14.8 18.7 15.4
Operating income 18.7 13.2 17.2 13.8
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EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS AND SIX MONTH PERIODS ENDED
DECEMBER 29, 2000 AND DECEMBER 31, 1999.
Net Sales. Net sales for the second quarter of fiscal 2001, the three
months ended December 29, 2000, decreased 2.7% to $50.1 million from $51.5
million in the second quarter of fiscal 2000. Net sales for the first six months
of fiscal 2001 decreased 3.5% to $102.6 million from $106.3 million in the first
six months of fiscal 2000. The decrease in net sales primarily reflects
decreases in net sales for the six months ended December 29, 2000 at the
Company's Resort and Licensed Apparel divisions of 9.8% and 4.8% respectively,
which were partially offset by a 4.7% increase at the Company's Corporate
division.
Gross Profit. Gross profit for the second quarter of fiscal 2001
decreased 6.6% to $19.3 million from $20.7 million in the second quarter of
fiscal 2000. Gross profit for the first six months of fiscal 2001 decreased 5.9%
to $39.4 million from $41.9 million in the first six months of fiscal 2000. The
decrease in gross profit is primarily a result of the decline in net sales noted
above and increases in overhead costs as a percent of sales due to product mix
changes from higher priced seasonal outerwear to lower priced products. For the
second quarter of fiscal 2001, gross profit as a percentage of net sales
decreased to 38.5% compared to 40.1% in the second quarter of fiscal 2000. For
the first six months of fiscal 2001, gross profit as a percentage of net sales
decreased to 38.4% compared to 39.4% in the first six months of fiscal 2000.
Operating Expenses. Operating expenses for the second quarter of fiscal
2001 increased 14.9% to $12.7 million from $11.0 million in the second quarter
of fiscal 2000. For the first six months, operating expenses increased 6.9% to
$25.3 million from $23.6 million in the first six months of fiscal 2000.
Operating expenses as a percentage of net sales increased to 25.3% from 21.4% in
the prior year second quarter. For the first six months of fiscal 2001,
operating expenses as a percentage of net sales increased to 24.6% from 22.2% in
the prior year period. The increase in operating expenses in fiscal 2001 is
attributable to the fall of fiscal 2000 benefitting from one-time reversals of
operating expenses due to changes in estimates of those expenses.
EBITDA. EBITDA for the second quarter of fiscal 2001 decreased 29.0% to
$7.4 million from $10.4 million in the second quarter of fiscal 2000. For the
first six months, EBITDA decreased 20.6% to $15.8 million from $19.9 million in
the first six months of fiscal 2000. The decrease for both periods is primarily
a result of the decrease in net sales and related gross profit and the increase
in operating expenses described above. EBITDA as a percentage of net sales
decreased to 14.8% from 20.3% in the second quarter of fiscal 2000. For the
first six months of fiscal 2001, EBITDA as a percentage of sales decreased to
15.4% from 18.7% in the first six months of fiscal 2000.
Operating Income. Operating income for the second quarter of fiscal
2001 decreased 31.2% to $6.6 million from $9.6 million in the second quarter of
fiscal 2000. For the first six months, operating income decreased 22.4% to $14.2
million from $18.3 million in the first six months of fiscal 2000. The decrease
is attributable to the decrease in net sales and related gross profit and
increase in operating expenses described above. Operating income as a percentage
of net sales decreased for the second quarter of fiscal 2001 to 13.2% from 18.7%
in fiscal 2000, and to 13.8% for the first six months of fiscal 2001 from 17.2%
in the first six months of fiscal 2000.
Other Income (Expense). Other expense for the second quarter of fiscal
2001 decreased to $4.2 million from $4.4 million in the second quarter of fiscal
2000. For the first six months of fiscal 2001 other expense decreased to $8.4
million from $8.7 million in the first six months of fiscal year 2000. The
decrease for the periods is primarily a result of decreased interest expense
associated with borrowings under the Company's Credit Agreement due to declining
balances on the Company's long-term debt.
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Income Taxes. The effective income tax rates for the three and six
month periods ended December 29, 2000 and December 31, 1999 were consistent at
39.0%.
Net Income. Net income for the second quarter of fiscal 2001 was $1.5
million compared to $3.2 million in the second quarter of fiscal 2000. For the
first six months of fiscal 2001, net income was $3.5 million compared to $5.8
million in the first six months of fiscal 2000. The decreases in net income were
for the reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the first six months of fiscal 2001
was $13.0 million compared to $451,000 in the first six months of fiscal 2000.
The change in cash provided by operating activities between the two periods was
primarily attributable to declining inventory balance and other operating asset
changes in the first six months of 2001 compared to the first six months of
2000.
Cash used in investing activities for the first six months of fiscal 2001
was $757,000 compared to $1.1 million in the first six months of 2000. The cash
used in both periods was related to acquisitions of property, plant and
equipment.
Cash used in financing activities for the first six months of fiscal 2001
was $3.8 million compared to $6.5 million in the first six months of fiscal
2000. Scheduled debt repayments were paid in the first six months of fiscal 2001
whereas debt payments in the first six months of fiscal 2000 included both
scheduled payments and prepayments.
The Company believes that cash flow from operating activities and
borrowings under the Credit Agreement will be adequate to meet the Company's
short-term and long-term liquidity requirements prior to the maturity of its
credit facilities in 2007, although no assurance can be given in this regard.
Under the Credit Agreement, the Revolver provides $40 million of revolving
credit availability (of which approximately $9.3 million was utilized for
outstanding commercial and stand-by letters of credit at December 29, 2000).
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 $407,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.4 million) plus accrued dividends with mandatory
redemption in 2009.
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 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. Derivative financial instruments 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. No such agreements were outstanding
at December 29, 2000. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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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 29, 2000.
Item 2. Changes in Securities
- ------- ---------------------
None
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits. The following exhibits are included with this report:
Exhibit 10-1(c) - Amendment No. 2 dated as of December 1, 2000
to Credit Agreement
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on
December 27, 2000 to report the replacement of its independent public
accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GFSI, INC.
February 13, 2001
/s/ ROBERT G. SHAW
---------------------------------------
Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
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