UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2001
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( ) 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
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(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
November 1, 2001.
1
GFSI, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended September 28, 2001
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 7
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 8
PART II - OTHER INFORMATION 9
SIGNATURE PAGE 10
2
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
June 29, September 28,
2001 2001
---------- ------------
Assets
Current assets:
Cash and cash equivalents $ 5,309 $ 1,937
Accounts receivable, net 22,694 35,349
Inventories, net 37,736 40,103
Deferred income taxes 911 865
Prepaid expenses and other current assets 1,143 986
--------- ----------
Total current assets 67,793 79,240
Property, plant and equipment, net 18,574 18,546
Other assets:
Deferred financing costs, net 5,194 4,890
Other 2,006 1,756
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Total assets $ 93,567 $ 104,432
========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 12,778 $ 17,273
Accrued interest expense 3,775 1,015
Accrued expenses 5,895 6,956
Income taxes payable 199 2,714
Current portion of long-term debt 6,699 7,465
--------- --------
Total current liabilities 29,346 35,423
Deferred income taxes 1,189 1,081
Revolving credit agreement -- 4,650
Other long-term obligations 527 527
Long-term debt, less current portion 145,642 143,210
Stockholder's equity (deficiency):
Common stock, $.01 par value, 10,000 shares authorized, one share
issued and outstanding at June 29, 2001 and September 28, 2001. -- --
Additional paid-in capital 59,127 59,127
Accumulated deficiency (142,264) (139,586)
--------- ---------
Total stockholder's equity (deficiency) (83,137) (80,459)
--------- ---------
Total liabilities and stockholder's equity $ 93,567 $ 104,432
========= =========
NOTE: The consolidated balance sheet at June 29, 2001 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
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended
September 29, September 28,
2000 2001
------------- -------------
Net sales $ 53,468 $ 54,608
Cost of sales 33,045 33,269
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Gross profit 20,423 21,339
Operating expenses:
Selling 6,025 6,425
General and administrative 6,861 6,405
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12,886 12,830
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Operating income 7,537 8,509
Other income (expense):
Interest expense (4,216) (4,135)
Other, net 50 16
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(4,166) (4,119)
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Income before income taxes 3,371 4,390
Income tax expense (1,315) (1,712)
--------- ---------
Net income $ 2,056 $ 2,678
========= =========
See notes to consolidated financial statements.
4
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Quarter Ended
September 29, September 28,
2000 2001
------------- -------------
Cash flows from operating activities:
Net income $ 2,056 $ 2,678
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 822 804
Amortization of deferred financing costs 289 303
Amortization of other intangibles -- 250
Gain on sale or disposal of property, plant and equipment (33) --
Deferred income taxes -- (62)
Changes in operating assets and liabilities:
Accounts receivable, net (4,139) (12,655)
Inventories, net 1,835 (2,368)
Prepaid expenses, other current assets and other assets (226) 157
Income taxes payable 1,294 2,515
Accounts payable, accrued expenses and other
long-term obligations (1,159) 2,796
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Net cash provided by (used in) operating activities 739 (5,582)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 64 1
Purchases of property, plant and equipment (298) (775)
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Net cash used in investing activities (234) (774)
--------- ---------
Cash flows from financing activities:
Net changes to short-term borrowings and revolving credit agreement -- 4,650
Payments on long-term debt (1,736) (1,666)
--------- ---------
Net cash provided by (used in) financing activities (1,736) 2,984
--------- ---------
Net decrease in cash and cash equivalents (1,231) (3,372)
Cash and cash equivalents at beginning of period 1,446 5,309
--------- ---------
Cash and cash equivalents at end of period $ 215 $ 1,937
========= =========
Supplemental cash flow information:
Interest paid $ 7,221 $ 6,592
========= =========
Income taxes paid (refunded) $ 21 $ ( 740)
========= =========
See notes to consolidated financial statements.
5
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2001
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 subsidiaries, Event 1, Inc. ("Event 1") and Champion Custom
Products, Inc. ("CCP"). All intercompany balances and transactions have been
eliminated. The unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the
financial position and operations of the Company have been included. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the entire fiscal year. For further information, refer
to the financial statements and footnotes thereto for the year ended June 29,
2001 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. ACQUISITION AND DIVESTITURE
In June 2001, the Company acquired CCP, formerly a wholly owned subsidiary
of Sara Lee Corporation. During the quarter ended September 28, 2001, CCP had
sales of $12.7 million and produced operating contribution of $2.4 million. At
September 28, 2001, CCP had total assets and stockholder's equity of $10.5
milion and $757,000, respectively. CCP is an unconditional guarantor of the
Senior Subordinated Notes.
In June 2001, the Company sold the assets of its Tandem Marketing
business. Tandem Marketing had revenues of $3.0 million and operating
contribution of $500,000 for the quarter ended September 29, 2000.
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
The FASB's Emerging Issues Task Force ("EITF") released its consensus No.
00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" which is effective January 1, 2002. The Company is currently
evaluating the impact that adopting the EITF will have on its presentation of
results of operations.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products". The consensus concluded that consideration from a vendor
to a reseller of the vendor's products is generally presumed to be an adjustment
to the selling prices of the vendor's products and, therefore, should be
classified as a reduction of revenue. EITF No. 00-25 is effective beginning
January 1, 2002. The Company is currently evaluating the impact that adopting
the EITF will have on its presentation of results of operations.
5. RECLASSIFICATION
Certain reclassifications have been made to the fiscal 2001 consolidated
financial statements to conform to the fiscal 2002 presentation.
6
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 29, 2001. 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.
EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 28, 2001 AND
SEPTEMBER 29, 2000.
Net Sales. Net sales for the quarter ended September 28, 2001 increased
2.1% to $54.6 million from $53.5 million in the quarter ended September 29,
2000. The increase in net sales from the first quarter last year was primarily
related to the addition of Champion college bookstore net sales of $12.7
million. The net sales increase from Champion was offset by declines in
Corporate and Resort division sales in comparison to the prior year. The
terrorist attacks of September 11, 2001 and the resulting political and economic
uncertainties created in the aftermath, directly affected the travel plans and
the marketing and employee incentive programs of the customers of these two
sales divisions. The Tandem Marketing business was sold in June 2001. Tandem
Marketing contributed $3.0 million in sales for the quarter ended September 29,
2000.
Gross Profit. Gross profit for the quarter ended September 28, 2001
increased 4.5% to $21.3 million from $20.4 million in the quarter ended
September 29, 2000. Gross profit as a percentage of net sales increased to 39.1%
compared to 38.2%. The increase in gross profit was the result of a decrease in
cost of material.
Operating Expenses. Operating expenses were the same as last year at
$12.8 million. Operating expenses as a percentage of net sales were 23.5% in the
first quarter of fiscal 2002 compared to 24.1% in the first quarter of fiscal
2001. The decline in operating expenses as a percentage of net sales resulted
from the restructuring and profit improvement programs implemented during the
fourth quarter of fiscal 2001.
EBITDA. EBITDA increased 14.4% to $9.6 million in the first quarter of
fiscal 2002 from $8.4 million in the first quarter of fiscal 2001. EBITDA as a
percentage of net sales increased to 17.5% in the quarter ended September 28,
2001 from 15.6% in the quarter ended September 29, 2000. The increase in EBITDA
is a result of the increases in net sales and gross profit.
Operating Income. Operating income increased 12.9% to $8.5 million in the
first quarter of fiscal 2002 from $7.5 million in the first quarter of fiscal
2001. Operating income as a percentage of net sales increased to 15.6% in the
first quarter of fiscal 2002 from 14.1% in the first quarter of fiscal 2001. The
increase in operating income is a result of the increase in net sales and gross
profit.
Other Income (Expense). Other expense decreased slightly to $4.1 million
in the first quarter of fiscal 2002 from $4.2 million in the first quarter of
fiscal 2001 due to decreases in interest expense as a result of reduced interest
rates and declining balances on the Company's term debt.
Net Income. Net income for the first quarter of fiscal 2002 was $2.7
million compared to $2.1 million for the first quarter of fiscal 2001. The
increase was a result of the increase in operating income.
7
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first quarter of fiscal 2002
was $5.6 million compared to cash provided of $739,000 in the first quarter of
fiscal 2001. The change in cash provided by (used in) operating activities
between the two periods was due to the increase in accounts receivable and the
increase in inventory as a result of the addition of the Champion college
bookstore business.
Cash used in investing activities in the first quarter of fiscal 2002 was
$774,000 compared to $234,000 in the first quarter of 2001. The cash used in
both periods was related to acquisitions of property, plant and equipment.
Cash provided by financing activities for the first quarter of fiscal
2002 was $3.0 million compared to cash used of $1.7 million in the first quarter
of fiscal 2001. The cash provided by financing activities for the quarter ended
September 28, 2001 was attributable to $4.7 million in borrowings under the
Company's revolving credit agreement. These borrowings were used to complete the
acquisition of Champion and to support its working capital requirements.
The Company believes that cash flow from operating activities and
borrowings under its Bank 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 fiscal 2003 and Senior Subordinated Notes in fiscal
2007, although no assurance can be given in this regard. Under the Bank Credit
Agreement's revolving loan facility $40 million of revolving credit availability
is provided, of which $4.7 million was borrowed and outstanding and
approximately $12.2 million was utilized for outstanding commercial and stand-by
letters of credit as of September 28, 2001.
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 $402,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.3 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 college bookstore sales volume during the first two
fiscal quarters. Sales at the Company's Resort and Corporate divisions typically
show no significant seasonal variations.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
DERIVATIVE AND MARKET RISK DISCLOSURE
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. 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. 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.
8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding the resolution of
which, the management of the Company believes, would have a material adverse
effect on the Company's results of operations or financial condition, nor to any
other pending legal proceedings other than ordinary, routine litigation
incidental to its business.
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. None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
reporting period.
9
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, 2001
/s/ J. CRAIG PETERSON
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J. Craig Peterson, Sr. Vice President of Finance and
Principal Accounting Officer
10