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 28, 2002.
-----------------
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 (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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
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, 2003.
GFSI, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended December 28, 2002
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 9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 12
PART II - OTHER INFORMATION 13
SIGNATURE PAGE 14
OFFICERS CERTIFICATION 15
2
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
December 28, June 29,
2002 2002
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,739 $ 313
Accounts receivable, net 32,776 32,626
Inventories, net 43,470 45,729
Prepaid expenses and other current assets 1,383 1,269
Deferred income taxes 1,195 845
---------- ----------
Total current assets 82,563 80,782
Property, plant and equipment, net 20,263 19,671
Other assets:
Deferred financing costs, net 3,423 3,873
Other 509 1,010
---------- ----------
Total assets $ 106,758 $ 105,336
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,099 $ 12,010
Accrued interest expense 4,174 4,366
Accrued expenses 6,292 5,983
Income taxes payable 8,020 5,087
Current portion of long-term debt 197 177
---------- ----------
Total current liabilities 28,782 27,623
Deferred income taxes 762 699
Other long-term obligations 527 527
Long-term debt, less current portion 152,053 156,132
Stockholders' equity (deficiency):
Common stock, $.01 par value, 10,000
shares authorized, one share issued
and outstanding at December 28, 2002
and June 29, 2002 -- --
Additional paid-in capital 59,127 59,127
Accumulated deficiency (134,493) (138,772)
---------- ----------
Total stockholders' deficiency (75,366) (79,645)
---------- ----------
Total liabilities and stockholders'
equity (deficiency) $ 106,758 $ 105,336
========== ==========
See notes to consolidated financial statements.
3
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (In thousands)
Quarter Ended Six Months Ended
--------------------------- ---------------------------
December 28, December 28, December 28, December 28,
2002 2001 2002 2001
----------- ------------ ------------ ------------
Net sales $ 54,633 $ 52,265 $ 115,844 $ 106,377
Cost of sales 34,404 32,820 73,553 66,090
--------- --------- ---------- ----------
Gross profit 20,229 19,445 42,291 40,287
Operating expenses:
Selling 6,879 6,022 14,375 11,950
General and administrative 6,844 6,504 13,479 12,909
--------- --------- ---------- ----------
13,723 12,526 27,854 24,859
--------- --------- ---------- ----------
Operating income 6,506 6,919 14,437 15,428
Other income (expense):
Interest expense (3,685) (3,945) (7,309) (8,080)
Other, net 11 (5) 11 11
--------- --------- ---------- ----------
(3,674) (3,950) (7,298) (8,069)
--------- --------- ---------- ----------
Income before income taxes 2,832 2,969 7,139 7,359
Income tax expense 1,106 1,158 2,786 2,870
--------- --------- ---------- ----------
Net income $ 1,726 $ 1,811 $ 4,353 $ 4,489
========= ========= ========== ==========
See notes to consolidated financial statements.
4
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousand)
Six Months Ended
December 28, December 28,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,353 $ 4,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,576 1,576
Amortization of deferred financing costs 487 549
Amortization of other intangibles 500 500
(Gain) loss on sale or disposal of property, plant and equipment (11) 8
Gain (loss) on foreign currency translation 7 --
Deferred income taxes (287) (81)
Changes in operating assets and liabilities:
Accounts receivable, net (150) (8,883)
Inventories, net 2,259 (1,334)
Prepaid expenses, other current assets and other assets (114) 283
Income taxes payable 2,933 3,542
Accounts payable, accrued expenses and other
long-term obligations (1,792) (1,342)
-------- --------
Net cash provided by (used in) operating activities 9,761 (693)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment 14 1
Purchases of property, plant and equipment (2,172) (1,988)
-------- --------
Net cash used in investing activities (2,158) (1,987)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short term borrowings and revolving credit agreement (4,422) 1,200
Cash paid for financing costs (37) --
Distributions to GFSI Holdings, Inc. (81) (49)
Issuance of long-term debt 450 --
Payments on long-term debt and capital lease obligations (87) (1,722)
-------- --------
Net cash used in financing activities (4,177) (571)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,426 (3,251)
Cash and cash equivalents at beginning of period 313 5,309
-------- --------
Cash and cash equivalents at end of period $ 3,739 $ 2,058
======== ========
Supplemental cash flow information:
Interest paid $ 7,013 $ 6,868
======== ========
Income taxes paid (refunded) $ 139 $ (962)
======== ========
See notes to consolidated financial statements.
5
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 28, 2002
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"), Champion Custom Products,
Inc. ("CCP") and GFSI Canada Company. 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, operations and cash flows 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. The consolidated
balance sheet information as of June 29, 2002 has been derived from the audited
consolidated 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. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended June
29, 2002 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. 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.
3. Condensed Consolidating Financial Information
---------------------------------------------
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not necessarily intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with accounting principles
generally accepted in the United States of America. Each of the subsidiary
guarantors are 100% owned by GFSI, Inc. The subsidiary guarantees of GFSI,
Inc.'s debts are full and unconditional.
As of December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Assets:
Current assets $ 69,957 $ 16,575 $ (3,969) $ 82,563
Investment in equity of subsidiaries 13,592 -- (13,592) --
Property, plant and equipment, net 19,862 401 -- 20,263
Other assets 4,902 2 (972) 3,932
--------- --------- --------- ---------
Total assets $108,313 $ 16,978 $(18,533) $106,758
========= ========= ========= =========
Liabilities and stockholders' equity
Current liabilities $ 30,435 $ 2,316 $ (3,969) $ 28,782
Deferred income taxes 664 98 -- 762
Other long-term obligations 527 -- -- 527
Long-term debt 152,053 972 (972) 152,053
Stockholders' equity (deficiency) (75,366) 13,592 (13,592) (75,366)
--------- --------- --------- ---------
Total liabilities and
stockholders' equity (deficiency) $108,313 $ 16,978 $(18,533) $106,758
========= ========= ========= =========
6
Six months ended December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net sales $ 76,832 $ 41,052 $ (2,040) $ 115,844
Costs and expenses 70,299 33,148 (2,040) 101,407
--------- --------- --------- ----------
Operating Income 6,533 7,904 -- 14,437
Equity in net earnings of subsidiaries 4,812 -- (4,812) --
Interest expense (7,285) (13) -- 7,298
--------- --------- --------- ----------
Income before income taxes 4,060 7,891 (4,812) 7,139
Income tax expense (benefit) (293) 3,079 -- 2,786
--------- --------- --------- ----------
Net income $ 4,353 $ 4,812 $ (4,812) $ 4,353
========= ========= ========= ==========
Six months ended December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Net cash flows provided by (used in)
operating activities $ 10,637 $ (876) $ -- $ 9,761
Net cash flows used in investing activities (2,126) (32) -- (2,158)
Cash flows from financing activities:
Net borrowings under revolving
credit agreements (4,422) -- -- (4,422)
Payments on long-term debt (87) -- -- (87)
Intercompany borrowings (972) 972 -- --
Cash paid for financing costs (37) -- -- (37)
Issuance of long-term debt 450 -- -- 450
Distributions to GFSI Holdings, Inc. (81) -- -- (81)
--------- --------- -------- ----------
Net cash provided (used) by
financing activities (5,149) 972 -- (4,177)
--------- --------- -------- ----------
Net change in cash and cash equivalents 3,362 64 -- 3,426
Cash and cash equivalents at
beginning of period 334 (21) -- 313
--------- --------- -------- ----------
Cash and cash equivalents end of period $ 3,696 $ 43 $ -- $ 3,739
========= ========= ======== ==========
As of June 29, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Assets:
Current assets $ 70,942 $ 10,923 $ (1,083) $ 80,782
Investment in equity of subsidiaries 8,773 -- (8,773) --
Property, plant and equipment, net 19,120 551 -- 19,671
Other assets 4,881 4 (2) 4,883
--------- --------- --------- ---------
Total assets $103,716 $ 11,478 $ (9,858) $105,336
========= ========= ========= =========
Liabilities and stockholders' equity
Current liabilities $ 26,198 $ 2,510 $ (1,085) $ 27,623
Deferred income taxes 504 195 -- 699
Other long-term obligations 527 -- -- 527
Long-term debt 156,132 -- -- 156,132
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
--------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficiency) $103,716 $ 11,478 $ (9,858) $105,336
========= ========= ========= =========
7
Six months ended December 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Net sales $ 78,206 $ 30,108 $ (1,937) $ 106,377
Costs and expenses 67,994 24,892 (1,937) 90,949
--------- --------- --------- ----------
Operating Income 10,212 5,216 -- 15,428
Equity in net earnings of subsidiaries 3,181 -- (3,181) --
Interest expense (8,069) -- -- (8,069)
--------- --------- --------- -----------
Income before income taxes 5,324 5,216 (3,181) 7,359
Income tax expense 835 2,035 -- 2,870
--------- --------- --------- ----------
Net income $ 4,489 $ 3,181 $ (3,181) $ 4,489
========= ========= ========= ==========
Six months ended December 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Net cash flows provided by (used in)
operating activities $ (933) $ 240 $ -- $ (693)
Net cash flows used in investing activities (1,772) (215) -- (1,987)
Cash flows from financing activities:
Net borrowings under revolving
credit agreement 1,200 -- -- 1,200
Payments on long-term debt (1,772) -- -- (1,722)
Distributions to GFSI Holdings, Inc. (49) -- -- (49)
--------- --------- --------- ----------
Net cash flows used in financing
activities (571) -- -- (571)
--------- --------- --------- ----------
Net change in cash and cash equivalents (3,276) 25 -- (3,251)
Cash and cash equivalents at
beginning of period 5,263 46 -- 5,309
--------- --------- --------- ----------
Cash and cash equivalents end of period $ 1,987 $ 71 $ -- $ 2,058
========= ========= ========= ==========
4. Reclassifications
-----------------
Certain reclassifications have been made to the fiscal 2002 consolidated
and condensed consolidating financial statements to conform to the fiscal 2003
presentation.
5. Subsequent Event
----------------
On December 31, 2002 the Company completed the private placement of $9.9
million of unregistered 9.625% senior subordinated notes ("Exchange Notes") in
exchange for $24 million aggregate principal amount at maturity of GFSI
Holdings, Inc. 11.375% Senior Discount Notes (the "Holdings Discount Notes")
with an accreted book value of $19.9 million. The acquisition of the Holdings
Discount Notes by the Company is considered an early extinguishment of Holdings'
debt, and accordingly, Holdings will record a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs, in the third quarter of fiscal
2003.
The Exchange Notes are unsecured obligations of the Company, mature on
March 1, 2007, pay interest semi-annually on March 1 and September 1, and were
issued under an indenture with substantially identical terms as the indenture
governing the $125 million aggregate principal amount at maturity of GFSI, Inc.
Senior Subordinated Notes issued on February 27, 1997. The Exchange Notes were
guaranteed by each of the Company's wholly-owned subsidiaries (Event One, CCP
and GFSI Canada Company). The Exchange Notes were issued to an "accredited
investor" and were exempt from registration under Rule 144 of the Securities Act
of 1933. The Company intends to file an exchange offer registration statement
with the Securities and Exchange Commission in the third quarter of fiscal 2003
to enable the holder of the Exchange Notes to exchange them for publicly
registered notes having terms substantially identical to the Exchange Notes.
8
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, 2002. 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
Company's ability 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 Company's ability 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.
Critical accounting policies
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources is based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, long-lived assets, deferred income taxes,
accrued expenses, contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that it believes are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially
from these estimates under different assumptions or conditions.
The Company's management believes that some of its significant accounting
policies involve a higher degree of judgment or complexity than other accounting
policies. Identified below are the policies deemed critical to its business and
the understanding of its results of operations.
Revenue recognition. The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated or
overstated.
Accounts receivable. Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of the Company's customers were to deteriorate
causing an impairment of their ability to make payments, additional provisions
for bad debts may be required in future periods. Accounts receivable at December
28, 2002 and June 28, 2002 were net of allowance for doubtful accounts of $1.1
million and $838,000, respectively.
Inventories. Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required.
9
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED DECEMBER 28, 2002
AND DECEMBER 28, 2001.
Net Sales. Net sales for the quarter ended December 28, 2002 increased 5%
to $54.6 million compared to $52.3 million last year. The increase in net sales
was primarily due to sales growth from the Licensed Apparel group, which was
partially offset by sales decreases from the Corporate division. The net sales
growth in the Licensed Apparel group was from college bookstore customers and
was most pronounced in our Champion licensed products group (CCP). Net sales
from college bookstore customers for the second quarter of fiscal 2003 were $3.0
million greater than last year while sales for the Corporate division were $1.3
million less than last year. A soft economy and reduced corporate spending on
marketing and employee incentive programs have had a detrimental effect on the
net sales of the Corporate division.
Gross Profit. Gross profit for the quarter ended December 28, 2002
increased 4% to $20.2 million compared to $19.4 million last year. Gross profit
as a percentage of net sales was comparable for both periods at about 37%.
College bookstore sales represented 46% of net sales for the quarter compared to
43% last year.
Operating Expenses. Operating expenses for the quarter ended December 28,
2002 increased 10% to $13.7 million from $12.5 million last year. Operating
expenses as a percentage of net sales were 25.1% in the second quarter of fiscal
2003 compared to 24.0% last year. Operating expenses increased due to more
revenue generated from college bookstore sales, which carry royalty fees and are
marketed through more expensive distribution channels. In addition, the Company
incurred higher bad debt expense in fiscal 2003 and changed the timing of its
annual sales meetings, which were held in the second quarter of fiscal 2003. The
annual sales meetings were held in the third quarter last year.
Operating Income. Operating income decreased 6% to $6.5 million in the
second quarter of fiscal 2003 compared to $6.9 million last year. Operating
income as a percentage of net sales decreased to 11.9% in the second quarter of
fiscal 2003 from 13.2% in the second quarter of fiscal 2002. The decrease in
operating income as a percentage of sales was the result of the increase in
operating expenses.
EBITDA. EBITDA decreased 5% to $7.6 million in the second quarter of fiscal
2003 compared to $7.9 million last year. EBITDA as a percentage of net sales
decreased to 13.8% in the quarter ended December 28, 2002 from 15.2% in the
quarter ended December 28, 2001. The decrease in EBITDA was the result of lower
operating income.
Interest Expense. Interest expense in the second quarter of fiscal 2003 was
$3.7 million compared to $3.9 million last year. Lower interest rates created
the decrease in interest expense.
Net Income. Net income for the second quarter of fiscal 2003 was
$1.7 million compared to $1.8 million for the second quarter of fiscal 2002. The
decrease was primarily the result of the decline in operating income.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 28, 2002
AND DECEMBER 28, 2001.
Net Sales. Net sales for the six months ended December 28, 2002 increased
9% to $115.8 million from $106.4 million in the six months ended December 28,
2001. The increase in net sales from last year was due to strong growth from the
Licensed Apparel group, which was fueled by a 42% increase in revenue from CCP.
The net sales increase from CCP was partially offset by a 28% decline in
Corporate division sales. Net sales for CCP for the first six months of fiscal
2003 were $10.8 million greater than last year while Corporate division sales
were $5.1 million less than last year. Management believes that the Company's
customers have shifted their purchases to lower priced apparel with less
expensive decoration, which has enhanced the sales of CCP's more moderately
priced goods. A soft economy and consequent reductions in corporate spending on
marketing and employee incentive programs have had a detrimental effect on the
net sales of the Corporate division.
Gross Profit. Gross profit for the six months ended December 28, 2002
increased 5% to $42.3 million from $40.3 million in the six months ended
December 28, 2001. Gross profit as a percentage of net sales decreased to 36.5%
from 37.9% last year. The decrease in gross profit as a percentage of net sales
was the result of a change in customer purchasing. College bookstore sales,
fueled by CCP, represented 52% of net sales for the six month period ended
December 28, 2002 compared to 45% last year. College bookstore sales generally
provide a lower gross profit than the Company's other divisions.
Operating Expenses. Operating expenses for the six months ended December
28, 2002 increased 12% to $27.9 million from $24.9 million last year. Operating
expenses as a percentage of net sales were 24.0% in the first six
10
months of fiscal 2003 compared to 23.4% in the first six months of fiscal 2002.
The increase in operating expenses was principally due to a greater portion of
fiscal 2003 sales generated from college bookstore sales, which carry royalty
fees and are marketed through more expensive distribution channels. In addition,
the Company incurred higher bad debt expense in fiscal 2003 due to soft economic
conditions.
Operating Income. Operating income decreased 6% to $14.4 million in fiscal
2003 from $15.4 million in fiscal 2002. Operating income as a percentage of net
sales decreased to 12.5% in fiscal 2003 from 14.5% in fiscal 2002. The decrease
in operating income as a percentage of sales was the result of a lower gross
profit percentage on higher net sales combined with the increase in operating
expenses.
EBITDA. EBITDA decreased 6% to $16.5 million in the first six months of
fiscal 2003 from $17.5 million in the first six months of fiscal 2002. EBITDA as
a percentage of net sales decreased to 14.3% in the six months ended December
28, 2002 from 16.5% in the comparable period last year. The decrease in EBITDA
was a result of lower operating income.
Interest Expense. Interest expense in the first six months of fiscal 2003
was $7.3 million, $771,000 less than the comparable period last year. Lower
interest rates created the decrease in interest expense.
Net Income. Net income for the first six months of fiscal 2003 was $4.4
million, $136,000 less than the first six months of fiscal 2002. The decrease
was primarily the result of the decrease in operating income.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the first six months of fiscal
2003 was $9.8 million compared to cash used by operating activities of $693,000
last year. Fiscal 2002 operating cash flows were used to fund the increase in
accounts receivable and inventory related to the addition of the CCP college
bookstore business.
Cash used in investing activities in the first six months of fiscal 2003
was $2.2 million compared to $2.0 million last year. The cash used in both
periods was related to the acquisition of property, plant and equipment.
Cash used in financing activities in the first six months of fiscal 2003
was $4.2 million compared to $571,000 in the comparable period of fiscal 2002.
Payments of bank debt was the primary use of cash in fiscal 2003.
Under the Company's Revolving Bank Credit Agreement ("RBCA") up to $65
million of revolving credit availability is provided, of which $26.1 million was
borrowed and outstanding and approximately $5.9 million was utilized for
outstanding commercial and stand-by letters of credit as of December 28, 2002.
At December 28, 2002, $28.4 million was available for future borrowings under
the RBCA. The Company believes that cash flows from operating activities and
borrowings under the RBCA will be adequate to meet the Company's short-term and
future liquidity requirements prior to the maturity of the RBCA in fiscal 2005,
although no assurance can be given in this regard.
The Company anticipates paying dividends to its parent, GFSI Holdings, Inc.
("Holdings") to enable Holdings to pay corporate income taxes, interest on
subordinated discount notes issued by Holdings (the "Holdings Discount Notes"),
fees payable under a consulting agreement, preferred stock dividends and certain
other ordinary course expenses incurred on behalf of the Company. Holdings is
dependent upon the cash flows of the Company to provide funds to service the
Holdings Discount Notes. Holdings Discount Notes do not have an annual cash flow
requirement until fiscal 2005 as they accrue interest at 11.375% per annum,
compounded semi-annually to an aggregate principal amount of $108.5 million at
September 15, 2004. Thereafter, the Holdings 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. Additionally, Holdings'
cumulative non-cash preferred stock ("Holdings Preferred Stock") dividends total
approximately $396,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.4 million) plus accrued dividends with mandatory
redemption in fiscal 2009.
11
SUBSEQUENT EVENT
On December 31, 2002 the Company completed the private placement of $9.9
million of unregistered 9.625% senior subordinated notes ("Exchange Notes") in
exchange for $24 million aggregate principal amount at maturity of GFSI
Holdings, Inc. 11.375% Senior Discount Notes (the "Holdings Discount Notes")
with an accreted book value of $19.9 million. The acquisition of the Holdings
Discount Notes by the Company is considered an early extinguishment of Holdings'
debt, and accordingly, Holdings will record a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs, in the third quarter of fiscal
2003.
The Exchange Notes are unsecured obligations of the Company, mature on
March 1, 2007, pay interest semi-annually on March 1 and September 1, and were
issued under an indenture with substantially identical terms as the indenture
governing the $125 million aggregate principal amount at maturity of GFSI, Inc.
Senior Subordinated Notes issued on February 27, 1997. The Exchange Notes were
guaranteed by each of the Company's wholly-owned subsidiaries (Event One, CCP
and GFSI Canada Company). The Exchange Notes were issued to an "accredited
investor" and were exempt from registration under Rule 144 of the Securities Act
of 1933. The Company intends to file an exchange offer registration statement
with the Securities and Exchange Commission in the third fiscal quarter of 2003
to enable the holder of the Exchange Notes to exchange them for publicly
registered notes having terms substantially identical to the Exchange Notes.
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 during the first two fiscal
quarters. Sales at the Company's Resort and Corporate divisions typically show
little 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 DISCLOSURES ABOUT MARKET RISK
DERIVATIVE AND MARKET RISK DISCLOSURE
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. The fixed rate portion of the Company's
long-term debt does not bear significant interest rate risk. An immediate 10%
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.
12
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
4.11 Indenture, dated as of December 31, 2002 between GFSI, Inc.
and State Street Bank and Trust Company.
4.12 9 5/8% Series A Senior Subordinated Note due 2007.
10.25 Exchange Agreement, dated as of December 31, 2002, between
GFSI, Inc. and Jefferies Company, Inc.
10.26 Consent and Amendment, dated as of December 31, 2002, to the Credit
Agreement, dated March 28, 2002.
(b) Reports on Form 8-K
None.
13
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 5, 2003
/s/ J. CRAIG PETERSON
-----------------------------------------
J. Craig Peterson, Sr.
Vice President of Finance and Principal
Accounting Officer
14
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI, INC.'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED DECEMBER 28, 2002
I, Robert M. Wolff, Chairman and Chief Executive Officer (Principal Executive
Officer) of GFSI, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods represented in this
Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls;
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not these were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 5, 2003
/S/ ROBERT M. WOLFF
- ---------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
15
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING GFSI, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED DECEMBER 28, 2002
I, J. Craig Peterson, Senior Vice President and Chief Financial Officer
(Principal Financial Officer) of GFSI, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods represented in this
Quarterly Report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not these were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 5, 2003
/S/ J. CRAIG PETERSON
- ---------------------------------------
J. Craig Peterson
Senior Vice President and Chief Financial Officer