UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-24189
GFSI, INC.
(Exact name of registrant specified in its charter)
Delaware 74-2810748
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9700 Commerce Parkway
Lenexa, Kansas 66219
----------------------------------------
(Address of principal executive offices)
(913) 693-3200
----------------------------------------------------
(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.
(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 by check mark whether the registrant is a shell company (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
November 1, 2005.
1
GFSI, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended October 1, 2005
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 11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 15
ITEM 4 - CONTROLS AND PROCEDURES 15
PART II - OTHER INFORMATION 16
SIGNATURE PAGE 17
2
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
October 1, July 2,
2005 2005
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,402 $ 749
Accounts receivable, net 31,814 31,802
Inventories, net 39,063 41,878
Prepaid expenses and other current assets 1,715 1,899
Deferred income taxes 1,056 1,188
--------- ---------
Total current assets 75,050 77,516
Property, plant and equipment, net 22,455 22,657
Other assets:
Deferred financing costs, net 1,157 1,361
Other 163 161
--------- ---------
Total assets $ 98,825 $ 101,695
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 8,119 $ 10,775
Accrued interest expense 1,198 4,396
Accrued expenses 8,563 7,882
Income taxes payable 12,472 11,540
Current portion of long-term debt 190 112
--------- ---------
Total current liabilities 30,542 34,705
Deferred income taxes 1,322 1,431
Other long-term obligations 127 127
Long-term debt, less current portion 155,488 154,257
Stockholders' equity (deficiency):
Common stock, $.01 par value, 10,000 shares
authorized, one share issued and outstanding
at October 1, 2005 and July 2, 2005 -- --
Additional paid-in capital 71,442 71,442
Parent company bonds acquired (24,995) (24,995)
Accumulated deficiency (135,101) (135,272)
--------- ---------
Total stockholders' deficiency (88,654) (88,825)
--------- ---------
Total liabilities and stockholders' equity (deficiency) $ 98,825 $ 101,695
========= =========
See notes to consolidated financial statements.
3
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (In thousands)
Quarter Ended
October 1, October 2,
2005 2004
------------ ------------
Net sales $ 50,772 $ 53,439
Cost of sales 30,539 32,759
------------ ------------
Gross profit 20,233 20,680
Operating expenses:
Selling 7,608 7,357
General and administrative 6,337 6,013
------------ ------------
13,945 13,370
------------ ------------
Operating income 6,288 7,310
Other income (expense):
Interest expense (3,831) (3,840)
Other (1) 21
------------ ------------
(3,832) (3,819)
------------ ------------
Income before income taxes 2,456 3,491
Income tax expense 958 1,358
------------ ------------
Net income $ 1,498 $ 2,133
============ ============
See notes to consolidated financial statements.
4
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousand)
Quarter Ended
October 1, October 2,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,498 $ 2,133
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 945 792
Amortization of deferred financing costs 205 214
Gain on sale or disposal of property, plant and equipment -- (20)
Deferred income taxes 23 (64)
Changes in operating assets and liabilities:
Accounts receivable, net (12) (810)
Inventories, net 2,815 (715)
Prepaid expenses, other current assets and other assets 182 182
Income taxes payable 932 1,361
Accounts payable, accrued expenses and other
long-term obligations (5,173) (6,707)
--------- ----------
Net cash provided by (used in) operating activities 1,415 (3,634)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment -- 25
Purchases of property, plant and equipment (743) (1,186)
--------- ----------
Net cash provided by (used in) investing activities (743) (1,161)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit agreement borrowing 1,252 5,360
Distributions to GFSI Holdings, Inc. (1,392) (191)
Issuance of long-term debt 100 --
Payments on long-term debt (43) (42)
Other (1) (3)
--------- ----------
Net cash provided by (used in) financing activities (84) 5,124
--------- ----------
Effect of foreign exchange rate changes on cash 65 51
--------- ----------
Net increase (decrease) in cash and cash equivalents 653 380
Cash and cash equivalents at beginning of period 749 911
--------- ----------
Cash and cash equivalents at end of period $ 1,402 $ 1,291
========= ==========
Supplemental cash flow information:
Interest paid $ 6,823 $ 6,762
========= ==========
Income taxes paid $ 8 $ 64
========= ==========
See notes to consolidated financial statements.
5
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 1, 2005
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"), CC 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 July 2, 2005 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 July 2, 2005 included in the Company's
Annual Report on Form 10-K. The Company is a wholly owned subsidiary of GFSI
Holdings, Inc. ("Holdings").
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. Inventories:
The following is a summary of inventories at October 1, 2005 and July 2,
2005:
(in thousands) October 1, July 2,
2005 2005
------------ -----------
(unaudited)
Undecorated apparel ("blanks") and supplies $ 36,540 $ 39,064
Work in process 229 338
Finished goods 2,533 3,009
------------ -----------
39,302 42,411
Allowance for markdowns (239) (533)
------------ -----------
Total $ 39,063 $ 41,878
============ ===========
6
4. Distribution to Holdings:
During the first quarter of fiscal 2006, the Company declared and paid a
net $1.4 million distribution to Holdings. The distribution enabled Holdings
to pay interest on its 11.375% Notes. Holdings is dependent upon the Company
to provide funding to service the 11.375% Notes.
5. 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 and joint and several.
As of October 1, 2005 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 1,291 $ 111 $ -- $ 1,402
Accounts receivable, net 16,167 43,343 (27,696) 31,814
Inventories, net 36,691 2,372 -- 39,063
Prepaid expenses and other current assets 1,537 178 -- 1,715
Deferred income taxes 1,056 -- -- 1,056
--------- ---------- ----------- ----------
Total current assets 56,742 46,004 (27,696) 75,050
Investment in equity of subsidiaries 42,391 -- (42,391) --
Property, plant and equipment, net 22,395 60 -- 22,455
Other assets 1,948 (628) -- 1,320
--------- ---------- ----------- ----------
Total assets $ 123,476 $ 45,436 $ (70,087) $ 98,825
========= ========== =========== ==========
Liabilities and stockholders' equity (deficiency):
Current liabilities:
Accounts payable $ 35,745 $ 70 $ (27,696) $ 8,119
Accrued interest expense 1,198 -- -- 1,198
Accrued expenses 5,465 3,098 -- 8,563
Income taxes payable 12,595 (123) -- 12,472
Current portion of long-term debt 190 -- -- 190
--------- ---------- ----------- ----------
Total current liabilities 55,193 3,045 (27,696) 30,542
Deferred income taxes 1,322 -- -- 1,322
Other long-term obligations 127 -- -- 127
Long-term debt, less current portion 155,488 -- -- 155,488
Stockholders' equity (deficiency) (88,654) 42,391 (42,391) (88,654)
--------- ---------- ----------- ----------
Total liabilities and stockholders' equity (deficiency) $ 123,476 $ 45,436 $ (70,087) $ 98,825
========= ========== =========== ==========
7
Quarter ended October 1, 2005 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Net sales $ 26,641 $ 24,210 $ (79) $ 50,772
Cost of sales 16,985 13,633 (79) 30,539
Selling expenses 3,608 4,000 -- 7,608
General and administrative expense 5,519 818 -- 6,337
---------- ---------- ----------- -----------
Total costs and expenses 26,112 18,451 (79) 44,484
---------- ---------- ----------- -----------
Operating income 529 5,759 -- 6,288
Equity in net earnings of subsidiaries 3,511 -- (3,511) --
Interest expense (3,828) (3) -- (3,831)
Other (1) -- -- (1)
---------- ----------- ----------- -----------
Income before income taxes 211 5,756 (3,511) 2,456
Income tax expense (benefit) (1,287) 2,245 -- 958
---------- ----------- ----------- ------------
Net income $ 1,498 $ 3,511 $ (3,511) $ 1,498
========== =========== =========== ============
Quarter ended October 1, 2005 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Net cash flows provided by (used in) operating $ 1,271 $ 144 $ -- $ 1,415
activities
Intercompany borrowings, net 128 -- (128) --
Purchase of property plant and equipment, net (740) (3) -- (743)
---------- ---------- ----------- -----------
Net cash flows used in investing activities (612) (3) (128) (743)
---------- ----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 1,252 -- -- 1,252
Issuance of long-term debt 100 -- -- 100
Payments on long-term debt (43) -- -- (43)
Repayments of intercompany borrowings, net -- (128) 128 --
Distributions to GFSI Holdings, Inc. (1,392) -- -- (1,392)
Other (1) -- -- (1)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (84) (128) 128 (84)
Effect of foreign exchange rate changes on cash -- 65 -- 65
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents 575 78 -- 653
Cash and cash equivalents at beginning of period 716 33 -- 749
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,291 $ 111 $ -- $ 1,402
=========== =========== =========== ===========
8
As of July 2, 2005 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 716 $ 33 $ -- $ 749
Accounts receivable, net 18,106 39,312 (25,616) 31,802
Inventories, net 39,168 2,710 -- 41,878
Prepaid expenses and other current assets 1,676 223 -- 1,899
Deferred income taxes 1,188 -- -- 1,188
--------- ---------- ------------ -----------
Total current assets 60,854 42,278 (25,616) 77,516
Investment in equity of subsidiaries 38,815 -- (38,815) --
Property, plant and equipment, net 22,592 65 -- 22,657
Other assets 2,278 (756) 1,522
--------- ---------- ------------ -----------
Total assets $ 124,539 $ 41,587 $ (64,431) $ 101,695
========= ========== ============ ===========
Liabilities and stockholders' equity (deficiency):
Current liabilities:
Accounts payable $ 35,712 $ 679 $ (25,616) $ 10,775
Accrued interest expense 4,396 -- -- 4,396
Accrued expenses 5,673 2,209 -- 7,882
Income taxes payable 11,656 (116) -- 11,540
Current portion of long-term debt 112 -- -- 112
--------- ---------- ------------ -----------
Total current liabilities 57,549 2,772 (25,616) 34,705
Deferred income taxes 1,431 -- -- 1,431
Other long-term obligations 127 -- -- 127
Long-term debt, less current portion 154,257 -- -- 154,257
Stockholders' equity (deficiency) (88,825) 38,815 (38,815) (88,825)
--------- ---------- ------------ -----------
Total liabilities and stockholders' equity (deficiency) $ 124,539 $ 41,587 $ (64,431) $ 101,695
========= ========== ============ ===========
9
Quarter ended October 2, 2004 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ------------ ------------- ------------
Net sales $ 30,573 $ 22,990 $ (124) $ 53,439
Cost of sales 19,465 13,418 (124) 32,759
Selling expenses 3,788 3,569 -- 7,357
General and administrative expense 5,177 836 -- 6,013
------------- ------------ ------------ ------------
Total costs and expenses 28,430 17,823 (124) 46,129
------------ ------------ ------------ -----------
Operating income 2,143 5,167 -- 7,310
Equity in net earnings of subsidiaries 3,154 -- (3,154) --
Interest expense (3,838) (2) -- (3,840)
Gain (loss) on sale of property, plant and equipment 22 (1) -- 21
------------ ------------ ------------ ------------
Income before income taxes 1,481 5,164 (3,154) 3,491
Income tax expense (benefit) (652) 2,010 -- 1,358
------------ ------------ ------------ ------------
Net income $ 2,133 $ 3,154 $ (3,154) $ 2,133
============ ============ ============ ============
Quarter ended October 2, 2004 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------------ ------------ ------------- ------------
Net cash flows provided by (used in) operating $ (3,640) $ 6 $ -- $ (3,634)
activities
Net cash flows used in investing activities (1,151) (10) -- (1,161)
Cash flows from financing activities:
Net borrowings under revolving credit agreements 5,360 -- -- 5,360
Payments on long-term debt (42) -- -- (42)
Distributions to GFSI Holdings, Inc. (191) -- -- (191)
Other (3) -- -- (3)
----------- ------------ ----------- ------------
Net cash provided by financing activities 5,124 -- -- 5,124
----------- ------------ ----------- ------------
Effect of foreign exchange rate changes on cash -- 51 -- 51
----------- ------------ ----------- ------------
Net increase in cash and cash equivalents 333 47 -- 380
Cash and cash equivalents at beginning of period 870 41 -- 911
----------- ------------ ----------- ------------
Cash and cash equivalents at end of period $ 1,203 $ 88 $ -- $ 1,291
=========== ============ =========== ============
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this Form 10-Q should be read in conjunction
with the financial information included herein and the Company's Annual Report
on Form 10-K for the year ended July 2, 2005. 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.
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 generally 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 October 1, 2005 and July 2,
2005 were net of allowance for doubtful accounts of $545,000 and $540,000,
respectively.
11
Reserves for self-insurance. The Company seeks to employ cost effective
risk management programs. At times the Company has elected to retain a portion
of insurance risk related to workers' compensation claims which are covered
under insurance programs with high deductible limits. The Company also
actively pursues programs intended to effectively manage the incidence of
workplace injuries. Reserves for reported but unpaid losses, as well as
incurred but not reported losses, related to the retained risks are calculated
based upon loss development factors, as well as other assumptions considered
by management, including assumptions provided by other external professionals
such as insurance brokers, consultants and carriers. The factors and
assumptions used are subject to change based upon historical experience, as
well as changes in expected cost trends and other factors.
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. The Company also records
changes in valuation allowances due to changes in operating strategy, such as
the discontinuances of certain product lines and other merchandising decisions
related to changes in demand. It is possible that further changes in required
inventory allowances may be necessary in the future as a result of market
conditions and competitive pressures.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED OCTOBER 1, 2005
AND OCTOBER 2, 2004
Net Sales. Net sales for the quarter ended October 1, 2005 were $50.8
million compared to $53.4 million last year, a 5% decline. Sales of the
Champion(R) brand increased to $23.8 million a 5% increase over last year,
principally due to higher sales volumes in its collegiate and resort channels.
Sales of recently introduced Sunice(R) and Robert Trent Jones(R) branded golf
and resort apparel added $1.1 million in sales to the first quarter of fiscal
2006. Sales of Gear for Sports(R) ("Gear") branded merchandise declined by
$5.3 million from last year. As expected, the Gear collegiate and golf sales
decreased by $2.0 million due to the Company's decisions to discontinue a
private branding initiative with one of its major collegiate customers and to
not participate in certain professional golf tournaments to the extent it did
last year. In addition, Gear's resort and golf sales were adversely affected
during the quarter due to the severe weather conditions affecting the United
States and Caribbean Basin. The Company expects these primary golf and resort
destination areas to continue to be adversely affected for the second and
third quarters of fiscal 2006 due to the damage from the hurricanes.
Gross Profit. Gross profit for the quarter ended October 1, 2005
decreased 2% to $20.2 million compared to $20.7 million last year. The
decrease in gross profit resulted from lower sales. Gross profit as a
percentage of net sales was 40% in the first quarter of fiscal 2006 compared
to 39% last year. The increase in gross profit as a percentage of sales
resulted from improved product sourcing and warehousing operations and expense
savings related to more efficient levels of inventory in comparison to last
year.
Operating Expenses. Operating expenses for the quarter ended October 1,
2005 increased 4% to $13.9 million from $13.4 million last year. Operating
expenses as a percentage of net sales were 27% in the first quarter of fiscal
2006 compared to 25% last year. Royalty costs incurred with the introduction
of the Sunice(R) and Robert Trent Jones(R) brands during the quarter created
the increase in selling expenses. In addition, the Company sold more
Champion(R) licensed apparel at higher royalty rates than in the first quarter
of fiscal 2005. The royalty obligation on Champion(R) branded apparel in
fiscal 2005 was 4% of net sales compared to 5% for fiscal 2006. General and
administrative costs increased principally due to higher depreciation and
amortization expenses related to the Company's enterprise wide application
software and hardware upgrade completed in December 2004. The increase in
operating expenses as a percentage of sales over last year was due to higher
royalty, depreciation and amortization expenses on lower sales.
12
Operating Income. Operating income decreased 14% to $6.3 million in the
first quarter of fiscal 2006 compared to $7.3 million last year. Operating
income as a percentage of net sales decreased to 12% in the first quarter of
fiscal 2006 from 14% in the first quarter of fiscal 2005. Lower sales along
with increased operating expenses created the decrease in operating income.
Interest Expense. Interest expense in the first quarter of fiscal 2006
was $3.8 million approximately the same as last year. The effect of lower
borrowings levels was offset by higher interest rates.
Net Income. Net income for the first quarter of fiscal 2006 was $1.5
million compared to $2.1 million for the first quarter of fiscal 2005, a
decrease of $635,000 or 30%. The current year's decrease in operating income
created the comparative decrease in net income.
UNDER ARMOUR(R) LICENSE AGREEMENT
During October 2005 the Company entered into a license agreement with
Under Armour, Inc. to market decorated Under Armour(R) garments in selected
markets. Under Armour develops and markets performance apparel to athletic
consumers for all climates and conditions. The six year license agreement is
for the Company's collegiate, golf and military retail sales channels. The
Company plans to commence product shipments in June 2006. Sales for the Under
Armour brand are not expected to be significant in fiscal 2006. The Company
expects to incur marketing and preproduction costs starting in the second
quarter of fiscal 2006. The Company believes it may incur up to $500,000 in
marketing and preproduction costs prior to the initial shipments of its Under
Armour(R) licensed products.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the first quarter of fiscal 2006
was $1.4 million compared to cash used by operating activities of $3.6 million
last year. Reduced inventory levels and lower payments to vendors and
suppliers produced the increase in the first quarter's fiscal 2006 operating
cash flows.
Cash used in investing activities in the first quarter of fiscal 2006 was
$743,000 compared to $1.2 million last year. Purchases of property, plant and
equipment were the principal investing activity in both years. Capital
expenditures were higher last year due to spending in preparation for the
Company's December 2004 enterprise wide application software and hardware
upgrade. The Company anticipates fiscal 2006 capital expenditures to
approximate $2.5 million.
Cash used by financing activities in the first quarter of fiscal 2006 was
$84,000 compared to cash provided by financing activities of $5.1 million in
the comparable period of fiscal 2005. In the first quarter of fiscal 2006 the
Company borrowed $1.4 million to make a distribution to Holdings to enable
Holdings to pay interest payment on its 11.375% Notes. In fiscal 2005 the
Company borrowed more heavily, primarily to finance higher levels of
inventory, receivables and capital expenditures.
The Company utilizes its Revolving Bank Credit Agreement ("RBCA") with a
group of financial institutions to provide a revolving line of credit. On
October 4, 2004 the Company amended its $65 million RBCA to extend the term of
the credit agreement to January 15, 2007. Under the Company's RBCA up to $65
13
million of revolving credit availability is provided, of which $20.1 million
was borrowed and outstanding and approximately $3.3 million was utilized for
outstanding commercial and stand-by letters of credit as of October 1, 2005.
At October 1, 2005, $24.3 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
2007, although no assurance can be given in this regard.
The Company's current intention is to refinance the RBCA prior to its
maturity; however, there can be no assurances that the RBCA will be renewed on
similar terms or at all. In addition, in March and December 2007, the 9.625%
Senior Subordinated Notes in the amount of $134,900,000 become due and
payable. The Company's current intention is to refinance the Senior
Subordinated Notes, however, there can be no assurances that the Senior
Subordinated Notes will be refinanced on similar terms or at all.
The Company anticipates paying dividends to Holdings to enable Holdings
to pay corporate income taxes, pursuant to a Tax Sharing Agreement, interest
on its 11.375% Notes, fees payable under management agreements, fees payable
under a non-competition agreement, and certain other ordinary course expenses.
Holdings is dependent upon the cash flows of the Company to provide funds to
service the 11.375% Notes. At October 1, 2005, Holdings' debt to third parties
totaled approximately $24.5 million. The 11.375% Notes annual cash flow
requirements commenced in March 2005 with semi-annual cash installments of
approximately $1.4 million.
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on the
Company's financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
14
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.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the fiscal
quarter ended October 1, 2005. Based on that evaluation, the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Company's periodic SEC filings. There have been no significant changes in
the Company's internal control over financial reporting during the fiscal
quarter ended October 1, 2005 that have affected, or are reasonably likely to
materially effect, the Company's internal control over financial reporting.
15
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
Exhibit
Number Description
------- -----------
31.1 Certification of Principal Executive Officer.
31.2 Certification of Principal Financial Officer.
32.1 Section 1350 Certification of the Chief Executive Officer.
32.2 Section 1350 Certification of the Chief Financial Officer.
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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.
November 9, 2005
/s/ J. Craig Peterson
----------------------------------------------------
J. Craig Peterson, Sr. Vice President of Finance and
Principal Accounting Officer
17