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 April 2, 1999.
( )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 (I.R.S. Employer Identification No.)
of 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 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
May 3, 1999.
GFSI, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended April 2, 1999
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 7
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 12
2
GFSI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
July 3, April 2,
1998 1999
--------- ---------
Assets
Current assets:
Cash & cash equivalents $ 1,346 $ 10,021
Accounts receivable, net of allowance for doubtful accounts of 27,774 29,357
$636 and $1,163, respectively
Inventories, net 44,298 33,835
Prepaid expenses and other current assets 1,187 936
Deferred income taxes 1,679 1,899
--------- ---------
Total current assets 76,284 76,048
Property, plant and equipment, net 21,243 20,053
Other assets:
Deferred financing costs, net 8,503 7,637
Other 5 10
--------- ---------
Total assets $ 106,035 $ 103,748
========= =========
Liabilities and stockholder's equity (deficiency)
Current liabilities:
Accounts payable $ 8,409 $ 8,931
Accrued interest expense 4,521 1,395
Accrued expenses 8,614 8,345
Income taxes payable 1,056 3,354
Current portion of long-term debt 5,050 6,174
--------- ---------
Total current liabilities 27,650 28,199
Deferred income taxes 1,234 1,342
Revolving credit agreement 5,600 --
Other long-term obligations 300 150
Long-term debt, less current portion 180,878 176,266
Stockholder's equity (deficiency):
Common stock, $.01 par value, 10,000 shares authorized, one share
issued and outstanding at July 3, 1998 and April 2, 1999 -- --
Additional paid-in capital 51,728 51,727
Accumulated deficiency (161,355) (153,936)
--------- ---------
Total stockholder's deficiency (109,627) (102,209)
--------- ---------
Total liabilities and stockholder's equity (deficiency) $ 106,035 $ 103,748
========= =========
NOTE: The consolidated balance sheet at July 3, 1998 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 SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended Nine Months Ended
April 3, April 2, April 3, April 2,
1998 1999 1998 1999
---------- -------- ---------- --------
Net sales $ 48,574 $ 44,807 $ 165,477 $ 160,229
Cost of sales 26,441 24,765 92,728 89,533
---------- -------- ---------- --------
Gross profit 22,133 20,042 72,749 70,696
Operating expenses:
Selling 6,230 6,388 18,076 18,518
General and administrative 8,071 8,313 22,411 25,782
---------- -------- ---------- --------
14,301 14,701 40,487 44,300
---------- -------- ---------- --------
Operating income 7,832 5,341 32,262 26,396
Other income (expense):
Interest expense (4,621) (4,499) (14,595) (14,081)
Other, net 7 81 (22) 141
---------- -------- ---------- --------
(4,614) (4,418) (14,617) (13,940)
---------- -------- ---------- --------
Income before income taxes 3,218 923 17,645 12,456
Provision for income taxes 1,346 414 7,264 5,037
---------- -------- ---------- --------
Net income $1,872 $ 509 $10,381 $ 7,419
========== ======== ========== ========
See notes to consolidated financial statements.
4
GFSI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousand)
Nine Months Ended
April 3, April 2,
1998 1999
-------- --------
Cash flows from operating activities:
Net income $10,381 $ 7,419
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,185 2,272
Amortization of deferred financing costs 868 867
Loss on sale or disposal of property, plant and equipment 15 71
Deferred income taxes 104 (112)
Changes in operating assets and liabilities:
Accounts receivable, net (7,696) (1,583)
Inventories, net 2,808 10,463
Prepaid expenses, other current assets and other assets 249 247
Income taxes payable 262 2,298
Accounts payable, accrued expenses and other
long-term obligations (1,813) (3,025)
-------- --------
Net cash provided by operating activities 7,363 18,917
-------- --------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 323 183
Purchases of property, plant and equipment (1,968) (1,337)
-------- --------
Net cash used in investing activities (1,645) (1,154)
-------- --------
Cash flows from financing activities:
Net changes to short-term borrowings and revolving credit agreement (3,000) (5,600)
Payments on long-term debt (3,375) (3,488)
Capital contribution from GFSI Holdings, Inc. 1,788 --
Distributions to GFSI Holdings, Inc. (1,141) --
-------- --------
Net cash used in financing activities (5,728) (9,088)
-------- --------
Net increase (decrease) in cash and cash equivalents (10) 8,675
Cash and cash equivalents at beginning of period 1,117 1,346
-------- --------
Cash and cash equivalents at end of period $ 1,107 $ 10,021
======== ========
Supplemental cash flow information:
Interest paid $ 16,503 $ 16,213
======== ========
Income taxes paid $ 5,694 $ 2,823
======== ========
See notes to consolidated financial statements.
5
GFSI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 2, 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of GFSI, Inc.
(the "Company") include the accounts of the Company and the accounts of its
wholly owned subsidiary, Event 1, Inc. ("Event 1"). All intercompany balances
and transactions have been eliminated. The unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly they do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statement reporting purposes. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the financial position and 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 July 3, 1998 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.
Various state and local taxing authorities have examined, or are in the
process of examining the Company's sales and use tax returns. The Company is
currently reviewing the status and the results of such examinations, including
the methods used by certain state taxing authorities in calculating the sales
tax assessments and believes that it has accrued an amount adequate to cover the
assessments.
3. New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all quarters of fiscal years beginning after June 15, 1999. The
Company is in the process of determining what impact the adoption of SFAS No.
133 will have on its financial position and results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the implementation of this
SOP to have a material impact on the Company's financial statements.
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 July 3, 1998. Management's discussion and
analysis of financial condition and results of operations and other sections of
this report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
The following sets forth the amount and percentage of net sales for
each of the periods indicated (dollars in thousands). Certain reclassifications
have been made to the fiscal year 1998 data to conform to the 1999 presentation:
Quarter Ended Nine Months Ended
April 3, 1998 April 2, 1999 April 3, 1998 April 2, 1999
-------------------- --------------------- ---------------------- ----------------------
Resort $ 14,048 28.9% $ 10,959 24.5% $ 48,476 29.3% $ 43,491 27.1%
Corporate 18,328 37.7% 16,487 36.8% 56,614 34.2% 57,690 36.0%
College Bookstore 7,316 15.1% 6,891 15.4% 37,304 22.5% 35,001 21.9%
Sports Specialty 3,164 6.5% 4,565 10.2% 10,614 6.4% 11,394 7.1%
Event 1 3,721 7.7% 4,718 10.6% 6,888 4.2% 8,251 5.2%
Other 1,997 4.1% 1,187 2.5% 5,581 3.4% 4,402 2.7%
-------- -------- -------- ---------
Total $ 48,574 $ 44,807 $ 165,477 $ 160,229
======= ======= ======== =========
Results of Operations
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for the quarters and nine
month periods ended April 3, 1998 and April 2, 1999.
Quarter Ended Nine Months Ended
April 3, April 2, April 3, April 2,
1998 1999 1998 1999
---------- ---------- ----------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 45.6 44.8 44.0 44.1
EBITDA 17.6 13.6 20.8 17.9
Operating income 16.1 11.9 19.5 16.5
7
EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
Comparison of Operating Results for the Quarters and Nine Month Periods Ended
April 2, 1999 and April 3, 1998.
Net Sales. Net sales for the third quarter of fiscal 1999, the three months
ended April 2, 1999, decreased 7.8% to $44.8 million from $48.6 million in the
third quarter of fiscal 1998. Net sales for the first nine months of fiscal 1999
decreased 3.2%to $160.2 million from $165.5 million in the first nine months of
fiscal 1998. The decrease in net sales primarily reflects decreases in net sales
for the nine months ended April 2, 1999 at the Company's Resort and College
Bookstore divisions of 10.3% and 6.2%, respectively. Management believes the
decreases in net sales at the Resort and College Bookstore divisions are
primarily attributable to unseasonably warm fall and winter temperatures in most
of the country. These decreases in net sales were partially offset by an
increase in net sales in the Company's Event 1 subsidiary of 19.8% for the nine
months ended April 3, 1999.
Gross Profit. Gross profit for the third quarter of fiscal 1999 decreased
9.4% to $20.0 million from $22.1 million in the third quarter of fiscal 1998.
Gross profit for the first nine months of fiscal 1999 decreased 2.8% to $70.7
million from $72.7 million in the first nine months of fiscal 1998. The decrease
in gross profit is primarily a result of the sales decreases noted above. For
the third quarter of fiscal 1999, gross profit as a percentage of net sales
decreased to 44.7% compared to 45.6% in the third quarter of fiscal 1998. For
the first nine months of fiscal 1999, gross profit as a percentage of net sales
increased to 44.1% compared to 44.0% in the first nine months of fiscal 1998.
Operating Expenses. Operating expenses for the third quarter of fiscal 1999
increased 2.8% to $14.7 million from $14.3 million in the third quarter of
fiscal 1998. For the first nine months, operating expenses increased 9.4% to
$44.3 million from $40.5 million in the first nine months of fiscal 1998.
Increases in operating expenses are primarily attributable to increased staffing
levels and licensing and site fees associated with Event 1. Operating expenses
as a percentage of net sales increased to 32.9% from 29.4% in the prior year
third quarter. For the first nine months, operating expenses as a percentage of
net sales increased to 27.7% from 24.5% in the prior year period.
EBITDA. EBITDA for the third quarter of fiscal 1999 decreased 28.3% to $6.1
million from $8.5 million in the third quarter of fiscal 1998. For the first
nine months, EBITDA decreased 16.7% to $28.7 million from $34.4 million in the
first nine months of fiscal 1998. The decrease for both periods is primarily a
result of the decrease in net sales and the increase in operating expenses
described above. EBITDA as a percentage of net sales decreased to 13.6% from
17.6% in the third quarter of fiscal 1998. For the nine months, EBITDA as a
percentage of sales decreased to 17.9% from 20.8% in the first nine months of
fiscal 1998.
Operating Income. Operating income for the third quarter of fiscal 1999
decreased 31.8% to $5.3 million from $7.8 million in the third quarter of fiscal
1998. For the first nine months, operating income decreased 18.2% to $26.4
million from $32.3 million in the first nine months of fiscal 1998. The decrease
is attributable to the decrease in net sales and the increase in operating
expenses described above. Operating income as a percentage of net sales
decreased for the third quarter of fiscal 1999 to 11.9% from 16.1% in fiscal
1998, and to 16.5% for the nine month period of fiscal 1999 from 19.5% in the
first nine months of fiscal 1998.
8
Other Income (Expense). Other expense for the third quarter of fiscal 1999
decreased to $4.4 million from $4.6 million in the third quarter of fiscal 1998.
For the first nine months of fiscal 1999 other expense decreased to $13.9
million from $14.6 million in the first nine months of fiscal year 1998. The
decrease for the periods is primarily a result of decreased interest expense
associated with borrowings under the Company's $115 million Credit Agreement due
to lower interest rates and declining balances on the Company's long term-debt.
Income Taxes. The effective income tax rates for the nine month periods
ended April 2, 1999 and April 3, 1998 were 40.4% and 41.2%, respectively.
Net Income. Net income for the third quarter of fiscal 1999 was $.5 million
compared to $1.9 million in the third quarter of fiscal 1998. For the first nine
months of fiscal 1999, net income was $7.4 million compared to $10.4 million in
the first nine months of fiscal 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the first nine months of fiscal
1999 was $18.9 million compared to $7.4 million in the first nine months of
fiscal 1998. The change in cash provided by operating activities between the two
periods primarily resulted from a larger decline in the inventory balance in the
first nine months of fiscal 1999 as compared to the first nine months of fiscal
1998.
Cash used by investing activities in the first nine months of fiscal 1999
was $1.2 compared to $1.6 million in the first nine months of 1998. The cash
used in both periods was related to acquisitions of property, plant and
equipment.
Cash used in financing activities for the first nine months of fiscal 1999
was $9.1 million compared to $5.7 million in the first nine months of fiscal
1998. The increase in cash used in financing activities in the first nine months
of fiscal 1999 is primarily attributable to increased repayments of the
revolving credit agreement balances over the prior period.
The Company believes that cash flow from operating activities and
borrowings under the Credit Agreement will be adequate to meet the Company's
short-term and long-term liquidity requirements prior to the maturity of its
credit facilities in 2007, although no assurance can be given in this regard.
Under the Credit Agreement, the Revolver provides $50 million of revolving
credit availability (of which none was outstanding as of April 2, 1999 and
approximately $15.4 million was utilized for outstanding commercial and stand-by
letters of credit).
GFSI Holdings, Inc. ("Holdings"), the sole stock holder 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 $427,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.6 million) plus accrued dividends with mandatory
redemption in 2009.
9
Derivative and Market Risk Disclosure
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. Derivative financial instruments, including an
interest rate swap and an interest rate cap agreement are used by the Company to
manage its exposure on variable rate debt obligations. The Company enters into
such agreements for hedging purposes and not with a view toward speculating in
the underlying instruments. The Company uses a balanced mix of debt maturities
along with both fixed rate and variable rate debt to manage its exposure to
interest rate changes. The fixed rate portion of the Company's long-term debt
does not bear significant interest rate risk. The variable rate debt would be
affected by interest rate changes to the extent the debt is not matched with an
interest rate swap or cap agreement or to the extent, in the case of the
revolving credit agreement, that balances are outstanding. An immediate 10
percent change in interest rates would not have a material effect on the
Company's results of operations over the next fiscal year, although there can be
no assurances that interest rates will not significantly change.
Year 2000 Compliance
The Company has a program to identify, evaluate and implement changes to
its computer systems as necessary to address the Year 2000 issue. As part of the
program, the Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Based on
management's best estimates, the new MIS will be operational during fiscal year
ending July 2, 1999. The costs associated with the new MIS implementation are
not expected to be material to the Company and are being expensed as incurred.
Any difficulty with the installation, initial operation or untimely resolution
of such issues associated with the new MIS may present an uncertainty that would
be reasonably likely to affect the Company's inventory purchasing control, sales
and customer service which could materially and adversely impact the Company's
future financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition. The Company will continue to consider the likelihood of a material
business interruption due to the Year 2000 issue, and, if necessary, implement
appropriate contingency plans.
Also as part of the Company's Year 2000 program, the Company has initiated
communications with suppliers with which it interacts to determine their plans
for addressing Year 2000 concerns. Based upon management's best estimates, all
Year 2000 issues will be resolved in 1999. However, the Company cannot make any
assurances that its computer systems, or the computer systems of its suppliers
will be Year 2000 ready on schedule, or that management's cost estimates will be
achieved.
Seasonality and Inflation
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. The seasonality of sales and profitability
is primarily due to higher volume at the College Bookstore division during the
first two fiscal quarters. This pattern of sales affects working capital
requirements and liquidity, as the Company generally must finance higher levels
of inventory during these periods prior to fully receiving payment from these
customers. Sales and profitability at the Company's Resort, Corporate and Sports
Specialty divisions typically show no significant seasonal variations. As the
Company continues to expand into other markets in its Resorts, Corporate and
Sports Specialty divisions, seasonal fluctuations in sales and profitability are
expected to decline. Cash requirements of Event 1 are anticipated to be
seasonal, with increasing sales and profitability in the third and fourth
quarters of fiscal years.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ---------------------------
There has been no change to matters discussed in Business-Legal Proceedings in
the Company's Form 10-K as filed with the Securities and Exchange Commission on
September 25, 1998.
Item 2. Changes in Securities
- -----------------------------
None
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None
Item 5. Other Information
- -------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits. The following exhibits are included with this report:
Exhibit 27 - Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
reporting period.
11
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.
May 14, 1999
/s/ ROBERT G. SHAW
---------------------------------------
Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
12