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 March 29, 2003.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 333-24189
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GFSI, INC.
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(Exact name of registrant specified in its charter)
Delaware 74-2810748
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9700 Commerce Parkway
Lenexa, Kansas 66219
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(Address of principal executive offices)
Registrant's telephone number, including area code (913) 888-0445
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate 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
May 1, 2003.
1
GFSI, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended March 29, 2003
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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
OFFICERS CERTIFICATION 18
2
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
March 29, June 29,
2003 2002
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,257 $ 313
Accounts receivable, net 30,299 32,626
Inventories, net 42,116 45,729
Prepaid expenses and other current assets 1,455 1,269
Deferred income taxes 1,132 845
----------- ----------
Total current assets 76,259 80,782
Property, plant and equipment, net 20,219 19,671
Other assets:
Deferred financing costs, net 3,191 3,873
Investment in parent company bonds 9,900 --
Other 259 1,010
------------ ----------
Total assets $ 109,828 $ 105,336
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 9,123 $ 12,010
Accrued interest expense 1,189 4,366
Accrued expenses 5,784 5,983
Income taxes payable 7,393 5,087
Current portion of long-term debt 241 177
------------ ----------
Total current liabilities 23,730 27,623
Deferred income taxes 1,151 699
Other long-term obligations 499 527
Long-term debt, less current portion 160,578 156,132
Stockholders' equity (deficiency):
Common stock, $.01 par value, 10,000 shares
authorized, one share issued and outstanding
at March 29, 2003 and June 29, 2002 -- --
Additional paid-in capital 59,127 59,127
Accumulated deficiency (135,257) (138,772)
------------ ----------
Total stockholders' deficiency (76,130) (79,645)
------------ ----------
Total liabilities and stockholders' equity (deficiency) $ 109,828 $ 105,336
============ ==========
See notes to consolidated financial statements.
3
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended Nine Months Ended
March 29, March 29, March 29, March 29,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ 41,204 $ 41,520 $ 157,048 $ 147,897
Cost of sales 25,983 26,258 99,536 92,348
------------ ------------ ------------ ------------
Gross profit 15,221 15,262 57,512 55,549
Operating expenses:
Selling 6,047 6,603 20,422 18,553
General and administrative 6,571 6,753 20,050 19,662
------------ ------------ ------------ ------------
12,618 13,356 40,472 38,215
------------ ------------ ------------ ------------
Operating income 2,603 1,906 17,040 17,334
Other income (expense):
Interest expense (3,809) (3,919) (11,118) (11,999)
Loss on early extinguishment of debt -- (994) -- (994)
Other, net 8 2 19 13
------------ ------------ ------------ ------------
(3,801) (4,911) (11,099) (12,980)
------------ ------------ ------------ ------------
Income (loss) before income taxes (1,198) (3,005) 5,941 4,354
Income tax expense (benefit) (468) (1,173) 2,318 1,697
------------ ------------ ------------ ------------
Net income (loss) $ (730) $ (1,832) $ 3,623 $ 2,657
============ ============ ============ ============
See notes to consolidated financial statements.
4
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousand)
Nine Months Ended
March 29, March 29,
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,623 $ 2,657
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 2,377 2,338
Amortization of deferred financing costs 732 909
Amortization of other intangibles 750 750
(Gain) loss on sale or disposal of property, plant and equipment (11) 6
Deferred income taxes 165 (414)
(Gain) loss on early extinguishment of debt -- 994
Gain (loss) on foreign currency translation 66 --
Changes in operating assets and liabilities:
Accounts receivable, net 2,327 (5,837)
Inventories, net 3,613 (2,917)
Prepaid expenses, other current assets and other assets (186) (82)
Income taxes payable 2,306 4,166
Accounts payable, accrued expenses and other
long-term obligations (6,262) (5,199)
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Net cash provided by (used in) operating activities 9,500 (2,629)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment 22 3
Purchases of property, plant and equipment (2,936) (3,622)
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Net cash used in investing activities (2,914) (3,619)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving credit agreement (5,738) 29,262
Cash paid for financing costs (50) (683)
Distributions to GFSI Holdings, Inc. (174) (123)
Issuance of long-term debt 450 300
Payments on long-term debt (130) (26,804)
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Net cash provided by (used in) financing activities (5,642) 1,952
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Net increase (decrease) in cash and cash equivalents 944 (4,296)
Cash and cash equivalents at beginning of period 313 5,309
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Cash and cash equivalents at end of period $ 1,257 $ 1,013
========== ==========
Supplemental cash flow information:
Interest paid $ 13,561 $ 13,865
========== ==========
Income taxes paid (refunded) $ (153) $ (2,053)
========== ==========
See notes to consolidated financial statements.
5
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 29, 2003
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 accounting principles generally accepted in
the United States of America 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 accounting
principles generally accepted in the United States of America 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 March 29, 2003 and June 29,
2002:
Unaudited (in thousands) March 29, 2003 June 29, 2002
-------------- -------------
Undecorated apparel ("blanks") and supplies $ 39,661 $ 41,976
Work in process 557 1,114
Finished goods 1,898 2,639
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Total $ 42,116 $ 45,729
========== ==========
6
4. 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 March 29, 2003 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Assets:
Current assets
Cash and cash equivalents $ 1,152 $ 105 $ -- $ 1,257
Accounts receivable, net 20,187 16,082 (5,970) 30,299
Inventories, net 40,468 1,648 -- 42,116
Prepaid expenses and other current assets 1,343 112 -- 1,455
Deferred income taxes 1,132 -- -- 1,132
---------- ---------- ---------- ----------
Total current assets 64,282 17,947 (5,970) 76,259
Investment in equity of subsidiaries 15,293 -- (15,293) --
Property, plant and equipment, net 19,908 311 -- 20,219
Investment in parent company bonds 9,900 -- -- 9,900
Other assets 4,479 (1,027) (2) 3,450
---------- ---------- ---------- ----------
Total assets $ 113,862 $ 17,231 $ (21,265) $ 109,828
========== ========== ========== ==========
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $ 14,088 $ 1,005 $ (5,970) $ 9,123
Accrued interest expense 1,189 -- -- 1,189
Accrued expenses 4,760 1,024 -- 5,784
Income taxes payable 7,508 (115) -- 7,393
Current portion of long-term debt 241 -- -- 241
---------- ---------- ---------- ----------
Total current liabilities 27,786 1,914 (5,970) 23,730
Deferred income taxes 1,127 24 -- 1,151
Other long-term obligations 499 -- -- 499
Long-term debt, less current portion 160,578 -- -- 160,578
Stockholders' equity (deficiency) (76,128) 15,293 (15,295) (76,130)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity (deficiency) $ 113,862 $ 17,231 $ (21,265) $ 109,828
========== ========== ========== ==========
Nine months ended March 29, 2003 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Net sales $ 105,116 $ 55,413 $ (3,481) $ 157,048
Cost of sales 69,342 33,675 (3,481) 99,536
Selling expenses 12,681 7,741 -- 20,422
General and administrative expense 16,655 3,395 -- 20,050
---------- ---------- ---------- ----------
Total costs and expenses 98,678 44,811 (3,481) 140,008
Operating Income 6,438 10,602 -- 17,040
Equity in net earnings of subsidiaries 6,451 (6,451) --
Interest expense (11,092) (26) -- (11,118)
Other, net 19 -- -- 19
---------- ---------- ---------- ----------
Income before income taxes 1,816 10,576 (6,451) 5,941
Income tax expense (benefit) (1,807) 4,125 -- 2,318
---------- ---------- ---------- ----------
Net income $ 3,623 $ 6,451 $ (6,451) $ 3,623
========== ========== ========== ==========
7
Nine months ended March 29, 2003 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Net cash flows provided by (used in) operating activities $ 10,373 $ (873) $ -- $ 9,500
Cash flows from investing activities:
Intercompany loan (1,033) -- 1,033 --
Purchases of property, plant and equipment, net (2,881) (33) -- (2,914)
---------- ---------- ---------- ----------
Net cash flows used in investing activities (3,914) (33) 1,033 (2,914)
Cash flows from financing activities:
Net change in revolving credit agreement (5,738) -- -- (5,738)
Payments on long-term debt (130) -- -- (130)
Intercompany borrowings -- 1,033 (1,033) --
Cash paid for financing costs (50) -- -- (50)
Issuance of long-term debt 450 -- -- 450
Distributions to GFSI Holdings, Inc. (174) -- -- (174)
---------- ---------- ---------- ----------
Net cash provided (used) by financing activities (5,642) 1,033 (1,033) (5,642)
---------- ---------- ---------- ----------
Net change in cash and cash equivalents: 817 127 -- 944
Cash and cash equivalents at beginning of period 334 (21) -- 313
---------- ---------- ---------- ----------
Cash and cash equivalents end of period $ 1,151 $ 106 $ -- $ 1,257
========== ========== ========== ==========
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Assets:
Current assets
Cash and cash equivalents $ 334 $ (21) $ -- $ 313
Accounts receivable, net 25,199 8,511 (1,084) 32,626
Inventories, net 43,402 2,327 -- 45,729
Prepaid expenses and other current assets 1,163 106 -- 1,269
Deferred income taxes 845 -- -- 845
---------- ---------- ---------- ----------
Total current assets 70,943 10,923 (1,084) 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 $ 103,717 $ 11,478 $ (9,859) $ 105,336
========== ========== ========== ==========
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $ 11,466 $ 1,630 $ (1,086) $ 12,010
Accrued interest expense 4,366 -- -- 4,366
Accrued expenses 5,034 949 -- 5,983
Income taxes payable 5,156 (69) -- 5,087
Current portion of long-term debt 177 -- -- 177
---------- ---------- ---------- ----------
Total current liabilities 26,199 2,510 (1,086) 27,623
Deferred income taxes 504 195 -- 699
Long-term debt, less current portion 156,132 -- -- 156,132
Other long-term obligations 527 -- -- 527
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity (deficiency) $ 103,717 $ 11,478 $ (9,859) $ 105,336
========== ========== ========== ==========
8
Nine months ended March 29, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Net sales $ 108,849 $ 42,336 $ (3,288) $ 147,897
Cost of sales 70,403 25,233 (3,288) 92,348
Selling expenses 12,309 6,244 -- 18,553
General and administrative expense 16,037 3,625 -- 19,662
---------- ---------- ---------- ----------
Total costs and expenses 98,749 35,102 (3,288) 130,563
Operating Income 10,100 7,234 -- 17,334
Equity in net earnings of subsidiaries 4,412 -- (4,412) --
Interest expense (11,999) -- -- (11,999)
Loss on early extinguishment of debt (994) -- -- (994)
Other income (expense) 13 -- -- 13
---------- ---------- ---------- ----------
Income before income taxes 1,532 7,234 (4,412) 4,354
Income tax expense (benefit) (1,125) 2,822 -- 1,697
---------- ---------- ---------- ----------
Net income $ 2,657 $ 4,412 $ (4,412) $ 2,657
========== ========== ========== ==========
Nine months ended March 29, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ---------- ------------- ------------
Net cash flows provided by (used in) operating activities $ (3,127) $ 498 $ -- $ (2,629)
Net cash flows used in investing activities (3,383) (236) -- (3,619)
Cash flows from financing activities:
Net change in revolving credit agreement 29,262 -- -- 29,262
Cash paid for financing costs (683) -- -- (683)
Distributions to GFSI Holdings, Inc. (123) -- -- (123)
Issuance of long-term debt 300 -- -- 300
Payments on long-term debt (26,804) -- -- (26,804)
---------- ---------- ---------- ----------
Net cash flows provided by financing activities 1,952 -- -- 1,952
---------- ---------- ---------- ----------
Net change in cash and cash equivalents (4,558) 262 -- (4,296)
Cash and cash equivalents at beginning of period 5,263 46 -- 5,309
---------- ---------- ---------- ----------
Cash and cash equivalents end of period $ 705 $ 308 $ -- $ 1,013
========== ========== ========== ==========
5. Reclassifications
Certain reclassifications have been made to the fiscal 2002 consolidated
and condensed consolidating financial statements to conform to the fiscal 2003
presentation.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." The new standard eliminates
the requirement to classify gains and losses related to early debt
extinguishments as extraordinary items. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. In the third quarter of fiscal 2003, GFSI
elected to early adopt SFAS No. 145 and has accordingly reclassified the 2002
loss on extinguishment of debt, previously presented as an extraordinary item,
net of income taxes, as other income (expense) in accordance with the
provisions of SFAS No. 145. Net income, shareholders' equity or cash flows
were not impacted by the adoption of this new standard.
9
6. Investment in Parent Company Bonds
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 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 the
Company's Senior Subordinated Notes issued on February 27, 1997. The Exchange
Notes were guaranteed by each of the Company's wholly-owned subsidiaries
(Event 1, 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, as amended. The Company has filed an exchange offer
registration statement with the Securities and Exchange Commission to enable
the holder of the Exchange Notes to exchange them for publicly registered
notes having terms substantially identical to the Exchange Notes.
As a result of the completion on December 31, 2002 of the private
placement of $9.9 million of Exchange Notes for $24 million aggregate
principal amount at maturity of Holdings Discount Notes with an accreted book
value of $19.9 million, GFSI's financial statements for the periods after
December 31, 2002, on a pro forma basis, will initially reflect additional
long-term debt of $9.9 million and a corresponding non-current investment in
Holdings Discount Notes. In future periods, GFSI's financial statements will
reflect additional annual interest expense of approximately $1.0 million.
The Company's non-current investment in Holdings Discount Notes is
recorded at its purchase cost, reflecting fair value at its acquisition date.
Trading activity in this security has been and is expected to continue to be
infrequent, and consequently, the Company has determined that it will
recognize interest income on the Holdings Discount Notes when it is received
commencing in March 2005 and to recognize the accretion of the purchase
discount should a more established market materialize. The Company would have
recognized interest income and accreted purchase discount of approximately
$962,000 as of March 29, 2003, had a more liquid market existed for this
security.
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 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.
Critical accounting policies
The following discussion and analysis of financial condition, results
of operations, liquidity and capital resources is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. 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, we
evaluate our estimates, including those related to bad debts, inventories,
intangible assets, long-lived assets, deferred income taxes, accrued expenses,
restructuring reserves, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe 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.
We believe that some of our significant accounting policies involve a
higher degree of judgment or complexity than other accounting policies.
Identified below are the policies deemed critical to our business and the
understanding of our results of operations.
Revenue recognition. We recognize 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. We maintain 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 our 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 March 29, 2003 and June 28, 2002 were net of allowance
for doubtful accounts of $1.0 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. We write 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. We also record changes in valuation allowances
due to changes in our 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.
11
Comparison of Operating Results for the Quarters Ended March 29, 2003 and
March 29, 2002.
Net Sales. Net sales for the quarter ended March 29, 2003 were $41.2
million compared to $41.5 million last year. We experienced sales decreases in
the Resort division, the Corporate division and our Event 1 subsidiary, offset
by sales growth from the Licensed Apparel group. The net sales growth in the
Licensed Apparel group was from college bookstore customers in our Champion
licensed products group (CCP) which continued to benefit from consumer
preferences for moderately priced apparel. Net sales for CCP were
approximately $2.9 million greater than last year. College bookstore sales
represented approximately 37% of net sales for the quarter compared to 31%
last year. The Corporate and Resort divisions were affected by reduced
business due to decreased discretionary spending on marketing and employee
incentive programs and declining business and consumer travel. Event 1 sales
for the third quarter of fiscal 2003 were below last year due to the timing of
the NCAA mens championship basketball tournament. The final championship games
were held in the fourth quarter of fiscal 2003, compared to the third quarter
of fiscal 2002.
Gross Profit. Gross profit for the quarter ended March 29, 2003 was
$15.2 million, approximately the same as last year. Gross profit as a
percentage of net sales was comparable for both periods at 37%.
Operating Expenses. Operating expenses for the quarter ended March
29, 2003 decreased 5% to $12.6 million from $13.4 million last year. Operating
expenses as a percentage of net sales were 30.6% in the third quarter of
fiscal 2003 compared to 32.2% last year. The decrease in operating expenses
was created by the implementation of cost controls.
Operating Income. Operating income increased 37% to $2.6 million in
the third quarter of fiscal 2003 compared to $1.9 million last year. Operating
income as a percentage of net sales increased to 6.3% in the third quarter of
fiscal 2003 from 4.6% in the third quarter of fiscal 2002. The increase in
operating income as a percentage of sales was the result of the decrease in
operating expenses.
Interest Expense. Interest expense in the third quarter of fiscal
2003 was $3.8 million, $110,000 less than the comparable period last year. The
decrease in interest expense was due to lower interest rates.
Loss on Early Extinguishment of Debt. In March 2002, the Company
entered into a $65 million revolving bank credit facility (the "RBCA) and
repaid its existing $40 million bank credit facility ahead of its scheduled
expiration. A pre-tax charge of $994,000 was recorded in the third quarter of
fiscal 2002 to write off deferred debt origination costs related to the
previous bank credit facility.
Net Income (loss). Net loss for the third quarter of fiscal 2003 was
$730,000 compared to a net loss of $1.8 million last year. The decrease in net
loss was created by higher operating income and the absence of a loss on
early extinguishment of debt in fiscal 2003.
12
Comparison of Operating Results for the Nine Months Ended March 29, 2003 and
March 29, 2002.
Net Sales. Net sales for the nine months ended March 29, 2003
increased 6% to $157.0 million from $147.9 million last year. The increase in
net sales 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 18% decline in Corporate division sales. Net sales
for CCP for the first nine months of fiscal 2003 were $13.7 million greater
than last year while Corporate division sales were $4.1 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 nine months ended March 29, 2003
increased 4% to $57.5 million from $55.5 million last year. Gross profit as a
percentage of net sales decreased to 36.6% from 37.6% 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 represented 51% of net sales for
the nine month period ended March 29, 2003 compared to 43% last year. College
bookstore sales generally provide a lower gross profit than the Company's
other divisions.
Operating Expenses. Operating expenses for the nine months ended
March 29, 2003 increased 6% to $40.5 million from $38.2 million last year.
Higher sales created the increase in operating expenses. Operating expenses as
a percentage of net sales were 25.8% for the first nine months of fiscal 2003
and fiscal 2002. The favorable impact of cost control measures offset the
higher royalty and distribution channel costs attributable to college
bookstore sales which allowed operating expenses as a percentage of net sales
to remain the same.
Operating Income. Operating income decreased 2% to $17.0 million in
fiscal 2003 from $17.3 million in fiscal 2002. Operating income as a
percentage of net sales decreased to 10.9% in fiscal 2003 from 11.7% 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.
Interest Expense. Interest expense in the first nine months of fiscal
2003 was $11.1 million, $881,000 less than the comparable period last year.
The decrease in interest expense was due to lower interest rates.
Loss on Early Extinguishment of Debt. In March 2002, the Company
entered into a $65 million RBCA and repaid its existing $40 million bank
credit facility ahead of its scheduled expiration. A pre-tax charge of
$994,000 was recorded in the third quarter of fiscal 2002 to write off
deferred debt origination costs related to the previous bank credit facility.
Net Income (loss). Net income for the first nine months of fiscal
2003 was $3.6 million, compared to $2.7 million last year. The increase in net
income was created by the reduction in interest expense and the absence of
the loss on early extinguishment of debt in fiscal 2003.
Liquidity and Capital Resources
Cash provided by operating activities in the first nine months of
fiscal 2003 was $9.5 million compared to cash used by operating activities of
$2.6 million 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 nine months of fiscal
2003 was $2.9 million compared to $3.6 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 nine months of fiscal
2003 was $5.6 million compared cash to provided by financing activities of
$2.0 million in the comparable period of fiscal 2002. Payments of bank debt
was the primary use of cash in fiscal 2003. In fiscal 2002, the Company used
borrowings under its RCBA to repay long-term debt.
13
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' 11.375% Senior Discount Notes ("Holdings Discount Notes") with
an accreted book value of $19.9 million. The Company recorded its investment
in the Holdings Discount Notes at its purchase cost.
The Exchange Notes are unsecured obligations of GFSI, Inc., 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 GFSI, Inc.'s wholly-owned subsidiaries (Event 1,
CCP, and GFSI Canada Company). GFSI, Inc. filed an exchange offer registration
statement with the Securities and Exchange Commission to enable the holder of
the Exchange Notes to exchange them for publicly registered notes having terms
substantially identical to the Exchange Notes.
Under the Company's RBCA up to $65 million of revolving credit
availability is provided, of which $24.8 million was borrowed and outstanding
and approximately $6.3 million was utilized for outstanding commercial and
stand-by letters of credit as of March 29, 2003. At March 29, 2003, $25.4
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 the Holdings Discount Notes, fees payable under consulting and
non-competition agreements, 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. The 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 $84.5
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, Holding's cumulative non-cash preferred stock ("Holdings
Preferred Stock") dividends total approximately $400,000 annually. Holdings
Preferred Stock may be redeemed at stated value (approximately $3.4 million)
plus accrued dividends with mandatory redemption in fiscal 2009.
Seasonality and Inflation
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. The seasonality of sales and profitability
is primarily due to higher college bookstore sales 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.
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
Within the 90 days prior to the date of filing this Quarterly Report
on From 10-Q, 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-14(c) and 15d-14(c)). 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. Subsequent to the date of
that evaluation, there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses.
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 and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
16
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 13, 2003
/s/ J. CRAIG PETERSON
---------------------------------
J. Craig Peterson, Sr. Vice
President of Finance and
Principal Accounting Officer
17
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING
GFSI, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED MARCH 29, 2003
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: May 13, 2003
/S/ ROBERT M. WOLFF
- --------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
18
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING
GFSI, INC.'S QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED MARCH 29, 2003
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: May 13, 2003
/s/ J. CRAIG PETERSON
- -----------------------------
J. Craig Peterson
Senior Vice President and
Chief Financial Officer
19