<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>form10q_2sison020802.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2001.
( )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 333-38951
GFSI HOLDINGS, INC.
(Exact name of registrant specified in its charter)
Delaware 74-2810744
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9700 Commerce Parkway
Lenexa, Kansas 66219
(Address of principal executive offices)
Registrant's telephone number, including area code (913) 888-0445
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes (X) No ( )
(2) Yes (X) No ( )
Indicate 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 - 1,857.5 shares issued and outstanding
as of February 1, 2002.
1
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended December 28, 2001
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
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 9
PART II - OTHER INFORMATION 10
SIGNATURE PAGE 11
2
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 28, June 29,
2001 2001
------------ --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,073 $ 5,324
Accounts receivable, net 31,577 22,694
Inventories, net 39,069 37,736
Income tax receivable -- 1,691
Prepaid expenses and other current assets 861 1,143
Deferred income taxes 775 911
-- --
Total current assets 74,355 69,499
Property, plant and equipment, net 18,977 18,574
Other assets:
Deferred financing costs, net 4,847 5,409
Other 1,506 2,006
--------- ---------
Total assets $ 99,685 $ 95,488
========= =========
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 11,121 $ 12,778
Accrued interest expense 4,384 3,775
Accrued expenses 5,600 5,895
Income taxes payable 160 --
Current portion of long-term debt 7,452 6,699
----- -----
Total current liabilities 28,717 29,147
Deferred income taxes 972 1,189
Revolving credit agreement 1,200 --
Other long-term obligations 527 527
Long-term debt, less current portion 223,581 221,729
Redeemable preferred stock 5,299 5,145
Stockholders' equity (deficiency):
Common stock, $.01 par value 2,105 shares authorized,
2,000 shares issued at December 28, 2001 and June 29, 2001 -- --
Additional paid-in capital 200 200
Accumulated deficiency (160,802) (162,442)
Treasury stock, at cost (142.5 and 100 series A shares at
December 28, 2001 and June 29, 2001, respectively) (9) (7)
-- --
Total stockholders' equity (deficiency) (160,611) (162,249)
--------- ---------
Total liabilities and stockholders' equity (deficiency) $ 99,685 $ 95,488
========= =========
</TABLE>
NOTE: The consolidated balance sheet at June 29, 2001 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See notes to consolidated financial statements.
3
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 52,663 $ 51,218 $ 107,271 $ 104,686
Cost of sales 32,821 31,536 66,090 64,581
--------- --------- --------- ---------
Gross profit 19,842 19,682 41,181 40,105
Operating expenses:
Selling 6,419 5,707 12,844 11,732
General and administrative 6,504 7,343 12,909 14,213
--------- --------- --------- ---------
12,923 13,050 25,753 25,945
--------- --------- --------- ---------
Operating income 6,919 6,632 15,428 14,160
Other income (expense):
Interest expense (6,164) (6,285) (12,420) (12,400)
Other, net (6) 106 11 156
--------- --------- --------- ---------
(6,170) (6,179) (12,409) (12,244)
--------- --------- --------- ---------
Income before income taxes 749 453 3,019 1,916
Provision for income taxes 293 176 1,178 747
--------- --------- --------- ---------
Net income 456 277 1,841 1,169
Preferred stock dividends (100) (104) (201) (210)
--------- --------- --------- ---------
Net income attributable to
common shareholders $ 356 $ 173 $ 1,640 $ 959
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 28, December 29,
2001 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,841 $ 1,169
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,576 1,603
Amortization of deferred financing costs 562 596
Amortization of other intangibles 500 --
(Gain) loss on sale or disposal of
property, plant and equipment 8 (55)
Amortization of discount on long-term debt 4,327 3,874
Deferred income taxes (81) --
Changes in operating assets and liabilities:
Accounts receivable, net (8,883) (2,952)
Inventories, net (1,334) 7,578
Prepaid expenses, other current assets and other assets 283 (217)
Income taxes receivable and payable 1,851 123
Accounts payable, accrued expenses and other
long-term obligations (1,342) 1,256
-------- --------
Net cash provided by (used in) operating activities (692) 12,975
-------- --------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 1 140
Purchases of property, plant and equipment (1,988) (897)
-------- --------
Net cash used in investing activities (1,987) (757)
-------- --------
Cash flows from financing activities:
Net changes to short-term borrowings and
revolving credit agreement 1,200 --
Deferred financing costs -- (190)
Redemption of preferred stock (700) (147)
Treasury stock purchase (26) (4)
Proceeds from sale of stock 676 --
Payments on long-term debt (1,722) (3,473)
-------- --------
Net cash used in financing activities (572) (3,814)
-------- --------
Net increase (decrease) in cash and cash equivalents (3,251) 8,404
Cash and cash equivalents at beginning of period 5,324 1,461
-------- --------
Cash and cash equivalents at end of period $ 2,073 $ 9,865
======== ========
Supplemental cash flow information:
Interest paid $ 6,868 $ 8,518
======== ========
Income taxes paid (refunded) $ (962) $ 623
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 28, 2001
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of GFSI
Holdings, Inc. (the "Company") include the accounts of the Company and the
accounts of its wholly owned subsidiary, GFSI, Inc. ("GFSI"). 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 results of operations of
the Company have been included. Operating results for the interim periods are
not necessarily indicative of the results that may be expected for the entire
fiscal year. For further information, refer to the financial statements and
footnotes thereto for the year ended June 29, 2001 included in the Company's
Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Acquisition and Divestiture
In June 2001, the Company acquired CCP, formerly a wholly owned subsidiary
of Sara Lee Corporation. CCP had sales of $13.5 million and $26.2 million and
produced operating contribution of $2.8 million and $5.2 million for the quarter
and six month periods ended December 28, 2001, respectively. At December 28,
2001, CCP had total assets and stockholder's equity of $10.9 million and $2.5
million, respectively. CCP is an unconditional guarantor of the Senior
Subordinated Notes.
In June 2001, the Company sold the assets of its Tandem Marketing business.
Tandem Marketing had revenues of $3.9 million and $6.8 million and operating
contribution of $500,000 and $1.0 million for the quarter and six month periods
ended December 28, 2000, respectively.
3. Commitments and Contingencies
The Company, in the normal course of business, may be threatened with or
named as a defendant in various lawsuits. It is not possible to determine the
ultimate disposition of these matters, however, management is of the opinion
that there are no known claims or known contingent claims that are likely to
have a material adverse effect on the results of operations, financial
condition, or cash flows of the Company.
4. New Accounting Standards
The FASB's Emerging Issues Task Force ("EITF") released its consensus No.
00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to be Delivered
in the Future" which is effective January 1, 2002. The Company does not believe
the EITF will have a material impact on its presentation of results of
operations.
In April 2001, the EITF reached a consensus on EITF Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products". The consensus concluded that consideration from a vendor
to a reseller of the vendor's products is generally presumed to be an adjustment
to the selling prices of the vendor's products and, therefore, should be
classified as a reduction of revenue. EITF No. 00-25 is effective beginning
January 1, 2002. The Company does not believe the EITF will have a material
impact on its presentation of results of operations.
5. Reclassification
Certain reclassifications have been made to the fiscal 2001 consolidated
financial statements to conform to the fiscal 2002 presentation.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this Form 10-Q should be read in conjunction
with the financial information included herein and the Company's Annual Report
on Form 10-K for the year ended June 29, 2001. Management's discussion and
analysis of financial condition and results of operations and other sections of
this report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of forward-
looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
Comparison of Operating Results for the Quarters Ended December 28, 2001 and
December 29, 2000.
Net Sales. Net sales for the quarter ended December 28, 2001, increased
2.8% to $52.7 million from $51.2 million in the quarter ended December 29, 2000.
The increase in net sales over the second quarter last year was primarily
related to the addition of CCP college bookstore net sales of $13.5 million. The
net sales increase from CCP was offset by declines in Corporate and Resort
division sales in comparison to the prior year. The terrorist attacks of
September 11, 2001 and the resulting political and economic uncertainties
created in the aftermath, directly affected the travel plans and the marketing
and employee incentive programs of the customers of these two sales divisions.
The Tandem Marketing business was sold in June 2001. Tandem Marketing
contributed $3.9 million in sales for the quarter ended December 29, 2000.
Gross Profit. Gross profit for the quarter ended December 28, 2001
increased 0.8% to $19.8 million from $19.7 million in the quarter ended December
29, 2000. Gross profit as a percentage of net sales decreased to 37.7% compared
to 38.4% last year. The decrease in gross profit as a percentage of sales was
the result of additional production costs incurred to meet customer demand for
screen printed and tackle twill decorated garments for the college bookstore
market using external manufacturing sources.
Operating Expenses. Operating expenses for the quarter ended December 28,
2001 decreased 1.0% to $12.9 million. Operating expenses as a percentage of net
sales were 24.5% in the second quarter of fiscal 2002 compared to 25.5% in the
second quarter of fiscal 2001. The decline in operating expenses resulted from
the profit improvement programs implemented during the fourth quarter of fiscal
2001.
EBITDA. EBITDA increased 7.1% to $7.9 million in the second quarter of
fiscal 2002 from $7.4 million in the second quarter of fiscal 2001. EBITDA as a
percentage of net sales increased to 15.1% in the quarter ended December 28,
2001 from 14.5% in the quarter ended December 29, 2000. The increase in EBITDA
was a result of the reduction in operating expenses.
Operating Income. Operating income increased 4.3% to $6.9 million in the
second quarter of fiscal 2002 from $6.6 million in the second quarter of fiscal
2001. Operating income as a percentage of net sales at 13.1% was approximately
the same as last year. The increase in operating income was the result of the
reduction in operating expenses.
Other Income (Expense). Other expense of $6.2 million in the second quarter
of fiscal 2002 was approximately the same as the comparable period last year.
Lower interest expense from reduced borrowings under the Company's bank Credit
Agreement offset increased interest expense on the Subordinated Discount Notes.
Net Income. Net income for the second quarter of fiscal 2002 was $456,000
compared to $277,000 for the second quarter of fiscal 2001. The 65% increase in
fiscal year 2002 was a result of the increase in operating income discussed
above.
7
<PAGE>
Comparison of Operating Results for the Six Months Ended December 28, 2001 and
December 29, 2000.
Net Sales. Net sales for the six months ended December 28, 2001, increased
2.5% to $107.3 million from $104.7 million in the six months ended December 29,
2000. The increase in net sales from last year was primarily related to the
addition of CCP college bookstore net sales of $26.2 million. The net sales
increase from CCP was offset by declines in Corporate and Resort division sales
in comparison to the prior year. The terrorist attacks of September 11, 2001 and
the resulting political and economic uncertainties created in the aftermath,
directly affected the travel plans and the marketing and employee incentive
programs of the customers of these two sales divisions. The Tandem Marketing
business was sold in June 2001. Tandem Marketing contributed $6.8 million in
sales for the six months ended December 29, 2000.
Gross Profit. Gross profit for the six months ended December 28, 2001
increased 2.7% to $41.2 million from $40.1 million in the six months ended
December 29, 2000. Gross profit as a percentage of net sales of 38.4% was
approximately the same as last year.
Operating Expenses. Operating expenses for the six months ended December
28, 2001 decreased 0.7% to $25.8 million. Operating expenses as a percentage of
net sales were 24.0% in fiscal 2002 compared to 24.8% in fiscal 2001. The
decline in operating expenses resulted from the profit improvement programs
implemented during the fourth quarter of fiscal 2001.
EBITDA. EBITDA increased 11.0% to $17.5 million in the first six months of
fiscal 2002 from $15.8 million in the first six months of fiscal 2001. EBITDA as
a percentage of net sales increased to 16.3% in the six months ended December
28, 2001 from 15.1% in the comparable period last year. The increase in EBITDA
was a result of an increase in gross profit and a reduction in operating
expenses.
Operating Income. Operating income increased 9.0% to $15.4 million in
fiscal 2002 from $14.2 million in fiscal 2001. Operating income as a percentage
of net sales increased to 14.4% in fiscal 2002 from 13.5% in fiscal 2001. Higher
gross profit and reduced operating expenses created the increase in operating
income.
Other Income (Expense). Other expense of $12.4 million in fiscal 2002 was
$165,000 higher than the comparable period last year. Lower earnings on excess
cash investments created the increase in net other expense.
Net Income. Net income for the first six months of fiscal 2002 was $1.8
million, an increase of $672,000 or 57.5% higher than the first six months of
fiscal 2001. The increase was a result of the increase in operating income
discussed above.
Liquidity and Capital Resources
Cash used in operating activities for the first six months of fiscal 2002
was $692,000 compared to cash provided of $13.0 million in the first six months
of fiscal 2001. The change in cash provided by (used in) operating activities
between the two periods was primarily due to the increase in accounts receivable
and the increase in inventory as a result of the addition of the CCP college
bookstore business.
Cash used in investing activities in the first six months of fiscal 2002
was $2.0 million compared to $757,000 in the first six months of 2001. The cash
used in both periods was related to the purchase of property, plant and
equipment. The increase over last year was the result of the Company adding to
production capacity to support the CCP acquired business.
Cash used in financing activities for the first six months of fiscal 2002
was $572,000 compared to cash used of $3.8 million in the first six months of
fiscal 2001. The decrease in cash used in financing activities for the six
months ended December 28, 2001 was primarily attributable to reduced payments on
long-term debt and borrowings under the Company's revolving credit agreement.
The borrowings under the revolving credit agreement were used to support the
working capital requirements of the CCP acquisition.
The Company's bank Credit Agreement matures in December 2002. The Company
anticipates a replacement facility will be in place before the maturity of the
existing bank Credit Agreement, but no assurance can be given that such a
replacement facility will be put in place at such time or will be on terms as
favorable to the Company as the existing Credit Agreement. The Company believes
that cash flow from operating activities and borrowings under its existing and
any replacement bank credit facility will be adequate to meet the Company's
short-term and long-term liquidity requirements, although no assurance can be
given in this regard. Under the bank Credit Agreement's revolving loan facility,
$40 million of revolving credit availability is provided, of which $1.2 million
was borrowed and outstanding and approximately $8.2 million was utilized for
outstanding commercial and stand-by letters of credit as of December 28, 2001.
8
<PAGE>
The Company is dependent upon the cash flows of its wholly-owned
subsidiary, GFSI, 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. The Company will be
dependent on GFSI to provide funds to service the indebtedness. Additionally,
the remaining cumulative non-cash preferred stock issued by Holdings ("Holdings
Preferred Stock") will accrue dividends totaling approximately $402,000
annually. Holdings Preferred Stock may be redeemed at stated value
(approximately $3.3 million) plus accrued dividends with mandatory redemption in
2009.
Seasonality and Inflation
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. The seasonality of sales and profitability
is primarily due to higher college bookstore sales volume during the first two
fiscal quarters. Sales at the Company's Resort and Corporate divisions typically
show no significant seasonal variations.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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
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.
9
<PAGE>
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
None
10
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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 HOLDINGS, INC.
February 8, 2002
/s/ J. CRAIG PETERSON
_______________________________________
J. Craig Peterson, Sr. Vice President of Finance and
Principal Accounting Officer
11
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</DOCUMENT>