-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QRFiodkbVEzyfAsedCicn+mZLp537/k/4I5idtrN5SE0NB6gNrQBxaNiaI+gDVjd 1VGx+m8fqmHUipYq30UYKw== 0000902561-04-000204.txt : 20040510 0000902561-04-000204.hdr.sgml : 20040510 20040510153423 ACCESSION NUMBER: 0000902561-04-000204 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040403 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GFSI INC CENTRAL INDEX KEY: 0001036327 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 742810748 STATE OF INCORPORATION: DE FISCAL YEAR END: 0627 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-24189 FILM NUMBER: 04792861 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 10-Q 1 form10q.txt 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 3, 2004. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 333-24189 GFSI, INC. (Exact name of registrant specified in its charter) Delaware 74-2810748 - -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9700 Commerce Parkway Lenexa, Kansas 66219 --------------------------------------- (Address of principal executive offices) (913) 888-0445 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1)Yes (X) No ( ) (2)Yes (X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes( ) No (X) Indicate 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, 2004. 1 GFSI, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q For the Quarter Ended April 3, 2004 INDEX Page PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 ITEM 4 - CONTROLS AND PROCEDURES 16 PART II - OTHER INFORMATION 17 SIGNATURE PAGE 18 2
GFSI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) April 3, June 28, 2004 2003 ----------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 1,388 $ 1,387 Accounts receivable, net 22,514 34,357 Inventories, net 37,936 42,663 Prepaid expenses and other current assets 1,805 1,323 Deferred income taxes 1,062 1,303 -------------- ------------- Total current assets 64,705 81,033 Property, plant and equipment, net 21,882 19,883 Other assets: Deferred financing costs, net 2,281 2,959 Investment in parent company bonds -- 9,900 Other 105 9 -------------- ------------- Total assets $ 88,973 $ 113,784 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 11,322 $ 7,843 Accrued interest expense 1,200 4,365 Accrued expenses 5,954 6,151 Income taxes payable 9,123 8,850 Current portion of long-term debt 307 324 -------------- ------------- Total current liabilities 27,906 27,533 Deferred income taxes 1,424 1,194 Other long-term obligations 491 491 Long-term debt, less current portion 151,904 158,639 Stockholders' equity (deficiency): Common stock, $.01 par value, 10,000 shares authorized, one share issued and outstanding at April 3, 2004 and June 28, 2003 -- -- Additional paid-in capital 71,442 59,127 Parent company bonds acquired (24,995) -- Accumulated deficiency (139,199) (133,200) -------------- ------------- Total stockholders' deficiency (92,752) (74,073) -------------- ------------- Total liabilities and stockholders' equity (deficiency) $ 88,973 $ 113,784 ============== =============
See notes to consolidated financial statements. 3
GFSI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands) Quarter Ended Nine Months Ended April 3, March 29, April 3, March 29, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net sales $ 37,196 $ 41,204 $ 140,715 $ 157,048 Cost of sales 21,776 25,983 85,163 99,536 ------------ ------------ ------------ ------------ Gross profit 15,420 15,221 55,552 57,512 Operating expenses: Selling 6,447 6,047 19,941 20,422 General and administrative 6,336 6,571 19,080 20,050 ------------ ------------ ------------ ------------ 12,783 12,618 39,021 40,472 ------------ ------------ ------------ ------------ Operating income 2,637 2,603 16,531 17,040 Other income (expense): Interest expense (3,662) (3,809) (11,368) (11,118) Gain on sale of property, plant and equipment (27) 8 912 19 ------------ ------------ ------------ ------------ (3,689) (3,801) (10,456) (11,099) ------------ ------------ ------------ ------------ Income (loss) before income taxes (1,052) (1,198) 6,075 5,941 Income tax expense (benefit) (411) (468) 2,369 2,318 ------------ ------------ ------------ ------------ Net income (loss) $ (641) $ (730) $ 3,706 $ 3,623 ============ ============ ============ ============
See notes to consolidated financial statements. 4
GFSI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousand) Nine Months Ended April 3, March 29, 2004 2003 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,706 $ 3,623 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,007 2,377 Amortization of deferred financing costs 679 732 Amortization of other intangibles -- 750 Gain on sale or disposal of property, plant and equipment (912) (11) Deferred income taxes 472 165 Changes in operating assets and liabilities: Accounts receivable, net 11,843 2,327 Inventories, net 4,727 3,613 Prepaid expenses, other current assets and other assets (578) (186) Income taxes payable 273 2,306 Accounts payable, accrued expenses and other long-term obligations (222) (6,262) ----------- ----------- Net cash provided by operating activities 21,995 9,434 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment 2,797 22 Purchases of property, plant and equipment (5,552) (2,936) ----------- ----------- Net cash used in investing activities (2,755) (2,914) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short term borrowings and revolving credit agreement (6,609) (5,738) Purchase of parent company bonds (12,265) -- Distributions to GFSI Holdings, Inc. (258) (174) Issuance of long-term debt 82 450 Payments on long-term debt (226) (130) Other (1) (50) ----------- ----------- Net cash used in financing activities (19,277) (5,642) ----------- ----------- Effect of foreign exchange rate changes on cash 38 66 ----------- ----------- Net increase in cash and cash equivalents 1 944 Cash and cash equivalents at beginning of period 1,387 313 ----------- ----------- Cash and cash equivalents at end of period $ 1,388 $ 1,257 =========== =========== Supplemental cash flow information: Interest paid $ 13,853 $ 13,561 =========== =========== Income taxes paid (refunded) $ 1,618 $ (153) =========== =========== Non-cash financing activities: Parent company bonds contributed $ 12,315 $ -- =========== =========== Bonds distributed to parent company $ 9,485 $ -- =========== =========== See notes to consolidated financial statements.
5 GFSI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) April 3, 2004 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements of GFSI, Inc. (the "Company") include the accounts of the Company and the accounts of its wholly-owned subsidiaries, Event 1, Inc. ("Event 1"), CC Products, Inc. ("CCP") and GFSI Canada Company. All intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, operations and cash flows of the Company have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. The consolidated balance sheet information as of June 28, 2003 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 28, 2003 included in the Company's Annual Report on Form 10-K. The Company is a wholly owned subsidiary of GFSI Holdings, Inc. ("Holdings"). The preparation of financial statements in conformity with 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. The Company's fiscal year ends on the Saturday nearest June 30, which results in a 53 week year from time to time. The fiscal year ending in June 2004 will be a 53 week period with the additional week falling in the Company's second quarter ended January 3, 2004. Both the third quarter of fiscal 2004 and the third quarter of fiscal 2003 contain 13 weeks of operations while the nine month fiscal period ended April 3, 2004 has one more week of operations than the comparable period of fiscal 2003. 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 April 3, 2004 and June 28, 2003: (in thousands) April 3, June 28, 2004 2003 ---------------- --------------- (unaudited) Undecorated apparel ("blanks") and supplies $ 36,803 $ 37,924 Work in process 193 609 Finished goods 1,685 4,887 -------------- ------------ 38,681 43,420 Allowance for markdowns (745) (757) ------------- ------------ Total $ 37,936 $ 42,663 ============== ============ 6 4. Dividend -------- During the third quarter of fiscal 2004, upon the recommendation of its Dividend Committee, the Company's Board of Directors declared a non-cash dividend payable to Holdings. Holdings 11 3/8% Senior Discount Notes due 2009 with a value at maturity of $21.8 million were distributed to Holdings in anticipation of Holdings retiring the Notes. 5. Condensed Consolidating Financial Information --------------------------------------------- The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and issuers of guaranteed securities registered or being registered." This information is not necessarily intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with accounting principles generally accepted in the United States of America. Each of the subsidiary guarantors are 100% owned by GFSI, Inc. The subsidiary guarantees of GFSI, Inc.'s debts are full and unconditional and joint and several.
As of April 3, 2004 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------- ---------- ----------- ---------- Assets: Current assets: Cash and cash equivalents $ 1,338 $ 50 $ -- $ 1,388 Accounts receivable, net 12,823 25,243 (15,552) 22,514 Inventories, net 36,213 1,723 -- 37,936 Prepaid expenses and other current assets 1,529 276 -- 1,805 Deferred income taxes 1,062 -- -- 1,062 ---------- ---------- --------- ---------- Total current assets 52,965 27,292 (15,552) 64,705 Investment in equity of subsidiaries 24,766 -- (24,766) -- Property, plant and equipment, net 21,683 199 -- 21,882 Other assets 3,010 (624) -- 2,386 ---------- ---------- ---------- ---------- Total assets $ 102,424 $ 26,867 $ (40,318) $ 88,973 ========== ========== ========== ========== Liabilities and stockholders' equity (deficiency): Current liabilities: Accounts payable $ 26,068 $ 806 $ (15,552) $ 11,322 Accrued interest expense 1,200 -- -- 1,200 Accrued expenses 4,546 1,408 -- 5,954 Income taxes payable 9,236 (113) -- 9,123 Current portion of long-term debt 307 -- -- 307 ---------- ---------- ---------- ---------- Total current liabilities 41,357 2,101 (15,552) 27,906 Deferred income taxes 1,424 -- -- 1,424 Other long-term obligations 491 -- -- 491 Long-term debt, less current portion 151,904 -- -- 151,904 Stockholders' equity (deficiency) (92,752) 24,766 (24,766) (92,752) ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity $ 102,424 $ 26,867 $ (40,318) $ 88,973 (deficiency) ========== ========== ========== ==========
7
Nine months ended April 3, 2004 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------- ---------- ----------- --------- Net sales $ 83,813 $ 60,534 $ (3,632) $ 140,715 Cost of sales 53,436 35,359 (3,632) 85,163 Selling expenses 10,156 9,785 -- 19,941 General and administrative expenses 15,821 3,259 -- 19,080 ------------ ------------ ------------ ------------- Total costs and expenses 79,413 48,403 (3,632) 124,184 ------------ ------------ ------------ ------------- Operating income 4,400 12,131 -- 16,531 Equity in net earnings of subsidiaries 7,396 -- (7,396) -- Interest expense (11,364) (7) 3 (11,368) Gain on sale of property, plant and equipment 915 -- (3) 912 ------------ ------------ ------------ ------------- Income before income taxes 1,347 12,124 (7,396) 6,075 Income tax expense (benefit) (2,359) 4,728 -- 2,369 ------------ ------------ ------------ ------------- Net income $ 3,706 $ 7,396 $ (7,396) $ 3,706 ============ ============ ============ ============= Nine months ended April 3, 2004 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------- ---------- ----------- ----------- Net cash flows provided by operating activities $ 21,681 $ 314 $ -- $ 21,995 Net cash flows used in investing activities (2,389) (6) (360) (2,755) Cash flows from financing activities: Net repayments under revolving credit agreement (6,609) -- -- (6,609) Purchase of parent company bonds (12,265) -- -- (12,265) Payments on long-term debt (226) -- -- (226) Repayment of intercompany debt -- (360) 360 -- Issuance of long-term debt 82 -- -- 82 Distributions to GFSI Holdings, Inc. (258) -- -- (258) Other (1) -- -- (1) ------------ ----------- --------- ---------- Net cash used in financing activities (19,277) (360) 360 (19,277) ------------ ----------- --------- ---------- Effect of foreign exchange rate changes on cash -- 38 -- 38 ------------ ----------- --------- ---------- Net increase (decrease) in cash and cash equivalents 15 (14) -- 1 Cash and cash equivalents at beginning of period 1,323 64 -- 1,387 ------------ ----------- --------- ---------- Cash and cash equivalents at end of period $ 1,338 $ 50 $ -- $ 1,388 ============ =========== ========= ==========
8
As of June 28, 2003 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------- ---------- ----------- ---------- Assets: Current assets: Cash and cash equivalents $ 1,323 $ 64 $ -- $ 1,387 Accounts receivable, net 25,027 15,300 (5,970) 34,357 Inventories, net 38,367 4,296 -- 42,663 Prepaid expenses and other current assets 1,198 125 -- 1,323 Deferred income taxes 1,303 -- -- 1,303 ------------ ----------- ----------- ---------- Total current assets 67,218 19,785 (5,970) 81,033 Investment in equity of subsidiaries 17,331 -- (17,331) -- Property, plant and equipment, net 19,624 259 -- 19,883 Investment in parent company bonds 9,900 -- -- 9,900 Other assets 3,957 (987) (2) 2,968 ------------ ----------- ----------- ---------- Total assets $ 118,030 $ 19,057 $ (23,303) $ 113,784 ============ =========== =========== ========== Liabilities and stockholders' equity (deficiency): Current liabilities: Accounts payable $ 13,263 $ 550 $ (5,970) $ 7,843 Accrued interest expense 4,365 -- -- 4,365 Accrued expenses 4,877 1,274 -- 6,151 Income taxes payable 8,948 (98) -- 8,850 Current portion of long-term debt 324 -- -- 324 ------------ ----------- ----------- ---------- Total current liabilities 31,777 1,726 (5,970) 27,533 Deferred income taxes 1,194 -- -- 1,194 Other long-term obligations 491 -- -- 491 Long-term debt, less current portion 158,639 -- -- 158,639 Stockholders' equity (deficiency) (74,071) 17,331 (17,333) (74,073) ------------ ----------- ----------- ---------- Total liabilities and stockholders' equity $ 118,030 $ 19,057 $ (23,303) $ 113,784 (deficiency) ============ =========== =========== ==========
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 expenses 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 =========== ========== =========== ==========
9
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 $ 10,373 $ (939) $ -- $ 9,434 activities Net cash flows provided by (used in) investing (3,914) (33) 1,033 (2,914) activities Cash flows from financing activities: Net repayments under revolving credit agreement (5,738) -- -- (5,738) Payments on long-term debt (130) -- -- (130) Repayment of intercompany debt -- 1,033 (1,033) -- Other (50) -- -- (50) Issuance of long-term debt 450 -- -- 450 Distributions to GFSI Holdings, Inc. (174) -- -- (174) ------------ ---------- ---------- ---------- Net cash flows provided by (used in) financing (5,642) 1,033 (1,033) (5,642) activities ------------ ---------- ---------- ---------- Effect of foreign exchange rate changes on cash -- 66 -- 66 ------------ ---------- ---------- ---------- Net increase in cash and cash equivalents 817 127 -- 944 Cash and cash equivalents at beginning of period 334 (21) -- 313 ------------ ---------- ---------- ---------- Cash and cash equivalents at end of period $ 1,151 $ 106 $ -- $ 1,257 ============ ========== ========== ==========
6. Financing and Recapitalization ------------------------------ On September 8, 2003, the Company amended its existing revolving bank credit agreement ("RBCA"). Under the terms of amendment, the RBCA lenders consented to the series of transactions described below (the "Recapitalization") and extended the term of the RBCA by one year to January 15, 2006. In September 2003, Company management formed a Delaware limited liability company called Gearcap LLC ("Gearcap") to effect the Recapitalization of Holdings. Gearcap purchased 11.375% Senior Discount Notes of Holdings ("Notes") with an aggregate principal amount at maturity of approximately $30.5 million and an accreted book value of $27.4 million at September 27, 2003 (the "Contributed Holdings Discount Notes") for approximately $12.3 million in cash. Gearcap and Holdings subsequently entered into an Exchange Agreement under which they exchanged 8,250 shares of newly authorized Holdings Class C common stock and 11,490 shares of newly authorized Series E 10% Cumulative Preferred Stock for the Contributed Holdings Discount Notes. The Company and Holdings entered into a Contribution Agreement under which Holdings contributed the Contributed Holdings Discount Notes it received from Gearcap to the Company as a capital contribution. The Company intends to pledge the Notes as collateral under the RBCA. On September 26, 2003, the Company purchased Notes with an aggregate principal amount at maturity of approximately $29.5 million and an accreted book value of $26.5 million at September 27, 2003 for approximately $12.2 million. The Company intends to pledge the Notes as collateral under the RBCA. The Company previously owned Notes with an aggregate maturity value of $84 million. The Company had owned 78% of the issued Notes and recorded its investment in Notes as a reduction of stockholders' equity at the acquisition cost of the Notes. During the third quarter of fiscal 2004 the Company's Board of Directors declared a dividend payable to Holdings in Notes with a value at maturity of $21.8 million. At a future date the Company intends to distribute to Holdings the remaining Notes to permit the parent company to formally retire these Notes. The Company is currently restricted under its various long-term debt agreements from making a full distribution of the remaining Notes. At April 3, 2004 Stockholders' equity (deficiency) included a reduction of $25.0 million representing the acquisition cost of the remaining Notes. 10 In September 2003 Holdings entered into a management agreement (the "2003 Management Agreement") with Gearcap under which Gearcap began providing certain services to Holdings and its affiliates. Under the agreement, Larry D. Graveel, Michael H. Gary and J. Craig Peterson (each one a director and officer of the Company and Holdings and a beneficial stockholder of Holdings) ceased to be employed by the Company and became employed by Gearcap. Gearcap incurs salary expenses and life insurance costs on the executives and certain financing costs related to the purchase of the Holdings Notes. The 2003 Management Agreement has a 10 year term. Payments to Gearcap under the 2003 Management Agreement totaled approximately $600,000 through April 3, 2003. The agreement provides for monthly payment of fees and contains a provision for an annual adjustment in fees each September 1 based upon planned services. 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 28, 2003. Management's discussion and analysis of financial condition and results of operations and other sections of this report contain forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products, developments affecting the Company's products and to those discussed in the Company's filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of financial condition, results of operations, liquidity and capital resources is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, long-lived assets, deferred income taxes, accrued expenses, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. The Company's management believes that some of its significant accounting policies involve a higher degree of judgment or complexity than other accounting policies. Identified below are the policies deemed critical to its business and the understanding of its results of operations. Revenue recognition. The Company recognizes revenues when goods are shipped, title has passed, the sales price is fixed and collectibility is reasonably assured. Returns, discounts and sales allowance estimates are based on projected sales trends, historical data and other known factors. If actual returns, discounts and sales allowances are not consistent with the historical data used to calculate these estimates, net sales could either be understated or overstated. Accounts receivable. Accounts receivable consist of amounts due from customers and business partners. The Company maintains an allowance for doubtful accounts to reflect expected credit losses and 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. 11 Furthermore, these judgments must be continually evaluated and updated. If the historic data used to evaluate credit risk does not reflect future collections, or, if the financial condition of the Company's customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. Accounts receivable at April 3, 2004 and June 28, 2003 were net of allowances for doubtful accounts of $816,000 and $906,000, respectively. Inventories. Inventories are carried at the lower of cost or market determined under the First-In, First-Out (FIFO) method. The Company writes down obsolete and unmarketable inventories to their estimated market value based upon, among other things, assumptions about future demand and market conditions. If actual market conditions are less favorable than projected, additional inventory write-downs may be required. The Company also records changes in valuation allowances due to changes in operating strategy, such as the discontinuances of certain product lines and other merchandising decisions related to changes in demand. It is possible that further changes in required inventory allowances may be necessary in the future as a result of market conditions and competitive pressures. Fiscal Period. The Company's fiscal year ends on the Saturday nearest June 30, which results in a 53 week year from time to time. The fiscal year ending in June 2004 will be a 53 week period with the additional week falling in the Company's second quarter ended January 3, 2004. Both the third quarter of fiscal 2004 and the third quarter of fiscal 2003 contain 13 weeks of operations while the nine month fiscal period ended April 3, 2004 has one more week of operations than the comparable period of fiscal 2003. Because of the seasonal nature of the Company's business, and the timing of the additional week, which fell during the holiday period, management believes the effect of the additional week of operations was not significant. COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED APRIL 3, 2004 AND MARCH 29, 2003 Net Sales. Net sales for the quarter ended April 3, 2004 decreased $4.0 million to $37.2 million compared to $41.2 million last year. The 10% decrease in net sales was due to reduced sales of Gear for Sports(R) ("Gear") branded products while sales of our Champion(R) licensed products experienced continued growth. Sales of Gear branded products decreased 20% in comparison to last year. The sales decrease was broad based across most of Gear's customer groups. Management believes that the Company's customers have shifted their purchases to lower priced apparel with less expensive decoration which has reduced sales of higher priced Gear products. Net sales of Champion licensed products for the third quarter of fiscal 2004 increased 10% over the comparable quarter of fiscal 2003. Champion licensed products are more moderately priced as compared to Gear's products. Gross Profit. Gross profit for the quarter ended April 3, 2004 increased 1% to $15.4 million compared to $15.2 million last year. Gross profit as a percentage of net sales increased to 41% for the quarter compared to 37% last year. The benefits of lower cost of product sourcing and improved efficiencies in garment decoration created the increase in gross profit as a percentage of net sales. Operating Expenses. Operating expenses for the quarter ended April 3, 2004 increased 1% to $12.8 million from $12.6 million last year. Beginning in fiscal 2004, the Company pays a 3% royalty on the net sales of Champion branded apparel under its license agreement with the Sara Lee Corporation. Higher sales, marketing and advertising costs in advance of peak Bookstore, Golf and Resort selling seasons and the additional cost of the Sara Lee royalty created the increase in operating expenses. Operating expenses as a percentage of net sales were 34% in the third quarter of fiscal 2004 compared to 31% last year. The additional expenses when divided by lower sales created the increase in operating expenses as a percentage of net sales in comparison to last year. 12 Operating Income. Operating income of $2.6 million in the third quarter of fiscal 2004 was the same as last year. Operating income as a percentage of net sales increased to 7% in the third quarter of fiscal 2004 from 6% in the third quarter of fiscal 2003. The increase in operating income as a percentage of sales resulted from higher gross profit on lower sales volume. Interest Expense. Interest expense in the third quarter of fiscal 2004 was $3.7 million compared to $3.8 million last year. Lower borrowings under the Company's bank credit facility in fiscal 2004 created the decrease in interest expense. Net Loss. Net loss for the third quarter of fiscal 2004 was $641,000 compared to a net loss of $730,000 for the third quarter of fiscal 2003. The decrease in interest expense created the improvement in net loss over the comparable period of last year. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED APRIL 3, 2004 AND MARCH 29, 2003 Net Sales. Net sales for the nine months ended April 3, 2004 decreased 10% to $140.7 million compared to $157.0 million last year. The decrease in net sales was due to reduced sales of Gear for Sports(R) ("Gear") branded products while sales of Champion(R) licensed products increased 8%. Sales of Gear branded products principally to the college bookstore and corporate customer groups decreased 24% in comparison to last year. Management believes that the Company's college bookstore customers have shifted their purchases to lower priced apparel with less expensive decoration which has reduced sales of higher priced Gear products. Reductions in corporate spending on marketing and employee incentive programs have had a negative effect on net sales of the Corporate Division. Champion licensed products are more moderately priced as compared to Gear's for college bookstore customers. Gross Profit. Gross profit for the nine months ended April 3, 2004 decreased 3% to $55.6 million compared to $57.5 million last year. The decrease in gross profit resulted from lower sales. Gross profit as a percentage of net sales increased to 39% for the nine month period compared to 37% last year. The benefits of lower cost of product sourcing and improved efficiencies in garment decoration created the increase in gross profit as a percentage of net sales. Operating Expenses. Operating expenses for the nine months ended April 3, 2004 decreased 4% to $39.0 million from $40.5 million last year. Beginning in fiscal 2004, the Company pays a 3% royalty on the net sales of Champion branded apparel under its license agreement with the Sara Lee Corporation. Lower direct sales expenses were partially offset by the additional cost of the Champion related royalty which created the decrease in operating expenses. Operating expenses as a percentage of net sales were 28% in fiscal 2004 compared to 26% last year. The additional royalty expense and lower sales created the increase in operating expenses as a percentage of net sales in comparison to last year. Operating Income. Operating income for the nine months ended April 3, 2004 decreased 3% to $16.5 million compared to $17.0 million last year. Operating income as a percentage of net sales increased to 12% in fiscal 2004 from 11% in fiscal 2003. The decrease in operating income resulted from lower sales. The increase in operating income as a percentage of sales resulted from higher gross profit on lower sales volume. Interest Expense. Interest expense in the first nine months of fiscal 2004 was $11.4 million compared to $11.1 million last year. The additional week in the first nine months of fiscal 2004 compared to fiscal 2003 created the increase in interest expense. 13 Gain on sale of property, plant and equipment. During the first quarter of fiscal 2004, the Company sold its 100,000 square foot distribution facility located in Lenexa, Kansas, for approximately $2.8 million and recorded a pre-tax gain of approximately $900,000 in other income. The facility was sold as part of a warehouse consolidation and automation initiative which combined distribution operations into a larger, renovated facility and will eliminate several smaller warehouses. The final phase of the warehouse consolidation project is expected to be completed in the fourth quarter of fiscal 2004. Net Income. Net income for the first nine months of fiscal 2004 was $3.7 million compared to $3.6 million last year. The decrease in operating income and higher interest expense were offset by the gain on the sale of the distribution facility to produce the increase in net income. FINANCING AND RECAPITALIZTION On September 8, 2003, the Company amended its existing revolving bank credit agreement ("RBCA"). Under the terms of amendment, the RBCA lenders consented to the series of transactions described below (the "Recapitalization") and extended the term of the RBCA by one year. In September 2003, Company management formed a Delaware limited liability company called Gearcap LLC ("Gearcap") to effect the Recapitalization of Holdings. Gearcap purchased 11.375% Senior Discount Notes of Holdings ("Notes") with an aggregate principal amount at maturity of approximately $30.5 million and an accreted book value of $27.4 million at September 27, 2003 (the "Contributed Holdings Discount Notes") for approximately $12.3 million in cash. Gearcap and Holdings subsequently entered into an Exchange Agreement under which they exchanged 8,250 shares of newly authorized Holdings Class C common stock and 11,490 shares of newly authorized Series E 10% Cumulative Preferred Stock for the Contributed Holdings Discount Notes. The Company and Holdings entered into a Contribution Agreement under which Holdings contributed the Contributed Holdings Discount Notes it received from Gearcap to the Company as a capital contribution. The Company intends to pledge the Notes as collateral under the RBCA. On September 26, 2003 the Company purchased Notes with an aggregate principal amount at maturity of approximately $29.5 million and an accreted book value of $26.5 million at September 27, 2003 for approximately $12.2 million. The Company intends to pledge the Notes as collateral under the RBCA. The Company previously owned Notes with an aggregate maturity value of $84 million. The Company had owned 78% of the issued Notes and recorded its investment in Notes as a reduction of stockholders' equity at the acquisition cost of the Notes. During the third quarter of fiscal 2004 the Company's Board of Directors declared a dividend payable to Holdings in Notes with a value at maturity of $21.8 million. At a future date the Company intends to distribute to Holdings the remaining Notes to permit the parent company to formally retire these Notes. The Company is currently restricted under its various long-term debt agreements from making a full distribution of the remaining Notes. At April 3, 2004 Stockholders' equity (deficiency) included a reduction of $25.0 million representing the acquisition cost of the remaining Notes. The Company's purchasing of the Notes has reduced its future cash dividend obligations to Holdings to enable it to retire the Notes in 2009 from $108 million to $24 million. Additionally, the Company's purchase of the Notes has reduced its future annual cash dividend obligation to Holdings to enable it to pay interest on the Notes commencing in March 2005 from $12.3 million to $2.7 million. 14 > LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in the first nine months of fiscal 2004 was $22.0 million compared to $9.4 million last year. Lower levels of inventory and accounts receivable produced improved fiscal 2004 operating cash flows. Cash used by investing activities in the first nine months of fiscal 2004 was $2.8 million compared to $2.9 million last year. The $2.8 million in proceeds from the sale of the Lenexa distribution facility in fiscal 2004 partially offset the capital expended on the warehouse consolidation project through April 3, 2004. The Company anticipates fiscal 2004 capital expenditures to approximate $6.0 million. Cash used in financing activities in the first nine months of fiscal 2004 was $19.3 million compared to $5.6 million in the comparable period of fiscal 2003. The purchase of Holdings Notes and the repayment of bank debt were the primary uses of cash in fiscal 2004. Under the Company's Revolving Bank Credit Agreement ("RBCA"), up to $65 million of revolving credit availability is provided, of which $16.4 million was borrowed and outstanding and approximately $2.9 million was utilized for outstanding commercial and stand-by letters of credit as of April 3, 2004. At April 3, 2004, $23.1 million was available for future borrowings under the RBCA. The Company was in compliance with its debt covenants at April 3, 2004. 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 2006, although no assurance can be given in this regard. The Company anticipates paying dividends to its parent to enable Holdings to pay corporate income taxes, interest on the remaining 11.375% Senior Discount Notes ("Holdings Discount Notes"), fees payable under consulting 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 its debt and meet its contractual obligations. At April 3, 2004, Holdings' debt to third parties, excluding the debt of its subsidiaries, totaled approximately $23 million. 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 $24.5 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. During the first quarter of fiscal 2004, the Company entered into a ten-year operating lease for approximately 240,000 square feet of space in an existing industrial building near its Lenexa headquarters to support the warehouse consolidation and automation initiative. Rent under the lease commenced in the third quarter of fiscal 2004. Annual rent is $730,000. The agreement provides for one ten year extension and allows the Company an option to expand into an additional 65,000 square feet of existing space during the first 5 years of the lease. 15 > SEASONALITY AND INFLATION The Company experiences seasonal fluctuations in its sales and profitability, with generally higher sales and gross profit in the first and third quarters of its fiscal year. The seasonality of sales and profitability is primarily due to higher college bookstore sales during the first two fiscal quarters. Sales at the Company's Resort and Corporate divisions typically show little seasonal variations. The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE AND MARKET RISK DISCLOSURE The Company's market risk exposure is primarily due to possible fluctuations in interest rates. The fixed rate portion of the Company's long-term debt does not bear significant interest rate risk. An immediate 10% change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year, although there can be no assurances that interest rates will not significantly change. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period ended April 3, 2004. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal 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. 16 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 Exhibit Number Description -------------- ----------- 31.1 Certification of Principal Executive Officer 31.2 Certification of Principal Financial Officer (b) Reports on Form 8-K None. 17 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 7, 2004 /s/ J. Craig Peterson - ------------------------------------------------- J. Craig Peterson Senior Vice President and Chief Financial Officer 18 EX-31 2 exh31-1.txt Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 2004 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 presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and (d) Disclosed in this Quarterly Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /S/ ROBERT M. WOLFF - ------------------------------------ Robert M. Wolff Chairman and Chief Executive Officer EX-31 3 exh31-2.txt Exhibit 31.2 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 2004 I, 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 presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and (d) Disclosed in this Quarterly Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 7, 2004 /S/ J. CRAIG PETERSON - ------------------------------------------------- J. Craig Peterson Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----