-----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, LXVdg5cK8V/6QQssY4E4JKmGwRw815h4rc08RmdcH9u6ZEsjzMIWw1rMcMyBYttm eS9Dpw4qhOESo6DNwP12cA== 0000902561-05-000364.txt : 20051110 0000902561-05-000364.hdr.sgml : 20051110 20051110131244 ACCESSION NUMBER: 0000902561-05-000364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051001 FILED AS OF DATE: 20051110 DATE AS OF CHANGE: 20051110 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: 051192901 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 October 1, 2005. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 333-24189 GFSI, INC. (Exact name of registrant specified in its charter) Delaware 74-2810748 - ---------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9700 Commerce Parkway Lenexa, Kansas 66219 ---------------------------------------- (Address of principal executive offices) (913) 693-3200 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes(X) No ( ) (2) Yes(X) No ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.01 par value per share - 1 share issued and outstanding as of November 1, 2005. 1 GFSI, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q For the Quarter Ended October 1, 2005 INDEX Page PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15 ITEM 4 - CONTROLS AND PROCEDURES 15 PART II - OTHER INFORMATION 16 SIGNATURE PAGE 17 2 GFSI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) October 1, July 2, 2005 2005 ----------- --------- ASSETS Current assets: Cash and cash equivalents $ 1,402 $ 749 Accounts receivable, net 31,814 31,802 Inventories, net 39,063 41,878 Prepaid expenses and other current assets 1,715 1,899 Deferred income taxes 1,056 1,188 --------- --------- Total current assets 75,050 77,516 Property, plant and equipment, net 22,455 22,657 Other assets: Deferred financing costs, net 1,157 1,361 Other 163 161 --------- --------- Total assets $ 98,825 $ 101,695 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 8,119 $ 10,775 Accrued interest expense 1,198 4,396 Accrued expenses 8,563 7,882 Income taxes payable 12,472 11,540 Current portion of long-term debt 190 112 --------- --------- Total current liabilities 30,542 34,705 Deferred income taxes 1,322 1,431 Other long-term obligations 127 127 Long-term debt, less current portion 155,488 154,257 Stockholders' equity (deficiency): Common stock, $.01 par value, 10,000 shares authorized, one share issued and outstanding at October 1, 2005 and July 2, 2005 -- -- Additional paid-in capital 71,442 71,442 Parent company bonds acquired (24,995) (24,995) Accumulated deficiency (135,101) (135,272) --------- --------- Total stockholders' deficiency (88,654) (88,825) --------- --------- Total liabilities and stockholders' equity (deficiency) $ 98,825 $ 101,695 ========= ========= See notes to consolidated financial statements. 3 GFSI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands) Quarter Ended October 1, October 2, 2005 2004 ------------ ------------ Net sales $ 50,772 $ 53,439 Cost of sales 30,539 32,759 ------------ ------------ Gross profit 20,233 20,680 Operating expenses: Selling 7,608 7,357 General and administrative 6,337 6,013 ------------ ------------ 13,945 13,370 ------------ ------------ Operating income 6,288 7,310 Other income (expense): Interest expense (3,831) (3,840) Other (1) 21 ------------ ------------ (3,832) (3,819) ------------ ------------ Income before income taxes 2,456 3,491 Income tax expense 958 1,358 ------------ ------------ Net income $ 1,498 $ 2,133 ============ ============ See notes to consolidated financial statements. 4 GFSI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousand)
Quarter Ended October 1, October 2, 2005 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,498 $ 2,133 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 945 792 Amortization of deferred financing costs 205 214 Gain on sale or disposal of property, plant and equipment -- (20) Deferred income taxes 23 (64) Changes in operating assets and liabilities: Accounts receivable, net (12) (810) Inventories, net 2,815 (715) Prepaid expenses, other current assets and other assets 182 182 Income taxes payable 932 1,361 Accounts payable, accrued expenses and other long-term obligations (5,173) (6,707) --------- ---------- Net cash provided by (used in) operating activities 1,415 (3,634) --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of property, plant and equipment -- 25 Purchases of property, plant and equipment (743) (1,186) --------- ---------- Net cash provided by (used in) investing activities (743) (1,161) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in revolving credit agreement borrowing 1,252 5,360 Distributions to GFSI Holdings, Inc. (1,392) (191) Issuance of long-term debt 100 -- Payments on long-term debt (43) (42) Other (1) (3) --------- ---------- Net cash provided by (used in) financing activities (84) 5,124 --------- ---------- Effect of foreign exchange rate changes on cash 65 51 --------- ---------- Net increase (decrease) in cash and cash equivalents 653 380 Cash and cash equivalents at beginning of period 749 911 --------- ---------- Cash and cash equivalents at end of period $ 1,402 $ 1,291 ========= ========== Supplemental cash flow information: Interest paid $ 6,823 $ 6,762 ========= ========== Income taxes paid $ 8 $ 64 ========= ==========
See notes to consolidated financial statements. 5 GFSI, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) October 1, 2005 1. Basis of Presentation The accompanying unaudited consolidated financial statements of GFSI, Inc. (the "Company") include the accounts of the Company and the accounts of its wholly-owned subsidiaries, Event 1, Inc. ("Event 1"), CC Products, Inc. ("CCP") and GFSI Canada Company. All intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, operations and cash flows of the Company have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. The consolidated balance sheet information as of July 2, 2005 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended July 2, 2005 included in the Company's Annual Report on Form 10-K. The Company is a wholly owned subsidiary of GFSI Holdings, Inc. ("Holdings"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Commitments and Contingencies The Company, in the normal course of business, may be threatened with or named as a defendant in various lawsuits. It is not possible to determine the ultimate disposition of these matters, however, management is of the opinion that there are no known claims or known contingent claims that are likely to have a material adverse effect on the results of operations, financial condition, or cash flows of the Company. 3. Inventories: The following is a summary of inventories at October 1, 2005 and July 2, 2005: (in thousands) October 1, July 2, 2005 2005 ------------ ----------- (unaudited) Undecorated apparel ("blanks") and supplies $ 36,540 $ 39,064 Work in process 229 338 Finished goods 2,533 3,009 ------------ ----------- 39,302 42,411 Allowance for markdowns (239) (533) ------------ ----------- Total $ 39,063 $ 41,878 ============ =========== 6 4. Distribution to Holdings: During the first quarter of fiscal 2006, the Company declared and paid a net $1.4 million distribution to Holdings. The distribution enabled Holdings to pay interest on its 11.375% Notes. Holdings is dependent upon the Company to provide funding to service the 11.375% Notes. 5. Condensed Consolidating Financial Information The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and issuers of guaranteed securities registered or being registered." This information is not necessarily intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with accounting principles generally accepted in the United States of America. Each of the subsidiary guarantors are 100% owned by GFSI, Inc. The subsidiary guarantees of GFSI, Inc.'s debts are full and unconditional and joint and several.
As of October 1, 2005 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. --------- ---------- ------------- ------------ Assets: Current assets: Cash and cash equivalents $ 1,291 $ 111 $ -- $ 1,402 Accounts receivable, net 16,167 43,343 (27,696) 31,814 Inventories, net 36,691 2,372 -- 39,063 Prepaid expenses and other current assets 1,537 178 -- 1,715 Deferred income taxes 1,056 -- -- 1,056 --------- ---------- ----------- ---------- Total current assets 56,742 46,004 (27,696) 75,050 Investment in equity of subsidiaries 42,391 -- (42,391) -- Property, plant and equipment, net 22,395 60 -- 22,455 Other assets 1,948 (628) -- 1,320 --------- ---------- ----------- ---------- Total assets $ 123,476 $ 45,436 $ (70,087) $ 98,825 ========= ========== =========== ========== Liabilities and stockholders' equity (deficiency): Current liabilities: Accounts payable $ 35,745 $ 70 $ (27,696) $ 8,119 Accrued interest expense 1,198 -- -- 1,198 Accrued expenses 5,465 3,098 -- 8,563 Income taxes payable 12,595 (123) -- 12,472 Current portion of long-term debt 190 -- -- 190 --------- ---------- ----------- ---------- Total current liabilities 55,193 3,045 (27,696) 30,542 Deferred income taxes 1,322 -- -- 1,322 Other long-term obligations 127 -- -- 127 Long-term debt, less current portion 155,488 -- -- 155,488 Stockholders' equity (deficiency) (88,654) 42,391 (42,391) (88,654) --------- ---------- ----------- ---------- Total liabilities and stockholders' equity (deficiency) $ 123,476 $ 45,436 $ (70,087) $ 98,825 ========= ========== =========== ==========
7
Quarter ended October 1, 2005 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. --------- ---------- ------------- ------------ Net sales $ 26,641 $ 24,210 $ (79) $ 50,772 Cost of sales 16,985 13,633 (79) 30,539 Selling expenses 3,608 4,000 -- 7,608 General and administrative expense 5,519 818 -- 6,337 ---------- ---------- ----------- ----------- Total costs and expenses 26,112 18,451 (79) 44,484 ---------- ---------- ----------- ----------- Operating income 529 5,759 -- 6,288 Equity in net earnings of subsidiaries 3,511 -- (3,511) -- Interest expense (3,828) (3) -- (3,831) Other (1) -- -- (1) ---------- ----------- ----------- ----------- Income before income taxes 211 5,756 (3,511) 2,456 Income tax expense (benefit) (1,287) 2,245 -- 958 ---------- ----------- ----------- ------------ Net income $ 1,498 $ 3,511 $ (3,511) $ 1,498 ========== =========== =========== ============
Quarter ended October 1, 2005 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. --------- ---------- ------------- ------------ Net cash flows provided by (used in) operating $ 1,271 $ 144 $ -- $ 1,415 activities Intercompany borrowings, net 128 -- (128) -- Purchase of property plant and equipment, net (740) (3) -- (743) ---------- ---------- ----------- ----------- Net cash flows used in investing activities (612) (3) (128) (743) ---------- ----------- ----------- ----------- Cash flows from financing activities: Net borrowings under revolving credit agreements 1,252 -- -- 1,252 Issuance of long-term debt 100 -- -- 100 Payments on long-term debt (43) -- -- (43) Repayments of intercompany borrowings, net -- (128) 128 -- Distributions to GFSI Holdings, Inc. (1,392) -- -- (1,392) Other (1) -- -- (1) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (84) (128) 128 (84) Effect of foreign exchange rate changes on cash -- 65 -- 65 ----------- ----------- ----------- ----------- Net increase in cash and cash equivalents 575 78 -- 653 Cash and cash equivalents at beginning of period 716 33 -- 749 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period $ 1,291 $ 111 $ -- $ 1,402 =========== =========== =========== ===========
8
As of July 2, 2005 (in thousands): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. --------- ---------- ------------- ------------ Assets: Current assets: Cash and cash equivalents $ 716 $ 33 $ -- $ 749 Accounts receivable, net 18,106 39,312 (25,616) 31,802 Inventories, net 39,168 2,710 -- 41,878 Prepaid expenses and other current assets 1,676 223 -- 1,899 Deferred income taxes 1,188 -- -- 1,188 --------- ---------- ------------ ----------- Total current assets 60,854 42,278 (25,616) 77,516 Investment in equity of subsidiaries 38,815 -- (38,815) -- Property, plant and equipment, net 22,592 65 -- 22,657 Other assets 2,278 (756) 1,522 --------- ---------- ------------ ----------- Total assets $ 124,539 $ 41,587 $ (64,431) $ 101,695 ========= ========== ============ =========== Liabilities and stockholders' equity (deficiency): Current liabilities: Accounts payable $ 35,712 $ 679 $ (25,616) $ 10,775 Accrued interest expense 4,396 -- -- 4,396 Accrued expenses 5,673 2,209 -- 7,882 Income taxes payable 11,656 (116) -- 11,540 Current portion of long-term debt 112 -- -- 112 --------- ---------- ------------ ----------- Total current liabilities 57,549 2,772 (25,616) 34,705 Deferred income taxes 1,431 -- -- 1,431 Other long-term obligations 127 -- -- 127 Long-term debt, less current portion 154,257 -- -- 154,257 Stockholders' equity (deficiency) (88,825) 38,815 (38,815) (88,825) --------- ---------- ------------ ----------- Total liabilities and stockholders' equity (deficiency) $ 124,539 $ 41,587 $ (64,431) $ 101,695 ========= ========== ============ ===========
9
Quarter ended October 2, 2004 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------------ ------------ ------------- ------------ Net sales $ 30,573 $ 22,990 $ (124) $ 53,439 Cost of sales 19,465 13,418 (124) 32,759 Selling expenses 3,788 3,569 -- 7,357 General and administrative expense 5,177 836 -- 6,013 ------------- ------------ ------------ ------------ Total costs and expenses 28,430 17,823 (124) 46,129 ------------ ------------ ------------ ----------- Operating income 2,143 5,167 -- 7,310 Equity in net earnings of subsidiaries 3,154 -- (3,154) -- Interest expense (3,838) (2) -- (3,840) Gain (loss) on sale of property, plant and equipment 22 (1) -- 21 ------------ ------------ ------------ ------------ Income before income taxes 1,481 5,164 (3,154) 3,491 Income tax expense (benefit) (652) 2,010 -- 1,358 ------------ ------------ ------------ ------------ Net income $ 2,133 $ 3,154 $ (3,154) $ 2,133 ============ ============ ============ ============
Quarter ended October 2, 2004 (in thousands) (unaudited): Parent Subsidiary Consolidating Consolidated Obligor Guarantors Adjustments GFSI, Inc. ------------ ------------ ------------- ------------ Net cash flows provided by (used in) operating $ (3,640) $ 6 $ -- $ (3,634) activities Net cash flows used in investing activities (1,151) (10) -- (1,161) Cash flows from financing activities: Net borrowings under revolving credit agreements 5,360 -- -- 5,360 Payments on long-term debt (42) -- -- (42) Distributions to GFSI Holdings, Inc. (191) -- -- (191) Other (3) -- -- (3) ----------- ------------ ----------- ------------ Net cash provided by financing activities 5,124 -- -- 5,124 ----------- ------------ ----------- ------------ Effect of foreign exchange rate changes on cash -- 51 -- 51 ----------- ------------ ----------- ------------ Net increase in cash and cash equivalents 333 47 -- 380 Cash and cash equivalents at beginning of period 870 41 -- 911 ----------- ------------ ----------- ------------ Cash and cash equivalents at end of period $ 1,203 $ 88 $ -- $ 1,291 =========== ============ =========== ============
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussions set forth in this Form 10-Q should be read in conjunction with the financial information included herein and the Company's Annual Report on Form 10-K for the year ended July 2, 2005. Management's discussion and analysis of financial condition and results of operations and other sections of this report contain forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products, developments affecting the Company's products and to those discussed in the Company's filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of financial condition, results of operations, liquidity and capital resources is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, long-lived assets, deferred income taxes, accrued expenses, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. The Company's management believes that some of its significant accounting policies involve a higher degree of judgment or complexity than other accounting policies. Identified below are the policies deemed critical to its business and the understanding of its results of operations. Revenue recognition. The Company recognizes revenues when goods are shipped, title has passed, the sales price is fixed and collectibility is reasonably assured. Returns, discounts and sales allowance estimates are based on projected sales trends, historical data and other known factors. If actual returns, discounts and sales allowances are not consistent with the historical data used to calculate these estimates, net sales could either be understated or overstated. Accounts receivable. Accounts receivable consist of amounts due from customers and business partners. The Company maintains an allowance for doubtful accounts to reflect expected credit losses and generally provides for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit-worthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the historic data used to evaluate credit risk does not reflect future collections, or, if the financial condition of the Company's customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. Accounts receivable at October 1, 2005 and July 2, 2005 were net of allowance for doubtful accounts of $545,000 and $540,000, respectively. 11 Reserves for self-insurance. The Company seeks to employ cost effective risk management programs. At times the Company has elected to retain a portion of insurance risk related to workers' compensation claims which are covered under insurance programs with high deductible limits. The Company also actively pursues programs intended to effectively manage the incidence of workplace injuries. Reserves for reported but unpaid losses, as well as incurred but not reported losses, related to the retained risks are calculated based upon loss development factors, as well as other assumptions considered by management, including assumptions provided by other external professionals such as insurance brokers, consultants and carriers. The factors and assumptions used are subject to change based upon historical experience, as well as changes in expected cost trends and other factors. Inventories. Inventories are carried at the lower of cost or market determined under the First-In, First-Out (FIFO) method. The Company writes down obsolete and unmarketable inventories to their estimated market value based upon, among other things, assumptions about future demand and market conditions. If actual market conditions are less favorable than projected, additional inventory write-downs may be required. The Company also records changes in valuation allowances due to changes in operating strategy, such as the discontinuances of certain product lines and other merchandising decisions related to changes in demand. It is possible that further changes in required inventory allowances may be necessary in the future as a result of market conditions and competitive pressures. COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED OCTOBER 1, 2005 AND OCTOBER 2, 2004 Net Sales. Net sales for the quarter ended October 1, 2005 were $50.8 million compared to $53.4 million last year, a 5% decline. Sales of the Champion(R) brand increased to $23.8 million a 5% increase over last year, principally due to higher sales volumes in its collegiate and resort channels. Sales of recently introduced Sunice(R) and Robert Trent Jones(R) branded golf and resort apparel added $1.1 million in sales to the first quarter of fiscal 2006. Sales of Gear for Sports(R) ("Gear") branded merchandise declined by $5.3 million from last year. As expected, the Gear collegiate and golf sales decreased by $2.0 million due to the Company's decisions to discontinue a private branding initiative with one of its major collegiate customers and to not participate in certain professional golf tournaments to the extent it did last year. In addition, Gear's resort and golf sales were adversely affected during the quarter due to the severe weather conditions affecting the United States and Caribbean Basin. The Company expects these primary golf and resort destination areas to continue to be adversely affected for the second and third quarters of fiscal 2006 due to the damage from the hurricanes. Gross Profit. Gross profit for the quarter ended October 1, 2005 decreased 2% to $20.2 million compared to $20.7 million last year. The decrease in gross profit resulted from lower sales. Gross profit as a percentage of net sales was 40% in the first quarter of fiscal 2006 compared to 39% last year. The increase in gross profit as a percentage of sales resulted from improved product sourcing and warehousing operations and expense savings related to more efficient levels of inventory in comparison to last year. Operating Expenses. Operating expenses for the quarter ended October 1, 2005 increased 4% to $13.9 million from $13.4 million last year. Operating expenses as a percentage of net sales were 27% in the first quarter of fiscal 2006 compared to 25% last year. Royalty costs incurred with the introduction of the Sunice(R) and Robert Trent Jones(R) brands during the quarter created the increase in selling expenses. In addition, the Company sold more Champion(R) licensed apparel at higher royalty rates than in the first quarter of fiscal 2005. The royalty obligation on Champion(R) branded apparel in fiscal 2005 was 4% of net sales compared to 5% for fiscal 2006. General and administrative costs increased principally due to higher depreciation and amortization expenses related to the Company's enterprise wide application software and hardware upgrade completed in December 2004. The increase in operating expenses as a percentage of sales over last year was due to higher royalty, depreciation and amortization expenses on lower sales. 12 Operating Income. Operating income decreased 14% to $6.3 million in the first quarter of fiscal 2006 compared to $7.3 million last year. Operating income as a percentage of net sales decreased to 12% in the first quarter of fiscal 2006 from 14% in the first quarter of fiscal 2005. Lower sales along with increased operating expenses created the decrease in operating income. Interest Expense. Interest expense in the first quarter of fiscal 2006 was $3.8 million approximately the same as last year. The effect of lower borrowings levels was offset by higher interest rates. Net Income. Net income for the first quarter of fiscal 2006 was $1.5 million compared to $2.1 million for the first quarter of fiscal 2005, a decrease of $635,000 or 30%. The current year's decrease in operating income created the comparative decrease in net income. UNDER ARMOUR(R) LICENSE AGREEMENT During October 2005 the Company entered into a license agreement with Under Armour, Inc. to market decorated Under Armour(R) garments in selected markets. Under Armour develops and markets performance apparel to athletic consumers for all climates and conditions. The six year license agreement is for the Company's collegiate, golf and military retail sales channels. The Company plans to commence product shipments in June 2006. Sales for the Under Armour brand are not expected to be significant in fiscal 2006. The Company expects to incur marketing and preproduction costs starting in the second quarter of fiscal 2006. The Company believes it may incur up to $500,000 in marketing and preproduction costs prior to the initial shipments of its Under Armour(R) licensed products. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in the first quarter of fiscal 2006 was $1.4 million compared to cash used by operating activities of $3.6 million last year. Reduced inventory levels and lower payments to vendors and suppliers produced the increase in the first quarter's fiscal 2006 operating cash flows. Cash used in investing activities in the first quarter of fiscal 2006 was $743,000 compared to $1.2 million last year. Purchases of property, plant and equipment were the principal investing activity in both years. Capital expenditures were higher last year due to spending in preparation for the Company's December 2004 enterprise wide application software and hardware upgrade. The Company anticipates fiscal 2006 capital expenditures to approximate $2.5 million. Cash used by financing activities in the first quarter of fiscal 2006 was $84,000 compared to cash provided by financing activities of $5.1 million in the comparable period of fiscal 2005. In the first quarter of fiscal 2006 the Company borrowed $1.4 million to make a distribution to Holdings to enable Holdings to pay interest payment on its 11.375% Notes. In fiscal 2005 the Company borrowed more heavily, primarily to finance higher levels of inventory, receivables and capital expenditures. The Company utilizes its Revolving Bank Credit Agreement ("RBCA") with a group of financial institutions to provide a revolving line of credit. On October 4, 2004 the Company amended its $65 million RBCA to extend the term of the credit agreement to January 15, 2007. Under the Company's RBCA up to $65 13 million of revolving credit availability is provided, of which $20.1 million was borrowed and outstanding and approximately $3.3 million was utilized for outstanding commercial and stand-by letters of credit as of October 1, 2005. At October 1, 2005, $24.3 million was available for future borrowings under the RBCA. The Company believes that cash flows from operating activities and borrowings under the RBCA will be adequate to meet the Company's short-term and future liquidity requirements prior to the maturity of the RBCA in fiscal 2007, although no assurance can be given in this regard. The Company's current intention is to refinance the RBCA prior to its maturity; however, there can be no assurances that the RBCA will be renewed on similar terms or at all. In addition, in March and December 2007, the 9.625% Senior Subordinated Notes in the amount of $134,900,000 become due and payable. The Company's current intention is to refinance the Senior Subordinated Notes, however, there can be no assurances that the Senior Subordinated Notes will be refinanced on similar terms or at all. The Company anticipates paying dividends to Holdings to enable Holdings to pay corporate income taxes, pursuant to a Tax Sharing Agreement, interest on its 11.375% Notes, fees payable under management agreements, fees payable under a non-competition agreement, and certain other ordinary course expenses. Holdings is dependent upon the cash flows of the Company to provide funds to service the 11.375% Notes. At October 1, 2005, Holdings' debt to third parties totaled approximately $24.5 million. The 11.375% Notes annual cash flow requirements commenced in March 2005 with semi-annual cash installments of approximately $1.4 million. SEASONALITY AND INFLATION The Company experiences seasonal fluctuations in its sales and profitability, with generally higher sales and gross profit in the first and second quarters of its fiscal year. The seasonality of sales and profitability is primarily due to higher college bookstore sales during the first two fiscal quarters. Sales at the Company's Resort and Corporate divisions typically show little seasonal variations. The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE AND MARKET RISK DISCLOSURE The Company's market risk exposure is primarily due to possible fluctuations in interest rates. The fixed rate portion of the Company's long-term debt does not bear significant interest rate risk. An immediate 10% change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year, although there can be no assurances that interest rates will not significantly change. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the fiscal quarter ended October 1, 2005. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal control over financial reporting during the fiscal quarter ended October 1, 2005 that have affected, or are reasonably likely to materially effect, the Company's internal control over financial reporting. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any pending legal proceeding the resolution of which, the management of the Company believes, would have a material adverse effect on the Company's results of operations or financial condition, nor to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits Exhibit Number Description ------- ----------- 31.1 Certification of Principal Executive Officer. 31.2 Certification of Principal Financial Officer. 32.1 Section 1350 Certification of the Chief Executive Officer. 32.2 Section 1350 Certification of the Chief Financial Officer. 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. November 9, 2005 /s/ J. Craig Peterson ---------------------------------------------------- J. Craig Peterson, Sr. Vice President of Finance and Principal Accounting Officer 17 EX-31.1 2 exh31_1.txt EXHIBIT 31.1 CERTIFICATE I, J. Craig Peterson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GFSI, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officers 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 functions): 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: November 9, 2005 /s/ J. Craig Peterson --------------------------------------- Name: J. Craig Peterson Title: Senior Vice President and Chief Financial Officer EX-31.2 3 exh31_2.txt EXHIBIT 31.2 CERTIFICATE I, Robert M. Wolff, certify that: 1. I have reviewed this quarterly report on Form 10-Q of GFSI, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officers 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 functions): 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: November 9, 2005 /s/ Robert M. Wolff ------------------------------------ Name: Robert M. Wolff Title: Chief Executive Officer and Chairman of the Board EX-32.1 4 exh32_1.txt EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, being the Chairman and Principal Executive Officer of GFSI, Inc., a Delaware corporation (the "Registrant"), hereby certifies that the Quarterly Report on Form 10-Q (the "Quarterly Report") of the Registrant for the period ended October 1, 2005, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. ss.78m(a)) and that the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: November 9, 2005 /s/ Robert M. Wolff - ---------------------------------------- Robert M. Wolff Chairman and Principal Executive Officer EX-32.2 5 exh32_2.txt EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, being the Senior Vice President, Principal Financial Officer and a Director of GFSI, Inc., a Delaware corporation (the "Registrant"), hereby certifies that the Quarterly Report on Form 10-Q (the "Quarterly Report") of the Registrant for the period ended October 1, 2005, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. ss.78m(a)) and that the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: November 9, 2005 /s/ J. Craig Peterson - ---------------------------------------- J. Craig Peterson Senior Vice President, Principal Financial Officer and a Director -----END PRIVACY-ENHANCED MESSAGE-----