-----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, CQXatoweEjv57GdOyJw6wxAovr340sbotAUEEeGPFoD+dAm95tDAzy66oh1u6K0C kxiar+Wzrq6pJXszdJOwwg== 0000940180-98-000165.txt : 19980218 0000940180-98-000165.hdr.sgml : 19980218 ACCESSION NUMBER: 0000940180-98-000165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980102 FILED AS OF DATE: 19980217 SROS: NONE 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: SEC FILE NUMBER: 333-24189 FILM NUMBER: 98542257 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 10-Q 1 FORM 10-Q FOR PERIOD ENDING 01/02/1998 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 January 2, 1998 --------------- ( )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 as specified in its charter)
Delaware 74-2810748 - -------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization)
9700 Commerce Parkway Lenexa, Kansas 66219 (address of principal executive offices) Registrant's telephone number, including area code (913) 888-0445 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes (X) No ( ) (2) Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, $0.01 par value per share - 10,000 shares issued and outstanding as of February 1, 1998 GFSI, INC. Quarterly Report on Form 10-Q For the Quarter Ended January 2, 1998 INDEX
Page ---- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) Balance Sheets 3 Statements of Income 4 Statements of Cash Flows 5 Notes to Financial Statements 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II - OTHER INFORMATION 15 SIGNATURE PAGE 16
Page 2 GFSI, INC. BALANCE SHEETS (UNAUDITED) (In thousands, except share data)
June 27, January 2, 1997 1998 ---------- ------------ Assets Current assets: Cash & cash equivalents $1,117 $607 Accounts receivable, net 23,687 31,233 Inventories, net 37,562 33,861 Prepaid expenses and other current assets 1,286 716 Deferred income taxes 926 797 ---------- ------------ Total current assets 64,578 67,214 Property, plant and equipment, net 21,548 20,668 Other assets: Deferred financing costs, net 9,661 9,081 Other 4 4 ---------- ------------ Total assets $95,791 $96,967 ========== ============ Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $12,199 $7,017 Accrued interest expense 4,236 5,298 Accrued expenses 5,543 6,933 Income taxes payable 338 1,338 Current portion of long-term debt 3,375 4,750 ---------- ------------ Total current liabilities 25,691 25,336 Deferred income taxes 1,436 1,436 Revolving credit agreement 3,000 --- Other long-term obligations 450 450 Long-term debt, less current portion 186,625 183,000 Stockholders' equity (deficit): Common stock, $.01 par value, 10,000 --- --- shares authorized, issued and outstanding at January 2, 1998 and June 27, 1997 Additional paid-in capital 49,939 50,727 Accumulated deficit (171,350) (163,982) ---------- ------------ Total stockholders' deficit (121,411) (113,255) ---------- ------------ Total liabilities and stockholders' deficit $95,791 $96,967 ========== ============
NOTE: The balance sheet at June 27, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to financial statements. Page 3 GFSI, INC. STATEMENTS OF INCOME (UNAUDITED) (In thousands)
Quarter Ended Six Months Ended December 31, January 2, December 31, January 2, 1996 1998 1996 1998 ----------------------- ----------------------- ------------------- ------------------- Net sales $51,439 $56,541 $104,811 $116,903 Cost of sales 29,362 32,748 59,458 66,287 ----------------------- ----------------------- ------------------- ------------------- Gross profit 22,077 23,793 45,353 50,616 Operating expenses: Selling 4,856 5,341 10,406 11,846 General and administrative 6,924 7,500 12,828 14,340 ----------------------- ----------------------- ------------------- ------------------- 11,780 12,841 23,234 26,186 ----------------------- ----------------------- ------------------- ------------------- Operating income 10,297 10,952 22,119 24,430 Other income (expense): Interest expense (726) (5,135) (1,465) (9,974) Other, net 17 (29) 43 (29) ----------------------- ----------------------- ------------------- ------------------- (709) (5,164) (1,422) (10,003) ----------------------- ----------------------- ------------------- ------------------- Income before income taxes 9,588 5,788 20,697 14,427 Provision for income taxes --- 2,376 --- 5,918 ----------------------- ----------------------- ------------------- ------------------- Net income $9,588 $3,412 $20,697 $8,509 ======================= ======================= =================== ===================
See notes to financial statements. Page 4 GFSI, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended December 31, January 2, 1996 1998 ----------------------- ----------------------- Cash flows from operating activities: Net income $20,697 $8,509 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,668 1,468 Amortization of deferred financing costs 4 580 (Gain) loss on sale or disposal of property, plant and equipment (24) 30 Deferred income taxes --- 129 Increase in cash value of life insurance (718) --- Changes in operating assets and liabilities: Accounts receivable, net (3,569) (7,546) Inventories, net (291) 3,701 Prepaid expenses, other current assets and other assets (105) 570 Income taxes payable --- 1,000 Accounts payable, accrued expenses and other long-term obligations 1,336 (2,730) ----------------------- ----------------------- Net cash provided by operating activities 18,998 5,711 Cash flows from investing activities: Proceeds from sales of property, plant and equipment 48 267 Purchases of property, plant and equipment (2,132) (885) ----------------------- ----------------------- Net cash used in investing activities (2,084) (618) Cash flows from financing activities: Net changes to short-term borrowings (1,000) (3,000) Proceeds from long-term debt 2,000 --- Payments on long-term debt (898) (2,250) Capital contribution from GFSI Holdings, Inc. --- 788 Distributions to GFSI Holdings, Inc. --- (1,141) Distributions to Winning Ways Inc. shareholders (17,831) --- Proceeds from sale of treasury stock 1,402 --- ----------------------- ----------------------- Net cash used in financing activities (16,327) (5,603) ----------------------- ----------------------- Net increase (decrease) in cash and cash equivalents 587 (510) Cash and cash equivalents at beginning of period 140 1,117 ----------------------- ----------------------- Cash and cash equivalents at end of period $727 $607 ======================= ======================= Supplemental cash flow information: Interest paid $1,483 $8,343 ======================= ======================= Income taxes paid $ --- $4,788 ======================= =======================
See notes to financial statements. Page 5 GFSI, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) January 2, 1998 1. Basis of Presentation --------------------- The accompanying unaudited financial statements of GFSI, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and operations of the Company have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the financial statements and footnotes thereto for the year ended June 27, 1997, included in the Company's Annual Report on Form 10-K. 2. Recapitalization Transaction ---------------------------- On October 31, 1996, the Board of Directors of Winning Ways, Inc. ("Winning Ways") executed a letter of intent to enter into a transaction with The Jordan Company. The Transaction included the formation of a holding company, GFSI Holdings, Inc. ("Holdings") and the Company, a wholly owned subsidiary of Holdings, to effect the acquisition of Winning Ways. On February 27, 1997, pursuant to the acquisition agreement, Holdings and the Company acquired all of the issued and outstanding capital stock of Winning Ways, and immediately thereafter merged Winning Ways with and into the Company with the Company as the surviving entity. All of the capital stock of Winning Ways acquired by Holdings in connection with the acquisition was contributed to the Company along with the balance of the Equity Contribution, as described below. The aggregate purchase price for Winning Ways was $242.3 million, consisting of $173.1 million in cash at closing, a post closing payment at April 30, 1997 of $10.0 million and the repayment of $59.2 million of Winning Ways' existing indebtedness. To finance the Acquisition, including approximately $11.5 million of related fees and expenses: (i) The Jordan Company, its affiliates and MCIT PLC (collectively the "Jordan Investors") and certain members of management (the "Management Investors") invested $52.2 million in Holdings and Holdings contributed $51.4 million of this amount to the Company (the "Equity Contribution"); (ii) the Company entered into a credit agreement (the "New Credit Agreement") which provides for borrowings of up to $115.0 million, of which approximately $68.0 million was outstanding at closing and approximately $22.9 million was utilized to cover outstanding letters of credit at closing; and (iii) the Company issued $125.0 million of Senior Subordinated Notes (the "Senior Subordinated Notes") which were purchased by institutional investors through a Rule 144A private placement. The Equity Contribution was comprised of (i) a contribution of $13.6 million from the Jordan Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings; (ii) a contribution of $13.6 million from the Management Investors to Holdings in exchange for Holdings Preferred Stock and approximately 50% of the Common Stock of Holdings, and (iii) a contribution of $25.0 million Page 6 from a Jordan Investor to Holdings in exchange for subordinated notes of Holdings (the "Holdings Subordinated Notes"). Approximately $0.8 million of the contribution from the Management Investors was financed by loans from Holdings. The transactions are reflected in the accompanying unaudited financial statements of the Company as of and for the quarter ended January 2, 1998 as a leveraged recapitalization under which the existing basis of accounting for Winning Ways was continued for financial accounting and reporting purposes. The historical financial information presented herein includes the operations and activities of Winning Ways through February 27, 1997 and the merged entity, GFSI, Inc., subsequent thereto as a result of the merger and the leveraged recapitalization. Subsequent to the recapitalization transactions described above, the Company is a wholly owned subsidiary of Holdings. Holdings is dependent upon the cash flows of the Company to provide funds to enable Holdings to pay consolidated income taxes, fees payable under a consulting agreement and certain other ordinary course expenses incurred on behalf of the Company. In addition, Holdings is dependent upon the cash flows of the Company to provide funds to service the indebtedness represented by $50.0 million of Holdings Subordinated Discount Notes (the "Discount Notes") which were issued by Holdings in September, 1997 and purchased by institutional investors through a Rule 144A private placement (the "Old Offering"). In the Old Offering certain holders of the Holdings Subordinated Notes and Holdings Preferred Stock issued and sold units (the "Units") consisting of 11.375% Subordinated Discount Notes (the "Subordinated Discount Notes") due 2009 and 11.375% Series D Preferred Stock due 2009 (the "Preferred Stock") which were exchangeable at the option of Holdings any time on or after September 29, 1997 into 11.375% Series A Senior Discount Notes due 2009 (the "Old Notes"). On October 23, 1997, the Units were exchanged into Old Notes (the "Old Exchange"). The Company did not receive any proceeds from the sale or exchange of the Units. Holdings Registration Statement on Form S-4 was declared effective on December 30, 1997, providing for the exchange of the Discount Notes registered under the Securities Act, for the Old Notes. The Discount Notes were issued to repay $25 million of Holdings Subordinated Notes and $25.0 million of Holdings Preferred Stock and accrued dividends. The Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash on March 15 and September 15 of each year, commencing on March 15, 2005. Holdings will be dependent on the Company to provide funds to service the indebtedness. Additionally, the remaining cumulative Holdings Preferred Stock will accrue dividends totaling approximately $427,000 annually. Holdings Preferred Stock may be redeemed at stated value (approximately $3.6 million) plus accrued dividends with mandatory redemption in 2009. 3. Commitments and Contingencies ----------------------------- The Company, in the normal course of business, is threatened with or named as a defendant in various lawsuits. It is not possible to determine the ultimate disposition of these matters, however, management is of the opinion that there are no known claims or known contingent claims that are likely to have a material adverse effect on the results of operations, financial condition, or cash flows of the Company. 4. New Accounting Standards ------------------------ Page 7 SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997. This Statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement will become effective for fiscal years beginning after December 15, 1997. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued in June 1997. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is in the process of evaluating the impact or applicability of this new standard on the presentation of the financial statements and the disclosures therein. This statement will become effective for fiscal years beginning after December 15, 1997. Page 8 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 27, 1997. The discussions set forth within and comments made by the Company from time to time may contain forward-looking comments based on current expectations that involve a number of risks and uncertainties. Actual results could differ materially from those projected or suggested in the forward-looking comments. Factors that could cause the Company's actual results in future periods to differ materially include, but are not limited to, those which may be discussed herein, as well as those discussed or identified from time to time in the Company's filings with the Commission. Overview The Company is a leading designer, manufacturer and marketer of high quality, custom designed sportswear and activewear bearing names, logos and insignia of resorts, corporations, colleges and professional sports leagues and teams. The Company, which was founded in 1974, custom designs and decorates an extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage. The Company markets its products to over 13,000 active customer accounts through its well-established and diversified distribution channels, rather than through the price sensitive mass merchandise, discount and department store distribution channels. On February 27, 1997, GFSI Holdings, Inc. ("Holdings") acquired all of the issued and outstanding capital stock of Winning Ways, Inc. ("Winning Ways") and immediately thereafter merged Winning Ways with and into the Company, with the Company as the surviving entity. All of the capital stock of Winning Ways acquired by Holdings in connection with the acquisition was contributed to the Company along with the balance of equity contributions. See Note 2 - Recapitalization Transaction, included herein, for further information. EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Statements of Cash Flows of the Company herein for further information. Sales Divisions The Company markets its products, which include custom designed fleecewear, jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and sports luggage, through four sales divisions. Page 9 The Resort Division (29.4% of year-to-date fiscal 1998 net sales) is a leading marketer of custom logoed sportswear and activewear to destination resorts, family entertainment companies, hotel chains, golf clubs, cruise lines, casinos and United States military bases. The Corporate Division (32.8% of year-to-date fiscal 1998 net sales) is a leading marketer of corporate identity sportswear and activewear for use by a diverse group of corporations in incentive and promotional programs as well as for office casual wear and uniforms. The College Bookstore Division (25.6% of year-to-date fiscal 1998 net sales) is a leading marketer of custom designed, embroidered and silk-screened sportswear and activewear products to nearly every major college and university in the United States. The Sports Specialty Division (6.4% of year-to-date fiscal 1998 net sales), established in 1994, has entered into licensing agreements to design, manufacture and market sportswear and activewear bearing the names, logos and insignia of professional sports leagues and teams as well as major sporting events. The Company's licensors include, among others, Major League Baseball, the National Basketball Association, the National Hockey League and NASCAR. The following sets forth the amount and percentage of net sales for each of the periods indicated (dollars in thousands):
Quarter Ended Six Months Ended December 31, 1996 January 2, 1998 December 31, 1996 January 2, 1998 ------------------- ----------------- ------------------- ---------------- Resort $17,099 35.4% $15,744 27.9% $36,000 34.3% $34,428 29.4% Corporate 15,669 22.8% 21,717 38.4% 27,861 26.6% 38,286 32.8% Bookstore 9,550 33.3% 10,646 18.8% 27,331 26.1% 29,988 25.6% Sports Specialty 2,848 4.8% 3,849 6.8% 5,386 5.1% 7,450 6.4% Other 6,273 3.7% 4,585 8.1% 8,233 7.9% 6,751 5.8% ------- -------- ------- ------- Total $51,439 $ 56,541 $ 104,811 $ 116,903 ======= ======== ======= ========
Results of Operations The following table sets forth certain historical financial information of the Company, expressed as a percentage of net sales, for the quarters and six month periods ended December 31, 1996 and January 2, 1998:
Quarter Ended Six Months Ended December 31, January 2, December 31, January 2, 1996 1998 1996 1998 -------- -------- -------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 42.9 42.1 43.3 43.3 EBITDA 21.8 20.7 22.7 22.2 Operating income 20.0 19.4 21.1 20.9
Page 10 Comparison of Operating Results for the Quarters and Six Month Periods Ended January 2, 1998 and December 31, 1996. Net Sales. Net sales for the second quarter of fiscal 1998, the three months ended January 2, 1998, increased 9.9% to $56.5 million from $51.4 million in the second quarter of fiscal 1997. Net sales for the first six months of fiscal 1998 increased 11.5% to $116.9 million from $104.8 million in the first six months of fiscal 1997. The increase in net sales for both periods primarily reflects increases in net sales at the Company's Corporate, Sports Specialty and Bookstore divisions for the six months of 37.4%, 38.3% and 9.7%, respectively, and was partially offset by a 4.4% decrease in net sales for the six month period at the Resort division. These increases were driven primarily by volume increases in both periods due to continued account expansion and the introduction of new product lines through each distribution channel. The decrease in the resort division was due to fluctuations in business with our top 10 customers within this market. Gross Profit. Gross profit for the second quarter of fiscal 1998 increased 7.7% to $23.8 million from $22.1 million in the first quarter of fiscal 1997. Gross profit for the first six months of fiscal 1998 increased 11.5% to $50.6 million from $45.4 million in the first six months of fiscal 1997. The increase in gross profit is primarily a result of the net sales increase described above. For the second quarter of fiscal 1998, gross profit as a percentage of net sales slightly decreased to 42.1% compared to 42.9% in the second quarter of fiscal 1997. For the first six months of fiscal 1998, gross profit as a percentage of net sales was 43.3%, consistent with the first six months of fiscal 1997. The slight decrease in margin for the second quarter reflects an increase in embroidery costs compared to the second quarter of fiscal 1997. The Company anticipates margins during the second half of the fiscal year to be below unusually high margins recorded during the third and fourth quarters of fiscal 1997. Operating Expenses. Operating expenses for the second quarter of fiscal 1998 increased 8.5% to $12.8 million from $11.8 million in the second quarter of fiscal 1997. For the first six months, operating expenses increased 12.9% to $26.2 million from $23.2 million in the first six months of fiscal 1997. Operating expenses for both periods increased due primarily to increased sales and staffing levels. Operating expenses as a percentage of net sales decreased to 22.7% from 23.0% in the prior year second quarter. For the first six months, operating expenses increased to 22.4% from 22.1% in the prior year period. The increase in operating expenses for the first six months, as a percentage of net sales, is primarily due to an increase in selling expenses as the Company continues to aggressively expand its Corporate and Sports Specialty divisions. EBITDA. EBITDA for the second quarter of fiscal 1998 increased 4.5% to $11.7 million from $11.2 million in the second quarter of fiscal 1997. For the first six months, EBITDA increased 8.8% to $25.9 million from $23.8 million in the first six months of fiscal 1997. The increase for both periods is primarily a result of the net sales and related gross profit increase partially offset by the increase in operating expenses, as described above. EBITDA as a percentage of net sales decreased to 20.7% from 21.8% in the second quarter of fiscal 1997. For the first six months of fiscal 1998, EBITDA decreased to 22.2% from 22.7% in the first six months of fiscal 1997. The decrease in margin for both periods reflects the changes in gross profit and an increase in operating expenses, as described above. Page 11 Operating Income. Operating income for the second quarter of fiscal 1998 increased 6.8% to $11.0 million from $10.3 million in the second quarter of fiscal 1997. For the first six months, operating income increased 10.4% to $24.4 million from $22.1 million in the first six months of fiscal 1997. The increase for both periods is primarily a result of the net sales increase described above. Operating income as a percentage of net sales decreased for the first quarter of fiscal 1998 to 19.4% from 20.0% in fiscal 1997, and to 20.9% for the six month period of fiscal 1998 from 21.1% in the first six months of fiscal 1997. The decrease as a percentage of net sales is due to the decrease in margin as a percentage of sales for the second quarter as noted above in addition to the increase in operating expenses as a percentage of net sales. Other Income (Expense). Other expense for the second quarter of fiscal 1998 increased to $5.2 million from $709,000 in the second quarter of fiscal 1997. For the first six months of fiscal 1998, other expense increased to $10.0 million from $1.4 million in the first six months of fiscal 1997. The increase for both periods is primarily a result of increased interest expense associated with the Company's recapitalization and subsequent issuance of $125 million Senior Subordinated Notes and borrowings under the Company's $115 million New Credit Agreement. The effect of derivative financial instruments serves to minimize unplanned changes in interest expense due to changes in interest rates. As such, interest rate fluctuations and their effect were immaterial for the periods presented. A reasonable likely change in the underlying rate, price or index would not have a material impact on the financial position of the Company. Income Taxes. An income tax provision of $2.4 million was recorded for the second quarter of fiscal 1998 and $5.9 million for the first six months due to the Company's change in tax status from an S-Corporation to a C-Corporation for income tax reporting purposes which was effective February 27, 1997. Company earnings subsequent to February 27, 1997 are subject to corporate income taxes. Net Income. Net income for the second quarter of fiscal 1998 was $3.4 million compared to $9.6 million in the second quarter of fiscal 1997. For the first six months of fiscal 1998, net income was $8.5 million compared to $20.7 million in the first six months of fiscal 1997. The decrease in net income for both periods is primarily the result of interest expense and income taxes, as mentioned above. Liquidity and Capital Resources Cash provided by operating activities for the first six months of fiscal 1998 was $5.7 million compared to $19.0 million in the first six months of fiscal 1997. The decrease in cash provided by operating activities between the two periods resulted from a decrease in net income, as previously discussed, in addition to increased accounts receivable due to a 11.5% increase in sales compared to the prior year period. Cash used by investing activities in the first six months of fiscal 1998 was $618,000 compared to cash used of $2.1 million in the first six months of fiscal 1997. The decrease in cash used was a result of a decrease in capital expenditure purchases from $2.1 million in the first six months of fiscal 1997 to $885,000 in the first six months of fiscal 1998. Cash used by financing activities for the first six months of fiscal 1998 was $5.6 million compared to cash used of $16.3 million in the first six months of fiscal 1997. The decrease in Page 12 cash used compared to the prior year period is due to Subchapter S distributions to Winning Ways shareholders in the prior year period. Due to the recapitalization transactions, as previously discussed, the Company changed from S-Corporation status to C-Corporation status for income tax reporting purposes. The Company believes that cash flow from operating activities and borrowings under the New Credit Agreement will be adequate to meet the Company's short-term and long-term liquidity requirements prior to the maturity of its credit facilities in 2007, although no assurance can be given in this regard. While the Company is currently evaluating its future capital requirements, no material capital commitments existed as of quarter end. Under the New Credit Agreement, the Revolver provides $50 million of revolving credit availability (of which no borrowings were outstanding as of January 2, 1998 and approximately $19.4 million was utilized for outstanding commercial and stand-by letters of credit). The Company anticipates paying dividends to Holdings to enable Holdings to pay corporate income taxes, fees payable under a consulting agreement and certain other ordinary course expenses incurred on behalf of the Company. Holdings is dependent upon the cash flows of the Company to provide funds to service the indebtedness represented by the $50.0 million of Discount Notes. The Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash on March 15 and September 15 of each year, commencing on March 15, 2005. Holdings will be dependent on the Company to provide funds to service the indebtedness. Additionally, the remaining cumulative Holdings Preferred Stock will accrue dividends totaling approximately $427,000 annually. Holdings Preferred Stock may be redeemed at stated value (approximately $3.6 million) plus accrued dividends with mandatory redemption in 2009. The Company monitors market risk with respect to the derivative instruments entered into by the Company, including the value of such instruments, by regularly consulting with its senior financial managers. The Company enters into such agreements for hedging purposes and not with a view toward speculating in the underlying instruments. Accordingly, any reasonably likely change in the level of the underlying rate, price or index would not be likely to have either a favorable or adverse impact on the Company's business, operations or financial condition, including with respect to interest expense. Seasonality and Inflation The Company experiences seasonal fluctuations in its sales and profitability, with generally higher sales and gross profit in the first and second quarters of its fiscal year. The seasonality of sales and profitability is primarily due to higher volume at the College Bookstore division during the first two fiscal quarters. This pattern of sales affects working capital requirements and liquidity, as the Company generally must finance higher levels of inventory during these periods prior to fully receiving payment from these customers. Sales and profitability at the Company's Resorts, Corporate and Sports Specialty divisions typically show no significant seasonal variations. As the Company continues to expand into other markets in its Resorts, Corporate and Sports Specialty divisions, seasonal fluctuations in sales and profitability are expected to decline. Page 13 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. Page 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibits are included with this report: Exhibit 27 - Financial Data Schedule (SEC Use Only) (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the reporting period. Page 15 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. FEBRUARY 17, 1998 /s/ ROBERT G. SHAW - ----------------- --------------------------------------- Date Robert G. Shaw, Sr. Vice President of Finance and Principal Accounting Officer Page 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GFSI, INC. FORM 10-Q AS OF JANUARY 2, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JUL-03-1998 JUN-28-1997 JAN-02-1998 607 0 31,869 636 33,861 67,214 35,906 15,238 96,967 25,336 183,000 0 0 0 (113,255) 96,967 116,903 116,903 66,287 92,473 29 0 9,974 14,427 5,918 8,509 0 0 0 8,509 0 0
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