-----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, CEsycTda9UsMPCVRniC5+ymj+ZHCs4S3yS0etiiMP15RCFewmeyK/EE+qWSJQSLm wJ4JY1mtBfAHOPcxVnNfHA== 0000950130-98-002715.txt : 19980519 0000950130-98-002715.hdr.sgml : 19980519 ACCESSION NUMBER: 0000950130-98-002715 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980403 FILED AS OF DATE: 19980518 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: 98627022 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 10-Q 1 FORM 10-Q 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, 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 or organization) Identification No.) 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 May 1, 1998. GFSI, INC. Quarterly Report on Form 10-Q For the Quarter Ended April 3, 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, April 3, 1997 1998 --------- ---------- Assets Current assets: Cash & cash equivalents $ 1,117 $ 1,107 Accounts receivable, net 23,687 31,384 Inventories, net 37,562 34,755 Prepaid expenses and other current assets 1,286 1,035 Deferred income taxes 926 822 --------- --------- Total current assets 64,578 69,103 Property, plant and equipment, net 21,548 20,992 Other assets: Deferred financing costs, net 9,661 8,792 Other 4 6 --------- --------- Total assets $ 95,791 $ 98,893 ========= ========= Liabilities and stockholders' equity (deficit) Current liabilities: Accounts payable $ 12,199 $ 11,263 Accrued interest expense 4,236 1,496 Accrued expenses 5,543 7,556 Income taxes payable 338 600 Current portion of long-term debt 3,375 4,875 --------- --------- Total current liabilities 25,691 25,790 Deferred income taxes 1,436 1,436 Revolving credit agreement 3,000 -- Other long-term obligations 450 300 Long-term debt, less current portion 186,625 181,750 Stockholders' equity (deficit): Common stock, $.01 par value, 10,000 -- -- shares authorized, issued and outstanding at April 3, 1998 and June 27, 1997 Additional paid-in capital 49,939 51,727 Accumulated deficit (171,350) (162,110) --------- --------- Total stockholders' deficit (121,411) (110,383) --------- --------- Total liabilities and stockholders' deficit $ 95,791 $ 98,893 ========= ========= 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 Nine Months Ended March 28, April 3, March 28, April 3, 1997 1998 1997 1998 --------- --------- ---------- ----------- Net sales $39,371 $48,574 $144,182 $165,477 Cost of sales 20,664 26,441 80,122 92,728 -------- -------- --------- --------- Gross profit 18,707 22,133 64,060 72,749 Operating expenses: Selling 4,248 6,230 14,654 18,076 General and administrative 6,353 8,071 19,181 22,411 -------- -------- --------- --------- 10,601 14,301 33,835 40,487 -------- -------- --------- --------- Operating income 8,106 7,832 30,225 32,262 Other income (expense): Interest expense (1,874) (4,621) (3,339) (14,595) Other, net 17 7 60 (22) -------- -------- --------- --------- (1,857) (4,614) (3,279) (14,617) -------- -------- --------- --------- Income before income taxes and extraordinary item 6,249 3,218 26,946 17,645 Provision for income taxes 1,319 1,346 1,319 7,264 -------- -------- --------- --------- Income before extraordinary item 4,930 1,872 25,627 10,381 Extraordinary item, net of tax benefit of $989 for the period ended March 28, 1997 1,484 1,484 -------- -------- --------- --------- Net income $ 3,446 $ 1,872 24,143 $ 10,381 ======== ======== ========= =========
See notes to financial statements. Page 4 GFSI, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands) Nine Months Ended March 28, April 3, 1997 1998 --------- -------- Cash flows from operating activities: Net income $24,143 $10,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,444 2,185 Amortization of deferred financing costs 100 868 (Gain) loss on sale or disposal of property, (25) 15 plant and equipment Deferred income taxes 994 104 Increase in cash value of life insurance (920) Extraordinary loss on early extinguishment of debt 2,473 Changes in operating assets and liabilities: Accounts receivable, net (2,979) (7,696) Inventories, net (103) 2,808 Prepaid expenses, other current assets and other assets (208) 249 Income taxes payable (665) 262 Accounts payable, accrued expenses and other long-term obligations 567 (1,813) --------- ---------- Net cash provided by operating activities 25,821 7,363 Cash flows from investing activities: Proceeds from sales of property, plant and equipment 946 323 Purchases of property, plant and equipment (2,511) (1,968) --------- ---------- Net cash used in investing activities (1,565) (1,645) Cash flows from financing activities: Net changes to short-term borrowings and revolving credit agreement (4,000) (3,000) Issuance of senior subordinated notes 125,000 Proceeds from long-term debt 67,000 Payments on long-term debt (24,276) (3,375) Cash paid for penalties related to early extinguishment of debt (2,390) Cash paid for financing costs (9,952) Distributions to stockholders (48,407) Distributions and recapitalization of Winning Ways, Inc. (173,143) Issuance of Common Stock to GFSI Holdings, Inc. 49,939 Proceeds from sale of treasury stock 1,402 Capital contribution from GFSI Holdings, Inc. 1,788 Distributions to GFSI Holdings, Inc. (1,141) --------- ---------- Net cash used in financing activities (18,827) (5,728) --------- ---------- Net increase (decrease) in cash and cash equivalents 5,429 (10) Cash and cash equivalents at beginning of period 140 1,117 --------- ---------- Cash and cash equivalents at end of period $5,569 $1,107 ========= ========== Supplemental cash flow information: Interest paid $ 2,207 $ 16,503 ========= ========== Income taxes paid $ - $ 5,694 ========= ========== Supplemental schedule of non-cash financing activities: Distributions payable to Winning Ways, Inc. stockholders $ 10,022 =========
See notes to financial statements. Page 5 GFSI, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) April 3, 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. Effective January 29, 1998, the Company established a wholly owned subsidiary, Event 1, Inc., the results of which are included in the accompanying financial statements. 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 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. Page 6 The transactions are reflected in the accompanying unaudited financial statements of the Company as of and for the quarter ended April 3, 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 became 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 11.375% Holdings Subordinated Discount Notes due 2009 (the "Subordinated 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 Subordinated Discount Notes 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 a like amount of 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"). Holdings 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 (the "New Exchange") of 11.375% Series B Senior Discount Notes due 2009 (the "Discount Notes") registered under the Securities Act, for a like amount of the Old Notes. Holdings did not receive any proceeds from the New Exchange. The Discount Notes were issued to repay $25.0 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 ------------------------ 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. Page 7 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. In March 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of internal use computer software at various stages of development. This SOP is effective for fiscal years beginning after December 15, 1998. The Company has not yet determined what effect implementation of the SOP will have on its financial position, results of operations or cash flows. 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 January 29, 1998, the Company established a wholly owned subsidiary, Event 1, Inc., to provide a retail outlet for the Company's sportswear and activewear. Event 1 is anticipated to provide increasing sales for the Company's products at higher margins. Operating expenses are also anticipated to increase due to site fees and royalties included in the concessionaire agreement with the National Collegiate Athletic Association. 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 five sales divisions. Page 9 The Resort Division (29.3% 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 (34.2% 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 (22.5% 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 Event 1 Division (2.3% of year-to-date fiscal 1998 net sales), established in the third quarter of fiscal 1998, has entered into an exclusive agreement with the National Collegiate Athletic Association (NCAA) to become the official concessionaire for all NCAA events. Additionally, the division has agreements with various conferences in the NCAA. THE FOLLOWING SETS FORTH THE AMOUNT AND PERCENTAGE OF NET SALES FOR EACH OF THE PERIODS INDICATED (DOLLARS IN THOUSANDS):
Quarter Ended Nine Months Ended March 28, 1997 April 3, 1998 March 28, 1997 April 3, 1998 -------------- ------------- --------------- ------------- Resort $14,836 37.7% $14,048 28.9% $ 50,836 35.2% $ 48,476 29.3% Corporate 14,457 36.7% 18,328 37.7% 42,318 29.4% 56,614 34.2% Bookstore 6,670 16.9% 7,316 15.1% 34,001 23.6% 37,304 22.5% Sports Specialty 2,513 6.4% 3,164 6.5% 7,899 5.5% 10,614 6.4% Event 1 3,721 7.7% 3,721 2.3% Other 895 2.3% 1,997 4.1% 9,128 6.3% 8,748 5.3% ------- -------- -------- -------- Total $39,371 $48,574 $144,182 $165,477 ======= ======== ======== ========
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 nine month periods ended March 28, 1997 and April 3, 1998: Quarter Ended Nine Months Ended March 28, April 3, March 28, April 3, 1997 1998 1997 1998 --------- -------- --------- -------- Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 47.5 45.6 44.4 44.0 EBITDA 22.8 17.6 22.7 20.8 Operating income 20.6 16.1 21.0 19.5 Page 10 COMPARISON OF OPERATING RESULTS FOR THE QUARTERS AND NINE MONTH PERIODS ENDED APRIL 3, 1998 AND MARCH 28, 1997. Net Sales. Net sales for the third quarter of fiscal 1998, the three months ended April 3, 1998, increased 23.4% to $48.6 million from $39.4 million in the third quarter of fiscal 1997. Net sales for the first nine months of fiscal 1998 increased 14.8% to $165.5 million from $144.2 million in the first nine 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 nine months of 33.8%, 34.4% and 9.7%, respectively, and the net sales for the Company's Event 1 division for the quarter ended April 3, 1998 of $3.7 million. These increases in net sales were partially offset by a 4.6% decrease in net sales for the nine 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 Resort customers primarily attributed to poor climatic conditions. Gross Profit. Gross profit for the third quarter of fiscal 1998 increased 18.3% to $22.1 million from $18.7 million in the third quarter of fiscal 1997. Gross profit for the first nine months of fiscal 1998 increased 13.6% to $72.7 million from $64.0 million in the first nine months of fiscal 1997. The increase in gross profit is primarily a result of the net sales increase described above. For the third quarter of fiscal 1998, gross profit as a percentage of net sales slightly decreased to 45.6% compared to 47.5% in the third quarter of fiscal 1997. For the first nine months of fiscal 1998 and fiscal 1997, gross profit as a percentage of net sales was 44.0% and 44.4%, respectively. The slight decrease in gross profit for the third quarter reflects an increase in embroidery costs compared to the third quarter of fiscal 1997. Operating Expenses. Operating expenses for the third quarter of fiscal 1998 increased 34.9% to $14.3 million from $10.6 million in the third quarter of fiscal 1997. For the first nine months, operating expenses increased 19.7% to $40.5 million from $33.8 million in the first nine months of fiscal 1997. Operating expenses for both periods increased due primarily to increased staffing levels and the additional site fees and royalities incurred by the Event 1 division. Operating expenses as a percentage of net sales increased to 29.4% from 26.9% in the prior year third quarter. For the first nine months, operating expenses increased to 24.5% from 23.5% in the prior year period. The increase in operating expenses for the first nine months, as a percentage of net sales, is primarily due to the Event 1 site fees and royalties incurred in the third quarter of fiscal 1998. EBITDA. EBITDA for the third quarter of fiscal 1998 decreased 4.9% to $8.5 million from $9.0 million in the third quarter of fiscal 1997. For the first nine months, EBITDA increased 5.1% to $34.5 million from $32.8 million in the first nine months of fiscal 1997. The increase for the nine month period 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 17.6% from 22.8% in the third quarter of fiscal 1997. For the first nine months of fiscal 1998, EBITDA decreased to 20.8% from 22.7% in the first nine 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 third quarter of fiscal 1998 decreased 3.4% to $7.8 million from $8.1 million in the third quarter of fiscal 1997. The decrease is attributable to the changes in gross profit and the increase in operating expenses described above. For the first nine months, operating income increased 6.7% to $32.3 million from $30.2 million in the first nine months of fiscal 1997. The increase for the nine month period is primarily a result of the net sales increase described above. Operating income as a percentage of net sales decreased for the third quarter of fiscal 1998 to 16.1% from 20.6% in fiscal 1997, and to 19.5% for the nine month period of fiscal 1998 from 21.0% in the first nine 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 third quarter in addition to the increase in operating expenses as a percentage of net sales as noted above. Other Income (Expense). Other expense for the third quarter of fiscal 1998 increased to $4.6 million from $1.9 million in the third quarter of fiscal 1997. For the first nine months of fiscal 1998, other expense increased to $14.6 million from $3.3 million in the first nine 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. The effective income tax rates for the quarters ended April 3, 1998 and March 28, 1997 were 41.8% and 21.1%, respectively. The fiscal 1997 rate is attributed 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 third quarter of fiscal 1998 was $1.9 million compared to $3.4 million in the third quarter of fiscal 1997. For the first nine months of fiscal 1998, net income was $10.4 million compared to $24.1 million in the first nine 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 nine months of fiscal 1998 was $7.4 million compared to $25.8 million in the first nine months of fiscal 1997. The decrease in cash provided by operating activities between the two periods primarily resulted from a decrease in net income, as previously discussed, in addition to increased accounts receivable due to a 14.8% increase in sales compared to the prior year period. Cash used by investing activities in the first nine months of fiscal 1998 was $1.6 million, consistent with cash used by investing activities in the first nine months of fiscal 1997. Page 12 Cash used by financing activities for the first nine months of fiscal 1998 was $5.7 million compared to cash used of $18.8 million in the first nine months of fiscal 1997. The decrease in 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 April 3, 1998 and approximately $26.1 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 11.375% Series B Senior Discount Notes due 2009 (the "Discount Notes"). The Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash on March 15 and September 15 of each year, commencing on March 15, 2005. 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. Page 13 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. Cash requirements of Event 1 are anticipated to be seasonal, with increasing sales and profitability in the third quarter of fiscal years. 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. May 18, 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 GFSI, INC FORM 10-Q AS OF APRIL 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUL-03-1998 JUN-28-1997 APR-03-1998 1,107 0 31,384 0 34,755 69,103 36,869 15,877 98,893 25,790 181,750 0 0 0 (110,383) 98,893 165,477 165,477 92,728 133,215 22 0 14,595 17,645 7,264 10,381 0 0 0 10,381 0 0
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