10-Q 1 form10q_2rwheeler111301.txt FORM 10-Q QUARTERLY REPORT 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 September 28, 2001 ------------------ ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 333-38951 ------------------------ GFSI HOLDINGS, INC. (Exact name of registrant specified in its charter) Delaware 74-2810744 -------------------------------------------------------------------------------- (State or other jurisdiction of 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 - 1,882.5 shares issued and outstanding as of November 1, 2001. 1 GFSI HOLDINGS, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q For the Quarter Ended September 28, 2001 INDEX Page ---- PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Consolidated Balance Sheets 3 Consolidated Statements of Income 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 8 PART II - OTHER INFORMATION 9 SIGNATURE PAGE 10 2 GFSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data)

See notes to consolidated financial statements. 4 GFSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)

5 GFSI HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 28, 2001 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") and Champion Custom Products, Inc. ("CCP"). All intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statement reporting purposes. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and operations of the Company have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the financial statements and footnotes thereto for the year ended June 29, 2001 included in the Company's Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITION AND DIVESTITURE In June 2001, the Company acquired CCP, formerly a wholly owned subsidiary of Sara Lee Corporation. During the quarter ended September 28, 2001, CCP had sales of $12.7 million and produced operating contribution of $2.4 million. At September 28, 2001, this subsidiary had total assets and stockholder's equity of $10.5 million and $757,000, respectively. CCP is an unconditional guarantor of the Senior Subordinated Notes. In June 2001, the Company sold the assets of its Tandem Marketing business. Tandem Marketing had revenues of $3.0 million and operating contribution of $500,000 for the quarter ended September 29, 2000. 3. COMMITMENTS AND CONTINGENCIES The Company, in the normal course of business, may be threatened with or named as a defendant in various lawsuits. It is not possible to determine the ultimate disposition of these matters, however, management is of the opinion that there are no known claims or known contingent claims that are likely to have a material adverse effect on the results of operations, financial condition, or cash flows of the Company. 4. NEW ACCOUNTING STANDARDS The FASB's Emerging Issues Task Force ("EITF") released its consensus No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future" which is effective January 1, 2002. The Company is currently evaluating the impact that adopting the EITF will have on its presentation of results of operations. In April 2001, the EITF reached a consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products". The consensus concluded that consideration from a vendor to a reseller of the vendor's products is generally presumed to be an adjustment to the selling prices of the vendor's products and, therefore, should be classified as a reduction of revenue. EITF No. 00-25 is effective beginning January 1, 2002. The Company is currently evaluating the impact that adopting the EITF will have on its presentation of results of operations. 5. RECLASSIFICATION Certain reclassifications have been made to the fiscal 2001 consolidated financial statements to conform to the fiscal 2002 presentation. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussions set forth in this Form 10-Q should be read in conjunction with the financial information included herein and the Company's Annual Report on Form 10-K for the year ended June 29, 2001. Management's discussion and analysis of financial condition and results of operations and other sections of this report contain forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products, developments affecting the Company's products and to those discussed in the Company's filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. EBITDA represents operating income plus depreciation and amortization. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, the Company believes that certain investors find EBITDA to be a useful tool for measuring the ability of the Company to service its debt. EBITDA is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statements of Cash Flows of the Company herein for further information. COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 28, 2001 AND SEPTEMBER 29, 2000. Net Sales. Net sales for the quarter ended September 28, 2001 increased 2.1% to $54.6 million from $53.5 million in the quarter ended September 29, 2000. The increase in net sales from the first quarter last year was primarily related to the addition of Champion college bookstore net sales of $12.7 million. The net sales increase from Champion was offset by declines in Corporate and Resort division sales in comparison to the prior year. The terrorist attacks of September 11, 2001 and the resulting political and economic uncertainties created in the aftermath directly affected the travel plans and the marketing and employee incentive programs of the customers of these two sales divisions. The Tandem Marketing business was sold in June 2001. Tandem Marketing contributed $3.0 million in sales for the quarter ended September 29, 2000. Gross Profit. Gross profit for the quarter ended September 28, 2001 increased 4.5% to $21.3 million from $20.4 million in the quarter ended September 29, 2000. Gross profit as a percentage of net sales increased to 39.1% compared to 38.2%. The increase in gross profit was the result of a decrease in cost of material. Operating Expenses. Operating expenses were the same as last year at $12.8 million. Operating expenses as a percentage of net sales were 23.5% in the first quarter of fiscal 2002 compared to 24.1% in the first quarter of fiscal 2001. The decline in operating expenses as a percentage of net sales resulted from the restructuring and profit improvement programs implemented during the fourth quarter of fiscal 2001. EBITDA. EBITDA increased 14.4% to $9.6 million in the first quarter of fiscal 2002 from $8.4 million in the first quarter of fiscal 2001. EBITDA as a percentage of net sales increased to 17.5% in the quarter ended September 28, 2001 from 15.6% in the quarter ended September 29, 2000. The increase in EBITDA is a result of the increases in net sales and gross profit. Operating Income. Operating income increased 12.9% to $8.5 million in the first quarter of fiscal 2002 from $7.5 million in the first quarter of fiscal 2001. Operating income as a percentage of net sales increased to 15.6% in the first quarter of fiscal 2002 from 14.1% in the first quarter of fiscal 2001. The increase in operating income is a result of the increase in net sales and gross profit. Other Income (Expense). Other expense increased 2.9% to $6.2 million in the first quarter of fiscal 2002 from $6.1 million in the first quarter of fiscal 2001 due to increasing interest expense on the Holdings Discount Notes. Net Income. Net income for the first quarter of fiscal 2002 was $1.4 million compared to $892,000 for the first quarter of fiscal 2001. The increase was a result of the increase in operating income noted above. 7 LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities for the first quarter of fiscal 2002 was $5.5 million compared to cash provided of $739,000 in the first quarter of fiscal 2001. The change in cash provided by (used in) operating activities between the two periods was due to the increase in accounts receivable and the increase in inventory as a result of the addition of the Champion college bookstore business. Cash used in investing activities in the first quarter of fiscal 2002 was $774,000 compared to $234,000 in the first quarter of 2001. The cash used in both periods was related to acquisitions of property, plant and equipment. Cash provided by financing activities for the first quarter of fiscal 2002 was $2.9 million compared to cash used of $1.7 million in the first quarter of fiscal 2001. The cash provided by financing activities for the quarter ended September 28, 2001 was primarily attributable to $4.7 million in borrowings under the Company's revolving credit agreement partially offset by $1.7 million in scheduled debt repayments. These borrowings were used to complete the acquisition of Champion and to support its working capital requirements. The Company believes that cash flow from operating activities and borrowings under its Bank Credit Agreement will be adequate to meet the Company's short-term and long-term liquidity requirements prior to the maturity of its Credit Agreement in fiscal 2003 and the Senior Subordinated Notes in fiscal 2007, although no assurance can be given in this regard. Under the Bank Credit Agreement's revolving loan facility $40 million of revolving credit availability is provided, of which $4.7 million was borrowed and outstanding and approximately $12.2 million was utilized for outstanding commercial and stand-by letters of credit as of September 28, 2001. The Company is dependent upon the cash flows of GFSI to provide funds to pay certain ordinary course expenses incurred on behalf of the Company and to service the indebtedness represented by the $50.0 million of 11.375% Series B Senior Discount Notes due 2009 (the "Discount Notes"). The Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes will accrue interest at the rate of 11.375% per annum, payable semi-annually, in cash on March 15 and September 15 of each year, commencing on March 15, 2005. The Company will be dependent on GFSI to provide funds to service the indebtedness. Additionally, the remaining cumulative Holdings Preferred Stock will accrue dividends totaling approximately $402,000 annually. Holdings Preferred Stock may be redeemed at stated value (approximately $3.3 million) plus accrued dividends with mandatory redemption in 2009. SEASONALITY AND INFLATION The Company experiences seasonal fluctuations in its sales and profitability, with generally higher sales and gross profit in the first and second quarters of its fiscal year. The seasonality of sales and profitability is primarily due to higher college bookstore sales volume during the first two fiscal quarters. Sales at the Company's Resort and Corporate divisions typically show no significant seasonal variations. The impact of inflation on the Company's operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on the Company's operating results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK DERIVATIVE AND MARKET RISK DISCLOSURE The Company's market risk exposure is primarily due to possible fluctuations in interest rates. The Company uses a balanced mix of debt maturities along with both fixed rate and variable rate debt to manage its exposure to interest rate changes. The fixed rate portion of the Company's long-term debt does not bear significant interest rate risk. An immediate 10 percent change in interest rates would not have a material effect on the Company's results of operations over the next fiscal year, although there can be no assurances that interest rates will not significantly change. 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceeding the resolution of which, the management of the Company believes, would have a material adverse effect on the Company's results of operations or financial condition, nor to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the reporting period. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GFSI HOLDINGS, INC. November 12 , 2001 /s/ J. CRAIG PETERSON --------------------------------------- J. Craig Peterson, Sr. Vice President of Finance and Principal Accounting Officer 10

GFSI HOLDINGS INC 10-Q