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, 2002
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( )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
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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)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common stock, $0.01 par value per share - 1 share issued and outstanding as of
November 1, 2002.
-1-
GFSI, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Quarter Ended September 28, 2002
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 9
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 12
ITEM 4 - CONTROLS AND PROCEDURES 12
PART II - OTHER INFORMATION 13
SIGNATURE PAGE 14
OFFICERS CERTIFICATION 15
-2-
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
September 28, June 29,
2002 2002
------------- ---------
Assets
Current assets:
Cash and cash equivalents $ 1,196 $ 313
Accounts receivable, net 40,661 32,626
Inventories, net 48,831 45,729
Deferred income taxes 905 845
Prepaid expenses and other current assets 1,323 1,269
---------- ----------
Total current assets 92,916 80,782
Property, plant and equipment, net 19,752 19,671
Other assets:
Deferred financing costs, net 3,643 3,873
Other 761 1,010
---------- ----------
Total assets $ 117,072 $ 105,336
========== ==========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 11,998 $ 12,010
Accrued interest expense 1,246 4,366
Accrued expenses 7,948 5,983
Income taxes payable 6,726 5,087
Current portion of long-term debt 183 177
---------- ----------
Total current liabilities 28,101 27,623
Deferred income taxes 745 699
Other long-term obligations 527 527
Long-term debt, less current portion 164,851 156,132
Stockholder's equity (deficiency):
Common stock, $.01 par value, 10,000 shares authorized, one share
issued and outstanding at September 28, 2002 and June 29, 2002 -- --
Additional paid-in capital 59,127 59,127
Accumulated deficiency (136,279) (138,772)
---------- ----------
Total stockholder's equity (deficiency) (77,152) (79,645)
---------- ----------
Total liabilities and stockholder's equity (deficiency) $ 117,072 $ 105,336
========== ==========
See notes to consolidated financial statements.
-3-
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended
September 28, September 28,
2002 2001
------------- --------------
Net sales $ 61,211 $ 54,112
Cost of sales 39,149 33,270
------------- --------------
Gross profit 22,062 20,842
Operating expenses:
Selling 7,496 5,928
General and administrative 6,635 6,405
------------- --------------
14,131 12,333
------------- --------------
Operating income 7,931 8,509
Other income (expense):
Interest expense (3,624) (4,135)
Other, net -- 16
------------- --------------
(3,624) (4,119)
------------- --------------
Income before income taxes 4,307 4,390
Income tax expense (1,680) (1,712)
------------- --------------
Net income $ 2,627 $ 2,678
============= ==============
See notes to consolidated financial statements.
-4-
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Quarter Ended
September 28, September 28,
2002 2001
------------- -------------
Cash flows from operating activities:
Net income $ 2,627 $ 2,678
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 780 804
Amortization of deferred financing costs 244 303
Amortization of other intangibles 250 250
Deferred income taxes (14) (62)
Gain (loss) on foreign currency translation (6) -
Changes in operating assets and liabilities:
Accounts receivable, net (8,035) (12,606)
Inventories, net (3,102) (2,368)
Prepaid expenses, other current assets and other assets (56) 157
Income taxes payable 1,638 2,515
Accounts payable, accrued expenses and other
long-term obligations (1,166) 2,796
--------- ---------
Net cash used in operating activities (6,840) (5,533)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment - 1
Purchases of property, plant and equipment (861) (775)
--------- ---------
Net cash used in investing activities (861) (774)
--------- ---------
Cash flows from financing activities:
Net changes in short-term borrowings and revolving credit agreement 8,321 4,650
Issuance of long-term debt 450 -
Payments on long-term debt (46) (1,666)
Cash paid for financing costs (13) -
Distributions to GFSI Holdings, Inc. (128) (49)
--------- ---------
Net cash provided by financing activities 8,584 2,935
--------- ---------
Net change in cash and cash equivalents 883 (3,372)
Cash and cash equivalents at beginning of period 313 5,309
--------- ---------
Cash and cash equivalents at end of period $ 1,196 $ 1,937
========= =========
Supplemental cash flow information:
Interest paid $ 6,499 $ 6,592
========= =========
Income taxes paid (refunded) $ 57 $ (740)
========= =========
See notes to consolidated financial statements.
-5-
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2002
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"), Champion Custom Products,
Inc. ("CCP") and GFSI Canada Company. All intercompany balances and transactions
have been eliminated. The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the
financial position, operations and cash flows of the Company have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the entire fiscal year. The consolidated
balance sheet information as of June 29, 2002 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. For further information, refer to the financial statements
and footnotes thereto for the year ended June 29, 2002 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. 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. 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.
As of September 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Assets:
Current assets $ 79,721 $ 17,061 $ (3,866) $ 92,916
Investment in equity of subsidiaries 11,214 - (11,214) -
Property, plant and equipment, net 19,263 489 - 19,752
Other assets 4,401 4 (1) 4,404
---------- ---------- ---------- ----------
Total assets $ 114,599 $ 17,554 $ (15,081) $ 117,072
========== ========== ========== ==========
Liabilities and stockholders' equity
Current liabilities $ 25,823 $ 6,145 $ (3,867) $ 28,101
Deferred income taxes 550 195 - 745
Other liabilities 527 - - 527
Long-term debt 164,851 - - 164,851
Stockholders' equity (deficiency) (77,152) 11,214 (11,214) (77,152)
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity (deficiency) $ 114,599 $ 17,554 $ (15,081) $ 117,072
========== ========== ========== =========
-6-
Quarter ended September 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Revenues $ 39,969 $ 21,420 $ (178) $ 61,211
Costs and expenses 36,049 17,409 (178) 53,280
---------- ---------- ----------- ----------
Operating Income 3,920 4,011 - 7,931
Equity in net earnings of subsidiaries 2,446 - (2,446) -
Interest expense (3,622) (2) - (3,624)
---------- ---------- ----------- ----------
Income before income taxes 2,744 4,009 (2,446) 4,307
Income tax expense 117 1,563 - 1,680
---------- ---------- ----------- ----------
Net income $ 2,627 $ 2,446 $ (2,446) $ 2,627
========== ========== =========== ==========
Quarter ended September 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Net cash flows used in operating activities $ (6,945) $ 105 $ - $ (6,840)
Net cash flows used in investing activities (833) (28) - (861)
Cash flows from financing activities:
Net borrowings under revolving credit agreements 8,321 - - 8,321
Payments on long-term debt (46) - - (46)
Cash paid for financing costs (13) - - (13)
Issuance of long-term debt 450 - - 450
Distributions to GFSI Holdings, Inc. (128) - - (128)
--------- -------- -------- ---------
Net cash provided by financing activities 8,584 - - 8,584
--------- -------- -------- ---------
Net change in cash and cash equivalents 806 77 - 883
Cash and cash equivalents at beginning of period 334 (21) - 313
--------- -------- -------- ---------
Cash and cash equivalents end of period $ 1,140 $ 56 $ - $ 1,196
========= ======== ======== =========
As of June 29, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Assets:
Current assets $ 70,942 $ 10,923 $ (1,083) $ 80,782
Investment in equity of subsidiaries 8,773 - (8,773) -
Property, plant and equipment, net 19,120 551 - 19,671
Other assets 4,881 4 (2) 4,883
--------- -------- --------- ----------
Total assets $ 103,716 $ 11,478 $ (9,858) $ 105,336
========= ======== ========= ==========
Liabilities and stockholders' equity
Current liabilities $ 26,198 $ 2,510 $ (1,085) $ 27,623
Deferred income taxes 504 195 - 699
Other liabilities 527 - - 527
Long-term debt 156,132 - - 156,132
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
--------- -------- --------- ----------
Total liabilities and stockholders' equity (deficiency) $ 103,716 $ 11,478 $ (9,858) $ 105,336
========= ======== ========= ==========
-7-
Quarter ended September 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Revenues $ 40,958 $ 13,352 $ (198) $ 54,112
Costs and expenses 34,612 11,189 (198) 45,603
--------- -------- ---------- ---------
Operating Income 6,346 2,163 - 8,509
Equity in net earnings of subsidiaries 1,318 - (1,318) -
Interest expense (4,135) - - (4,135)
Other, net 16 - - 16
--------- -------- --------- ---------
Income before income taxes 3,545 2,163 (1,318) 4,390
Income tax expense 867 845 - 1,712
--------- -------- --------- ---------
Net income $ 2,678 $ 1,318 $ (1,318) $ 2,678
========= ======== ========= =========
Quarter ended September 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Net cash flows used in operating activities $(5,639) $ 106 $ - $(5,533)
Net cash flow from investing activities:
Proceeds from sales of property, plant and equipment 1 - - 1
Purchase of property, plant and equipment (591) (184) - (775)
-------- --------- -------- --------
Net cash flows used in investing activities $ (590) (184) - (774)
-------- --------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreement 4,650 - - 4,650
Payments on long-term debt (1,666) - - (1,666)
Distributions to GFSI Holdings, Inc. (49) - - (49)
-------- --------- -------- --------
Net cash flows provided by financing activities $ 2,935 - - $ 2,935
-------- --------- -------- --------
Net change in cash and cash equivalents (3,294) (78) - (3,372)
Cash and cash equivalents at beginning of period 5,263 46 - 5,309
-------- --------- -------- --------
Cash and cash equivalents end of period $ 1,969 $ (32) $ - $ 1,937
======== ========= ======== ========
4. Reclassification
----------------
Certain reclassifications have been made to the fiscal 2002
consolidated and condensed consolidating financial statements to conform to the
fiscal 2003 presentation.
-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 29, 2002. 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.
Critical accounting policies
The following discussion and analysis of financial condition, results
of operations, liquidity and capital resources is based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, long-lived assets, deferred income taxes,
accrued expenses, contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that it believes are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially
from these estimates under different assumptions or conditions.
The Company's management believes that some of its significant
accounting policies involve a higher degree of judgment or complexity than other
accounting policies. Identified below are the policies deemed critical to its
business and the understanding of its results of operations.
Revenue recognition. The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated or
overstated.
Accounts receivable. Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
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.
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 its 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.
-9-
Comparison of Operating Results for the Quarters Ended September 28, 2002 and
September 29, 2001.
Net Sales. Net sales for the quarter ended September 28, 2002 increased
13% to $61.2 million compared to $54.1 million last year. The increase in net
sales was primarily due to robust sales growth from the Licensed Apparel
division, which was partially offset by sales decreases from the Corporate,
Resort and Golf divisions. The net sales growth in the Licensed Apparel division
was from college bookstore customers and was most pronounced in our Champion
licensed products group ("CCP"). Net sales of CCP for the quarter represented
33% of the Company's total net sales, up from 24% of total net sales last year.
A soft economy and reduced corporate spending on marketing and employee
incentive programs have had a detrimental effect on the net sales of the
Corporate, Resort and Golf divisions. Management believes that the Company's
customers have shifted their purchases to less expensive apparel with less
expensive decoration.
Gross Profit. Gross profit for the quarter ended September 28, 2002
increased 6% to $22.1 million compared to $20.8 million last year. Gross profit
as a percentage of net sales decreased to 36.0% compared to 38.5% last year. The
decrease in gross profit as a percentage of net sales was the result of a change
in customer purchasing. College bookstore sales, fueled by CCP, represented 62%
of net sales for the quarter compared to 51% last year. College bookstore sales
generally provide a lower gross profit than the Company's other divisions.
Fiscal 2003 gross profit also decreased due to sales of close-out and
discontinued merchandise.
Operating Expenses. Operating expenses for the quarter ended September
28, 2002 increased 15% to $14.1 million from $12.3 million last year. Operating
expenses as a percentage of net sales were 23.1% in the first quarter of fiscal
2003 compared to 22.8% last year. The increase in operating expenses resulted
from higher selling expenses. A greater portion of fiscal 2003 sales were
generated from college bookstore sales which carry royalty fees and are marketed
through more expensive distribution channels. In addition, the Company incurred
higher bad debt expense in fiscal 2003 due to soft economic conditions in the
golf, resort and leisure markets.
EBITDA. EBITDA decreased 6% to $9.0 million in the first quarter of
fiscal 2003 compared to $9.6 million last year. EBITDA as a percentage of net
sales decreased to 14.6% in the quarter ended September 28, 2002 from 17.7% in
the quarter ended September 28, 2001. The decrease in EBITDA as a percentage of
sales was the result of a lower gross profit percentage on higher net sales.
Operating Income. Operating income decreased 7% to $7.9 million in the
first quarter of fiscal 2003 compared to $8.5 million last year. Operating
income as a percentage of net sales decreased to 13.0% in the first quarter of
fiscal 2003 from 15.7% in the first quarter of fiscal 2002. The decrease in
operating income as a percentage of sales was the result of a lower gross profit
percentage on higher net sales.
Interest Expense. Interest expense decreased 12% to $3.6 million in the
first quarter of fiscal 2003 from $4.1 million in the first quarter of fiscal
2002 due to lower interest rates.
Net Income. Net income for the first quarter of fiscal 2003 was $2.6
million compared to $2.7 for the first quarter of fiscal 2002. The decrease was
a result of the decline in operating income.
Outlook. On October 5, 2002 the International Longshore & Warehouse
Union (ILWU) declared a strike at all ports on the West Coast of the United
States. Although President Bush subsequently intervened and invoked the 80 day
cooling off period under provisions of the Taft-Hartley Act, the pace of
subsequent shipping traffic at West Coast ports is presently reported to be
60-75% of normal levels. The Company imports most of the apparel it sells from
foreign sources and is dependent upon the free flow of goods through the
strike-affected ports to receive merchandise from its suppliers in the Far East.
While the financial impact, if any, of the temporary work stoppage and ensuing
transportation disruption is not presently determinable, the Company believes
that the strike could have a negative impact on its second quarter operations
due to unplanned delays in receiving merchandise and an increase in shipping
costs associated with receiving cargo by alternative means. In addition, while
another work stoppage is not expected, there can be no assurance that another
strike will not ensue once the 80 day cooling off period expires on December 27,
2002.
-10-
Liquidity and Capital Resources
Cash used in operating activities for the first quarter of fiscal 2003
was $6.8 million compared to cash used of $5.5 million in the first quarter of
fiscal 2002. Cash was used to purchase inventory and support higher accounts
receivable created by higher sales.
Cash used in investing activities in the first quarter of fiscal 2003
was $861,000 compared to $774,000 in the first quarter of 2002. 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
2003 was $8.6 million compared to cash provided of $2.9 million in the first
quarter of fiscal 2002. The cash provided by financing activities for the
quarter ended September 28, 2002 was primarily attributable to $8.3 million in
borrowings under the Company's revolving credit agreement. These borrowings were
used to support the inventory and accounts receivable working capital
requirements related to increased sales.
Under the Company's Revolving Bank Credit Agreement ("RBCA") up to $65
million of revolving credit availability is provided, of which $38.9 million was
borrowed and outstanding and approximately $7.0 million was utilized for
outstanding commercial and stand-by letters of credit as of September 28, 2002.
At September 28, 2002, $19.1 million was available for future borrowings under
the RBCA.
The Company believes that cash flows from operating activities and
borrowings under RBCA will be adequate to meet the Company's short-term and
future liquidity requirements prior to the maturity of its RBCA in fiscal 2005
although no assurance can be given in this regard.
GFSI, Inc. anticipates paying dividends to its parent, GFSI Holdings,
Inc. ("Holdings") to enable Holdings to pay corporate income taxes, interest on
subordinated discount notes issued by Holdings (the "Holdings Discount Notes"),
fees payable under a consulting agreement and certain other ordinary course
expenses incurred on behalf of the GFSI, Inc. Holdings is dependent upon the
cash flows of GFSI, Inc. to provide funds to service the Holdings Discount
Notes. Holdings Discount Notes do not have an annual cash flow requirement until
fiscal 2005 as they accrue interest at 11.375% per annum, compounded
semi-annually to an aggregate principal amount of $108.5 million at September
15, 2004. Thereafter, the Holdings Discount Notes will accrue interest at the
rate of 11.375% per annum, payable semi-annually, in cash on March 15 and
September 15 of each year, commencing on March 15, 2005. Additionally, Holdings'
cumulative non-cash preferred stock ("Holdings Preferred Stock") dividends total
approximately $407,000 annually. Holdings Preferred Stock may be redeemed at
stated value (approximately $3.4 million) plus accrued dividends with mandatory
redemption in fiscal 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 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.
-11-
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. The variable rate
debt would be affected by interest rate changes to the extent the debt is not
matched with an interest rate swap or cap agreement or to the extent, in the
case of the RBCA, that balances are outstanding. 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of filing this Quarterly Report on
Form 10-Q, 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-14(c) and 15d-14(c)). 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. Subsequent to the date of that
evaluation, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls,
nor were any corrective actions required with regard to significant deficiencies
and material weaknesses.
-12-
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.
-13-
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 6, 2002
/s/ J. CRAIG PETERSON
---------------------------------------
J. Craig Peterson, Sr. Vice President of Finance and
Principal Accounting Officer
-14-
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI, INC.'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED SEPTEMBER 28, 2002
I, Robert M. Wolff, Chairman and Chief Executive Officer (Principal Executive
Officer) of GFSI, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods represented in this Quarterly 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-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/S/ ROBERT M. WOLFF
- ---------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
-15-
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING GFSI, INC.'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED SEPTEMBER 28, 2002
I, J. Craig Peterson, Senior Vice President and Chief Financial Officer
(Principal Financial Officer) of GFSI, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods represented in this Quarterly 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-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 day prior
to the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ J. CRAIG PETERSON
- -------------------------------------------------
J. Craig Peterson
Senior Vice President and Chief Financial Officer
-16-