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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 DECEMBER 28, 2002.
( )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 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 - 1,820 shares issued and outstanding as
of February 1, 2003.
1
GFSI HOLDINGS, INC. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 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 7
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 10
PART II - OTHER INFORMATION 11
SIGNATURE PAGE 12
OFFICERS CERTIFICATION 13
2
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
December 28, June 29,
2002 2002
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,753 $ 328
Accounts receivable, net 32,776 32,626
Inventories, net 43,470 45,729
Income tax receivable -- 284
Prepaid expenses and other current assets 1,383 1,268
Deferred income taxes 1,195 845
------------ ------------
Total current assets 82,577 81,080
Property, plant and equipment, net 20,263 19,671
Other assets:
Deferred financing costs, net 3,599 4,063
Other 509 1,010
------------ ------------
Total assets $ 106,948 $ 105,824
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $ 10,099 $ 12,010
Accrued interest expense 4,174 4,365
Accrued expenses 6,292 5,983
Income taxes payable 759 --
Current portion of long-term debt 197 177
------------ ------------
Total current liabilities 21,521 22,535
Deferred income taxes 762 699
Other long-term obligations 527 527
Long-term debt, less current portion 241,874 241,120
Redeemable preferred stock 5,522 5,405
Stockholders' equity (deficiency):
Common stock, $.01 par value 2,105 shares authorized,
2,000 shares issued at December 28, 2002 and June 29, 2002 -- --
Additional paid-in capital 200 200
Accumulated deficiency (163,445) (164,651)
Treasury stock, at cost (180 and 152.5 series A shares at
December 28, 2002 and June 29, 2002, respectively) (13) (11)
------------ ------------
Total stockholders' equity (deficiency) $ (163,258) (164,462)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 106,948 $ 105,824
============ ============
See notes to consolidated financial statements.
3
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (In thousands)
QUARTER ENDED SIX MONTHS ENDED
DECEMBER 28, DECEMBER 28, DECEMBER 28, DECEMBER 28,
2002 2001 2002 2001
------------- ------------ ------------- ------------
Net sales $ 54,633 $ 52,265 $ 115,844 $ 106,377
Cost of sales 34,404 32,820 73,553 66,090
--------- --------- ----------- ----------
Gross profit 20,229 19,445 42,291 40,287
Operating expenses:
Selling 6,879 6,022 14,375 11,950
General and administrative 6,844 6,504 13,479 12,909
--------- --------- ----------- ----------
13,723 12,526 27,854 24,859
--------- --------- ----------- ----------
Operating income 6,506 6,919 14,437 15,428
Other income (expense):
Interest expense (6,164) (6,164) (12,156) (12,420)
Other, net 11 (6) 11 11
--------- --------- ----------- ----------
(6,153) (6,170) (12,145) (12,409)
--------- --------- ----------- ----------
Income before income taxes 353 749 2,292 3,019
Income tax expense 139 293 895 1,178
--------- --------- ----------- ----------
Net income 214 456 1,397 1,841
Preferred stock dividends (99) (100) (198) (201)
--------- --------- ----------- ----------
Net income attributable to
common shareholders $ 115 $ 356 $ 1,199 $ 1,640
========= ========= =========== ==========
See notes to consolidated financial statements.
4
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
SIX MONTHS ENDED
DECEMBER 28, DECEMBER 28,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,397 $ 1,841
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 1,576 1,576
Amortization of deferred financing costs 500 562
Amortization of other intangibles 500 500
(Gain) loss on sale or disposal of property, plant and equipment (11) 8
Accretion of discount on long-term debt 4,834 4,327
Deferred income taxes (287) (81)
Gain (loss) on foreign currency translation 7 --
Changes in operating assets and liabilities:
Accounts receivable, net (150) (8,883)
Inventories, net 2,259 (1,334)
Prepaid expenses, other current assets and other assets (114) 283
Income taxes receivable and payable 1,043 1,851
Accounts payable, accrued expenses and other
long-term obligations (1,792) (1,342)
----------- -----------
Net cash provided by (used in) operating activities 9,762 (692)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment 14 1
Purchases of property, plant and equipment (2,172) (1,988)
----------- -----------
Net cash used in investing activities (2,158) (1,987)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net changes to short-term borrowings and revolving credit agreement (4,422) 1,200
Redemption of preferred stock (81) (700)
Treasury stock purchase (2) (26)
Proceeds from sale of stock -- 676
Cash paid for financing costs (37) --
Issuance of long-term debt 450 --
Payments on long-term debt (87) (1,722)
----------- -----------
Net cash used in financing activities (4,179) (572)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,425 (3,251)
Cash and cash equivalents at beginning of period 328 5,324
----------- -----------
Cash and cash equivalents at end of period $ 3,753 $ 2,073
=========== ===========
Supplemental cash flow information:
Interest paid $ 7,013 $ 6,868
=========== ===========
Income taxes paid (refunded) $ 139 $ (962)
=========== ===========
See notes to consolidated financial statements.
5
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 28, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GFSI
Holdings, Inc. (the "Company") include the accounts of the Company and the
accounts of its wholly owned subsidiaries, GFSI, Inc., 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 consolidated financial statements at
that date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended 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. RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2002 consolidated
financial statements to conform to the fiscal 2003 presentation.
4. SUBSEQUENT EVENT
On December 31, 2002 the Company's wholly-owned subsidiary, GFSI, Inc.,
completed the private placement of $9.9 million of unregistered 9.625% senior
subordinated notes ("Exchange Notes") in exchange for $24 million aggregate
principal amount at maturity of the Company's 11.375% Senior Discount Notes (the
"Holdings Discount Notes") with an accreted book value of $19.9 million. The
acquisition of the Holdings Discount Notes by GFSI, Inc. is considered an early
extinguishment of debt, and accordingly, the Company will record a pre-tax gain
on the transaction of approximately $9.6 million, net of related costs, in the
third quarter of fiscal 2003.
The Exchange Notes are unsecured obligations of GFSI, Inc., mature on March
1, 2007, pay interest semi-annually on March 1 and September 1, and were issued
under an indenture with substantially identical terms as the indenture governing
the $125 million aggregate principal amount at maturity of GFSI, Inc. Senior
Subordinated Notes issued on February 27, 1997. The Exchange Notes were
guaranteed by each of GFSI, Inc.'s wholly-owned subsidiaries (Event One, CCP and
GFSI Canada Company). The Exchange Notes were issued to an "accredited investor"
and were exempt from registration under Rule 144 of the Securities Act of 1933.
GFSI, Inc. intends to file an exchange offer registration statement with the
Securities and Exchange Commission in the third quarter of fiscal 2003 to enable
the holder of the Exchange Notes to exchange them for publicly registered notes
having terms substantially identical to the Exchange Notes.
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, 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
Company's ability 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 Company's ability 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. Accounts receivable at December
28, 2002 and June 28, 2002 were net of allowance for doubtful accounts of
$1.1 million and $838,000, respectively.
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.
7
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED DECEMBER 28, 2002
AND DECEMBER 28, 2001.
NET SALES. Net sales for the quarter ended December 28, 2002 increased
5% to $54.6 million compared to $52.3 million last year. The increase in net
sales was primarily due to sales growth from the Licensed Apparel group, which
was partially offset by sales decreases from the Corporate division. The net
sales growth in the Licensed Apparel group was from college bookstore customers
and was most pronounced in our Champion licensed products group (CCP). Net sales
from college bookstore customers for the second quarter of fiscal 2003 were $3.0
million greater than last year while sales for the Corporate division were $1.3
million less than 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 division.
GROSS PROFIT. Gross profit for the quarter ended December 28, 2002
increased 4% to $20.2 million compared to $19.4 million last year. Gross profit
as a percentage of net sales was comparable for both periods at about 37%.
College bookstore sales represented 46% of net sales for the quarter compared to
43% last year.
OPERATING EXPENSES. Operating expenses for the quarter ended December
28, 2002 increased 10% to $13.7 million from $12.5 million last year. Operating
expenses as a percentage of net sales were 25.1% in the second quarter of fiscal
2003 compared to 24.0% last year. Operating expenses increased due to more
revenue 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 and changed the timing of its
annual sales meetings, which were held in the second quarter of fiscal 2003. The
annual sales meetings were held in the third quarter last year.
OPERATING INCOME. Operating income decreased 6% to $6.5 million in the
second quarter of fiscal 2003 compared to $6.9 million last year. Operating
income as a percentage of net sales decreased to 11.9% in the second quarter of
fiscal 2003 from 13.2% in the second quarter of fiscal 2002. The decrease in
operating income as a percentage of sales was the result of the increase in
operating expenses.
EBITDA. EBITDA decreased 5% to $7.6 million in the second quarter of
fiscal 2003 compared to $7.9 million last year. EBITDA as a percentage of net
sales decreased to 13.8% in the quarter ended December 28, 2002 from 15.2% in
the quarter ended December 28, 2001. The decrease in EBITDA was the result of
lower operating income.
INTEREST EXPENSE. Interest expense in the second quarter of fiscal 2003
was $6.2 million, the same as the comparable period last year. The effect of
higher average borrowings was offset by lower interest rates.
NET INCOME. Net income for the second quarter of fiscal 2003 was
$214,000 compared to $456,000 for the second quarter of fiscal 2002. The
decrease was primarily the result of the decline in operating income.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 28, 2002
AND DECEMBER 28, 2001.
NET SALES. Net sales for the six months ended December 28, 2002
increased 9% to $115.8 million from $106.4 million in the six months ended
December 28, 2001. The increase in net sales from last year was due to strong
growth from the Licensed Apparel group, which was fueled by a 42% increase in
revenue from CCP. The net sales increase from CCP was partially offset by a 28%
decline in Corporate division sales. Net sales for CCP for the first six months
of fiscal 2003 were $10.8 million greater than last year while Corporate
division sales were $5.1 million less than last year. Management believes that
the Company's customers have shifted their purchases to lower priced apparel
with less expensive decoration, which has enhanced the sales of CCP's more
moderately priced goods. A soft economy and consequent reductions in corporate
spending on marketing and employee incentive programs have had a detrimental
effect on the net sales of the Corporate division.
GROSS PROFIT. Gross profit for the six months ended December 28, 2002
increased 5% to $42.3 million from $40.3 million in the six months ended
December 28, 2001. Gross profit as a percentage of net sales decreased to 36.5%
from 37.9% 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 52% of net sales for the six month period ended
December 28, 2002 compared to 45% last year. College bookstore sales generally
provide a lower gross profit than the Company's other divisions.
OPERATING EXPENSES. Operating expenses for the six months ended
December 28, 2002 increased 12% to $27.9 million from $24.9 million last year.
Operating expenses as a percentage of net sales were 24.0% in the first six
months of fiscal 2003 compared to 23.4% in the first six months of fiscal 2002.
The increase in operating expenses was principally due to a greater portion of
fiscal 2003 sales 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.
8
Operating Income. Operating income decreased 6% to $14.4 million in
fiscal 2003 from $15.4 million in fiscal 2002. Operating income as a percentage
of net sales decreased to 12.5% in fiscal 2003 from 14.5% in 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 combined with the increase in
operating expenses.
EBITDA. EBITDA decreased 6% to $16.5 million in the first six months of
fiscal 2003 from $17.5 million in the first six months of fiscal 2002. EBITDA as
a percentage of net sales decreased to 14.3% in the six months ended December
28, 2002 from 16.5% in the comparable period last year. The decrease in EBITDA
was a result of lower operating income.
INTEREST EXPENSE. Interest expense in the first six months of fiscal
2003 was $12.2 million, $264,000 less than the comparable period last year.
Lower interest rates created the decrease in interest expense.
NET INCOME. Net income for the first six months of fiscal 2003 was
$1.4 million, compared to $1.8 million for the first six months of fiscal 2002.
The decrease was primarily the result of the decrease in operating income.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in the first six months of fiscal
2003 was $9.8 million compared to cash used by operating activities of $692,000
last year. Fiscal 2002 operating cash flows were used to fund the increase in
accounts receivable and inventory related to the addition of the CCP college
bookstore business.
Cash used in investing activities in the first six months of fiscal
2003 was $2.2 million compared to $2.0 million last year. The cash used in both
periods was related to the acquisition of property, plant and equipment.
Cash used in financing activities in the first six months of fiscal
2003 was $4.2 million compared to $572,000 in the comparable period of fiscal
2002. Payments of bank debt was the primary use of cash in fiscal 2003.
Under the Company's Revolving Bank Credit Agreement ("RBCA") up to $65
million of revolving credit availability is provided, of which $26.1 million was
borrowed and outstanding and approximately $5.9 million was utilized for
outstanding commercial and stand-by letters of credit as of December 28, 2002.
At December 28, 2002, $28.4 million was available for future borrowings under
the RBCA. The Company believes that cash flows from operating activities and
borrowings under the RBCA will be adequate to meet the Company's short-term and
future liquidity requirements prior to the maturity of the RBCA in fiscal 2005,
although no assurance can be given in this regard.
The Company's wholly-owned subsidiary, GFSI, Inc., anticipates paying
dividends to the Company to enable the Company to pay corporate income taxes,
interest on subordinated discount notes issued by Holdings (the "Holdings
Discount Notes"), fees payable under a consulting agreement, preferred stock
dividends and certain other ordinary course expenses incurred on behalf of GFSI,
Inc. The Company is dependent upon the cash flows of GFSI, Inc. to provide funds
to service the Holdings Discount Notes. The 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, the Company's cumulative non-cash preferred stock ("Holdings
Preferred Stock") dividends total approximately $396,000 annually. Holdings
Preferred Stock may be redeemed at stated value (approximately $3.4 million)
plus accrued dividends with mandatory redemption in fiscal 2009.
9
SUBSEQUENT EVENT
On December 31, 2002 GFSI, Inc., completed the private placement of
$9.9 million of unregistered 9.625% senior subordinated notes ("Exchange Notes")
in exchange for $24 million aggregate principal amount at maturity of the
Company's 11.375% Senior Discount Notes (the "Holdings Discount Notes") with an
accreted book value of $19.9 million. The acquisition of the Holdings Discount
Notes by the Company's wholly-owned subsidiary is considered an early
extinguishment of debt, and accordingly, the Company will record a pre-tax gain
on the transaction of approximately $9.6 million, net of related costs, in the
third quarter of fiscal 2003.
The Exchange Notes are unsecured obligations of GFSI, Inc., mature on
March 1, 2007, pay interest semi- annually on March 1 and September 1, and were
issued under an indenture with substantially identical terms as the indenture
governing the $125 million aggregate principal amount at maturity of GFSI, Inc.
Senior Subordinated Notes issued on February 27, 1997. The Exchange Notes were
guaranteed by each of GFSI, Inc.'s wholly-owned subsidiaries (Event One, CCP and
GFSI Canada Company). The Exchange Notes were issued to an "accredited investor"
and were exempt from registration under Rule 144 of the Securities Act. GFSI,
Inc. intends to file an exchange offer registration statement with the
Securities and Exchange Commission in the third quarter of fiscal 2003 to enable
the holder of the Exchange Notes to exchange them for publicly registered notes
having terms substantially identical to the Exchange Notes.
SEASONALITY AND INFLATION
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. The seasonality of sales and profitability
is primarily due to higher college bookstore sales during the first two fiscal
quarters. Sales at the Company's Resort and Corporate divisions typically show
little seasonal variations.
The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE AND MARKET RISK DISCLOSURE
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. The fixed rate portion of the Company's
long-term debt does not bear significant interest rate risk. An immediate 10%
change in interest rates would not have a material effect on the Company's
results of operations over the next fiscal year, although there can be no
assurances that interest rates will not significantly change.
10
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
4.11 Indenture, dated as of December 31, 2002 between GFSI, Inc.
and State Street Bank and Trust Company.*
4.12 9 5/8% Series A Senior Subordinated Note due 2007.*
10.25 Exchange Agreement, dated as of December 31, 2002, between
GFSI, Inc. and Jefferies Company, Inc.*
10.26 Consent and Amendment, dated as of December 31, 2002, to the
Credit Agreement, dated March 28, 2002.*
* Incorporated by reference to Form 10-Q of GFSI, Inc., filed with the
Securities and Exchange Commission on February 6, 2003 (Commission File
No. 333-24189).
(b) Reports on Form 8-K
None
11
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.
February 5, 2003
/s/ J. CRAIG PETERSON
--------------------------------------------
J. Craig Peterson, Sr. Vice President
of Finance and Principal Accounting Officer
12
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI HOLDINGS, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED DECEMBER 28, 2002
I, Robert M. Wolff, Chairman and Chief Executive Officer (Principal Executive
Officer) of GFSI Holdings, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI Holdings,
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;
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 these 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: February 5, 2003
/S/ ROBERT M. WOLFF
- ---------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
13
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING GFSI HOLDINGS, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED DECEMBER 28, 2002
I, J. Craig Peterson, Senior Vice President and Chief Financial Officer
(Principal Financial Officer) of GFSI Holdings, Inc., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of GFSI Holdings, 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 these 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: February 5, 2003
/S/ J. CRAIG PETERSON
- ---------------------------------------
J. Craig Peterson
Senior Vice President and Chief Financial Officer
14