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 March 29, 2003.
( )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 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 - 1,805 shares issued and outstanding as
of May 1, 2003.
1
GFSI HOLDINGS, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended March 29, 2003
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 8
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 12
ITEM 4 - CONTROLS AND PROCEDURES 12
PART II - OTHER INFORMATION 13
SIGNATURE PAGE 14
OFFICERS CERTIFICATION 15
2
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
March 29, June 29,
2003 2002
------------- ----------
Assets
Current assets:
Cash and cash equivalents $ 1,271 $ 328
Accounts receivable, net 30,299 32,626
Inventories, net 42,116 45,729
Income tax receivable 630 284
Prepaid expenses and other current assets 1,455 1,268
Deferred income taxes 1,132 845
--------- ---------
Total current assets 76,903 81,080
Property, plant and equipment, net 20,219 19,671
Other assets:
Deferred financing costs, net 3,321 4,063
Other 259 1,010
--------- ---------
Total assets $ 100,702 $ 105,824
========= =========
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 9,123 $ 12,010
Accrued interest expense 1,189 4,365
Accrued expenses 6,064 5,983
Current portion of long-term debt 241 177
--------- ---------
Total current liabilities 16,617 22,535
Deferred income taxes 4,914 699
Other long-term obligations 499 527
Long-term debt, less current portion 232,469 241,120
Redeemable preferred stock 5,572 5,405
Stockholders' equity (deficiency):
Common stock, $.01 par value 2,105 shares authorized,
2,000 shares issued at March 29, 2003 and June 29, 2002 -- --
Additional paid-in capital 200 200
Accumulated deficiency (159,554) (164,651)
Treasury stock, at cost (195 and 152.5 series A shares at
March 29, 2003 and June 29, 2002, respectively) (15) (11)
---------- ----------
Total stockholders' equity (deficiency) (159,369) (164,462)
---------- ----------
Total liabilities and stockholders'
equity (deficiency) $ 100,702 $ 105,824
========== ==========
See notes to consolidated financial statements.
3
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
Quarter Ended Nine Months Ended
March 29, March 29, March 29, March 29,
2003 2002 2003 2002
------------ ---------- ----------- -----------
Net sales $ 41,204 $ 41,520 $ 157,048 $ 147,897
Cost of sales 25,983 26,258 99,536 92,348
---------- ---------- ---------- ----------
Gross profit 15,221 15,262 57,512 55,549
Operating expenses:
Selling 6,047 6,603 20,422 18,553
General and administrative 6,571 6,753 20,050 19,662
---------- --------- --------- ---------
12,618 13,356 40,472 38,215
---------- --------- --------- ---------
Operating income 2,603 1,906 17,040 17,334
Other income (expense):
Interest expense (5,759) (6,161) (17,915) (18,581)
Gain (loss) on early extinguishment of debt 9,610 (994) 9,610 (994)
Other, net 8 2 19 13
---------- ---------- ---------- ----------
3,859 (7,153) (8,286) (19,562)
---------- ---------- ---------- ---------
Income before income taxes 6,462 (5,247) 8,754 (2,228)
Income tax expense (benefit) 2,534 (2,047) 3,429 (869)
---------- ---------- ---------- ---------
Net income (loss) 3,928 (3,200) 5,325 (1,359)
Preferred stock dividends (96) (100) (294) (301)
---------- ---------- ---------- ---------
Net income (loss) attributable to
common shareholders $ 3,832 $ (3,300) $ 5,031 $ (1,660)
========== ========== ========== =========
See notes to consolidated financial statements.
4
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 29, March 29,
2003 2002
------------- -----------
Cash flows from operating activities:
Net income (loss) $ 5,325 $ (1,359)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,377 2,338
Amortization of deferred financing costs 753 929
Amortization of other intangibles 750 750
(Gain) loss on sale or disposal of property, plant and equipment (11) 6
Accretion of discount on long-term debt 6,777 6,562
Deferred income taxes 3,928 (414)
(Gain) loss on early extinguishment of debt (9,610) 994
Gain (loss) on foreign currency translation 66 --
Changes in operating assets and liabilities:
Accounts receivable, net 2,327 (5,837)
Inventories, net 3,613 (2,917)
Prepaid expenses, other current assets and other assets (186) (82)
Income taxes receivable and payable (346) 1,600
Accounts payable, accrued expenses and other
long-term obligations (6,307) (5,199)
-------- ---------
Net cash provided by (used in) operating activities 9,456 (2,629)
-------- ---------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment 22 3
Purchases of property, plant and equipment (2,936) (3,622)
-------- ---------
Net cash used in investing activities (2,914) (3,619)
-------- ---------
Cash flows from financing activities:
Net changes in revolving credit agreement (5,738) 29,262
Redemption of preferred stock (127) (771)
Treasury stock purchase (4) (28)
Proceeds from sale of stock -- 676
Cash paid for financing costs (50) (683)
Issuance of long-term debt 450 300
Payments on long-term debt (130) (26,804)
-------- ---------
Net cash provided by (used in) financing activities (5,599) 1,952
-------- ---------
Net increase (decrease) in cash and cash equivalents 943 (4,296)
Cash and cash equivalents at beginning of period 328 5,324
--------- ---------
Cash and cash equivalents at end of period $ 1,271 $ 1,028
========= =========
Supplemental cash flow information:
Interest paid $ 13,561 $ 13,865
========= =========
Income taxes paid (refunded) $ (153) $ (2,053)
========= =========
See notes to consolidated financial statements.
5
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 29, 2003
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
accounting principles generally accepted in the United States of America 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 accounting
principles generally accepted in the United States of America 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.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145 "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13 and, and Technical Corrections." The new standard
eliminates the requirement to classify gains and losses related to early debt
extinguishments as extraordinary items. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. In the third quarter of fiscal 2003, GFSI
elected to early adopt SFAS No. 145 and has accordingly reclassified the 2002
loss on extinguishment of debt, previously presented as an extraordinary item,
net of income taxes, as other income (expense) in accordance with the
provisions of SFAS No. 145. Net income, shareholders' equity or cash flows
were not impacted by the adoptioin of this new standard.
6
4. Inventories
-----------
The following is a summary of inventories at March 29, 2003 and June 29,
2002:
Unaudited(In thousands)
March 29, 2003 June 29, 2002
-------------- -------------
Undecorated apparel ("blanks")
and supplies $ 39,661 $ 41,976
Work in process 557 1,114
Finished Goods 1,898 2,639
------------ ----------
Total $ 42,116 $ 45,729
============ ==========
5. Early Extinguishment of Debt
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 recorded a pre-tax
gain on the transaction of approximately $9.6 million, net of related costs,
in the third quarter of fiscal 2003. In future periods, GFSI Holdings'
financial statements will reflect a net reduction in annual interest expense
of approximately $1.3 million.
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. has filed an exchange offer registration
statement with the Securities and Exchange Commission to enable the holder of
the Exchange Notes to exchange them for publicly registered notes having terms
substantially identical to the Exchange Notes.
7
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.
Critical accounting policies
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources is based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. 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, we
evaluate our estimates, including those related to bad debts, inventories,
intangible assets, long-lived assets, deferred income taxes, accrued expenses,
restructuring reserves, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe 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.
We believe that some of our significant accounting policies involve a
higher degree of judgment or complexity than other accounting policies.
Identified below are the policies deemed critical to our business and the
understanding of our results of operations.
Revenue recognition. We recognize 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. We maintain 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 our 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 March 29, 2003 and June 28, 2002 were net of allowance
for doubtful accounts of $1.0 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. We write 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. We also record changes in valuation allowances
due to changes in our 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.
8
Comparison of Operating Results for the Quarters Ended March 29, 2003 and
March 29, 2002.
Net Sales. Net sales for the quarter ended March 29, 2003 were $41.2
million compared to $41.5 million last year. We experienced sales decreases in
the Resort division, the Corporate division and our Event 1 subsidiary, offset
by sales growth from the Licensed Apparel group. The net sales growth in the
Licensed Apparel group was from college bookstore customers in our Champion
licensed products group (CCP) which continued to benefit from consumer
preferences for moderately priced apparel. Net sales for CCP were
approximately $2.9 million greater than last year. College bookstore sales
represented approximately 37% of net sales for the quarter compared to 31%
last year. The Corporate and Resort divisions were affected by reduced
business due to decreased discretionary spending on marketing and employee
incentive programs and declining business and consumer travel. Event 1 sales
for the third quarter of fiscal 2003 were below last year due to the timing of
the NCAA mens championship basketball tournament. The final championship games
were held in the fourth quarter of fiscal 2003, compared to the third quarter
of fiscal 2002.
Gross Profit. Gross profit for the quarter ended March 29, 2003 was $15.2
million, approximately the same as last year. Gross profit as a percentage of
net sales was comparable for both periods at about 37%.
Operating Expenses. Operating expenses for the quarter ended March 29,
2003 decreased 5% to $12.6 million from $13.4 million last year. Operating
expenses as a percentage of net sales were 30.6% in the third quarter of
fiscal 2003 compared to 32.2% last year. The decrease in operating expenses
was created by implementation of cost controls.
Operating Income. Operating income increased 37% to $2.6 million in the
third quarter of fiscal 2003 compared to $1.9 million last year. Operating
income as a percentage of net sales increased to 6.3% in the third quarter of
fiscal 2003 from 4.6% in the third quarter of fiscal 2002. The increase in
operating income as a percentage of sales was the result of the decrease in
operating expenses.
Interest Expense. Interest expense in the third quarter of fiscal 2003
was $5.8 million, $402,000 less than the comparable period last year. The
decrease in interest expense in third quarter of fiscal 2003 was primarily due
to lower borrowings outstanding at lower interest rates in comparison to last
year.
Gain on Early Extinguishment of Debt. 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 ("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 recorded 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 1, CCP, and GFSI Canada Company). GFSI, Inc. filed an exchange offer
registration statement with the Securities and Exchange Commission to enable
the holder of the Exchange Notes to exchange them for publicly registered
notes having terms substantially identical to the Exchange Notes.
In March 2002, the Company entered into a $65 million revolving bank
credit facility (the "RBCA) and repaid its existing $40 million bank credit
facility ahead of its scheduled expiration. A pre-tax charge of $994,000 was
recorded in the third quarter of fiscal 2002 to write off deferred debt
origination costs related to the previous bank credit facility.
Net Income (loss). Net income for the third quarter of fiscal 2003 was
$3.9 million compared to a net loss of $3.2 million last year. The early
extinguishment gain on debt compared to a loss last year and the increase in
operating income combined to create the increase in net income.
9
Comparison of Operating Results for the Nine Months Ended March 29, 2003 and
March 29, 2002.
Net Sales. Net sales for the nine months ended March 29, 2003 increased
6% to $157.0 million from $147.9 million last year. The increase in net sales
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 18% decline in Corporate division sales. Net sales for
CCP for the first nine months of fiscal 2003 were $13.7 million greater than
last year while Corporate division sales were $4.1 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 nine months ended March 29, 2003
increased 4% to $57.5 million from $55.5 million last year. Gross profit as a
percentage of net sales decreased to 36.6% from 37.6% 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 represented 51% of net sales for
the nine month period ended March 29, 2003 compared to 43% last year. College
bookstore sales generally provide a lower gross profit than the Company's
other divisions.
Operating Expenses. Operating expenses for the nine months ended March
29, 2003 increased 6% to $40.5 million from $38.2 million last year. Higher
sales created the increase in operating expenses. Operating expenses as a
percentage of net sales were 25.8% for the first nine months of fiscal 2003
and fiscal 2002. The favorable impact of cost control measures offset the
higher royalty and distribution channel costs attributable to college
bookstore sales which allowed operating expenses as a percentage of net sales
to remain the same.
Operating Income. Operating income decreased 2% to $17.0 million in
fiscal 2003 from $17.3 million in fiscal 2002. Operating income as a
percentage of net sales decreased to 10.9% in fiscal 2003 from 11.7% 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.
Interest Expense. Interest expense in the first nine months of fiscal
2003 was $17.9 million, $666,000 less than the comparable period last year.
The decrease in interest expense was due to lower borrowings at lower interest
rates in comparison to last year.
Gain on Early Extinguishment of Debt. 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 recorded a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs.
In March 2002, the Company entered into a $65 million RBCA and repaid its
existing $40 million bank credit facility ahead of its scheduled expiration. A
pre-tax charge of $994,000 was recorded in the third quarter of fiscal 2002 to
write off deferred debt origination costs related to the previous bank credit
facility.
Net Income (loss). Net income for the first nine months of fiscal 2003
was $5.3 million, compared to a net loss of $1.4 million last year. The early
extinguishment gain on debt compared to a loss last year and offset the
decrease in operating income and combined to create the $6.7 million increase
in net income over last year.
10
Liquidity and Capital Resources
Cash provided by operating activities in the first nine months of fiscal
2003 was $9.5 million compared to cash used by operating activities of $2.6
million 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 nine months of fiscal 2003
was $2.9 million compared to $3.6 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 nine months of fiscal 2003
was $5.6 million compared to cash provided by financing activities of $2.0
million in the comparable period of fiscal 2002. Payments of bank debt was the
primary use of cash in fiscal 2003. In fiscal 2002, the Company used
borrowings under its RCBA to repay long-term debt.
Under the Company's RBCA up to $65 million of revolving credit
availability is provided, of which $24.8 million was borrowed and outstanding
and approximately $6.3 million was utilized for outstanding commercial and
stand-by letters of credit as of March 29, 2003. At March 29, 2003, $25.4
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 the Holdings Discount Notes, fees payable under consulting and
non-competition agreements, 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 $84.5
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 $400,000 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 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 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.
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 he 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
None.
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 HOLDINGS, INC.
May 13, 2003
/s/ J. CRAIG PETERSON
----------------------------------
J. Craig Peterson, Sr. Vice
President of Finance and Principal
Accounting Officer
14
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER REGARDING GFSI HOLDINGS, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED MARCH 29, 2003
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: May 13, 2003
/S/ ROBERT M. WOLFF
- ---------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
15
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER REGARDING GFSI HOLDINGS, INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL PERIOD ENDED MARCH 29, 2003
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: May 13, 2003
/S/ J. CRAIG PETERSON
- -------------------------------------------------
J. Craig Peterson
Senior Vice President and Chief Financial Officer
16