-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qwb4wncrwLlXpHS5demY37WFgI+C+6q7dN4wLkTnMIZ+GRdQrSc6dXjme5pNrobG 9dGaZXwKYpu+WE/i0lbxFQ== 0000902561-03-000254.txt : 20030513 0000902561-03-000254.hdr.sgml : 20030513 20030513160328 ACCESSION NUMBER: 0000902561-03-000254 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030329 FILED AS OF DATE: 20030513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GFSI HOLDINGS INC CENTRAL INDEX KEY: 0001036180 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 742810744 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-38951 FILM NUMBER: 03695677 BUSINESS ADDRESS: STREET 1: 9700 COMMERCE PARKWAY CITY: LENEXA STATE: KS ZIP: 66219 BUSINESS PHONE: 9138880445 MAIL ADDRESS: STREET 1: 9700 COMMERCE PKWY CITY: LENEXA STATE: KS ZIP: 66219 10-Q 1 form10q.txt 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 -----END PRIVACY-ENHANCED MESSAGE-----