<PAGE>
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 January 1, 1999.
-----------------
( )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 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 - 2,000 shares issued and outstanding as
of February 1, 1999.
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GFSI HOLDINGS, INC. AND SUBSIDIARY
Quarterly Report on Form 10-Q
For the Quarter Ended January 1, 1999
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 9
PART II - OTHER INFORMATION 14
SIGNATURE PAGE 15
2
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GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
July 3, January 1,
1998 1999
---------- -----------
<S> <C> <C>
Assets
Current assets:
Cash & cash equivalents $ 1,361 $ 5,143
Accounts receivable, net of allowance for doubtful accounts of $636
and $1,188, respectively 27,664 35,219
Inventories, net 44,298 35,920
Prepaid expenses and other current assets 1,484 986
Deferred income taxes 1,679 1,899
--------- ---------
Total current assets 76,486 79,167
Property, plant and equipment, net 21,243 20,550
Other assets:
Deferred financing costs, net 8,798 8,207
Other 5 10
--------- ---------
Total assets $ 106,532 $ 107,934
========= =========
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 8,409 $ 7,819
Accrued interest expense 4,521 4,376
Accrued expenses 8,918 8,672
Income taxes payable -- 847
Current portion of long-term debt 5,050 5,802
--------- ---------
Total current liabilities 26,898 27,516
Deferred income taxes 1,234 1,342
Revolving credit agreement 5,600 1,000
Other long-term obligations 300 150
Long-term debt, less current portion 235,179 235,544
Redeemable preferred stock 4,136 4,349
Stockholders' equity (deficiency):
Common stock, $.01 par value, 2,000 shares authorized, issued
and outstanding at July 3, 1998 and January 1, 1999 -- --
Additional paid-in capital 200 200
Accumulated deficiency (167,015) (162,167)
--------- ---------
Total stockholders' equity (deficiency) (166,815) (161,967)
--------- ---------
Total liabilities and stockholders' equity (deficiency) $ 106,532 $ 107,934
========= =========
</TABLE>
NOTE: The consolidated balance sheet at July 3, 1998 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
3
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See notes to consolidated financial statements.
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
January 2, January 1, January 2, January 1,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 56,541 $ 55,377 $ 116,903 $ 115,422
Cost of sales 32,748 30,497 66,287 64,769
------- ------- -------- --------
Gross profit 23,793 24,880 50,616 50,653
Operating expenses:
Selling 5,341 5,688 11,846 12,130
General and administrative 7,500 8,747 14,340 17,481
------- ------- -------- --------
12,841 14,435 26,186 29,611
------- ------- -------- --------
Operating income 10,952 10,445 24,430 21,042
Other income (expense):
Interest expense (6,458) (6,320) (12,033) (12,651)
Other, net (29) 25 (17) 60
------- ------- -------- --------
Income before income taxes &
extraordinary item (6,487) (6,295) (12,050) (12,591)
------- ------- -------- --------
4,465 4,150 12,380 8,451
Provision for income taxes 1,834 1,662 5,079 3,391
------- ------- -------- --------
Income before extraordinary item 2,631 2,488 7,301 5,060
Extraordinary item, net of tax
benefit of $135 -- -- 203 --
------- ------- -------- --------
Net income 2,631 2,488 7,098 5,060
Preferred stock dividends (324) (106) (1,118) (212)
------- ------- -------- --------
Net income attributable to
common shareholders $ 2,307 $ 2,382 $ 5,980 $ 4,848
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
4
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GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
January 2, January 1,
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,098 $ 5,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,468 1,516
Amortization of deferred financing costs 593 591
Loss on sale or disposal of property, plant and equipment 30 71
Deferred income taxes 129 (112)
Amortization of discount on long-term debt 1,388 3,064
Extraordinary loss on early extinguishment of debt 338 --
Changes in operating assets and liabilities:
Accounts receivable, net (7,357) (7,553)
Inventories, net 3,701 8,379
Prepaid expenses, other current assets and other assets 570 491
Income taxes payable 25 847
Accounts payable, accrued expenses and other
long-term obligations (3,103) (851)
------- -------
Net cash provided by operating activities 4,880 11,503
------- -------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 267 183
Purchases of property, plant and equipment (885) (1,077)
------- -------
Net cash used in investing activities (618) (894)
------- -------
Cash flows from financing activities:
Net changes to short-term borrowings and revolving credit agreement (3,000) (4,600)
Payments on long-term debt (2,250) (2,227)
Cash paid for financing costs (295) --
Redemption of note receivable from sale of stock 788 --
------- -------
Net cash used in financing activities (4,757) (6,827)
------- -------
Net increase (decrease) in cash and cash equivalents (495) 3,782
Cash and cash equivalents at beginning of period 1,117 1,361
------- -------
Cash and cash equivalents at end of period $ 622 $ 5,143
======= =======
Supplemental cash flow information:
</TABLE>
5
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<TABLE>
<S> <C> <C>
Interest paid $ 9,485 $ 9,076
======= =======
Income taxes paid $ 4,788 $ 2,346
======= =======
Supplemental schedule of non-cash financing activities:
Accrual of preferred stock dividends $ 1,118 $ 212
======= =======
Exchange of subordinated notes and preferred stock for discount notes $50,000
=======
</TABLE>
See notes to consolidated financial statements.
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
January 1, 1999
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of GFSI Holdings,
Inc. ("Holdings" or the "Company") include the accounts of the Company and the
accounts of its wholly owned subsidiary, GFSI, Inc. ("GFSI"). All intercompany
balances and transactions have been eliminated. The unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statement reporting purposes. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position and operations of
the Company have been included. Operating results for the interim periods are
not necessarily indicative of the results that may be expected for the entire
fiscal year. For further information, refer to the financial statements and
footnotes thereto for the year ended July 3, 1998 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. Recapitalization Transaction
----------------------------
On October 31, 1996, the Board of Directors of Winning Ways, Inc. ("Winning
Ways") executed a letter of intent to enter into a transaction with The Jordan
Company. The Transaction included the formation of Holdings, and GFSI, a wholly
owned subsidiary of Holdings, to effect the acquisition of Winning Ways. On
February 27, 1997, pursuant to the acquisition agreement, Holdings and GFSI
acquired all of the issued and outstanding capital stock of Winning Ways, and
immediately thereafter merged Winning Ways with and into GFSI with GFSI as the
surviving entity. All of the capital stock of Winning Ways acquired by Holdings
in connection with the acquisition was contributed to GFSI along with the
balance of the Equity Contribution, as described below.
The aggregate purchase price for Winning Ways was $242.3 million, consisting
of
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$173.1 million in cash at closing, a post closing payment at April 30, 1997 of
$10.0 million and the repayment of $59.2 million of Winning Ways' existing
indebtedness. To finance the Acquisition, including approximately $11.5 million
of related fees and expenses: (i) The Jordan Company, its affiliates and JZEP
PLC (collectively the "Jordan Investors") invested $52.2 million in Holdings and
Holdings contributed $51.4 million of this amount to GFSI (the "Equity
Contribution"); (ii) GFSI entered into a credit agreement (the "Credit
Agreement") which provides for borrowings of up to $115.0 million, of which
approximately $68.0 million was outstanding at closing and approximately $22.9
million was utilized to cover outstanding letters of credit at closing; and
(iii) GFSI issued $125.0 million of Senior Subordinated Notes (the "Senior
Subordinated Notes") which were purchased by institutional investors through a
Rule 144A private placement. The Equity Contribution was comprised of (i) a
contribution of $13.6 million from the Jordan Investors to Holdings in exchange
for Holdings Preferred Stock and approximately 50% of the Common Stock of
Holdings; (ii) a contribution of $13.6 million from the Management Investors to
Holdings in exchange for Holdings Preferred Stock and approximately 50% of the
Common Stock of Holdings, and (iii) a contribution of $25.0 million from JZEP
PLC to Holdings in exchange for subordinated notes of Holdings (the "Holdings
Subordinated Notes"). Approximately $0.8 million of the contribution from the
Management Investors was financed by loans from Holdings.
Subsequent to the recapitalization transactions described above, GFSI became a
wholly owned subsidiary of Holdings. Holdings is dependent upon the cash flows
of the GFSI to provide funds to enable Holdings to pay consolidated income
taxes, fees payable under a consulting agreement and certain other ordinary
course expenses incurred on behalf of GFSI and to provide funds to service the
indebtedness represented by the $50.0 million of Holdings Series B Senior
Discount Notes due 2009. Holdings Series B Discount Notes do not have an annual
cash flow requirement until 2005. Additionally, the remaining cumulative
Holdings Preferred Stock will accrue dividends totaling approximately $427,000
annually. Holdings Preferred Stock may be redeemed at stated value
(approximately $3.6 million) plus accrued dividends with mandatory redemption in
2009.
3. Commitments and Contingencies
-----------------------------
The Company, in the normal course of business, may be threatened with or named
as a defendant in various lawsuits. It is not possible to determine the ultimate
disposition of these matters, however, management is of the opinion that there
are no known claims or known contingent claims that are likely to have a
material adverse effect on the results of operations, financial condition, or
cash flows of the Company.
Various state and local taxing authorities have examined, or are in the
process of examining the Company's sales and use tax returns. The Company is
currently reviewing the status and the results of such examinations, including
the methods used by certain state taxing authorities in calculating the sales
tax assessments and believes that it has
7
<PAGE>
accrued an amount adequate to cover the assessments.
4. New Accounting Standards
------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all quarters of fiscal years beginning after June 15, 1999. The
Company is in the process of determining what impact the adoption of SFAS No.
133 will have on its financial position and results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of internal use computer software at
various stages of development. This SOP is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the implementation of this
SOP to have a material impact on the Company's financial statements.
8
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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 July 3, 1998. 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.
The following sets forth the amount and percentage of net sales for each of
the periods indicated (dollars in thousands). Certain reclassifications have
been made to the fiscal year 1998 data to conform to the 1999 presentation:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
January 2, 1998 January 1, 1999 January 2, 1998 January 1, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Resort $15,744 27.9% $15,276 27.6% $ 34,428 29.4% $ 32,532 28.2%
Corporate 21,717 38.4% 21,946 39.6% 38,286 32.8% 41,203 35.7%
College Bookstore 10,646 18.8% 9,917 17.9% 29,988 25.6% 28,110 24.4%
Sports Specialty 3,849 6.8% 3,559 6.4% 7,450 6.4% 6,829 5.9%
Event 1 2,978 5.2% 3,355 6.1% 3,167 2.7% 3,533 3.1%
Other 1,607 2.9% 1,324 2.4% 3,584 3.1% 3,215 2.7%
------- ------- -------- --------
Total $56,541 $55,377 $116,903 $115,422
======= ======= ======== ========
</TABLE>
Results of Operations
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for the quarters and six
month periods ended January 2, 1998 and January 1, 1999.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
January 2, January 1, January 2, January 1,
1998 1999 1998 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 42.1 44.9 43.3 43.9
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
<S> <C> <C> <C> <C>
EBITDA 20.7 20.2 22.2 19.5
Operating income 19.4 18.9 20.9 18.2
</TABLE>
EBITDA represents operating income plus depreciation and amortization. While
EBITDA should not be construed as a substitute for operating income or a better
indicator of liquidity than cash flow from operating activities, which are
determined in accordance with generally accepted accounting principles, it is
included herein to provide additional information with respect to the ability of
the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Consolidated Statements of Cash Flows of the
Company herein for further information.
Comparison of Operating Results for the Quarters and Six Month Periods Ended
January 1, 1999 and January 2, 1998.
Net Sales. Net sales for the second quarter of fiscal 1999, the three
months ended January 1, 1999, decreased 2.1% to $55.4 million from $56.5 million
in the second quarter of fiscal 1998. Net sales for the first six months of
fiscal 1999 decreased 1.3% to $115.4 million from $116.9 million in the first
six months of fiscal 1998. The decrease in net sales primarily reflects
decreases in net sales for the six months ended January 1, 1999 at the Company's
Resort, College Bookstore and Sports Specialty divisions of 5.5%, 6.3% and 8.3%
respectively. The decreases in net sales at the Resort and College Bookstore
divisions are primarily attributable to unseasonably warm fall and winter
temperatures in most of the country and the decrease at the Sports Specialty
division is primarily attributable to the NBA strike. These decreases in net
sales were partially offset by an increase in net sales in the Company's
Corporate division and Event 1 subsidiary of 7.6% and 11.6%, respectively, for
the six months ended January 1, 1999.
Gross Profit. Gross profit for the second quarter of fiscal 1999 increased
4.6% to $24.9 million from $23.8 million in the second quarter of fiscal 1998.
Gross profit for the first six months of fiscal 1999 increased .1% to $50.7
million from $50.6 million in the first six months of fiscal 1998. The increase
in gross profit is primarily a result of reductions in material costs realized
in the second quarter of fiscal year 1999. For the second quarter of fiscal
1999, gross profit as a percentage of net sales increased to 44.9% compared to
42.1% in the second quarter of fiscal 1998. For the first six months of fiscal
1999, gross profit as a percentage of net sales increased to 43.9% compared to
43.3% in the first six months of fiscal 1998.
Operating Expenses. Operating expenses for the second quarter of fiscal
1999 increased 12.4% to $14.4 million from $12.8 million in the second quarter
of fiscal 1998. For the first six months, operating expenses increased 13.0% to
$29.6 million from $26.2 million in the first six months of fiscal 1998.
Increases in operating expenses are primarily attributable to increased staffing
levels related to continued expansion into new markets including further
development of Event 1 activities. Operating expenses as a percentage of net
sales increased to 26.1% from 22.7% in the prior year second quarter. For the
first six months, operating expenses as a percentage of net sales increased to
25.6% from 22.4% in the prior year period.
EBITDA. EBITDA for the second quarter of fiscal 1999 decreased 4.6% to
$11.2 million from $11.7 million in the second quarter of fiscal 1998. For the
first six months, EBITDA decreased 12.9% to $22.6 million from $25.9 million in
the first six months of fiscal 1998. The decrease for both periods is primarily
a result of the decrease in net sales and the increase in operating expenses
described above. EBITDA as a percentage of net sales decreased to 20.2% from
20.7% in the second quarter of fiscal 1998. For the six months, EBITDA as a
percentage of sales decreased to 19.5% from 22.2% in the first six months of
fiscal 1998.
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Operating Income. Operating income for the second quarter of fiscal 1999
decreased 4.6% to $10.5 million from $11.0 million in the second quarter of
fiscal 1998. For the first six months, operating income decreased 13.9% to
$21.0 million from $24.4 million in the first six months of fiscal 1998. The
decrease is attributable to the decrease in net sales and the increase in
operating expenses described above. Operating income as a percentage of net
sales decreased for the second quarter of fiscal 1999 to 18.9% from 19.4% in
fiscal 1998, and to 18.2% for the six month period of fiscal 1999 from 20.9% in
the first six months of fiscal 1998.
Other Income (Expense). Other expense for the second quarter of fiscal
1999 decreased to $6.3 million from $6.5 million in the second quarter of
fiscal 1998. For the first six months of fiscal 1999, other expense increased
to $12.6 million from $12.0 million in the first six months of fiscal 1998. The
increase for the six month period is primarily a result of the issuance of the
Holdings Discount Notes in October 1997.
Income Taxes. The effective income tax rates for the six months ended
January 1, 1999 and January 2, 1998 were 40.1% and 41.0%, respectively.
Net Income. Net income for the second quarter of fiscal 1999 was $2.5
million compared to $2.6 million in the second quarter of fiscal 1998. For the
first six months of fiscal 1999, net income was $5.1 million compared to $7.1
million in the first six months of fiscal 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the first six months of fiscal 1999
was $11.5 million compared to $4.8 million in the first six months of fiscal
1998. The change in cash used in operating activities between the two periods
primarily resulted from a larger decline in the inventory balance during the
first six months of fiscal 1999 compared to the first six months of fiscal 1998.
Cash used by investing activities in the first six months of fiscal 1999 was
$894,000 compared to $618,000 in the first six months of 1998. The cash used in
both periods was related to acquisitions of property, plant and equipment.
Cash used in financing activities for the first six months of fiscal 1999 was
$6.8 million compared to $4.8 million in the first six months of fiscal 1998.
Cash flows from borrowings under the revolving credit agreement were relatively
consistent during the two periods, however, during the first six months of
fiscal 1998 the Company also received $788,000 on the redemption of a
stockholder note receivable.
The Company believes that cash flow from operating activities and borrowings
under the Credit Agreement will be adequate to meet the Company's short-term and
long-term liquidity requirements prior to the maturity of its credit facilities
in 2007, although no assurance can be given in this regard. Under the Credit
Agreement, the Revolver provides $50 million of revolving credit availability
(of which $1 million was outstanding as of January 1, 1999 and approximately
$14.5 million was utilized for outstanding commercial and stand-by letters of
credit).
Holdings is dependent upon the cash flows of GFSI to provide funds to pay
certain ordinary course expenses incurred on behalf of the Company and to
service the indebtedness represented by the $50.0 million of 11.375% Series B
Senior Discount Notes due 2009 (the "Discount Notes"). The Discount Notes will
accrete at a rate of 11.375%, compounded semi-annually to an aggregate principal
amount of $108.5 million at September 15, 2004. Thereafter, the Discount Notes
will accrue interest at the rate of 11.375% per annum,
11
<PAGE>
payable semi-annually, in cash on March 15 and September 15 of each year,
commencing on March 15, 2005. Holdings will be dependent on the Company to
provide funds to service the indebtedness. Additionally, the remaining
cumulative Holdings Preferred Stock will accrue dividends totaling approximately
$427,000 annually. Holdings Preferred Stock may be redeemed at stated value
(approximately $3.6 million) plus accrued dividends with mandatory redemption in
2009.
Derivative and Market Risk Disclosure
The Company's market risk exposure is primarily due to possible fluctuations
in interest rates. Derivative financial instruments, including an interest rate
swap and an interest rate cap agreement are used by the Company to manage its
exposure on variable rate debt obligations. The Company enters into such
agreements for hedging purposes and not with a view toward speculating in the
underlying instruments. The Company uses a balanced mix of debt maturities
along with both fixed rate and variable rate debt to manage its exposure to
interest rate changes. The fixed rate portion of the Company's long-term debt
does not bear significant interest rate risk. The variable rate debt would be
affected by interest rate changes to the extent the debt is not matched with an
interest rate swap or cap agreement or to the extent, in the case of the
revolving credit agreement, that balances are outstanding. An immediate 10
percent change in interest rates would not have a material effect on the
Company's results of operations over the next fiscal year, although there can be
no assurances that interest rates will not significantly change.
Year 2000 Compliance
The Company has a program to identify, evaluate and implement changes to its
computer systems as necessary to address the Year 2000 issue. As part of the
program, the Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Based on
management's best estimates, the new MIS will be operational during fiscal year
ending July 2, 1999. The costs associated with the new MIS implementation are
not expected to be material to the Company and are being expensed as incurred.
Any difficulty with the installation, initial operation or untimely resolution
of the new MIS may present an uncertainty that would be reasonably likely to
affect the Company's inventory purchasing control, sales and customer service
which could materially and adversely impact the Company's future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition. The
Company will continue to consider the likelihood of a material business
interruption due to the Year 2000 issue, and, if necessary, implement
appropriate contingency plans.
Also as part of the Company's Year 2000 program, the Company has initiated
communications with suppliers with which it interacts to determine their plans
for addressing Year 2000 concerns. Based upon management's best estimates, all
Year 2000 issues will be resolved in 1999. However, the Company cannot make any
assurances that its computer systems, or the computer systems of its suppliers
will be Year 2000 ready on schedule, or that management's cost estimates will be
achieved.
12
<PAGE>
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 volume at the College Bookstore division during the first two fiscal
quarters. This pattern of sales affects working capital requirements and
liquidity, as the Company generally must finance higher levels of inventory
during these periods prior to fully receiving payment from these customers.
Sales and profitability at the Company's Resort, Corporate and Sports Specialty
divisions typically show no significant seasonal variations. As the Company
continues to expand into other markets in its Resorts, Corporate and Sports
Specialty divisions, seasonal fluctuations in sales and profitability are
expected to decline. Cash requirements of Event 1 are anticipated to be
seasonal, with increasing sales and profitability in the third and fourth
quarters of fiscal years.
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.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
There has been no change to matters discussed in Business-Legal Proceedings in
Holdings' Form 10-K as filed with the Securities and Exchange Commission on
September 25, 1998.
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. The following exhibits are included with this report:
Exhibit 27 - Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the reporting
period.
14
<PAGE>
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 11, 1999
/s/ ROBERT G. SHAW
_______________________________________
Robert G. Shaw, Sr. Vice President of Finance and
Principal Accounting Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-03-1998
<PERIOD-END> JAN-01-1999
<CASH> 5,143
<SECURITIES> 0
<RECEIVABLES> 35,219
<ALLOWANCES> 0
<INVENTORY> 35,920
<CURRENT-ASSETS> 79,167
<PP&E> 38,456
<DEPRECIATION> 17,906
<TOTAL-ASSETS> 107,934
<CURRENT-LIABILITIES> 27,516
<BONDS> 236,544
4,349
0
<COMMON> 0
<OTHER-SE> (161,967)
<TOTAL-LIABILITY-AND-EQUITY> 107,934
<SALES> 115,422
<TOTAL-REVENUES> 115,422
<CGS> 64,769
<TOTAL-COSTS> 94,380
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,651
<INCOME-PRETAX> 8,451
<INCOME-TAX> 3,391
<INCOME-CONTINUING> 5,060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,060
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
