Exhibit 99.5
GFSI HOLDINGS, INC. AND SUBSIDIARIES
Quarterly Report
Quarterly Report
As of October 2, 2010
INDEX
| Page | ||||
| CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | ||||
| Consolidated Balance Sheets | 2 | |||
| Consolidated Statements of Income | 3 | |||
| Consolidated Statements of Cash Flows | 4 | |||
| Notes to Consolidated Financial Statements | 5 | |||
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GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| October 2, | July 3, | |||||||
| 2010 | 2010 | |||||||
| (UNAUDITED) | ||||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,501 | $ | 1,301 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $571 and $572 at October 2, 2010 and July 3, 2010 | 51,557 | 35,764 | ||||||
| Inventories, net | 46,254 | 49,546 | ||||||
| Prepaid expenses and other current assets | 1,145 | 1,178 | ||||||
| Deferred income taxes | 2,148 | 2,100 | ||||||
| Total current assets | 102,605 | 89,889 | ||||||
| Deferred income taxes | — | 20 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $46,046 and $45,242 at October 2, 2010 and July 3, 2010 | 16,032 | 16,048 | ||||||
| Other assets: | ||||||||
| Deferred financing costs, net | 1,163 | 1,544 | ||||||
| Other | 445 | 436 | ||||||
| 1,608 | 1,980 | |||||||
| Total assets | $ | 120,245 | $ | 107,937 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 18,862 | $ | 16,293 | ||||
| Accrued interest expense | 3,274 | 998 | ||||||
| Accrued expenses | 15,116 | 11,304 | ||||||
| Accrued taxes payable | 2,534 | 221 | ||||||
| Current portion of long-term debt | 164,992 | 168,288 | ||||||
| Total current liabilities | 204,778 | 197,104 | ||||||
| Deferred income taxes, noncurrent | 81 | — | ||||||
| Other long-term obligations | 3,443 | 3,318 | ||||||
| Redeemable preferred stock | 22,770 | 22,491 | ||||||
| Total liabilities | 231,072 | 222,913 | ||||||
| Stockholders’ equity (deficiency): | ||||||||
| Series A Common Stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued at October 2, 2010 and July 3, 2010 | — | — | ||||||
| Series B Common Stock, $.01 par value, 1,000 shares authorized, 1,000 shares issued at October 2, 2010 and July 3, 2010 | — | — | ||||||
| Series C Common Stock, $.01 par value, 17,000 shares authorized, 8,250 shares issued at October 2, 2010 and July 3, 2010 | — | — | ||||||
| Series F Preferred Stock, no par value, 1,157 shares authorized, 1,144 shares issued at October 2, 2010 and July 3, 2010 | — | — | ||||||
| Additional paid-in capital | 1,025 | 1,025 | ||||||
| Accumulated deficiency | (111,830 | ) | (115,979 | ) | ||||
| Treasury Stock, at cost (290 Series A shares at October 2, 2010 and July 3, 2010) | (22 | ) | (22 | ) | ||||
| Total stockholders’ equity (deficiency) | (110,827 | ) | (114,976 | ) | ||||
| Total liabilities and stockholders’ equity (deficiency) | $ | 120,245 | $ | 107,937 | ||||
See notes to consolidated financial statements.
2
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (In thousands)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) (In thousands)
| Quarter Ended | ||||||||
| October 2, | September 26, | |||||||
| 2010 | 2009 | |||||||
| Net sales | $ | 80,052 | $ | 70,037 | ||||
| Cost of sales | 47,197 | 41,165 | ||||||
| Gross profit | 32,855 | 28,872 | ||||||
| Operating expenses: | ||||||||
| Selling | 14,616 | 12,440 | ||||||
| General and administrative | 6,688 | 5,942 | ||||||
| 21,304 | 18,382 | |||||||
| Operating income | 11,551 | 10,490 | ||||||
| Other income (expense): | ||||||||
| Gain on early extinguishment of debt | — | 3,554 | ||||||
| Interest expense | (4,447 | ) | (4,868 | ) | ||||
| (4,447 | ) | (1,314 | ) | |||||
| Income before income taxes | 7,104 | 9,176 | ||||||
| Income tax expense | 2,965 | 4,133 | ||||||
| Net income | $ | 4,139 | $ | 5,043 | ||||
See notes to consolidated financial statements.
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GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (In thousands)
| Quarter Ended | ||||||||
| October 2, | September 26, | |||||||
| 2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 4,139 | $ | 5,043 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 828 | 837 | ||||||
| Amortization of deferred financing costs | 382 | 385 | ||||||
| Gain on early extinguishment of debt | — | (3,554 | ) | |||||
| Deferred income taxes and other | 178 | 1,717 | ||||||
| Preferred stock dividends | 279 | 310 | ||||||
| Accretion of discount on long-term debt | 1,211 | 1,126 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (15,793 | ) | (15,396 | ) | ||||
| Inventories, net | 3,292 | 8,456 | ||||||
| Prepaid expenses, other current assets and other assets | 24 | 8 | ||||||
| Income taxes payable | 2,313 | 2,362 | ||||||
| Accounts payable and accrued expenses | 8,657 | 3,465 | ||||||
| Net cash provided by operating activities | 5,510 | 4,759 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | (812 | ) | (539 | ) | ||||
| Net cash used in investing activities | (812 | ) | (539 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net change in short term borrowings and revolving credit agreement | (4,485 | ) | 3,928 | |||||
| Payments on long-term debt | (22 | ) | (1,791 | ) | ||||
| Repurchase of Company bonds | — | (5,492 | ) | |||||
| Cash paid for financing costs | (1 | ) | (91 | ) | ||||
| Net cash used in financing activities | (4,508 | ) | (3,446 | ) | ||||
| Effect of foreign exchange rate changes on cash | 10 | 2 | ||||||
| Net increase in cash and cash equivalents | 200 | 776 | ||||||
| Cash and cash equivalents at beginning of period | 1,301 | 701 | ||||||
| Cash and cash equivalents at end of period | $ | 1,501 | $ | 1,477 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 298 | $ | 490 | ||||
| Income taxes paid | $ | 468 | $ | 62 | ||||
See notes to consolidated financial statements.
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GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 2, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 2, 2010
1.Basis of Presentation
In fiscal 2007, GearCo, Inc. (“GearCo”) was formed to acquire GFSI Holdings, Inc. (the “Company” or “Holdings”). On December 30, 2006 GearCo acquired substantially all of the common and preferred stock of Holdings in a tax-free exchange. Following the transaction, Holdings became a wholly-owned subsidiary of GearCo.
The accompanying unaudited consolidated financial statements of GFSI Holdings, Inc. include the accounts of the Company and the accounts of GearCo (its parent) and its wholly-owned subsidiaries, GFSI, Inc. (“GFSI”), Event 1, Inc. (“Event 1”), CC Products, Inc. (“CCP”), GFSI Canada Company and GFSI Southwest S De RL De CV. All inter-company balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes as of and for the year ended July 3, 2010 included as an Exhibit to this registration statement.
Earnings per share data has been omitted in the unaudited interim consolidated financial statements because the information is not meaningful.
The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
2.Sale of the Company
On August 10, 2010, Hanesbrands, Inc. (“Hanesbrands”), a Winston-Salem, N.C. company known for brands such as Hanes®, Champion® and Wonderbra®, signed a definitive merger agreement to purchase the preferred and common stock of GearCo for approximately $55 million in cash plus the assumption of all the Company’s debt. The transaction (the “Hanesbrands Transaction”) was approved by both companies’ boards of directors and by the shareholders of GearCo. Upon closing, GearCo will operate as a wholly-owned subsidiary of Hanesbrands.
The definitive merger agreement contained a number of conditions to be met by GearCo prior to closing. The agreement required GearCo to (among other things) maintain certain operating levels of profitability and cash flows; it restricted capital expenditures and borrowings; it required GearCo via GFSI, Inc. (a wholly-owned subsidiary of Holdings) to renew and retain certain major collegiate and pro sports trademark licenses and renew its Under Armour License; it required GFSI, Inc. to maintain its sales relationships with the Company’s two largest customers.
Prior to the signing of the definitive merger agreement, management’s plan was to refinance or restructure maturities of its indebtedness due in fiscal years 2011 and 2012, which aggregated approximately $166.6 million. As a result of the signing of the definitive merger agreement on August 10, 2010, management discontinued its efforts to refinance or restructure its existing indebtedness, as such indebtedness pursuant to the terms of the definitive merger agreement, would be assumed by Hanesbrands. Management believed that cash flows from operating activities and borrowings under its existing revolving bank credit agreement would be adequate to meet short-term and future liquidity requirements prior to the closing of the Hanesbrands Transaction.
On November 1, 2010, Hanesbrands announced that it completed its acquisition of GearCo, Inc. for $55 million and the retirement of approximately $172 million of debt.
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3.Commitments and Contingencies
In fiscal 2008 the Company commenced the wind down of GFSI Canada Company (“Canada”) and recorded an inventory write-down of $150,000. Canada was administered by the Fletcher Leisure Group, Inc. (Fletcher”). In fiscal 2010 the Company sued Fletcher for breach of its duties. The Company prevailed in the matter and was awarded a judgment of approximately $450,000. Fletcher has appealed the court’s decision and as a conditions of the appeal, posted a bond of $560,000. Management believes that the Company will ultimately prevail and the bond reasonably assures the collectability of the judgment. The judgment is included in accounts receivable at October 2, 2010 and July 3, 2010 in the accompanying consolidated balance sheets.
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.
4.Inventories:
The following is a summary of inventories at October 2, 2010 and July 3, 2010:
| October 2, | July 3, | |||||||
| 2010 | 2010 | |||||||
| (in thousands) | (unaudited) | |||||||
| Undecorated apparel (“blanks”) and supplies | $ | 43,355 | $ | 46,252 | ||||
| Work in process | 397 | 460 | ||||||
| Finished goods | 4,657 | 4,102 | ||||||
| 48,409 | 50,814 | |||||||
| Allowance for markdowns | (2,155 | ) | (1,268 | ) | ||||
| Total | $ | 46,254 | $ | 49,546 | ||||
5.Related Party Transactions
GFSI declared and paid $90,000 and $1.8 million in distributions to the Company during the first quarters of fiscal 2011 and fiscal 2010, respectively. The distribution in fiscal 2011 enabled the Company to pay interest on the Stockholder notes. The distribution in fiscal 2010 enabled the Company to retire the remaining principal outstanding on both its 11.375% Notes and the Wolff Note and to pay interest on its 11.375% Notes . The Company is dependent upon GFSI to provide funding to service its debt.
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6.Long-term Debt
The terms of the definitive merger agreement with Hanesbrands, as discussed in note 2, provide for the assumption by Hanesbrands of all the Company’s outstanding obligations. Hanesbrands has advised the Company of its intention to repay all of the Company’s outstanding obligations at closing. Accordingly, the Company’s debt due in fiscal 2011 and beyond is presented in the accompanying Consolidated Balance Sheets as a current obligation.
Long-term debt consists of:
(in thousands)
(in thousands)
| October 2, 2010 | July 3, 2010 | |||||||
| Senior Secured Variable Rate Notes, 10.5% to 11.5%, due June 2011 | $ | 95,914 | $ | 95,914 | ||||
| Revolving Bank Credit Agreement, variable interest rate, due March 2011 | 7,623 | 12,108 | ||||||
| Senior Secured Payment-In-Kind Notes, floating interest rate, due September 2011 | 59,810 | 58,598 | ||||||
| Stockholder Notes payable, 12%, due 2018 | 1,500 | 1,500 | ||||||
| Other | 145 | 168 | ||||||
| 164,992 | 168,288 | |||||||
| Less current portion | 164,992 | 168,288 | ||||||
| $ | — | $ | — | |||||
The Revolving Bank Credit Agreement (“RBCA”) provides for borrowings on a revolving basis at an interest rate based upon LIBOR or prime. The weighted average interest rate in effect at October 2, 2010 was 3.6%. In addition, the RBCA provides for the issuance of letters of credit on behalf of GFSI. As of October 2, 2010, $7.6 million was borrowed and outstanding, approximately $1.3 million was utilized for outstanding commercial and stand-by letters of credit and $45.8 million was available for future borrowings under the RBCA.
In August 2009 the Company repurchased and cancelled Senior Secured Variable Rate Notes with a par value of $9.2 million for $5.5 million in cash and recorded a pre-tax gain of approximately $3.6 million. The Company financed the transaction with borrowings under its RBCA. The Company recorded deferred income tax expense on the gain.
The fair value of long-term debt is not materially different than its carrying amount at October 2, 2010 and the long-term debt was retired at carrying value upon Hanesbrands’ acquisition of the Company on November 1, 2010.
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