As filed with the Securities and Exchange Commission on March 17, 2003
Registration No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
GFSI, INC.
*And the Subsidiary Guarantors listed below
(Exact name of registrant as specified in its charter)
____________________
Delaware 2396 74-2810748
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Number)
organization) Number)
GFSI, INC.
9700 Commerce Parkway
Lenexa, Kansas 66219
913-888-0445
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
____________________
J. Craig Peterson
GFSI, INC.
9700 Commerce Parkway
Lenexa, Kansas 66219
913-888-0445
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________________
With a copy to:
Philip J. Niehoff, Esq.
Mayer, Brown, Rowe & Maw
190 South LaSalle Street
Chicago, Illinois 60603
(312) 782-0600
____________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [_]
______________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _______________
CALCULATION OF REGISTRATION FEE
=========================================================================================
Proposed Proposed
Maximum Maximum
Title of Each Amount Offering Aggregate Amount of
Class of Securities to be Price Per Offering Registration
to Be Registered Registered Unit(1) Price(1) Fee
- -----------------------------------------------------------------------------------------
9 5/8% Series B Senior
Subordinated Notes Due
2007.................... $9,900,000 100% $9,900,000 $800.91
- -----------------------------------------------------------------------------------------
Guarantees related to
the 9 5/8% Series B
Senior Subordinated
Notes Due 2007.......... N/A N/A N/A N/A(2)
=========================================================================================
(1) Estimated solely for the purposes of calculating the registration fee.
(2) No separate consideration is received for the guarantees, and therefore, no
additional fee is required.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
=========================================================================================
TABLE OF ADDITIONAL REGISTRANTS
State or Other Primary
Name of Jurisdiction of Standard Industrial
Additional Incorporation or Classification I.R.S. Employer
Registrant* Formation Code Number Identification No.
- ------------------------------------------------------------------------------------------
CC Products, Inc. Delaware 2329 48-1244929
Event 1, Inc. Kansas 5611 48-1197012
GFSI Canada Company Nova Scotia, Canada 2329 N/A
__________________
* Address and telephone number of principal executive offices are the same
as GFSI, Inc.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH 17, 2003
PROSPECTUS
GFSI, INC.
Offer To Exchange Its 9 5/8% Series B Senior Subordinated Notes
Due 2007, which have been registered under the Securities Act,
for any and all of its outstanding 9 5/8% Series A Senior
Subordinated Notes Due 2007
Notwithstanding the designation of the notes as senior
subordinated notes, we have not issued, and do not have any current firm
arrangements to issue, any significant indebtedness to which the notes
would be senior, and the notes will be effectively subordinate to
essentially all of our outstanding indebtedness. We do not have any current
or pending arrangements or agreements to incur any additional significant
indebtedness to which the notes would be subordinate.
o The exchange offer expires at 5:00 p.m., New York City time,
on _____ ___, 2003, unless extended.
o All outstanding notes that are validly tendered and not
validly withdrawn will be exchanged.
o Tenders of outstanding notes may be withdrawn at any time
before 5:00 p.m., New York City time, on the expiration
date of the exchange offer.
o The exchange of notes will not be a taxable exchange for
U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
o The terms of the new notes are substantially identical to
the terms of the old notes.
o There is no established trading market for the new notes,
and we do not intend to apply for listing of the new
notes on any securities exchange or stock market.
o All broker-dealers must comply with the registration and
prospectus delivery requirements of the Securities Act.
See "Plan of Distribution."
o Any outstanding notes not tendered and accepted in the
exchange offer will remain outstanding and will continue
to be subject to the existing restrictions on transfer,
and we will have no further obligations to provide for
the registration of the outstanding notes under the
Securities Act.
___________________
See "Risk Factors" beginning on page 11 for a discussion of risks
you should consider prior to tendering your outstanding old notes for
exchange.
These securities have not been approved or disapproved by the
Securities and Exchange Commission or any state securities commission nor
has the Securities and Exchange Commission or any state securities
commission passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
___________________
The date of this Prospectus is _____ ___ , 2003
TABLE OF CONTENTS
Page
Summary.....................................................................i
Risk Factors................................................................11
Use of Proceeds.............................................................25
Ratio of Earnings to Fixed Charges..........................................25
Selected Historical Financial Data..........................................26
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................................27
Business....................................................................34
Management..................................................................39
Security Ownership and Certain Beneficial Owners and Management.............44
Certain Relationships and Related Transactions..............................46
The Exchange Offer..........................................................47
Description of Notes........................................................54
Description of Certain Indebtedness.........................................85
Certain Transactions........................................................86
Plan of Distribution........................................................87
Federal Income Tax Consequences.............................................88
Legal Matters...............................................................88
Experts ...................................................................88
Available Information.......................................................89
Index to Consolidated Financial Statements..................................F-1
-ii-
SUMMARY
This summary highlights the information contained elsewhere in or
incorporated by reference into this prospectus. Because this is only a
summary, it does not contain all of the information that may be important
to you. For a more complete understanding of this offering, we encourage
you to read this entire prospectus and the documents to which we refer you.
You should read the following summary together with the more detailed
information and consolidated financial statements and the notes to those
statements included elsewhere in or incorporated by reference into this
prospectus. Unless the context indicates or otherwise requires, references
in this prospectus to the terms "GFSI," "we," "us" and "our" refer to GFSI,
Inc. and its subsidiaries. We operate on a 52/53 week fiscal year which
ends on the Saturday nearest June 30.
Our Business
We are a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, national associations, colleges and
professional sports leagues and teams. We custom design and decorate an
extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts,
woven shirts, sweaters, shorts, pants, headwear and sports luggage. We
market our products through our well-established and diversified
distribution channels. Our principal executive office is located at 9700
Commerce Parkway, Lenexa, Kansas 66219. Our telephone number is (913)
888-0445.
We are a wholly owned subsidiary of GFSI Holdings, Inc. We
anticipate paying dividends to GFSI Holdings to enable it to pay corporate
income taxes, interest on subordinated discount notes issued by it, fees
payable under a consulting agreement and certain other ordinary course
expenses incurred on our behalf. GFSI Holdings is dependent upon our cash
flows to provide funds to service the subordinated discount notes.
Recent Development
On December 31, 2002, we exchanged $9.9 million aggregate
principal amount of our old notes for $24 million aggregate principal
amount at maturity of 11.375% Senior Discount Notes of GFSI Holdings. The
exchange was made in reliance on an exemption from the registration
requirements of the Securities Act of 1933. Under the terms of an exchange
agreement, we agreed to use our commercially reasonable efforts to file
with the Securities and Exchange Commission and cause to become effective,
a registration statement relating to an offer to exchange the new notes for
the old notes.
1
The Exchange Offer
Old Notes............... 9 5/8% Senior Subordinated Notes due 2007, which we
issued on December 31, 2002.
New Notes............... 9 5/8% Senior Subordinated Notes due 2007, the
issuance of which has been registered under the
Securities Act of 1933. The form and terms of
the new notes are identical in all material
respects to those of the old notes, except that
the transfer restrictions and registration
rights provisions relating to the old notes do
not apply to the new notes.
The Exchange Offer...... We are offering to issue up to $9.9 million
aggregate principal amount of the new notes in
exchange for the same principal amount of old
notes to satisfy our obligations under the
exchange agreement that we entered into when the
old notes were issued in transactions in reliance
upon the exemptions from registration provided by
Rule 144A under the Securities Act.
Tenders, Expiration
Date.................... The exchange offer will expire at 5:00 p.m.,
New York City time, on _______ ___, 2003, unless
extended in our sole and absolute discretion. By
tendering your old notes, you represent that:
o you are not an "affiliate," as defined in
Rule 405 under the Securities Act;
o any new notes you receive in the exchange
offer are being acquired by you in the
ordinary course of your business;
o at the time of commencement of the
exchange offer, neither you nor, to your
knowledge, anyone receiving new notes
from you, has any arrangement or
understanding with any person to
participate in the distribution, as
defined in the Securities Act, of the new
notes in violation of the Securities Act;
o if you are not a participating
broker-dealer, you are not engaged in,
and do not intend to engage in, the
distribution of the new notes, as defined
in the Securities Act; and
2
o if you are a broker-dealer, you will
receive the new notes for your own
account in exchange for old notes that
were acquired by you as a result of your
market-making or other trading activities
and that you will deliver a prospectus in
connection with any resale of the new
notes you receive. For further
information regarding resales of the new
notes by participating broker-dealers,
see the discussion under the caption
"Plan of Distribution."
Withdrawal;
Non-Acceptance.......... You may withdraw any old notes tendered in the
exchange offer at any time prior to 5:00 p.m.,
New York City time, on __________ ___, 2003. If
we decide for any reason not to accept any old
notes tendered for exchange, the old notes will
be returned to the registered holder at our
expense promptly after the expiration or
termination of the exchange offer. In the case of
old notes tendered by book-entry transfer into
the exchange agent's account at The Depository
Trust Company, which we sometimes refer to in
this prospectus as DTC, any withdrawn or
unaccepted old notes will be credited to the
tendering holder's account at DTC. For further
information regarding the withdrawal of tendered
old notes, see "The Exchange Offer--Terms of the
Exchange Offer; Period for Tendering Old Notes"
and "The Exchange Offer--Withdrawal Rights."
Conditions to the
Exchange Offer.......... We are not required to accept for exchange or
to issue new notes in exchange for any old notes
and we may terminate or amend the exchange offer
if any of the following events occur prior to our
acceptance of the old notes:
o the exchange offer violates any applicable
law or applicable interpretation of
the staff of the SEC;
o an action or proceeding shall have been
instituted or threatened in any court or
by any governmental agency that might
materially impair our or any subsidiary
guarantor's ability to proceed with the
exchange offer;
o we do not receive all governmental
approvals that we believe are necessary to
consummate the exchange offer; or
o there has been proposed, adopted, or
enacted any law, statute, rule or
regulation that, in our reasonable
judgment, would materially impair our
ability to consummate the exchange offer.
We may waive any of the above conditions in our
reasonable discretion. See the discussion below
under the caption "The Exchange Offer--Conditions
to the Exchange Offer" for more information
regarding the conditions to the exchange offer.
3
Procedures for
Tendering Old Notes..... Unless you comply with the procedures described
below under the caption "The Exchange
Offer--Guaranteed Delivery Procedures," you must
do one of the following on or prior to the
expiration or termination of the exchange offer
to participate in the exchange offer:
o tender your old notes by sending the
certificates for your old notes, in
proper form for transfer, a properly
completed and duly executed letter of
transmittal, with any required signature
guarantees, and all other documents
required by the letter of transmittal, to
U.S. Bank National Association, as
exchange agent, at the address listed
below under the caption "The Exchange
Offer--Exchange Agent;" or
o tender your old notes by using the
book-entry transfer procedures described
below and transmitting a properly
completed and duly executed letter of
transmittal, with any required signature
guarantees, or an agent's message instead
of the letter of transmittal, to the
exchange agent. In order for a book-entry
transfer to constitute a valid tender of
your old notes in the exchange offer,
U.S. Bank National Association, as
exchange agent, must receive a
confirmation of book-entry transfer of
your old notes into the exchange agent's
account at DTC prior to the expiration or
termination of the exchange offer. For
more information regarding the use of
book-entry transfer procedures, including
a description of the required agent's
message, see the discussion below under
the caption "The Exchange
Offer--Book-Entry Transfers."
Guaranteed Delivery
Procedures.............. If you are a registered holder of old notes and
wish to tender your old notes in the exchange
offer, but
o the old notes are not immediately available;
o time will not permit your old notes or
other required documents to reach the
exchange agent before the expiration or
termination of the exchange offer; or
o the procedure for book-entry transfer cannot
be completed prior to the expiration or
termination of the exchange offer;
then you may tender old notes by following the
procedures described below under the caption "The
Exchange Offer--Guaranteed Delivery Procedures."
4
Special Procedures
for Beneficial Owners.... If you are a beneficial owner whose old notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and you wish to tender your old notes in the
exchange offer, you should promptly contact the
person in whose name the old notes are registered
and instruct that person to tender on your
behalf. If you wish to tender in the exchange
offer on your behalf, prior to completing and
executing the letter of transmittal and
delivering your old notes, you must either make
appropriate arrangements to register ownership of
the old notes in your name, or obtain a properly
completed bond power from the person in whose
name the old notes are registered.
Material United
States Federal
Income Tax
Considerations.......... The exchange of the old notes for new notes in
the exchange offer will not be a taxable
transaction for United States federal income tax
purposes. See the discussion below under the
caption "Federal Income Tax Consequences" for
more information regarding the United States
federal income tax consequences of the exchange
offer to you.
Use of Proceeds......... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent.......... U.S. Bank National Association is serving as
the exchange agent in connection with the
exchange offer. You can find the address and
telephone number of the exchange agent below
under the caption "The Exchange Offer--Exchange
Agent."
Resales................. Based on interpretations by the staff of the
SEC, as set forth in no-action letters issued to
third parties, we believe that the new notes
issued in the exchange offer may be offered for
resale, resold or otherwise transferred by you
without compliance with the registration and
prospectus delivery requirements of the
Securities Act as long as:
o you are acquiring the new notes in the
ordinary course of your business;
o you are not participating, do not intend
to participate and have no arrangement
or understanding with any person to
participate, in a distribution of the new
notes; and
o you are not an affiliate of ours.
If you are an affiliate of ours or are engaged in
or intend to engage in or have any arrangement or
understanding with any person to participate in
the distribution of the new notes:
o you cannot rely on the applicable
interpretations of the staff of the SEC;
and
o you must comply with the registration
requirements of the Securities Act in
connection with any resale transaction.
5
Each broker or dealer that receives new notes
for its own account in exchange for old notes
that were acquired as a result of market-making
or other trading activities must acknowledge that
it will comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any offer,
resale, or other transfer of the new notes issued
in the exchange offer, including information with
respect to any selling holder required by the
Securities Act in connection with any resale of
the new notes.
Furthermore, any broker-dealer that acquired
any of its old notes directly from us:
o may not rely on the applicable
interpretation of the staff of the SEC's
position contained in Exxon Capital
Holdings Corp., SEC no-action letter
(April 13, 1988), Morgan, Stanley & Co.
Inc., SEC no-action letter (June 5, 1991)
and Shearman & Sterling, SEC no-action
letter (July 2, 1983); and
o must also be named as a selling
noteholder in connection with the
registration and prospectus delivery
requirements of the Securities Act
relating to any resale transaction.
Broker-Dealers.......... Each broker-dealer that receives new notes for
its own account pursuant to the exchange offer
must acknowledge that it will deliver a
prospectus in connection with any resale of new
notes. The letter of transmittal states that by
so acknowledging and delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of new notes received in exchange for old
notes which were received by such broker-dealer
as a result of market-making activities or other
trading activities. See "Plan of Distribution"
for more information.
Registration Rights..... When we issued the old notes in December 2002,
we entered into an exchange agreement with the
initial purchasers of the old notes. Under the
terms of the exchange agreement, we agreed to use
our commercially reasonable efforts to file with
the SEC and cause to become effective, a
registration statement relating to an offer to
exchange the old notes for the new notes.
A copy of the exchange agreement is filed
as an exhibit to the registration statement
of which this prospectus is a part.
6
Consequences of Not Exchanging the Old Notes
If you do not exchange your old notes in the exchange offer, you
will continue to be subject to the restrictions on transfer described in
the legend on the certificate for your old notes. In general, you may offer
or sell your old notes only:
o if they are registered under the Securities Act and
applicable state securities laws;
o if they are offered or sold under an exemption from
registration under the Securities Act and applicable state
securities laws; or
o if they are offered or sold in a transaction not subject to
the Securities Act and applicable state securities laws.
We do not intend to register the old notes under the Securities
Act. For more information regarding the consequences of not tendering your
old notes see "The Exchange Offer--Consequences of Exchanging or Failing to
Exchange Old Notes."
Summary Description of the New Notes
Notwithstanding the designation of the old notes and new notes as
senior subordinated notes, GFSI has not issued, and does not have any
current firm arrangements to issue, any significant indebtedness to which
the old notes or new notes would be senior, and the old notes and new notes
will be effectively subordinate to essentially all of the outstanding
indebtedness of GFSI and its subsidiaries. GFSI does not have any current
or pending arrangements or agreements to incur any additional significant
indebtedness to which the old notes and new notes would be subordinate.
The terms of the new notes and the old notes are identical in all
material respects, except for certain transfer restrictions and
registration rights relating to the old notes.
The new notes will bear interest from the most recent date to
which interest has been paid on the old notes or, if no interest has been
paid on the old notes, from December 31, 2002. Accordingly, registered
holders of new notes on the relevant record date for the first interest
payment date following the consummation of the exchange offer will receive
interest accruing from the most recent date to which interest has been paid
or, if no interest has been paid, from December 31, 2002. Old notes
accepted for exchange will cease to accrue interest from and after the date
of consummation of the exchange offer. Holders of old notes whose old notes
are accepted for exchange will not receive any payment in respect of
interest on such old notes otherwise payable on any interest payment date
which occurs on or after consummation of the exchange offer.
7
The New Notes
Issuer.................. GFSI, Inc. References to "GFSI" in this section
shall refer only to GFSI, Inc., and such
reference shall not include subsidiaries of GFSI.
Securities Offered...... $9.9 million aggregate principal amount of 9 5/8%
Series B Senior Subordinated Notes due 2007.
Maturity................ March 1, 2007.
Interest................ The old notes bear interest and the new notes
will bear interest at a rate of 9 5/8% per annum,
payable semi-annually in cash in arrears on each
March 1 and September 1, commencing on the first
such date to occur after the expiration date.
Optional Redemption..... The new notes will be redeemable at the option
of GFSI, in whole or in part, at any time at the
redemption prices set forth herein, plus accrued
and unpaid interest, to the date of redemption.
See "Description of Notes--Redemption of Notes."
Mandatory Redemption.... Except after the passage of certain events, GFSI
is not required to make any mandatory redemption,
purchase or sinking fund payments with respect to
the new notes. See "Description of
Notes--Mandatory Offers to Purchase Notes."
Change of Control....... Upon the occurrence of a change of control (as
defined in the indenture governing the old notes
and new notes), each holder of old notes or new
notes will have the right to require GFSI to
purchase such holder's notes pursuant to an offer
(as defined in the indenture) at a purchase price
in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest,
to the date of purchase. Certain transactions
with affiliates of GFSI may not be deemed to be a
change of control. Transactions constituting a
change of control are not limited to hostile
takeover transactions not approved by the current
management of GFSI. Except as described under
"Description of Notes--Mandatory Offers to
Purchase Notes," the indenture does not contain
provisions that permit the holders of notes to
require GFSI to purchase or redeem the notes in
the event of a takeover, recapitalization or
similar restructuring, including an issuer
recapitalization or similar transaction with
management.
Guarantees.............. The notes will be fully and unconditionally
guaranteed, jointly and severally, on a senior
subordinated basis, by all of GFSI's future
restricted subsidiaries (as defined in the
indenture). As of the date of the indenture, GFSI
has three subsidiaries, Event 1, Inc., CC
Products, Inc. and GFSI Canada Company.
8
Ranking................. The notes will be general unsecured obligations
of GFSI, subordinated in right of payment to all
existing and future senior indebtedness (as
defined in the indenture) of GFSI, including
indebtedness (as defined in the indenture) under
the Revolving Bank Credit Agreement, and pari
passu or senior in right of payment to any future
subordinated indebtedness of GFSI. As of December 28,
2002, the aggregate principal amount of
senior indebtedness of GFSI to which the notes
would have been subordinated would have been
approximately $27 million. The indenture pursuant
to which the notes are issued permits GFSI and
its subsidiaries to incur additional
indebtedness, including senior indebtedness,
subject to certain limitations, including a
specified cash flow coverage ratio (as defined in
the indenture). See "Description of
Notes--Certain Covenants" and "Description of
Certain Indebtedness."
GFSI believes that prepayment of the notes
pursuant to a change of control (as defined in
the indenture) would constitute a default under
the Revolving Bank Credit Agreement. If a
change of control occurs, GFSI will likely be
required to refinance the indebtedness
outstanding under the Revolving Bank Credit
Agreement and the notes. If there is a change of
control, any indebtedness under the Revolving
Bank Credit Agreement could be accelerated, which
indebtedness is secured and effectively ranks
senior to the notes. Moreover, there can be no
assurance that sufficient funds will be available
at the time of any change of control to make any
required repurchases of the notes given GFSI's
high leverage. See "Risk Factors."
Certain Covenants....... The indenture contains the following material
covenants which limit the ability of GFSI and its
restricted subsidiaries (as defined in the
indenture) to:
o pay dividends or make certain other restricted
payments (as defined in the indenture);
o incur additional indebtedness;
o encumber or sell assets;
o enter into certain guarantees of indebtedness;
o enter into transactions with affiliates; and
o merge or consolidate with any other entity
and to transfer or lease all or
substantially all of their assets.
9
In addition, under certain circumstances, GFSI
is required to offer to purchase notes at a price
equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, to the date of
purchase with the proceeds of certain asset sales
(as defined in the indenture). See "Description
of Notes--Certain Covenants" and "--Mandatory
Offers to Purchase Notes--Asset Sales."
Satisfaction and
Discharge................ The indenture contains provisions which would
allow GFSI to terminate all of its and any future
guarantor's obligations under the notes, any
guarantees of notes and the indenture, including
the covenants contained in the indenture, except
for certain specified obligations. In order to
exercise this option with respect to the notes
outstanding, GFSI must irrevocably deposit in
trust with the trustee money or U.S. government
obligations (as defined in the indenture) for the
payment of principal of and premium and unpaid
interest on the notes then outstanding to
redemption or maturity, as the case may be, and
must comply with certain other conditions. See
"Description of Notes--Satisfaction and Discharge
of the Indenture."
10
RISK FACTORS
Holders of the old notes should carefully consider the following
risk factors, as well as other information set forth in this prospectus,
before tendering their old notes in the exchange offer. The risk factors
set forth below (other than "Holders who fail to exchange their old notes
will continue to be subject to restrictions on transfer.") are generally
applicable to the old notes as well as the new notes.
Risks Relating to the Exchange Offer and Holding the New Notes
Holders who fail to exchange their old notes will continue to be subject to
restrictions on transfer.
Holders who fail to exchange their old notes will continue to be
subject to restrictions on transfer. If you do not exchange your old notes
for new notes in the exchange offer, you will continue to be subject to the
restrictions on transfer of your old notes described in the legend on the
certificates for your old notes. The restrictions on transfer of your old
notes arise because we issued the old notes under exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, you may
only offer or sell the old notes if they are registered under the
Securities Act and applicable state securities laws, or are offered and
sold under an exemption from these requirements. We do not plan to register
the old notes under the Securities Act. For further information regarding
the consequences of tendering your old notes in the exchange offer, see the
discussions below under the captions "The Exchange Offer--Consequences of
Exchanging or Failing to Exchange Old Notes" and "Federal Income Tax
Consequences."
You must comply with the exchange offer procedures in order to receive new,
freely tradable notes.
Delivery of new notes in exchange for old notes tendered and
accepted for exchange pursuant to the exchange offer will be made only
after timely receipt by the exchange agent of the following:
o certificates for old notes or a book-entry confirmation of a
book-entry transfer of old notes into the exchange agent's account
at DTC, New York, New York as a depository, including an agent's
message, as defined in this prospectus, if the tendering holder
does not deliver a letter of transmittal;
o a completed and signed letter of transmittal, or facsimile copy,
with any required signature guarantees, or, in the case of a
book-entry transfer, an agent's message in place of the letter of
transmittal; and
o any other documents required by the letter of transmittal.
Therefore, holders of old notes who would like to tender old notes
in exchange for new notes should be sure to allow enough time for the old
notes to be delivered on time. We are not required to notify you of defects
or irregularities in tenders of old notes for exchange. Old notes that are
not tendered or that are tendered but we do not accept for exchange will,
following consummation of the exchange offer, continue to be subject to the
existing transfer restrictions under the Securities Act and will no longer
have the registration and other rights under the exchange agreement. See
"The Exchange Offer--Procedures for Tendering Old Notes" and "The Exchange
Offer--Consequences of Exchanging or Failing to Exchange Old Notes."
11
Some holders who exchange their old notes may be deemed to be underwriters
and these holders will be required to comply with the registration and
prospectus delivery requirements in connection with any resale transaction.
If you exchange your old notes in the exchange offer for the
purpose of participating in a distribution of the new notes, you may be
deemed to have received restricted securities. If you are deemed to have
received restricted securities, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
There is no established trading market for the new notes and you may find it
difficult to sell your notes.
There is no existing trading market for the new notes. We do not
intend to apply for listing or quotation of the new notes on any exchange.
Therefore, we do not know the extent to which investor interest will lead
to the development of a trading market or how liquid that market might be,
nor can we make any assurances regarding the ability of new note holders to
sell their new notes, the amount of new notes to be outstanding following
the exchange offer or the price at which the new notes might be sold. As a
result, the market price of the new notes could be adversely affected.
Historically, the market for non-investment grade debt, such as the new
notes, has been subject to disruptions that have caused substantial
volatility in the prices of securities. Any disruptions may have an adverse
effect on holders of the new notes.
We have substantial debt and interest payment requirements that may
restrict our operations and impair our ability to meet our obligations
under the new notes. We also have the ability to incur additional debt
which may increase these risks.
As of December 28, 2002, our total indebtedness was approximately
$152 million, approximately $27 million of which was secured indebtedness.
Approximately $26 million of our indebtedness bore interest depending on
LIBOR and other floating rates. Our level of indebtedness could restrict
our operations and make it more difficult for us to fulfill our obligations
under the new notes. Among other things, our indebtedness may:
o limit our ability to obtain additional financing for working
capital, capital expenditures, acquisitions and general corporate
purposes;
o require us to dedicate all or a substantial portion of our cash
flow to service our debt, which will reduce funds available for
other business purposes, such as capital expenditures or
acquisitions;
o limit our flexibility in planning for or reacting to changes in the
markets in which we compete;
o place us at a competitive disadvantage relative to our competitors
with less indebtedness;
o render us more vulnerable to general adverse economic and industry
conditions; and
o make it more difficult for us to satisfy our financial obligations,
including those relating to the new notes.
We and our subsidiaries may still be able to incur substantially
more debt. The terms of our Revolving Bank Credit Agreement, the indenture
governing the new notes and the agreements governing our other indebtedness
will permit additional borrowings, and any borrowings may be senior in
12
right of payment to the new notes and the related guarantees. Our
incurrence of additional debt could further exacerbate the risks described
in this prospectus. The subsidiaries that guarantee the new notes are also
borrowers or guarantors under the Revolving Bank Credit Agreement.
Our ability to service our debt and meet our cash requirements depends on
many factors, some of which are beyond our control.
Although there can be no assurances, we believe that the level of
borrowings available to us, combined with cash provided by our operations,
will be sufficient to provide for our cash requirements. However, our
ability to satisfy our obligations will depend on our future operating
performance and financial results, which will be subject, in part, to
factors beyond our control, including interest rates and general economic,
financial and business conditions. If we are unable to generate sufficient
cash flow to service our debt, we may be required to:
o refinance all or a portion of our debt, including the new notes;
o obtain additional financing;
o sell some of our assets or operations;
o reduce or delay capital expenditures; or
o revise or delay our strategic plans.
If we are required to take any of these actions, it could have a
material adverse effect on our business, financial condition and results of
operations. In addition, we cannot assure you that we would be able to take
any of these actions, that these actions would enable us to continue to
satisfy our capital requirements prior to the maturity of our Revolving
Bank Credit Agreement in fiscal 2005 or that these actions would be
permitted under the terms of our various debt instruments, including the
indenture governing the new notes.
We anticipate paying dividends to GFSI Holdings, our parent, to
enable GFSI Holdings to pay corporate income taxes, interest on
subordinated discount notes issued by GFSI Holdings, fees payable under a
consulting agreement and certain other ordinary course expenses incurred on
our behalf. GFSI Holdings is dependent upon our cash flows to provide funds
to service the subordinated discount notes issued by GFSI Holdings. If we
are unable to generate sufficient cash flow to pay sufficient dividends to
GFSI Holdings, GFSI Holdings may default on its outstanding subordinated
discount notes. Such a default may trigger cross-defaults of the Revolving
Bank Credit Agreement and the indenture governing the old notes and new
notes. One of the remedies for a default under the Revolving Bank Credit
Agreement, the indenture and the instruments governing our other
indebtedness is the acceleration of the related indebtedness. We may be
unable to satisfy the accelerated obligation which would have an adverse
material effect on our financial condition.
The covenants in our Revolving Bank Credit Agreement and the indenture
governing the new notes impose restrictions that may limit our operating
and financial flexibility and prevent us from engaging in transactions that
we wish to consummate.
Our Revolving Bank Credit Agreement, the indenture governing the
new notes and the instruments governing our other indebtedness contain a
number of significant restrictions and covenants that limit our ability and
our subsidiaries' ability to:
13
o incur liens and debt or provide guarantees regarding the obligations
of any other person;
o declare or pay common stock dividends;
o make redemptions and repurchases of capital stock;
o make distributions to GFSI Holdings, our parent;
o make loans, investments and capital expenditures;
o prepay, redeem or repurchase debt;
o engage in mergers, consolidations and asset dispositions;
o engage in sale/leaseback transactions and affiliate transactions;
o change our business, amend the indenture and other documents
governing any subordinated debt that we may issue in the future
and issue and sell capital stock of subsidiaries; and
o restrict distributions from subsidiaries.
The terms of our Revolving Bank Credit Agreement require us to meet various
financial ratios and if we fail to meet these ratios, we will be in default
under the Revolving Bank Credit Agreement which could cause the
acceleration of our indebtedness.
Borrowings under our Revolving Bank Credit Agreement are secured
by substantially all of our assets and are guaranteed by our subsidiaries
and our parent, GFSI Holdings. Our Revolving Bank Credit Agreement requires
us to maintain a fixed charge coverage ratio (as defined in the Revolving
Bank Credit Agreement), which, at the most restrictive level, is required
to be 1.15 to 1.0. Although we currently expect to be able to comply with
the covenants of our Revolving Bank Credit Agreement, operating results
below our business plan or other adverse factors could result in our being
unable to comply with our financial covenants. If we violate these
covenants and are unable to obtain waivers from our lenders, our debt under
these agreements would be in default and could be accelerated by our
lenders. If our indebtedness is accelerated, we may not be able to repay
our debt or borrow sufficient funds to refinance it. Even if we are able to
obtain new financing, it may not be on commercially reasonable terms, or
terms that are acceptable to us. If our expectations of future operating
results are not achieved, or our debt is in default for any reason, our
business, financial condition and results of operations would be materially
and adversely affected. In addition, complying with these covenants may
also cause us to take actions that are not favorable to holders of the new
notes and may make it more difficult for us to successfully execute our
business strategy and compete against companies who are not subject to
these types of restrictions.
The new notes and the subsidiary guarantees are effectively subordinate to
all of our secured debt and if a default occurs, we may not have sufficient
funds to fulfill our obligations under the new notes and the subsidiary
guarantees.
The new notes are general senior unsecured obligations that rank
equally in right of payment with all of our existing and future unsecured
and unsubordinated debt. As of December 28, 2002, we had approximately $27
million of secured indebtedness that the new notes and the related
guarantees would have been effectively subordinate and approximately $28
million available for borrowing under the Revolving Bank Credit Agreement.
In addition, the indenture governing the new notes will, subject to some
limitations, permit us to incur additional secured indebtedness and your
new notes will be effectively junior to any additional secured indebtedness
we may incur.
14
In the event of our bankruptcy, liquidation, reorganization or
other winding up, our assets that secure our secured indebtedness will be
available to pay obligations on the new notes only after all secured
indebtedness has been repaid in full from our assets. Likewise, because our
Revolving Bank Credit Agreement is a secured obligation, our failure to
comply with the terms of the Revolving Bank Credit Agreement would entitle
those lenders to foreclose on substantially all of our assets which serve
as collateral. In this event, our secured lenders would be entitled to be
repaid in full from the proceeds of the liquidation of those assets before
those assets would be available for distribution to other creditors,
including holders of the new notes. Holders of the new notes will
participate in our remaining assets ratably with all holders of our
unsecured indebtedness that is deemed to be of the same class as the new
notes, and potentially with all of our other general creditors. We advise
you that there may not be sufficient assets remaining to pay amounts due on
any or all the new notes then outstanding. The subsidiary guarantees of the
new notes will have a similar ranking with respect to secured and unsecured
senior indebtedness of the subsidiaries as the new notes do with respect to
our secured and unsecured senior indebtedness, as well as with respect to
any unsecured obligations expressly subordinated in right of payment to the
subsidiary guarantees.
Holders should not rely on the book value of our assets as a measure of the
value of our secured creditors' collateral in the event of a foreclosure
sale.
The new notes are effectively subordinate to all of our and our
subsidiary guarantors' secured debt to the extent of the value of the
assets securing that debt. Holders should not overly rely on the book value
of the assets pledged as collateral to our secured creditors as a measure
of realizable value in a foreclosure sale. By its nature, portions of the
collateral may be illiquid and have no readily ascertainable market value.
In addition, a portion of the collateral may only be used as part of our
operating business and the sale of this collateral separate from a sale of
our company may not be feasible or the collateral may not have any value.
The new notes will be structurally subordinate to all of the indebtedness
and other liabilities, including trade payables, of our subsidiaries that
are not guarantors of the notes.
As of the date of this prospectus, we have three subsidiaries,
Event 1, CC Products and GFSI Canada Company, all of which are
guarantors of the new notes. However, under certain circumstances, we will
be able to designate subsidiaries formed or acquired in the future as
non-restricted subsidiaries. Non-restricted subsidiaries will not be
required to guarantee the new notes.
You will not have any claim as a creditor against our subsidiaries
that are not guarantors of the new notes. Therefore, indebtedness and other
liabilities, including trade payables, whether secured or unsecured, of any
future subsidiaries that are not guarantors of the notes will effectively
be senior to your claims against those subsidiaries. In addition, the
indenture will, subject to some limitations, permit any future subsidiaries
to incur additional indebtedness and will not contain any limitation on the
amount of other liabilities, such as trade payables, that may be incurred
by these subsidiaries.
We may incur additional indebtedness ranking equal to the new notes which
may reduce the amount of proceeds paid to you upon our insolvency,
liquidation, reorganization, dissolution or other winding up.
If we incur any additional indebtedness that ranks equally with
the new notes, including trade payables, the holders of that debt will be
entitled to share ratably with you in any proceeds distributed in
connection with any insolvency, liquidation, reorganization, dissolution or
other winding up of our company. This may have the effect of reducing the
amount of proceeds paid to you.
15
We may be unable to purchase the new notes upon a change of control and it
may be difficult to determine whether a change of control has occurred.
Upon a change of control, we would be required to offer to
purchase all of the new notes then outstanding for cash at 101% of the
principal amount thereof plus accrued and unpaid interest. If a change of
control were to occur, we may not have sufficient funds to pay the change
of control purchase price and we may be required to secure third-party
financing to do so. However, we may not be able to obtain this financing on
commercially reasonable terms, or on terms acceptable to us, or at all. A
change of control under the indenture may also result in an event of
default under our Revolving Bank Credit Agreement which will permit our
lenders to accelerate the maturity of amounts borrowed under the Revolving
Bank Credit Agreement. Our future indebtedness may also contain
restrictions on our ability to repurchase the new notes upon certain
events, including transactions that could constitute a change of control
under the indenture. Our failure to repurchase the new notes upon a change
of control would constitute an event of default under the indenture and
would have a material adverse effect on our financial condition. We cannot
predict the likelihood that we would be able to fulfill these obligations
upon a change of control. In addition, we cannot predict whether our
lenders would grant us any necessary consents or waivers, our ability to
raise additional funds in the future, how much indebtedness we might have
at the time of a change of control, and whether we will issue any
additional indebtedness that will include change of control redemption or
default provisions.
The definition of change of control includes a disposition of all
or substantially all of our and our subsidiaries' assets taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no clear established meaning under New York
law, which governs the indenture, and in some circumstances, there may be a
degree of uncertainty as to whether we disposed of all or substantially all
of our assets. As a result, it may be unclear as to whether a change of
control has occurred and whether a holder of new notes may require us to
make an offer to purchase new notes.
The indenture governing the new notes will allow us to consummate highly
leveraged transactions, reorganizations, mergers and restructurings that do
not constitute a change of control, and in these events, we will not be
required to repurchase the new notes.
The change of control provisions in the indenture may not protect
you in the event we consummate a highly leveraged transaction,
reorganization, restructuring, merger or other similar transaction, unless
the transaction constitutes a change of control under the indenture. These
types of transactions may not involve a change in voting power or
beneficial ownership or, even if they do, may not involve a change in the
magnitude required under the definition of change of control in the
indenture to trigger our obligation to repurchase the new notes. Except as
described above, the indenture does not contain provisions that permit the
holders of the new notes to require us to repurchase or redeem the new
notes in an event of a takeover, recapitalization or similar transaction.
A subsidiary guarantee could be voided or subordinated because of federal
bankruptcy law or comparable foreign and state law provisions.
Our obligations under the new notes are guaranteed by our
subsidiaries that are borrowers under or guarantee our Revolving Bank
Credit Agreement. Under the federal bankruptcy law and comparable
provisions of foreign and state fraudulent transfer laws, one or more of
the subsidiary guarantees could be voided, or claims against a subsidiary
guarantee could be subordinated to all other debts of that guarantor if,
among other things the guarantor, at the time it incurred the indebtedness
evidenced by its guarantee received less than reasonably equivalent value
or fair consideration for the incurrence of the guarantee; and
16
o was insolvent or rendered insolvent by reason of such incurrence; or
o was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay its debts as they mature.
In addition, any payment by that guarantor pursuant to its
guarantee could be voided and required to be returned to the guarantor or
to a fund for the benefit of the creditors of the guarantor. The measure of
insolvency for purposes of fraudulent transfer laws will vary depending
upon the law applied in any proceeding to determine whether a fraudulent
transfer has occurred. Generally, however, a guarantor would be considered
insolvent if:
o the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets;
o the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
o it could not pay its debts as they become due.
We cannot be sure as to the standards that a court would use to
determine whether or not the guarantors were solvent at the relevant time,
or, regardless of the standard that the court uses, that the issuance of
the guarantee of the notes would not be voided or the guarantee of the new
notes would not be subordinated to that guarantor's other debt. If the
guarantees were legally challenged, any guarantee could also be subject to
the claim that, since the guarantee was incurred for our benefit, and only
indirectly for the benefit of the guarantor, the obligations of the
applicable guarantor were incurred for less than fair consideration.
A court could thus void the obligations under the guarantee or
subordinate the guarantee to the applicable guarantor's other debt or take
other action detrimental to holders of the new notes.
Risks Relating to our Business
The retail industry is in the process of consolidation.
We believe that consolidation in the retail industry and the
strength of our customers have given certain customers the ability to make
greater demands over suppliers such as us and we expect this trend to
continue. If consolidation continues, our net sales and results of
operations may be increasingly sensitive to a deterioration in the
financial condition of, or other adverse developments with, one or more of
our customers. Although we believe that our relationships with our major
customers are good, we generally do not have long-term contracts with any
of them, which is typical of our industry. As a result, although our
customers provide indications of their product needs and purchases on a
season by season basis, they generally purchase our products on an
order-by-order basis and the relationship, as well as particular orders,
can be terminated at any time. The loss or significant decrease in business
from any of our major customers could have a material adverse effect on our
business, results of operations and financial condition.
17
Our College Bookstore division sells sportswear and activewear
primarily through on-campus bookstores, most of which also offer sportswear
and activewear products distributed by one or more of our major
competitors. Historically, on-campus bookstores have been owned and
operated by the colleges and universities. During the last several years,
however, an increasing number of campus bookstores have been leased to
companies engaged in retail bookstore operations, primarily Barnes & Noble
College Bookstores Inc. and Follett Corporation. Combined, these two
customers comprised approximately 21% of our net sales for the six month
period ended December 28, 2002. If any of these operators of campus
bookstores were to grant exclusive rights to one of our competitors, or if
for any other reason we were unable to continue selling our products
through these college bookstore operators, our operating results would be
materially adversely affected.
Cyclical variations in the retail industry may adversely affect our
financial performance and bankruptcies of our customers would likely
increase our bad debt reserves.
Historically, our industry has been subject to substantial
cyclical variations due, in part, to significant changes and difficulties
in the retail industry. Significant and sustained difficulties at the
retail level may adversely affect the wholesale sportswear and activewear
sector in general and our business. In addition, a general economic
slowdown in the United States economy or uncertainties regarding future
economic prospects that affect consumer spending habits would have a
material adverse effect on our business, results of operations and
financial condition.
Purchases of apparel and related merchandise tend to decline
during general economic slowdowns. Many of our products are discretionary
purchases. The corporate advertising and employee incentive program markets
are currently in a downturn due to decreased discretionary corporate
spending and the general economic slowdown. Any substantial decline in
general economic conditions could affect consumer and corporate spending
habits and have an adverse effect on our business, results of operations
and financial condition.
We are dependent on third parties for the manufacture of our products. If
these third parties fail to perform, we may not meet the demands of our
customers.
We import from non-domestic suppliers substantially all of our
non-decorated apparel products or "blanks". Our manufacturing process
consists of embroidery and/or screen printing applications to our blanks.
We outsource approximately 33% of the custom decoration used in our
products. Our dependence upon third parties could subject us to
difficulties in obtaining timely delivery of products that meet our quality
standards. Although we monitor the performance of our suppliers and
contractors, we cannot assure you that they will deliver our products in a
timely manner or that they will meet our quality standards. In this event,
failure to satisfy our customers' requirements could result in our
customers canceling orders, demanding reduced prices, refusing to accept
orders or reducing future orders, any of which could materially adversely
affect our business, results of operations and financial condition.
We do not have long-term supply contracts for any of our blank
products. As a result, either we or our suppliers or manufacturers may
unilaterally terminate the relationship at any time. In addition, we also
compete for factories, some of which have long-standing relationships with
our competitors. After an initial period of disruption, we believe there
are readily available alternative sources of supply and manufacturers,
however, if we are unable to secure or maintain our relationships with
suppliers and manufacturers, or experience a delay in obtaining an
alternative source of supply, we may not be able to fulfill our customers'
requirements which could have a material adverse effect on our business,
results of operations, and financial condition.
18
We import substantially all of our blank products. We are
dependent upon the free flow of goods across international boundaries and
through various customs and shipping channels. We are subject to the risks
associated with any constraint or disruption to the free flow of our
product through this international distribution system. Recently, there was
a labor dispute affecting the West Coast ports of the United States.
Disruptions of this nature can have world-wide repercussions and create
unforeseen constraints across our shipping network. Such constraints and
disruptions to the transportation system including labor strikes, work
stoppages and slowdowns, war, acts of war, acts of terrorism, changes in
customs regulations and governmental security alerts and procedures can
have a material adverse effect on our business, results of operations and
financial condition.
We depend upon our licenses with respect to some of our products and we
cannot be certain that we will be able to retain or renew these licenses.
We hold licenses to use various trademarks and other intellectual
property in the promotion, distribution and sale of some of our products.
Our license to use the Champion(R) brand in our college, university, resort
and military markets expires in 2016 and contains certain sales volume
commitments.
We have licenses with licensing agents which cover approximately
400 colleges and universities and are for fixed terms of generally less
than three years. Our NCAA, Major League Baseball, NBA, NHL and PGA Tour
replica and non-replica products are for fixed terms of generally less than
three years. We cannot assure you that we will be able to renew these
licenses on commercially reasonable terms, or terms acceptable to us, or at
all.
If our licenses are terminated or if we are unsuccessful in
negotiating renewals of these licenses, our business, results of operations
and financial condition could be materially and adversely affected.
Our success is dependent upon the continued protection of our trademarks
and other intellectual property rights. We may be forced to incur
substantial costs to protect our intellectual property, and if we are
unable to protect our intellectual property, the image of one or more of
our brands may suffer.
Our registered and common law trademarks have significant value
and some of our trademarks are instrumental to our ability to create and
sustain demand for and market our products. We cannot assure you that
third-parties will not assert claims to our trademarks and other
intellectual property or that we will be able to successfully resolve those
claims. In addition, while we seek international protection of our
intellectual property, the laws of some foreign countries may not allow us
to protect our intellectual property to the same extent as the laws of the
United States. In addition, we could incur substantial costs to defend
legal actions taken against us relating to our use of trademarks, which
could have a material adverse effect on our business, results of operations
and financial condition.
The demand for some of our products is cyclical and seasonal. An economic
downturn or unseasonably warm weather may reduces purchases of our products
which could adversely affect our financial performance.
Our revenues and income are subject to seasonal variation.
Historically, our sales have been seasonal with higher sales during the
first half of our fiscal year (July to December) primarily due to increased
sales in our College Bookstore division during this period. Unseasonably
warm weather may also adversely affect the demand for our products,
particularly our core fleece products.
Generally, we purchase and warehouse inventory to meet the
expected demand, based on historical orders, our monitoring of the market,
and seasonal customer commitments. If, after acquiring and storing
inventory, demand is significantly less than expected, we may have to hold
19
inventory for extended periods of time, sell excess inventory at reduced
prices or write down our inventories. In those events, our results of
operations would be materially adversely affected. Reduced demand could
also result in lower decoration equipment and plant utilization and lower
fixed operating cost absorption, all of which would have a negative impact
on our business, results of operations and financial condition.
Our business outside the United States exposes us to uncertain conditions
in overseas markets, including fluctuations in currency exchange rates.
We currently source substantially all of our blanks through our
foreign suppliers located in China, Guatemala, Honduras, Hong Kong,
Indonesia, Korea, Malaysia, Mexico, Philippines, Singapore, Taiwan,
Thailand and Vietnam. These foreign suppliers provide product to us through
short-term purchase orders occasionally supported by letters of credit. The
majority of these foreign suppliers do not provide product exclusively to
us, and there are no long-term contracts between us and any of the foreign
suppliers.
While no foreign country has a manufacturing concentration of more
than 20%, such foreign operations subject us to risks customarily
associated with foreign operations. We are exposed to the risk of changes
in social, political and economic conditions inherent in operating in
foreign countries, including:
o currency fluctuations;
o import and export license requirements;
o trade restrictions;
o changes in tariffs and taxes;
o restrictions on repatriating foreign profits back to the United States;
o foreign laws and regulations;
o difficulties in staffing and managing international operations;
o political unrest; and
o disruptions or delays in shipments.
We have foreign currency exposures relating to buying and selling
in currencies other than our functional currency. We also have foreign
currency exposure related to foreign denominated revenues and costs
translated into U.S. dollars. Fluctuations in foreign currency exchange
rates may affect the cost of our imported blank inventory and the value of
our foreign assets, which in turn may materially adversely affect reported
earnings and the comparability of period-to-period results of operations.
In addition, changes in the value of the relevant currencies may affect the
cost of certain items required in our operations. We cannot assure you that
management of our foreign currency exposure will protect us from
fluctuations in foreign currency exchange rates.
We are also subject to taxation in foreign jurisdictions.
Applicable tax rates in foreign jurisdictions differ from those of the
United States and change periodically.
20
The changing international trade regulation and the elimination of quotas
on imports of textiles and apparel may increase competition in our
industry. Future quotas, duties or tariffs may increase our costs or limit
the amount of products that we can import into a country.
We currently import substantially all of our blank apparel into
the United States and Canada where we custom decorate and sell our
products. Substantially all of our import operations are subject to quotas
imposed by bilateral textile agreements and customs duties.
In addition, the countries in which our products are manufactured
or to which they are imported may from time to time impose additional new
quotas, duties, tariffs or other restrictions on our imports or adversely
modify existing restrictions. Adverse changes in these costs and
restrictions could harm our business. We cannot assure you that future
trade agreements will not provide our competitors an advantage over us, or
increase our costs, either of which could have a material adverse effect on
our business, results of operations and financial condition.
Our operations are also subject to the effects of international
trade agreements and regulations such as the North American Free Trade
Agreement and the Caribbean Basin Initiative, and the activities and
regulations of the World Trade Organization ("WTO"). Generally, these trade
agreements benefit our business by reducing or eliminating the duties
and/or quotas assessed on products manufactured in a particular country.
However, trade agreements can also impose requirements that negatively
impact our business, such as limiting the countries from which we can
purchase blanks and setting quotas on products that may be imported into
the United States from a particular country. In addition, the WTO may
commence a new round of trade negotiations that liberalize textile trade.
The elimination of quotas on WTO member countries by 2005 and other effects
of these trade agreements could result in increased competition from
developing countries which historically have lower labor costs. This
increased competition could have a material adverse effect on our business,
results of operations and financial condition.
The raw materials used to manufacture our products are subject to price
volatility which could increase our costs and affect our pricing decisions.
The raw materials used to manufacture our products are subject to
price volatility caused by weather, supply conditions, government
regulations, economic climate and other unpredictable factors. In addition,
fluctuations in petroleum prices can influence the prices of chemicals,
dyestuffs and polyester yarn. If one or more of our competitors is able to
reduce their production costs by taking advantage of any reductions in raw
material prices, we may face pricing pressures from those competitors and
may be forced to reduce our prices or face a decline in net sales, either
of which could have a materially adverse effect on our business, results of
operations and financial condition.
The apparel industry is subject to consumer preferences and if we misjudge
consumer preferences, the image of one or more of our brands may suffer and
the demand for our products may decrease.
While we believe the basic nature of our products makes us less
subject to style trends compared to other apparel manufacturers, the
apparel industry is subject to shifting consumer demands and evolving
fashion trends, and our success is dependent upon our ability to anticipate
and promptly respond to these changes. Failure to anticipate, identify or
promptly react to changing trends, styles, or brand preferences may result
in decreased demand for our products, as well as excess inventories and
markdowns, which could have a material adverse effect on our business,
results of operations, and financial condition. In addition, if we misjudge
consumer preferences, our brand image may be significantly impaired. At the
same time, while we believe it is important to manage our inventory, this
focus may result in not having an adequate supply of products to meet our
customers demand and cause us to lose sales.
21
Our operations are subject to environmental, health and safety regulations
that may result in unanticipated costs or liabilities.
Our operations are subject to increasingly stringent environmental
and occupational health and safety laws and regulations, including laws and
regulations relating to our generating emissions, water discharges, waste
and workplace safety. Violations of environmental, health and safety
requirements may result in substantial monetary penalties and criminal
sanctions. We believe that compliance with those laws and regulations will
not have a material adverse effect on our future rate of capital
expenditures, financial condition or results of operations. However,
environmental requirements have changed rapidly in recent years and are
expected to evolve rapidly in the future. Future events, such as:
o a change in existing laws and regulations;
o the enactment of new laws and regulations;
o a release of hazardous substances on or from our properties or any
associated offsite disposal location; or
o the discovery of contamination from prior activities at any of our
properties,
may give rise to compliance costs that could have a material adverse effect
on our business and financial condition.
Our industry is subject to pricing pressures that may cause us to lower the
prices we charge for our products and adversely impact our financial
performance.
Prices in our industry are subject to pressure primarily as a
result of the introduction of new manufacturing technologies, yarns and
fibers, growth of the mass retail channel of distribution, increased
competition, consolidation in the retail industry and the general economic
slowdown. Many of our competitors also source their product requirements
from developing countries to achieve a lower-cost operating environment,
possibly in environments with lower-costs than our non-domestic suppliers
and those manufacturers may use these cost savings to reduce prices.
To remain competitive, we adjust our prices from time to time in
response to these industry-wide pricing pressures. Our financial
performance may be negatively affected by these pricing pressures if:
o we are forced to reduce our prices and we cannot reduce our
production costs; or
o our production costs increase and we cannot increase our prices.
The markets in which we operate are highly competitive and we may not be
able to compete effectively.
The apparel industry is extremely competitive. Some of our
competitors are larger, more diversified and have greater financial and
other resources than we do. Competition could result in reduced sales or
prices, or both, which could have a material adverse effect on us. We, and
other participants in our industry, face competition on many fronts,
including:
22
o quality of product;
o brand recognition;
o price;
o product differentiation;
o advertising; and
o customer service.
We expect competition to intensify in each of our markets. Our
primary competitors are Cutter & Buck, Ashworth, Callaway, Land's End,
Jansport (VF Corp.), Cotton Exchange, Russell Athletic, Nike, Majestic,
Addidas and M.V. Sports. We also compete with manufacturers of activewear
outside the United States, which may have substantially lower costs. Our
ability to compete in each of our markets depends, in part, on our ability
to source quality blanks from suppliers, creatively decorate our product to
customer specifications and recruit and maintain a high quality sales
force. Our ability to remain competitive in the areas of quality, price,
marketing, product development, manufacturing, distribution and order
processing will, in large part, determine our future success. We cannot
assure you that we will be able to maintain our current network of
suppliers or our sales force or continue to compete successfully with other
competitors, some of which may have greater resources, including financial
resources, than we do. To the extent that any of our competitors offer
higher quality products, better service or more attractive pricing, it
could have a material adverse effect on our business, results of operations
and financial condition. See "Business--Sales Divisions" and "--Design,
Manufacturing and Materials Sourcing."
We are dependent upon certain members of our management team and the loss
of their services could have a material adverse effect on our ability to
develop and implement our strategies.
The success of our business is materially dependent upon the
continued services of some members of our senior management. The loss of
the services of one or more key employees could have a material adverse
effect on our ability to develop and implement our strategies. The failure
of our management team to effectively work together could prevent efficient
decision-making, affecting product development and our sales and marketing
efforts, which would negatively impact our ability to manage our business
and operations. Furthermore, we cannot assure you that we will be able to
attract or retain other skilled personnel in the future. While we take
measures to protect our confidential information, if we were to lose a key
employee, we cannot assure you that we would be able to prevent the
unauthorized disclosure or use of our procedures, practices, new product
development or client lists.
We do not maintain key-man life insurance on our key personnel. We
have entered into an employment agreement and a noncompetition agreement
with Robert M. Wolff, the Chairman of GFSI. See "Management,"
"Business--Employees" and "Certain Transactions--Wolff Employment
Agreement."
An economic downturn in any of the markets we serve or changes to our
distribution channels may adversely affect our financial performance.
Our financial performance is dependent, in part, on the overall
health of the markets we serve. Downturns in any one market could reduce
demand for, and prices of, customized sportswear and activewear products,
including those manufactured by us. As a result, a significant downturn in
any one market could have a material adverse effect on our business,
results of operations and financial conditions.
23
Our growth strategy includes acquisitions, and we may not be successful in
finding suitable targets or integrating any business that we acquire.
As part of our growth strategy, we intend to pursue selective
acquisitions to further diversify our portfolio of brands and products to
appeal to consumers across a broader variety of price points. This strategy
involves risks and we cannot assure you that:
o we will identify suitable acquisition candidates or that we will be
able to finance or consummate the transactions we select;
o any acquisitions will be profitable or be successfully integrated
into our operations;
o we will be able to retain and motivate key personnel and to retain
the clients of acquired businesses;
o any acquisitions and integrations will not divert management
resources; or
o any acquisitions and integrations will not have a material adverse
effect on our results of operations or financial condition.
Future terrorist attacks in the United States may result in declining
economic activity and reduced travel, which could have a material adverse
effect on our business.
Future terrorist attacks in the United States, such as the attacks
that occurred in New York and Washington, D.C. on September 11, 2001, and
other acts of terrorism or war, may result in declining economic activity
and reduced travel. An economic downturn could reduce demand for, and
prices of, our products. In addition, a reduction in travel and related
expenditures could have an adverse effect on the financial condition of our
travel dependent customers which include resorts, hotel chains, destination
golf courses, cruise lines and casinos. Such an attack could also affect
attendance at sporting events and gatherings where our products are sold.
Any negative impact on the financial condition of our customers could in
turn reduce demand for our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.
24
USE OF PROCEEDS
We did not receive any proceeds in connection with the December
2002 exchange of the old notes for the notes issued by our parent, GFSI
Holdings, and we will not receive any proceeds in connection with the
exchange offer.
RATIO OF EARNINGS TO FIXED CHARGES
We have calculated the ratio of earnings to fixed charges by
dividing earnings by fixed charges. For purposes of determining the ratio
of earnings to fixed charges, earnings consist of income (loss) before
income taxes, plus fixed charges, excluding capitalized interest. Fixed
charges consist of interest expense, including capitalized interest, on
debt and amortization of deferred debt issuance costs, and an estimate of
the portion of rental expense that is representative of the interest
component.
Fiscal Years Ended Six Months Ended
July 3, July 2, June 30, June 29, June 29, December 28, December 28,
1998 1999 2000 2001 2002 2001 2002
---- ---- ---- ---- ---- ---- ----
1.9 1.7 1.8 1.3 1.4 1.9 2.0
25
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in thousands)
In the following table, we provide you with our selected historical
consolidated information and other operating data at the dates and for the
periods indicated. The selected historical consolidated financial data for
fiscal 2000, 2001 and 2002, and at June 29, 2001 and June 29, 2002, are
derived from our audited consolidated financial statements included elsewhere
in this prospectus. The selected historical financial data for the six months
ended December 28, 2001 and as of and for the six months ended December 28,
2002 are derived from our unaudited condensed consolidated financial
statements included elsewhere in this prospectus. The selected historical
financial data for fiscal 1998 and 1999 are derived from our audited financial
statements not included in this prospectus. The selected historical financial
data as of December 28, 2001 is derived from our unaudited financial
statements not included in this prospectus. Our fiscal year ends on the last
Saturday in June, which results in a 53 week year from time to time. A 53 week
period is included in the fiscal year ended July 3, 1998. The remaining fiscal
years are comprised of 52 week periods.
When you read this selected historical consolidated financial and
other data, it is important that you read along with it the historical
financial statements and related notes in our consolidated financial
statements included in this prospectus, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which
appears below.
Fiscal Years Ended Six Months Ended
July 3, July 2, June 30, June 29, June 29, December 28, December 28,
1998 1999 2000 2001 2002 2001 2002
---- ---- ---- ---- ---- ---- ----
Statements of Income Data:
Net sales........................ $ 214,894 $ 208,025 $ 205,500 $ 185,305 $ 197,250 $ 106,377 $ 115,844
Gross profit..................... 86,068 83,236 79,326 70,726 73,627 40,287 42,291
Operating expenses (1)........... 48,400 52,395 48,093 49,998 50,933 24,859 27,854
---------- --------- --------- --------- --------- --------- ---------
Operating income................. 37,668 30,841 31,233 20,728 22,694 15,428 14,437
Other expense, principally (19,284) (18,345) (17,450) (16,247) (15,726) (8,069) (7,298)
interest............................
Loss on early extinguishment of -- -- -- -- (993) -- --
--------- --------- --------- --------- --------- --------- ---------
debt................................
Income before taxes (2).......... 18,384 12,496 13,783 4,481 5,975 7,359 7,139
Income tax expense .............. (7,248) (4,683) (5,177) (1,630) (2,331) 2,870 2,786
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 11,136 $ 7,813 $ 8,606 $ 2,851 $ 3,644 $ 4,489 $ 4,353
Balance Sheet Data (as of period
end):
Cash and cash equivalents........ $ 1,346 $ 10,264 $ 1,446 $ 5,309 $ 313 $ 2,058 $ 3,739
Total assets 106,035 104,917 99,179 93,567 105,336 99,518 106,758
Long-term debt (including
current portion)........... 191,528 180,878 167,309 152,341 156,309 151,819 152,250
Total stockholders' equity (109,627) (99,014) (86,809) (83,137) (79,645) (78,648) (75,366)
(deficiency).......................
Other Data:
Cash flows from operating $ 3,703 $ 18,222 $ 3,555 $ 21,547 $ (3,710) $ (693) $ 9,761
activities..........................
Cash flows from investing (2,648) (2,041) (1,937) (8,412) (4,189) (1,987) (2,158)
activities..........................
Cash flows from financing (825) (7,263) (10,436) (9,272) 2,904 (571) (4,177)
activities..........................
Depreciation and amortization.... 2,938 3,083 3,235 3,046 4,095 1,576 1,576
Capital expenditures............. 2,972 2,291 1,998 1,788 4,203 1,988 2,172
- --------------------
(1) Operating expenses for fiscal 2001 include $836 of restructuring charges, $1,110 of pre-acquisition integration
costs related to the acquisition of Champion and a $630 gain on the sale of the Tandem Marketing division.
(2) Income before taxes for fiscal 2002 includes a loss of $993 related to the write-off of deferred financing costs
incurred in connection with our previous bank credit agreement which was replaced by the Revolving Bank Credit
Agreement.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis of our results of operations
and liquidity and capital resources should be read in conjunction with the
consolidated financial statements and the related notes thereto appearing
elsewhere in this prospectus.
Forward-Looking Statements
Management's discussion and analysis of financial condition and
results of operations and other sections of this prospectus contain
forward-looking statements relating to future results of GFSI. 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 our products, acceptance of new products and developments
affecting our products. 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.
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 December 28, 2002 and
June 28, 2002 were net of allowance for doubtful accounts of $1.1 million
and $838,000, respectively.
27
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.
Results of Operations
The following table sets forth certain historical financial
information of GFSI, expressed as a percentage of net sales, for fiscal
2002, 2001 and 2000:
Fiscal Year Ended Six Months Ended
----------------- ----------------
June 30, June 29, June 29, December 28, December 28,
2000 2001 2002 2001 2002
---- ---- ---- ---- ----
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................... 38.6 38.2 37.3 37.9 36.5
Operating income............... 15.2 11.2 11.5 14.5 12.5
Six Months Ended December 28, 2002 Compared to the Six Months Ended
December 28, 2001
Net Sales. Net sales for the six months ended December 28, 2002
increased 9% to $115.8 million from $106.4 million in the six months ended
December 28, 2001. The increase in net sales from last year was due to
strong growth from the Licensed Apparel group, which was fueled by a 42%
increase in revenue from Champion Custom Products. The net sales increase
from Champion Custom Products was partially offset by a 28% decline in
Corporate division sales. Net sales for Champion Custom Products for the
first six months of fiscal 2003 were $10.8 million greater than last year
while Corporate division sales were $5.1 million less than last year.
Management believes that our customers have shifted their purchases to
lower priced apparel with less expensive decoration, which has enhanced the
sales of Champion Custom Products' more moderately priced goods. A soft
economy and consequent reductions in corporate spending on marketing and
employee incentive programs have had a detrimental effect on the net sales
of the Corporate division.
Gross Profit. Gross profit for the six months ended December 28,
2002 increased 5% to $42.3 million from $40.3 million in the six months
ended December 28, 2001. Gross profit as a percentage of net sales
decreased to 36.5% from 37.9% last year. The decrease in gross profit as a
percentage of net sales was the result of a change in customer purchasing.
College bookstore sales, fueled by Champion Custom Products, represented
52% of net sales for the six month period ended December 28, 2002 compared
to 45% last year. College bookstore sales generally provide a lower gross
profit than our other divisions.
Operating Expenses. Operating expenses for the six months ended
December 28, 2002 increased 12% to $27.9 million from $24.9 million last
year. Operating expenses as a percentage of net sales were 24% in the first
six months of fiscal 2003 compared to 23.4% in the first six months of
fiscal 2002. The increase in operating expenses was principally due to a
greater portion of fiscal 2003 sales generated from college bookstore
sales, which carry royalty fees and are marketed through more expensive
distribution channels. In addition, we incurred higher bad debt expense in
fiscal 2003 due to soft economic conditions.
28
Operating Income. Operating income decreased 6% to $14.4 million
in fiscal 2003 from $15.4 million in fiscal 2002. Operating income as a
percentage of net sales decreased to 12.5% in fiscal 2003 from 14.5% in
fiscal 2002. The decrease in operating income as a percentage of sales was
the result of a lower gross profit percentage on higher net sales combined
with the increase in operating expenses.
Interest Expense. Interest expense in the first six months of
fiscal 2003 was $7.3 million, $771,000 less than the comparable period last
year. Lower interest rates created the decrease in interest expense.
Net Income. Net income for the first six months of fiscal 2003 was
$4.4 million, $136,000 less than the first six months of fiscal 2002. The
decrease was primarily the result of the decrease in operating income.
Fiscal Year Ended June 29, 2002 Compared to Fiscal Year Ended June 29, 2001
Net Sales. Net sales increased 6.4% in fiscal 2002 to $197.2
million from $185.3 million in fiscal 2001. The increase was primarily
attributable to the addition of Champion Custom Products college bookstore
net sales of $43.4 million. The net sales increase from Champion Custom
Products was partially offset by declines in Corporate and Resort division
sales. The terrorist attacks of September 11, 2001 and the resulting
political and economic uncertainties created in the aftermath, directly
affected the travel plans and the marketing and employee incentive programs
of the customers of these two sales divisions. In addition, the Tandem
Marketing division was sold in June 2001. The Tandem Marketing division
contributed $11.7 million in sales in fiscal 2001.
Gross Profit. Gross profit for fiscal 2002 increased 4.1% to $73.6
million from $70.7 million in fiscal 2001 due to the increase in net sales.
Gross profit as a percentage of net sales decreased to 37.3% from 38.2%
last year. The decrease in gross profit as a percentage of sales was the
result of lower Corporate division sales, which generally provide a higher
gross profit than sales from the Champion Custom Products college bookstore
sales. Fiscal 2002 gross profit was also adversely affected by both (i)
increased loss on sales of close-out and discontinued merchandise and (ii)
the start-up production costs at the new Chillicothe, Missouri facility.
Operating Expenses. Operating expenses increased $0.9 million or
1.8%, to $50.9 million in fiscal 2002 from $50 million in fiscal 2001.
Operating expenses as a percentage of net sales decreased in fiscal 2002 to
25.8% from 27% in fiscal 2001. Operating expenses in fiscal 2001 included
costs incurred from the following non-recurring activities: $1.1 million of
integration costs associated with the acquisition of Champion Custom
Products and $0.8 million in costs associated with severance and employee
termination benefits related to the execution of a restructuring plan;
which were partially offset by $0.6 million in gain related to the sale of
the Tandem Marketing division. If costs from these non-recurring activities
are excluded, operating expenses as a percentage of sales would have
decreased in fiscal 2002 to 25.8% from 26.3% in fiscal 2001. Cost control
measures created the decrease in operating expenses.
Operating Income. Operating income for fiscal 2002 increased $2
million to $22.7 million in fiscal 2002 from $20.7 million in fiscal 2001.
Operating income as a percentage of net sales increased to 11.5% in fiscal
2002 from 11.2% in fiscal 2001. The increase in operating income was the
result of the increase in sales and lower operating expenses.
29
Other Income (Expense). Other expense in fiscal 2002 decreased
$0.5 million to $15.7 million from $16.2 million in fiscal 2001. The
favorable effects of lower interest rates created the decrease in fiscal
2002.
Loss on Early Extinguishment of Debt. In March 2002, we entered
into a $65 million Revolving Bank Credit Agreement and repaid our existing
bank credit agreement ahead of its scheduled expiration. A $1 million loss
was recorded in the third quarter of fiscal 2002 to write off deferred debt
origination costs related to the previous bank credit agreement.
Net Income. We had net income of $3.6 million in fiscal 2002
compared to $2.9 million in fiscal 2001. The increase in fiscal 2002
operating income created the improvement over fiscal 2001.
Fiscal Year Ended June 29, 2001 Compared to Fiscal Year Ended June 30, 2000
Net Sales. Net sales declined 9.8% in fiscal 2001 to $185.3
million from $205.5 million in fiscal 2000. The decrease was principally
attributable to decreases in our Licensed Apparel and Corporate divisions.
The decrease in net sales at our Licensed Apparel division was due to
college bookstore customers' reducing individual location inventories.
Corporate sales declined in fiscal 2001 due to a curtailment of purchasing,
marketing and employee relations incentive items by many corporations.
Gross Profit. Gross profit for fiscal 2001 decreased 10.8% to
$70.7 million from $79.3 million in fiscal 2000, due primarily to the
decline in sales noted above. Gross profit as a percentage of net sales
declined slightly in fiscal 2001 to 38.2% from 38.6% in fiscal 2000.
Operating Expenses. Operating expenses increased $1.9 million or
4%, to $50 million in fiscal 2001 from $48.1 million in fiscal 2000.
Operating expenses as a percentage of net sales increased in fiscal 2001 to
27% from 23.4% in fiscal 2000. The increases in operating expenses were
primarily attributable to the following non-recurring activities in fiscal
2001: $1.1 million of integration costs associated with the acquisition of
Champion and $0.8 million in costs associated with severance and employee
termination benefits related to the execution of a restructuring plan;
which were partially offset by $0.6 million in gain related to the sale of
the Tandem Marketing division. In addition, we incurred costs associated
with the change in our Corporate division's sales strategy to replace
independent sales representatives by focusing employee representatives on
selling though advertising incentive distributors who, in turn, fulfill
corporate incentive programs.
Operating Income. Operating income for fiscal 2001 decreased $10.5
million to $20.7 million in fiscal 2001 from $31.2 million in fiscal 2000.
Operating income as a percentage of net sales decreased to 11.2% in fiscal
2001 from 15.2% in fiscal 2000. The decrease in operating income was the
result of the decline in sales and the increase in operating expenses.
Other Income (Expense). Other expense in fiscal 2001 decreased
$1.2 million to $16.2 million from $17.4 million in fiscal 2000 due to
declining balances on our long-term debt outstanding and declining interest
rates.
Net Income. Net income for fiscal 2001 was $2.9 million compared
to $8.6 million in fiscal 2000. The decrease was the result of lower
operating income.
30
Liquidity and Capital Resources
During fiscal 2002, we replaced our existing bank credit agreement
by entering into a Revolving Bank Credit Agreement with a group of
financial institutions to provide a $65 million revolving line of credit
which matures in January 2005. At December 28, 2002, $28.4 million was
available for future borrowing under the Revolving Bank Credit Agreement.
We believe that cash flows from operating activities and borrowings under
the Revolving Bank Credit Agreement will be adequate to meet our short-term
and future liquidity requirements prior to the maturity of our Revolving
Bank Credit Agreement in fiscal 2005 although no assurance can be given in
this regard.
Cash provided by operating activities in the first six months of
fiscal 2003 was $9.8 million compared to cash used by operating activities
of $693,000 last year. Fiscal 2002 operating cash flows were used to fund
the increase in accounts receivable and inventory related to the addition
of the Champion Custom Products college bookstore business.
Cash used in investing activities in the first six months of
fiscal 2003 was $2.2 million compared to $2 million used in the comparable
period in 2002. The cash used in both periods was related to the
acquisition of property, plant and equipment.
Cash used in financing activities in the first six months of
fiscal 2003 was $4.2 million compared to $571,000 in the comparable period
of fiscal 2002. Payments of bank debt was the primary use of cash in fiscal
2003.
Cash provided by (used in) operating activities in fiscal 2002,
2001 and 2000 was ($3.7) million, $21.5 million and $3.5 million,
respectively. Increases in accounts receivable and inventory to support the
acquired Champion Custom Products college bookstore business created the
change in cash provided by (used in) operating activities between fiscal
2002 and fiscal 2001. Reductions in inventory and accounts receivable and
increases in payables contributed to the increase in cash provided by
operating activities in fiscal 2001 compared to fiscal 2000.
Cash used in investing activities for fiscal 2002, 2001 and 2000
was $4.2 million, $8.4 million and $1.9 million, respectively. Cash used in
investing activities in fiscal 2002 was principally related to capital
expenditures associated with the construction of a new garment decoration
facility in Chillicothe, Missouri. The cash used in investing activities in
fiscal 2001 was related to the purchase of Champion Custom Products and
capital expenditures, partially offset by $2.7 million in proceeds from the
sale of the Tandem Marketing division. In fiscal 2000 cash used in
investing activities represented capital expenditures.
Cash provided by (used in) financing activities for fiscal 2002,
2001 and 2000 was $2.9 million, ($9.3) million and ($10.4) million,
respectively. The net $2.9 million provided from financing activities in
fiscal 2002 was created by borrowings under the new Revolving Bank Credit
Agreement to replace existing bank loans and support increased working
capital and equipment needs related to the acquisition of the Champion
Custom Products business. The cash used in financing activities in fiscal
2001 and fiscal 2000 was primarily related to long-term debt repayments of
which $8.5 million and $7.8 million were debt prepayments in fiscal 2001
and fiscal 2000, respectively.
GFSI anticipates paying dividends to GFSI Holdings to enable GFSI
Holdings to pay corporate income taxes, interest on subordinated discount
notes issued by GFSI Holdings (the "Holdings Discount Notes"), fees payable
under a consulting agreement and certain other ordinary course expenses
incurred on our behalf. GFSI Holdings is dependent upon the cash flows of
GFSI to provide funds to service the Holdings Discount Notes. Holdings
Discount Notes do not have an annual cash flow requirement until fiscal
2005 as they accrue interest at 11.375% per annum, compounded semi-annually
to an aggregate principal amount of $108.5 million at September 15, 2004.
Thereafter, the Holdings Discount Notes will accrue interest at the rate of
11.375% per annum, payable semi-annually, in cash on March 15 and September
15 of each year, commencing on March 15, 2005. Additionally, GFSI Holdings'
cumulative non-cash preferred stock ("Holdings Preferred Stock") dividends
total approximately $407,000 annually. Holdings Preferred Stock may be
redeemed at stated value (approximately $3.4 million) plus accrued
dividends with mandatory redemption in fiscal 2009.
31
A summary of our contractual cash obligations by maturity date as
of June 29, 2002 is as follows:
Contractual Obligations Total Year 1 Years 2-3 Years 4-5 After 5 Years
- ----------------------- ----- ------ --------- --------- -------------
Long-term debt $156,001,132 $ 72,018 $ 30,711,346 $ 125,057,197 $ 160,571
Capital lease obligations 308,207 105,069 193,292 9,846 --
Operating leases 734,856
------ ------ ------- --------- ---------
1,462,482 689,871 37,755 --
--------- ------- ------ --
Total Contractual Cash Obligations $157,771,821 $ 911,943 $31,594,509 $ 125,104,798 $ 160,571
============ ========= =========== ============= ==========
It is anticipated that leases that expire will be renewed or replaced, and
future lease commitments are not expected to aggregate less than the amount
shown in year 1.
New Accounting Standards
We adopted Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations: and SFAS No. 142, "Goodwill and Other
Intangible Assets," in fiscal 2002. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001, and contains certain
transition provisions, that apply to purchase method business combinations
with an acquisition date before July 1, 2002. SFAS No. 142 addresses the
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination after they have been initially
recognized in the financial statements, eliminates amortization of
goodwill, and requires that goodwill be tested for impairment at least
annually. The adoption of SFAS No. 141 and SFAS No. 142 did not have an
impact on our consolidated financial statements.
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 Technical Corrections." The new
standard eliminates the requirement to classify gains and losses related to
debt extinguishments as extraordinary items. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002. We adopted SFAS No. 145 in the
third quarter of fiscal 2003, and reclassified the fiscal 2002
extraordinary loss on early extinguishment of debt as other income
(expense) in accordance with the transition provisions of SFAS No. 145. Net
income, shareholders' equity or cash flows were not impacted by this new
standard.
Seasonality and Inflation
We experience seasonal fluctuations in our sales and
profitability, with generally higher sales and gross profit in the first
and second quarters of our fiscal year. In fiscal 2002, our net sales
during the first half and second half of the fiscal year were approximately
54% and 46%, respectively. The seasonality of sales is primarily due to
higher college bookstore sales volume during the first two fiscal quarters.
Sales at our Resort and Corporate divisions typically show no significant
seasonal variations.
32
The impact of inflation on our 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 our operating results.
Quantitative and Qualitative Disclosures About Market Risks
Our market risk exposure is primarily due to possible fluctuations
in interest rates. We use 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 portion of our 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 Bank
Credit Agreement, that balances are outstanding. An immediate 10% change in
interest rates would not have a material effect on our results of
operations over the next fiscal year, although there can be no assurances
that interest rates will not change significantly.
33
BUSINESS
We were incorporated in the State of Delaware on January 15, 1997
as GFSI, Inc. We are a wholly owned subsidiary of GFSI Holdings, Inc. and
were organized by affiliates of The Jordan Company and management to effect
the acquisition of Winning Ways, Inc.
On February 27, 1997, GFSI Holdings acquired all of the issued and
outstanding capital stock of Winning Ways and immediately thereafter merged
Winning Ways with and into us. We were the surviving entity. All of the
capital stock of Winning Ways acquired by GFSI Holdings in connection with
the acquisition was contributed to us along with the balance of equity
contributions.
We are a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, national associations, colleges and
professional sports leagues and teams. We custom design and decorate an
extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts,
woven shirts, sweaters, shorts, pants, headwear and sports luggage. We
market our products through our well-established and diversified
distribution channels.
On January 29, 1998, we established a wholly owned subsidiary,
Event 1, Inc. to provide a concessionaire outlet for our sportswear and
activewear. Event 1 provides increasing sales for our products with the
National Collegiate Athletic Association ("NCAA"), Big 10 Conference, Big
12 Conference, the Atlantic Coast Conference and Professional Golf
Association ("PGA") tournament events.
On June 25, 2001, we acquired 100% of the stock of Champion
Products, Inc. for approximately $9.5 million. In conjunction with the
acquisition of Champion Products, we entered into a 15 year licensing
agreement with the seller which permits us to sell decorated Champion(R)
apparel in the college bookstore, military and resort markets. Under the
licensing agreement, we will pay a royalty to the seller based upon net
sales beginning in fiscal 2004.
On June 29, 2001, we sold our Tandem Marketing business for
approximately $2.7 million in cash, net of closing costs, and the buyer's
assumption of approximately $1.2 million in liabilities. We recognized a
$629,787 gain on the sale of the Tandem Marketing business.
We operate on a 52/53 week fiscal year which ends on the Saturday
nearest June 30. The twelve month periods ended July 2, 1999, June 30,
2000, June 29, 2001 and June 29, 2002 each contain 52 weeks. The twelve
month period ended July 3, 1998 contains 53 weeks.
Sales Divisions and Subsidiaries
We believe that we enjoy distinct competitive advantages in each
of our sales divisions and subsidiaries because of our ability to quickly
deliver high quality, customized products and provide excellent customer
service. We operate state-of-the-art design, embroidery and screen print
manufacturing and distribution facilities which we believe have set the
standard in the sportswear and activewear industry for product quality and
response time to orders and re-orders. This allows our customers to carry
less inventory, increase merchandise turnover and reduce the risk of
obsolete merchandise.
Resort Division. The Resort division is a leading marketer of
custom logoed sportswear and activewear to over 7,400 active customer
accounts, including destination resorts, family entertainment companies,
hotel chains, golf courses, cruise lines and casinos.
34
We distribute our Resort division products through our national
sales force of approximately 35 independent sales agents. We believe that
we are well known and respected in the resort and leisure industry because
of our quick turn around for new orders and re-orders, our product
innovation, our quality and our high level of service.
Corporate Division. The Corporate division is a leading marketer
of corporate identity sportswear and activewear for use by a diverse group
of corporations for incentive programs, employee pride and recognition
initiatives, corporate meetings and outings, company retail stores and
catalog programs, dealer incentive programs as well as office casual wear
and uniforms.
We provide our corporate identity sportswear products to over
1,500 of the leading independent marketing companies, who in turn each
employ a sales staff to service a client base. We employ 21 regional sales
personnel who are exclusively dedicated to promoting Corporate division
products. We believe this marketing approach leverages the sales force and
marketing contacts of these independent marketing companies. Prior to
fiscal 2001, the Corporate division utilized approximately 40 independent
sales agents to market directly to corporate customers.
Licensed Apparel Division. The Licensed Apparel division includes
the college bookstore business, through both the Gear for Sports(R) and
Champion(R) college brands, sales under professional sports team, league
and event licensing agreements and sales to the military. We have over
3,500 active college bookstore accounts, including nearly every major
college and university in the United States. The largest college bookstore
accounts include the major college bookstore lease operators as well as
high volume, university managed bookstores.
Our professional sports team, league and event licensors include,
among others, the NBA, the NHL, and Major League Baseball. We target the
upscale adult sports enthusiast through our existing distribution channels
as well as through stadium stores and team retail outlets. We have over 800
active professional sports related customer accounts.
Event 1 Subsidiary. The Event 1 subsidiary was established in
fiscal 1998 to provide concessionaire services that create additional
outlets for our products. Since its inception, Event 1 has become the
leading event merchandiser in the collegiate championship industry. The
subsidiary has renewed and extended its agreements with the NCAA, Big 10
Conference, Big 12 Conference, the Atlantic Coast Conference, the
Southeastern Conference, PGA and various other institutions and entities.
GFSI Canada Company. In June 2002, we formed GFSI Canada Company
to enable us to conduct business in Canada and reach similar markets with
our existing product line. Certain of our products had previously been
available in the Canadian market through an international licensing
agreement that expired in December 2001. In June 2002, GFSI Canada entered
into a Management Agreement with Fletcher Leisure Group Inc., a Canadian
corporation headquartered in Quebec, Canada, to provide certain services.
Products
Our extensive product offerings include: fleecewear, outerwear,
polo shirts, woven shirt, sweaters, T-shirts and bottoms, women's and other
apparel items and accessories. These products are currently offered in over
1,000 combinations of style and color. While our products are generally
characterized by a low fashion risk, we attempt to incorporate the latest
trends in style, color and fabrics with a heavy emphasis on innovative
graphics to create leading-edge fashion looks. We believe that the quality
and breadth of our product lines and our innovative logo designs represent
significant competitive advantages in our markets.
35
The following illustrates the attributes of our current product
lines:
Fleecewear. Our fleecewear products represented approximately 27%
of net sales for fiscal 2002. Our current styles offered include classic
crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops, vests,
and bottoms. Products are constructed of a wide range of quality fabrics
including combed cotton, textured fleece ribbed knit cotton and inside out
fleece. The resulting product line offers customers a variety of styles
ranging from relaxed, functional looks to more sophisticated, casual looks.
T-Shirts and Bottoms. Our T-shirt and bottoms products represented
approximately 15% of net sales for fiscal 2002. We design our products to
address consumer needs for comfort, fit and function while providing
innovative logo designs. We offer a full line of T-shirts, shorts and pants
in a variety of styles, fabrics and colors.
Outerwear. Our outerwear products represented approximately 13% of
net sales for fiscal 2002. These products are designed to offer consumers
contemporary styling, functional features and quality apparel. Product
offerings include a variety of weights and styles, including heavy nylon
parkas, denim jackets, corduroy hooded pullovers, nylon windshirts and
water-resistant poplin jackets. Our products also provide a number of
functional features such as adjustable cuffs, windflaps, vented backs,
drawstring bottoms and heavyweight fleece lining.
Polo Shirts, Woven Shirts and Sweaters. Our polo shirt, woven
shirt and sweater products represented approximately 13% of net sales for
fiscal 2002. Our products in this category are designed to be suitable for
both leisure and work-related activities with a full range of materials and
styles.
Women's. Our women's products represented approximately 9% of net
sales for fiscal 2002. Recognizing the market demand for specific
women-sized apparel, we have designed a more complete women's collection.
The resulting product line offers customers a variety of styles ranging
from relaxed, functional looks to more sophisticated, casual looks.
Other. We also sell headwear, sports luggage, and a number of
other miscellaneous apparel items. Event 1 also sells non-apparel items at
events including basketballs, pennants and related items. Sales of "Other"
items represented approximately 23% of net sales for fiscal 2002.
Design, Manufacturing and Materials Sourcing
We operate state-of-the-art design, embroidery and screen print
manufacturing and distribution facilities in Lenexa, Kansas, Chillicothe,
Missouri and Bedford, Iowa.
Our design group consists of more than 75 in-house artists and
graphic designers who work closely with each customer to create the product
offering and customization that fulfills the account's needs. The design
group is responsible for presenting new ideas to each account in order to
continually generate new products. This design function is a key element in
our ability to provide value-added services and maintain superior relations
with our customers. Once the design and logo specifications have been
determined, our manufacturing process begins. This manufacturing process
consists of embroidery and/or screen printing applications to our designed
non-decorated apparel or "blanks". Most of the screen printing and the
embroidery operations are performed by us in our Lenexa, Kansas,
Chillicothe, Missouri and Bedford, Iowa facilities. In addition, we
outsource screen printing and embroidery work to independent contractors
when necessary.
36
All of our blanks are sourced and manufactured to our
specifications by third party vendors. We closely monitor each of our
vendors in order to ensure that our specifications and quality standards
are met. A significant portion of our blanks are contract manufactured in
various off-shore plants. Our imported items are currently manufactured in
China, Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia, Vietnam,
Guatemala, Honduras, Philippines, Thailand and Mexico. No foreign country
has a manufacturing concentration above 20%. We have long-standing
contractual relationships with our independent buying agents who assist us
in our efforts to control garment quality and delivery. None of these
agents represent us on an exclusive basis. We have independent buying
agents in each foreign country in which we purchase blanks.
Competition
Our primary competitors vary within each of our divisions and
subsidiaries. In the resort division, there are few national competitors
and even fewer that operate in all of the varied segments in which we
operate. In the corporate identity market, there are several large
manufacturers of corporate identity products. We believe we are one of the
few manufacturers and marketers of corporate identity products that
specialize in the activewear product segment. In the Licensed Apparel
division's college bookstore market, the GEAR For Sports(R) and Champion(R)
brands and their closest two competitors have traditionally held greater
than 60% of the market.
The following table sets forth our primary competitors in each of
our markets:
Market Primary Competitors
- -------------------------------------------------------------------------------
Resort Cutter & Buck and local and regional competitors
Corporate Cutter & Buck, Ashworth, Callaway, Land's End
Licensed Apparel Jansport (VF Corp.), Cotton Exchange, Russell
Athletic, Nike, Majestic, Addidas and M.V. Sports
Competition in each of our markets generally is based on product
design and decoration, customer service, overall product quality and price.
We believe that we have been able to compete successfully because of our
ability to create diverse and innovative designs, provide excellent
customer service, leverage our GEAR For Sports(R) and Champion(R) brand
names and differentiate our products on the basis of quality.
Employees
We employ approximately 833 people at two facilities in Lenexa,
Kansas, of which approximately 112 are members of management, 264 are
involved in either product design, customer service, sales support or
administration and 457 are involved in manufacturing. We employ
approximately 86 people in our Bedford, Iowa embroidery facility and 162 at
our Chillicothe, Missouri screen print facility, all of which are involved
in manufacturing. None of our employees is covered by a collective
bargaining agreement. We believe that the dedication of our employees is
critical to our success, and that our relations with our employees are
excellent.
Trademarks
We market our products primarily under the GEAR For Sports(R) and
Champion(R) brand names. In addition, we market our products under, among
others, the Pro GEAR(R), Big Cotton(R), Winning Ways(R) and Yikes!(R)
trademarks. Generally, our trademarks will remain in effect as long as we
use the trademark and obtain the required renewals.
37
We license the GEAR For Sports(R) trademark in Japan. This license
agreement provides exclusive, non-transferable and non-assignable rights to
manufacture, advertise and promote adult apparel, headwear and bags under
the GEAR For Sports(R) brand name. The agreement provides for royalties as
a percentage of net sales, contains annual royalty minimums, and gives us
final control over product design and quality. We believe this licensing
arrangement enables us to broaden our geographic distribution and extend
the GEAR For Sports(R) brand name in a cost-effective manner.
In connection with our acquisition of Champion Products, we
entered into a license agreement in June 2001 with Sara Lee Corporation.
Pursuant to the license agreement, we were granted the exclusive right to
use the Champion(R) name and C(R) logo and related trademarks on certain
products sold in the collegiate, military and resort markets in the United
States. The license agreement is scheduled to expire on June 30, 2016. In
consideration for the license grant, we pay Sara Lee a quarterly royalty
based on a percentage of net sales of products bearing the licensed marks
beginning in fiscal 2004.
Licenses
We market our products, in part, under licensing agreements. In
fiscal 2002, net sales under our 433 active licensing agreements totaled
$74.4 million, or approximately 37% of our net sales. Our licensing
agreements are mostly with (i) high volume, university bookstores, (ii)
professional sports leagues such as Major League Baseball, NBA, NHL and PGA
Tour and (iii) major sporting events such as the NCAA, U.S. Open, Ryder Cup
and the Indianapolis 500. Such licensing agreements are generally renewable
every one to three years with the consent of the licensor.
Properties
We own each of our four properties: our 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas, our 100,000
square foot distribution facility located approximately two miles from our
headquarters, our 23,000 square foot embroidery facility located in
Bedford, Iowa, and our 50,000 square foot screen print decoration facility
located in Chillicothe, Missouri. Approximately 200,000 square feet of the
headquarters/manufacturing facility, the distribution facility in Lenexa,
the embroidery facility in Bedford and the Chillicothe screen print
facility are devoted to the design and manufacture of our products and to
customer service. The Chillicothe facility was completed and began
production in fiscal 2002.
From time to time, we lease additional warehouse space under
short-term agreements to meet short-term seasonal needs.
Litigation
We are not a party to any pending legal proceeding the resolution
of which, we believe, would have a material adverse effect on our results
of operations, cash flows, or financial condition, nor to any other pending
legal proceedings other than ordinary, routine litigation incidental to our
business.
38
MANAGEMENT
Directors and Executive Officers
The following sets forth the names and ages of GFSI Holding's
directors and executive officers and the positions they hold as of the date
of this prospectus. The directors and officers hold the same directorships
and titles with respect to GFSI.
Name Age Position With GFSI Holdings
---- --- ---------------------------
Robert M. Wolff........ 68 Chairman and Chief Executive Officer
Larry D. Graveel....... 54 President, Chief Operating Officer
J. Craig Peterson...... 50 Senior Vice President, Chief Financial Officer
Michael H. Gary........ 50 Senior Vice President, Sales Administration
A. Richard Caputo, Jr.. 37 Director
John W. Jordan II...... 55 Director
David W. Zalaznick..... 48 Director
Set forth below is a brief description of the business experience
of each director and executive officer of GFSI Holdings including each
person's principal occupations and employment during the past five years,
the name and principal business of any corporation or other organization in
which such occupations and employment were carried on and whether such
corporation or organization is a parent, subsidiary or other affiliate of
the registrant.
Robert M. Wolff has served as Chairman since inception in 1974.
Larry D. Graveel has served as President since September 2000. He
has served as a director since February 1997 and as Chief Operating Officer
since 1999. Prior to that, Mr. Graveel served as a Senior Vice President,
Merchandising from 1993 to 1999 and as a merchandising manager since 1984.
J. Craig Peterson has served as Senior Vice President and Chief
Financial Officer since March 2001. Prior to that, Mr. Peterson served as
Chief Financial Officer at eScout.com LLC (2000 - 2001), Chief Financial
Officer at Gold Bancshares Corp. (1999 - 2000), and Chief Financial Officer
at Unitog Company (1991 - 1998). Prior to those positions, Mr. Peterson was
a partner at KPMG LLP, a public accounting firm.
Michael H. Gary has served as Senior Vice President, Sales
Administration since 1993. Prior to that, Mr. Gary held several management
positions in sales administration since 1982.
A. Richard Caputo, Jr. has served as a director since February
1997. Mr. Caputo is a managing director of The Jordan Company, a private
merchant banking firm, with which he has been associated since 1990. Mr.
Caputo is also a director of AmeriKing, Inc. and Jackson Products, Inc. as
well as other privately held companies.
John W. Jordan II has served as a director since February 1997.
Mr. Jordan has been a managing director of The Jordan Company since 1982.
Mr. Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas,
Inc., American Safety Razor Company, Apparel Ventures, Inc., AmeriKing,
Inc., Jordan Telecommunication Products, Inc., Motors and Gears, Inc.,
Jackson Products, Inc. and Rockshox, Inc. as well as other privately held
companies.
David W. Zalaznick has served as a director since February 1997.
Mr. Zalaznick has been a managing director of The Jordan Company since
1982. Mr. Zalaznick is also a director of Jordan Industries, Inc., Carmike
Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc.,
Marisa Christina, Inc., AmeriKing, Inc., Jordan Telecommunications
Products, Inc., Motors and Gears, Inc. and Jackson Products, Inc. as well
as other privately held companies.
39
Stockholders Agreement
In connection with the acquisition of Winning Ways, Inc. in 1997,
GFSI Holdings and certain affiliated investors entered into a subscription
and stockholders agreement (the "Stockholders Agreement") which sets forth
certain rights and restrictions relating to the ownership of GFSI Holdings'
stock and agreements among the parties thereto as to the governance of GFSI
Holdings and, indirectly, GFSI.
The Stockholders Agreement contains material provisions which,
among other things and subject to certain exceptions, including any
restrictions imposed by applicable law or by our debt agreements, (i)
provide for put and call rights in the event a stockholder (as defined in
the Stockholders Agreement) is no longer employed by us, (ii) restrict the
ability of all stockholders to transfer their respective ownership
interests, other than with respect to transfers to permitted transferees
(as defined in the Stockholders Agreement), including rights of first
refusal and tag along rights held by each of the remaining stockholders,
(iii) grant drag along rights to selling stockholders (as defined in the
Stockholders Agreement) in which the holders of 75% or more of the common
stock of GFSI Holdings who agree to transfer their stock in an arms-length
transaction to a nonaffiliated party may require the remaining stockholders
to sell their stock on the same terms and conditions and (iv) grant each
stockholder piggyback registration rights to participate in certain
registrations initiated by GFSI Holdings.
The Stockholders Agreement also contains certain material
governance provisions which, among other things, (i) provide for the
election of three directors (the "Management Directors") nominated by the
Management Investors (as defined in the Stockholders Agreement), three
directors (the "Jordan Directors") nominated by the Jordan Investors (as
defined in the Stockholders Agreement) and one director nominated by the
stockholders, (ii) prohibit the removal of the Management Directors other
than by the Management Investors or the Jordan Directors other than by the
Jordan Investors and (iii) require the approval of at least five directors
of certain fundamental transactions affecting GFSI Holdings or GFSI,
including any proposed dissolution, amendment to the certificate of
incorporation or by-laws or merger, consolidation or sale of all or
substantially all of the assets of GFSI Holdings or GFSI. The provisions
described under "Stockholders Agreement" represent all of the material
provisions of such agreement.
Board of Directors
Liability Limitation. The certificate of incorporation provides
that a director of GFSI Holdings shall not be personally liable to it or
its stockholders for monetary damages to the fullest extent permitted by
the Delaware General Corporation Law. In accordance with the Delaware
General Corporation Law, the certificate of incorporation does not
eliminate or limit the liability of a director for acts or omissions that
involve intentional misconduct by a director or a knowing violation of law
by a director for voting or assenting to an unlawful distribution, or for
any transaction from which the director will personally receive a benefit
in money, property, or services to which the director is not legally
entitled. The Delaware General Corporation Law does not affect the
availability of equitable remedies such as an injunction or rescission
based upon a director's breach of his duty of care. Any amendment to these
provisions of the Delaware General Corporation Law will automatically be
incorporated by reference into the certificate of incorporation and the
bylaws, without any vote on the part of its stockholders, unless otherwise
required.
40
Indemnification Agreements. Simultaneously with the consummation
of the securities offering conducted in connection with the acquisition of
Winning Ways, Inc. in 1997, GFSI Holdings and each of its directors entered
into indemnification agreements. The indemnification agreements provide
that we will indemnify the directors against certain liabilities (including
settlements) and expenses actually and reasonably incurred by them in
connection with any threatened or pending legal action, proceeding or
investigation (other than actions brought by or in the right of GFSI
Holdings) to which any of them is, or is threatened to be, made a party by
reason of their status as a director, officer or agent of GFSI Holdings, or
serving at the request of GFSI Holdings in any other capacity for or on
behalf of GFSI Holdings; provided that:
o such director acted in good faith and in a manner not opposed to
the best interest of GFSI Holdings,
o with respect to any criminal proceedings had no reasonable cause
to believe his or her conduct was unlawful,
o such director is not finally adjudged to be liable for negligence
or misconduct in the performance of his or her duty to GFSI
Holdings, unless the court views in light of the circumstances the
director is nevertheless entitled to indemnification, and
o the indemnification does not relate to any liability arising under
Section 16(b) of the Exchange Act, or the rules or
regulations promulgated thereunder.
With respect to any action brought by or in the right of GFSI
Holdings, directors may also be indemnified to the extent not prohibited by
applicable laws or as determined by a court of competent jurisdiction
against expenses actually and reasonably incurred by them in connection
with such action if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of GFSI
Holdings.
Director Compensation. Each director of GFSI Holdings receives
$20,000 per year for serving as a director. In addition, GFSI Holdings
reimburses directors for their travel and other expenses incurred in
connection with attending meetings of the Board of Directors.
41
Executive Compensation
The following table sets forth information concerning the
aggregate compensation paid and accrued to our executive officers for
services rendered to us during each of the three most recent fiscal years.
Board of
Fiscal Directors
Position Year Salary Bonus Fees (3) Other (2)
-------- ---- ------ ----- -------- ---------
Robert M. Wolff 2002 $195,354 -- $ 20,000 $257,014
Chairman and Chief Executive 2001 209,005 -- 20,000 257,014
Officer 2000 144,837 -- 20,000 257,014
Larry D. Graveel 2002 350,727 -- 20,000 4,718
President and 2001 311,931 -- 20,000 6,352
Chief Operating Officer 2000 190,000 35,000 20,000 10,533
J. Craig Peterson (1) 2002 250,666 -- 20,000 4,043
Senior Vice President and 2001 87,500 -- 10,000 --
Chief Financial Officer 2000 -- -- -- --
Michael H. Gary 2002 325,669 -- 20,000 9,531
Senior Vice President 2001 288,654 -- 10,000 10,152
2000 200,000 40,000 -- 7,971
Jim Malseed 2002 180,726 15,500 -- 11,125
President/General 2001 59,712 -- -- 3,865
Manager Champion Custom Products 2000 -- -- -- --
- -------------
(1) During fiscal 2002, GFSI Holdings granted J. Craig Peterson options to purchase 45 shares of GFSI
Holdings' Class A Common Stock and 79.8 shares of GFSI Holdings' Class A Preferred Stock. The options
vest over a period of two years and were generally granted with an exercise price equal to the
formula value at the date of grant. Management believes the formula value reasonably approximates
fair value. A portion of this grant, consisting of 5 Class A Common shares and 8.87 shares of the
Class A Preferred Stock, was awarded to Mr. Peterson at a price lower than the formula value and,
accordingly, we recorded $14,630 in compensation expense during fiscal 2002.
(2) Other compensation for Robert M. Wolff includes $250,000 per annum paid under the Wolff
Noncompetition Agreement with GFSI Holdings which is described more fully in "Certain Relationships
and Related Transactions." Other compensation for Mr. Wolff and the remaining officers also includes
GFSI Holdings' contributions to the qualified 401(k) plan and vehicle reimbursement allowances.
(3) Mr. Wolff, Mr. Graveel, Mr. Peterson and Mr. Gary each received compensation as members of the Board
of Directors of GFSI Holdings.
42
Incentive Compensation Plan
We adopted an incentive compensation plan, for senior executives
during the fiscal year ended July 3, 1998. The incentive compensation plan
provides for annual cash bonuses payable based on a percentage of EBIT (as
defined in the incentive compensation plan) if certain EBIT targets are
met. During each of the fiscal years ended June 30, 2000, June 29, 2001 and
June 29, 2002, no compensation was paid under the incentive compensation
plan.
43
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information regarding
beneficial ownership of the common stock of GFSI Holdings held by (i) each
of its directors and executive officers who own shares of common stock of
GFSI Holdings, (ii) all directors and executive officers of GFSI Holdings
as a group and (iii) each person known by GFSI Holdings to own beneficially
more than 5% of its common stock. We believe that each individual or entity
named has sole investment and voting power with respect to shares of common
stock of GFSI Holdings as beneficially owned by them, except as otherwise
noted.
Amount of Beneficial Ownership (1)
--------------------------------------------
Executive Officers and Directors: Number of Shares Percentage Owned
- ------------------------------------------------------------------------- ----------------------- --------------------
Robert M. Wolff (2)(3) 60.0 3.3 %
Larry D. Graveel (2)(4) 225.0 12.4
Michael H. Gary (2)(5) 225.0 12.4
J. Craig Peterson (2)(6) 75.0 4.1
John W. Jordan II (7)(8) 78.3125 4.3
David W. Zalaznick (7) 78.3125 4.3
A. Richard Caputo, Jr. (7) 50.0 2.7
All directors and executive officers as a group (7 persons) 791.625 42.9
Other Principal Stockholders:
- -------------------------------------------------------------------------
JZ Equity Partners PLC (9) 500.0 27.5
Leucadia Investors, Inc. (10) 125.0 6.9
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under
Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable
within 60 days after December 28, 2002 are deemed outstanding for
the purpose of calculating the number and percentage owned by such
person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. As of December
28, 2002, there were 1,820 shares of common stock of GFSI Holdings
issued and outstanding.
(2) The address of each of Messrs. Wolff, Peterson, Graveel and Gary is
c/o GFSI, Inc., 9700 Commerce Parkway, Lenexa, Kansas 66219.
(3) All shares are held by the Robert M. Wolff Trust, of which Mr. Wolff
is a trustee.
(4) All shares are held by the Larry D. Graveel Revocable Trust, of
which Mr. Graveel is a trustee.
(5) 205 shares are held by Michael H. Gary Revocable Trust, of which
Mr. Gary is a trustee. The remaining 20 shares are held in
trust for family members of Mr. Gary.
44
(6) 25 shares are held by a financial institution as trustee for Mr.
Peterson, 25 shares are held by the J. Craig Peterson and Linda Z.
Peterson Revocable Trust of which Mr. Peterson is trustee and 25
shares are issuable upon exercise of stock options.
(7) The address of each of Messrs. Jordan, Zalaznick and Caputo is
c/o The Jordan Company, 767 Fifth Avenue, New York, NY 10153.
(8) All shares are held by the John W. Jordan II Revocable Trust, of
which Mr. Jordan is trustee.
(9) The principal address of JZ Equity Partners PLC is
c/o Jordan/Zalaznick Capital Company, 767 Fifth Avenue,
New York, NY 10153.
(10) The principal address of Leucadia Investors, Inc. is 315 Park
Avenue South, New York, NY 10010.
45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Wolff Employment Agreement
In connection with the acquisition of Winning Ways, Inc. in 1997,
we entered into an Employment Agreement with Robert M. Wolff (the "Wolff
Employment Agreement"). Pursuant to the Wolff Employment Agreement, Mr.
Wolff will serve as our Chairman for a ten-year period ending on the tenth
anniversary of the acquisition. In exchange for his services, we will
compensate Mr. Wolff with a base salary of $140,000 per annum, subject to
annual increases set forth in the Wolff Employment Agreement, to provide
him with certain employee benefits comparable to that received by our other
senior executives, including the use of company cars, and to reimburse him
for expenses incurred in connection with the performance of his duties as
Chairman. In the event that Mr. Wolff no longer provides services to us due
to his dismissal for Cause (as defined in the Wolff Employment Agreement),
he will no longer be entitled to any compensation from us as of the date of
his dismissal, subject to certain rights of appeal. During fiscal 2002, we
entered into a Supplemental Employment Agreement with Robert M. Wolff (the
"Wolff Supplemental Agreement") which extended the term of his tenure as an
executive of GFSI for an additional ten years at a base salary of $120,000
per annum. The Wolff Supplemental Agreement generally follows the same
terms and provides for employee benefits similar to the Wolff Employment
Agreement.
Wolff Noncompetition Agreement
In connection with the Acquisition of Winning Ways in 1997, GFSI
Holdings entered into a Noncompetition Agreement with Robert M. Wolff (the
"Wolff Noncompetition Agreement"). Pursuant to the Wolff Noncompetition
Agreement, Mr. Wolff will not, directly or indirectly:
o engage in or have any active interest in any sportswear or
activewear business comparable to that of our business or sell to,
supply, provide goods or services to, purchase from or conduct
business in any form with GFSI or GFSI Holdings for a ten-year
period ending on the tenth anniversary of the acquisition,
o disclose at any time other than to us any Confidential Information
(as defined in the Wolff Noncompetition Agreement) and
o engage in any business with us through an affiliate for as long as
Mr. Wolff or any member of his family is the beneficial owner of
GFSI Holdings' capital stock. In exchange for his covenant not to
compete, GFSI Holdings will pay Mr. Wolff $250,000 per annum for a
period of ten years. In the event that the Wolff Noncompetition
Agreement is terminated for Cause (as defined in the Wolff
Noncompetition Agreement), GFSI Holdings will no longer be
obligated to make any payment to Mr. Wolff, but Mr. Wolff will
remain obligated to comply with the covenants set forth in the
Wolff Noncompetition Agreement until its expiration on the tenth
anniversary of the Acquisition.
46
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Subject to terms and conditions detailed in this prospectus, we
will accept for exchange old notes that are properly tendered on or prior
to the expiration date and not withdrawn as permitted below. When we refer
to the term expiration date, we mean 5:00 p.m., New York City time,
________ ___, 2003. We may, however, in our sole discretion, extend the
period of time that the exchange offer is open. The term expiration date
means the latest time and date to which the exchange offer is extended.
As of the date of this prospectus, $9.9 million principal amount
of old notes are outstanding. We are sending this prospectus, together with
the letter of transmittal, to all holders of old notes of whom we are
aware. We expressly reserve the right, at any time, to extend the period of
time that the exchange offer is open, and delay acceptance for exchange of
any old notes, by giving oral or written notice of an extension to the
holders of old notes as described below. During any extension, all old
notes previously tendered will remain subject to the exchange offer and may
be accepted for exchange by us. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder as
promptly as practicable after the expiration or termination of the exchange
offer.
Old notes tendered in the exchange offer must be in denominations
of principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange
offer, and not to accept for exchange any old notes, upon the occurrence of
any of the conditions of the exchange offer specified under "--Conditions
to the Exchange Offer." We will give oral or written notice of any
extension, amendment, non-acceptance or termination to the holders of the
old notes as promptly as practicable. In the case of any extension, we will
issue a notice by means of a press release or other public announcement no
later than 9:00 a.m., New York City time, on the next business day after
the previously scheduled expiration date.
Procedures for Tendering Old Notes
Your tender to us of old notes as set forth below and our
acceptance of the old notes will constitute a binding agreement between us
and you upon the terms and subject to the conditions detailed in this
prospectus and in the accompanying letter of transmittal. Except as set
forth below, to tender old notes for exchange in the exchange offer, you
must transmit a properly completed and duly executed letter of transmittal,
including all other documents required by the letter of transmittal or, in
the case of a book-entry transfer, an agent's message in place of the
letter of transmittal, to U.S. Bank National Association, as exchange
agent, at the address set forth below under "--Exchange Agent" on or prior
to the expiration date. In addition, either:
o certificates for old notes must be received by the exchange agent
along with the letter of transmittal, or
o a timely confirmation of a book-entry transfer, which we refer to
in this prospectus as a "book-entry confirmation," of old notes,
if this procedure is available, into the exchange agent's account
at DTC pursuant to the procedure for book-entry transfer
(described below) must be received by the exchange agent, prior to
the expiration date, with the letter of transmittal or an agent's
message in place of the letter of transmittal, or the holder must
comply with the guaranteed delivery procedures described below.
47
The term "agent's message" means a message, transmitted by DTC to
and received by the exchange agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment
from the tendering participant stating that the participant has received
and agrees to be bound by the letter of transmittal and that we may enforce
the letter of transmittal against such participant.
The method of delivery of old notes, letters of transmittal and
all other required documents is at your election and risk. If delivery is
by mail, it is recommended that you use registered mail, properly insured,
with return receipt requested. In all cases, you should allow sufficient
time to assure timely delivery. No letter of transmittal or old notes
should be sent to us.
Signatures on a letter of transmittal or a notice of withdrawal
must be guaranteed unless the old notes surrendered for exchange are
tendered:
o by a holder of the old notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal, or
o for the account of an eligible institution, as defined below.
In the event that signatures on a letter of transmittal or a
notice of withdrawal are required to be guaranteed, these guarantees must
be by a firm which is a member of the Securities Transfer Agent Medallion
Program, the Stock Exchanges Medallion Program or the New York Stock
Exchange Medallion Program. We refer to those entities as eligible
institutions. If old notes are registered in the name of a person other
than the signer of the letter of transmittal, the old notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as we or the
exchange agent determine in our sole discretion, duly executed by the
registered holders with the signature thereon guaranteed by an eligible
institution.
We or the exchange agent in our sole discretion will make a final
and binding determination on all questions as to the validity, form,
eligibility, including time of receipt, and acceptance of old notes
tendered for exchange. We reserve the absolute right to reject any and all
tenders of any particular old note not properly tendered or to not accept
any particular old note which acceptance might, in our judgment or our
counsel's, be unlawful. We also reserve the absolute right to waive any
defects or irregularities or conditions of the exchange offer as to any
particular old note either before or after the expiration date, including
the right to waive the ineligibility of any holder who seeks to tender old
notes in the exchange offer. Our or the exchange agent's interpretation of
the terms and conditions of the exchange offer as to any particular old
note either before or after the expiration date, including the letter of
transmittal and its instructions, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
old notes for exchange must be cured within a reasonable period of time, as
we determine. We are not, nor is the exchange agent or any other person,
under any duty to notify you of any defect or irregularity with respect to
your tender of old notes for exchange, and no one will be liable for
failing to provide notification.
If the letter of transmittal is signed by a person or persons
other than the registered holder or holders of old notes, these old notes
must be endorsed or accompanied by powers of attorney signed exactly as the
name(s) of the registered holder(s) that appear on the old notes.
48
If the letter of transmittal or any old notes or powers of
attorneys are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary
or representative capacity, these persons should so indicate when signing.
Unless waived by us or the exchange agent, proper evidence satisfactory to
us of their authority to so act must be submitted with the letter of
transmittal.
By tendering old notes, you represent to us that, among other
things:
o the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of the person
receiving these new notes, whether or not that person is the
holder; and
o neither the holder nor the other person has any arrangement or
understanding with any person, to participate in the distribution
of the new notes.
In the case of a holder that is not a broker-dealer, that holder,
by tendering, will also represent to us that the holder is not engaged in
or does not intend to engage in a distribution of new notes.
If you are our "affiliate," as defined under Rule 405 under the
Securities Act, and engage in or intend to engage in or have an arrangement
or understanding with any person to participate in a distribution of new
notes to be acquired pursuant to the exchange offer, you or that other
person:
o could not rely on the applicable interpretations of the staff of the
SEC; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives new notes for its own account in
exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in
connection with any resale of these new notes. See "Plan of Distribution."
The letter of transmittal states that by so acknowledging and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the
exchange offer, we will promptly accept after the expiration date all old
notes properly tendered and will promptly issue the new notes after
acceptance of the old notes. See "--Conditions to the Exchange Offer." For
purposes of the exchange offer, we will be deemed to have accepted properly
tendered old notes for exchange if and when we give oral, confirmed in
writing, or written notice to the exchange agent. The holder of each old
note accepted for exchange will receive a new note in the amount equal to
the surrendered old note. Accordingly, registered holders of new notes on
the record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the
most recent date that interest has been paid on the old notes. Holders of
new notes will not receive any payment of accrued interest on old notes
otherwise payable on any interest payment date, if the record date occurs
on or after the consummation of the exchange offer.
49
In all cases, issuance of new notes for old notes that are
accepted for exchange will only be made after timely receipt by the
exchange agent of:
o certificates for old notes or a timely book-entry confirmation of
these old notes into the exchange agent's account at DTC,
o a properly completed and duly executed letter of transmittal or
an agent's message in its place, and
o all other required documents.
If any tendered old notes are not accepted for any reason set
forth in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than the holder desires to
exchange, the unaccepted or non-exchanged old notes will be returned
without expense to the tendering holder, or, in the case of old notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry procedures, described below the non-exchanged
old notes will be credited to an account maintained with DTC as promptly as
practicable after the expiration or termination of the exchange offer.
Book-Entry Transfers
For purposes of the exchange offer, the exchange agent will
request that an account be established for the old notes at DTC within two
business days after the date of this prospectus, unless the exchange agent
already has established an account with DTC suitable for the exchange
offer. Any financial institution that is a participant in DTC may make
book-entry delivery of old notes by causing DTC to transfer the old notes
into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. Although delivery of old notes may be effected
through book-entry transfer at DTC, the letter of transmittal or facsimile
copy of the letter or an agent's message in place of the letter of
transmittal, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the
exchange agent at the address set forth under "--Exchange Agent" on or
prior to the expiration date, otherwise, the guaranteed delivery procedures
described below must be followed.
Guaranteed Delivery Procedures
If you desire to tender your old notes and your old notes are not
immediately available, or time will not permit your old notes or other
required documents to reach the exchange agent before the expiration date,
a tender may be effected if:
o prior to the expiration date, the exchange agent received from an
eligible institution a notice of guaranteed delivery,
substantially in the form we provide, by telegram, telex,
facsimile transmission, mail or hand delivery, setting forth your
name and address, the amount of old notes tendered, stating that
the tender is being made and guaranteeing that within three New
York Stock Exchange trading days after the date of execution of
the notice of guaranteed delivery, the certificates for all
physically tendered old notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a
properly completed and duly executed appropriate letter of
transmittal or facsimile of the letter or agent's message in place
of the letter, with any required signature guarantees and any
other documents required by the letter of transmittal will be
deposited by an eligible institution with the exchange agent, and
o the certificates for all physically tendered old notes, in proper
form for transfer, or a book-entry confirmation, as the case may
be, together with a properly completed and duly executed
appropriate letter of transmittal or facsimile of the letter or
agent's message in place of the letter, with any required
signature guarantees and all other documents required by the
letter of transmittal, are received by the exchange agent within
three New York Stock Exchange trading days after the date of
execution of the notice of guaranteed delivery.
50
Withdrawal Rights
You may withdraw your tender of old notes at any time prior to the
expiration date. To be effective, a written notice of withdrawal must be
received by the exchange agent at the address set forth under "--Exchange
Agent." This notice must specify:
o the name of the person that tendered the old notes to be withdrawn,
o the old notes to be withdrawn, including the principal amount of the
old notes, and
o where certificates for old notes have been transmitted, the name
in which the old notes are registered, if different from that of
the withdrawing holder.
If certificates for old notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of the
certificates, the withdrawing holder must also submit the serial numbers of
the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an eligible institution, unless
the holder is an eligible institution. If old notes have been tendered
pursuant to the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at DTC
to be credited with the withdrawn old notes and otherwise comply with the
procedures of DTC.
We or the exchange agent will make a final and binding
determination on all questions regarding the validity, form and
eligibility, including time of receipt, of notices. Any old notes withdrawn
will be deemed not to have been validly tendered for exchange for purposes
of the exchange offer. Any old notes tendered for exchange but not
exchanged for any reason will be returned to the holder without cost to the
holder, or, in the case of old notes tendered by book-entry transfer into
the exchange agent's account at DTC pursuant to the book-entry transfer
procedures described above, the old notes will be credited to an account
maintained with DTC for the old notes, as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn old notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at
any time on or prior to the expiration date.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we are
not required to accept for exchange, or to issue new notes in exchange for
any old notes and may terminate or amend the exchange offer, if any of the
following events occur prior to acceptance of the old notes:
o the exchange offer violates any applicable law or applicable
interpretation of the staff of the SEC;
o an action or proceeding shall have been instituted or threatened
in any court or by any governmental agency that might materially
impair our or any subsidiary guarantor's ability to proceed with
the exchange offer;
o we shall not have received all governmental approvals that we deem
necessary to consummate the exchange offer; or
o there has been proposed, adopted, or enacted any law, statute,
rule or regulation that, in our reasonable judgment, would
materially impair our ability to consummate the exchange offer.
51
The conditions stated above are for our sole benefit and may be
asserted by us regardless of the circumstances giving rise to any condition
or may be waived by us in whole or in part at any time in our reasonable
discretion. Our failure at any time to exercise any of the foregoing rights
will not be deemed a waiver of any right and each right will be deemed an
ongoing right that we may assert at any time.
In addition, we will not accept for exchange any old notes
tendered, and we will not issue any new notes if at the time of exchange
any stop order is threatened or in effect with respect to the registration
statement, of which this prospectus constitutes a part, or the
qualification of the indenture under the Trust Indenture Act.
Exchange Agent
We have appointed U.S. Bank National Association as the exchange
agent for the exchange offer. You should direct all executed letters of
transmittal to the exchange agent at the address set forth below. Questions
and requests for assistance, requests for additional copies of this
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery should be directed to the exchange agent addressed as
follows:
By overnight courier, registered/certified mail and by hand:
U.S. Bank National Association
Corporate Trust Services
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Specialized Finance 4th Floor
Facsimile transmission:
Telecopier No.: (651) 244-1537
Attention: Specialized Finance
Fax cover sheets should include a call back telephone
number and request a call back, upon receipt.
Delivery of the letter of transmittal to an address other than as
set forth above or transmission of such letter of transmittal via facsimile
other than as set forth above does not constitute a valid delivery of the
letter of transmittal.
Fees and Expenses
The principal solicitation is being made by mail by U.S. Bank
National Association, as exchange agent. We will pay the exchange agent
customary fees for its services, reimburse the exchange agent for its
reasonable out-of-pocket expenses incurred in connection with the provision
of these services and pay other registration expenses, including fees and
expenses of the trustee under the indenture relating to the new notes,
filing fees, blue sky fees and printing and distribution expenses. We
estimate these expenses to be approximately $122,000 in the aggregate. We
will not make any payment to brokers, dealers or others soliciting
acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in
person by our and our affiliates' officers and regular employees and by
persons so engaged by the exchange agent.
52
Accounting Treatment
We will record the new notes at the same carrying value as the old
notes, as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting
purposes. The expenses of the exchange offer will be amortized over the
term of the new notes.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection
with the tender of old notes in the exchange offer unless you instruct us
to register new notes in the name of, or request that old notes not
tendered or not accepted in the exchange offer be returned to, a person
other than the registered tendering holder. In those cases, you will be
responsible for the payment of any applicable transfer tax.
Consequences of Exchanging or Failing to Exchange Old Notes
If you do not exchange your old notes for new notes in the
exchange offer, your old notes will continue to be subject to the
provisions of the indenture regarding transfer and exchange of the old
notes and the restrictions on transfer of the old notes described in the
legend on your certificates. These transfer restrictions are required
because the old notes were issued under an exemption from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the old
notes may not be offered or sold unless registered under the Securities
Act, except under an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. We do not plan to
register the old notes under the Securities Act.
Under existing interpretations of the Securities Act by the SEC's
staff contained in several no-action letters to third parties, and subject
to the immediately following sentence, we believe that the new notes would
generally be freely transferable by holders after the exchange offer
without further registration under the Securities Act, subject to
representations required to be made by each holder of new notes, as set
forth below. However, any purchaser of new notes who is one of our
"affiliates," as defined in Rule 405 under the Securities Act, or who
intends to participate in the exchange offer for the purpose of
distributing the new notes:
o will not be able to rely on the interpretation of the SEC's staff;
o will not be able to tender its old notes in the exchange offer; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or
transfer of the new notes unless the sale or transfer is made
pursuant to an exemption from the requirements. See "Plan of
Distribution."
We do not intend to seek our own interpretation regarding the
exchange offer and we cannot assure you that the SEC's staff would make a
similar determination with respect to the new notes as it has in other
interpretations to other parties, although we have no reason to believe
otherwise.
Each broker-dealer that receives new notes for its own account in
exchange for old notes, where the old notes were acquired by it as a result
of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus that meets the requirements of the
Securities Act in connection with any resale of the new notes. The letter
of transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. See "Plan of
Distribution."
53
DESCRIPTION OF NOTES
All references in this "Description of Notes" to "GFSI," "we,"
"us" and "our" refer solely to GFSI, Inc.
General
The notes have been issued pursuant to the indenture between GFSI and
U.S. Bank National Association (formerly known as State Street Bank and Trust
Company), as trustee (the "Trustee"), in a private transaction that is not
subject to the registration requirements of the Securities Act. See "Notice to
Investors." The terms of the notes include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939, as amended, as in effect on the date of original issuance of the notes.
The notes are subject to all such terms, and holders of the notes are referred
to the indenture and the Trust Indenture Act for a statement thereof. The
following summary of the material provisions of the indenture does not purport
to be complete and is qualified in its entirety by reference to the indenture,
including the definitions therein of certain terms used below. Copies of the
proposed form of indenture and the exchange agreement are available as set forth
below under "--Additional Information." The definitions of certain terms used in
the following summary are set forth below under "--Certain Definitions."
GFSI's obligations under the indenture and the notes will be fully and
unconditionally guaranteed jointly and severally, on a senior subordinated basis
(the "Note Guarantees") by any future Restricted Subsidiaries (the
"Guarantors"). See "--Note Guarantees." As of the date of the indenture, GFSI
had three Subsidiaries (Event 1, Inc., CC Products, Inc. and GFSI Canada
Company). Under certain circumstances, we will be able to designate any
Subsidiaries formed by GFSI or acquired by GFSI after the original issuance of
the notes as Non-Restricted Subsidiaries. Non-Restricted Subsidiaries will not
be Guarantors and will not be subject to many of the restrictive covenants set
forth in the indenture.
The Indenture does not limit the aggregate principal amount of notes
that may be issued pursuant to the Indenture. The notes will initially be
limited to $9,900,000 in aggregate principal amount. The notes will mature on
March 1, 2007. The notes bear interest at the rate set forth on the front cover
of this offering memorandum. Interest on the notes is payable semi-annually in
cash in arrears on March 1 and September 1 in each year, commencing March 1,
2003, to holders of record of notes at the close of business on February 15 or
August 15 immediately preceding such interest payment date. Interest on the
notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of original issuance. Interest will
be computed on the basis of a 360-day year of twelve 30-day months. The notes
will be issued in denominations of $1,000 and integral multiples thereof.
Principal of and premium, interest, on the notes will be payable, and
the notes may be presented for registration of transfer or exchange, at the
office of the Paying Agent and Registrar. Holders of notes must surrender their
notes to the Paying Agent to collect principal payments, and GFSI may pay
principal and interest by check and may mail checks to a holder's registered
address; provided that all payments with respect to Global Notes and with
respect to Certificated Notes, the holders of which have given wire transfer
instructions to GFSI, will be required to be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof.
The Registrar may require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection with certain transfers or
exchanges. See "--Transfer and Exchange." The Trustee will initially act as
Paying Agent and Registrar. GFSI may change the Paying Agent or Registrar
without prior notice to holders of notes, and GFSI or any of its Subsidiaries
may act as Paying Agent or Registrar.
54
Subordination
The payment of principal of and premium, interest, on the notes will be
subordinated in right of payment, as set forth in the indenture, to the prior
payment in full in cash or Marketable Securities of all Senior Indebtedness,
whether outstanding on the date of the indenture or thereafter incurred. The
indenture permits the incurrence of additional Senior Indebtedness in the
future.
Upon any acceleration of the maturity of the notes or upon any payment
or distribution of assets of GFSI to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceeding of GFSI, the holders of all Senior Indebtedness will be first
entitled to receive payment in full in cash or Marketable Securities (as
defined) of all Obligations (as defined) due in respect of such Senior
Indebtedness (including interest after the commencement of any such proceeding
at the rate specified in the applicable Senior Indebtedness) before the holders
of notes will be entitled to receive any payment with respect to the notes, and
until all Obligations with respect to Senior Indebtedness are paid in full in
cash or Marketable Securities, any distribution to which the holders of notes
would be entitled shall be made to the holders of Senior Indebtedness (except
that holders of notes may receive Permitted Junior Securities and payments made
from the trust described under "--Legal Defeasance and Covenant Defeasance").
GFSI also may not make any payment upon or in respect of the notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if:
o a default in the payment of the principal of or premium, if any, or
interest on Designated Senior Indebtedness occurs and is continuing
beyond any applicable period of grace or
o any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior
Indebtedness as to which such default relates to accelerate its
maturity and the Trustee receives a written notice (with a copy to
GFSI) of such other default (a "Payment Blockage Notice") from GFSI or
the holders of any Designated Senior Indebtedness.
Payments on the notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in case
of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived or 179 days after the date on which the applicable
Payment Blockage Notice is received by the Trustee, unless the maturity of any
Designated Senior Indebtedness has been accelerated. No new period of payment
blockage may be commenced unless and until 360 days have elapsed since the date
of receipt by the Trustee of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice (it being understood that any subsequent
action, or any breach of any covenant for a period commencing after the date of
receipt by the Trustee of such Payment Blockage Notice, that, in either case,
would give rise to such a default pursuant to any provisions under which a
default previously existed or was continuing shall constitute a new default for
this purpose).
The indenture will further require that GFSI promptly notify holders of
Senior Indebtedness if payment of the notes is accelerated because of an Event
of Default.
As a result of the subordination provisions described above, in the
event of a liquidation or insolvency, holders of notes may recover less ratably
than creditors of GFSI who are holders of Senior Indebtedness. As of December
55
28, 2002, the aggregate principal amount of Senior Indebtedness of GFSI to which
the notes would have been subordinated would have been approximately $27
million. The indenture will limit, subject to certain financial tests, the
amount of additional Indebtedness, including Senior Indebtedness, that GFSI and
its subsidiaries can incur. See "--Certain Covenants--Limitation on Incurrence
of Indebtedness."
Note Guarantees
GFSI's payment obligations under the notes will be fully and
unconditionally guaranteed jointly and severally, on a senior subordinated
basis, (the "Note Guarantees"), by GFSI's future Restricted Subsidiaries (the
"Guarantors"). The Note Guarantees will be subordinated to the prior payment in
full in cash or Marketable Securities of all Senior Indebtedness of each
Guarantor (including such Guarantor's guarantee of the Existing Credit
Agreement) to the same extent that the notes are subordinated to Senior
Indebtedness of GFSI. The obligations of any Guarantor under its Note Guarantee
will be limited so as not to constitute a fraudulent conveyance under applicable
law.
The indenture provides that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the notes and the indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default exists; (iii) such
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) GFSI would be
permitted by virtue of its pro forma Cash Flow Coverage Ratio, immediately after
giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Cash Flow Coverage test set forth in the covenant
described below under the caption "Limitation on Incurrence of Indebtedness."
The requirements of clauses (iii) and (iv) of this paragraph will not apply in
the case of a consolidation with or merger with or into GFSI or another
Guarantor.
The indenture provides that:
o in the event of a sale or other disposition of all of the assets of any
Guarantor, by way of merger, consolidation or otherwise, or a sale or
other disposition of all of the capital stock of any Guarantor, or
o in the event that GFSI designates a Guarantor to be a Non-Restricted
Subsidiary,
then such Guarantor (in the event of a sale or other disposition, by way of such
a merger, consolidation or otherwise, of all of the capital stock of such
Guarantor or any such designation) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Note Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the indenture. See "Mandatory
Offers to Purchase Notes."
Redemption of Notes
Optional Redemption. The notes may be redeemed at the option of GFSI at
any time. The notes will be redeemable, at the option of GFSI, in whole or in
56
part, on at least 30 but not more than 60 days' notice to each holder of notes
to be redeemed, at the redemption prices (expressed as percentages of the
principal amount) set forth below, plus any accrued and unpaid interest, to the
redemption date:
Year Percentage
- ---- ----------
December 31, 2002 through February 28, 2003....... 104.813%
March 1, 2003 through February 29, 2004................ 103.208%
March 1, 2004 through February 28, 2005................ 101.604%
March 1, 2005 and thereafter........................... 100.000%
The restrictions on optional redemptions contained in the indenture do
not limit GFSI's right to separately make open market, privately negotiated or
other purchases of notes from time to time.
Mandatory Redemption. Except as set forth below under "--Mandatory
Offers to Purchase Notes--Change of Control" and "--Asset Sales," GFSI is not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the notes.
Mandatory Offers to Purchase Notes
Change of Control. Upon the occurrence of a change of control (such
date being the "Change of Control Trigger Date"), each holder of notes shall
have the right to require GFSI to purchase all or any part (equal to $1,000 or
an integral multiple thereof) of such holder's notes pursuant to an offer (as
defined) at a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus any accrued and unpaid interest, to the date of purchase.
GFSI shall furnish to the Trustee, at least two Business Days before notice of
an offer is mailed to all holders of notes pursuant to the procedures described
below under "-- Procedures for Offers," notice that the offer is being made.
Transactions constituting a change of control are not limited to hostile
takeover transactions not approved by the current management of GFSI. Except as
described under "--Change of Control," the indenture does not contain provisions
that permit the holders of notes to require GFSI to purchase or redeem the notes
in the event of a takeover, recapitalization or similar restructuring, including
an issuer recapitalization or similar transaction with management. Consequently,
the change of control provisions will not afford any protection in a highly
leveraged transaction, including such a transaction initiated by GFSI,
management of GFSI or an affiliate of GFSI, if such transaction does not result
in a change of control. In addition, because the obligations of GFSI with
respect to the notes are subordinated to all Senior Indebtedness of GFSI and all
obligations of GFSI's future subsidiaries, existing or future Senior
Indebtedness of GFSI or obligations of GFSI's future subsidiaries may prohibit
GFSI from repurchasing the notes upon a change of control. Moreover, the ability
of GFSI to repurchase notes following a change of control will be limited by
GFSI's then-available resources. The change of control provisions may not be
waived by the Board of Directors of GFSI or the Trustee without the consent of
holders of at least a majority in principal amount of the notes. See
"--Amendment, Supplement and Waiver."
We expect that prepayment of the notes following a change of control
would, and the exercise by holders of notes of the right to require GFSI to
purchase notes may, constitute a default under the Existing Credit Agreement or
our other indebtedness. The indenture will provide that, prior to the mailing of
the notice referred to below, but in any event within 30 days following any
change of control Trigger Date, GFSI is required to (i) repay in full and
terminate all commitments under Indebtedness under the Existing Credit Agreement
and all other Senior Indebtedness the terms of which require repayment upon a
change of control or offer to repay in full and terminate all commitments under
all Indebtedness under the Existing Credit Agreement and all other such Senior
Indebtedness and to repay the Indebtedness owed to each lender which has
57
accepted such offer or (ii) obtain the requisite consents under the Existing
Credit Agreement and all such other Senior Indebtedness to permit the repurchase
of the notes as provided below. We shall first comply with the covenant in the
immediately preceding sentence before it shall be required to repurchase notes
pursuant to the provisions described below. Our failure to comply with this
covenant shall constitute an Event of Default described in clause (c) and not in
clause (b) under "--Events of Default and Remedies" below. In the event a change
of control occurs, GFSI will likely be required to refinance the Indebtedness
outstanding under the Existing Credit Agreement and the notes. If there is a
change of control, any Indebtedness under the Existing Credit Agreement could be
accelerated. Moreover, there can be no assurance that sufficient funds will be
available at the time of any change of control to repay Senior Indebtedness and
make any required repurchases of the notes given GFSI's high leverage. The
financing of the purchases of notes could additionally result in a default under
the Existing Credit Agreement or our other indebtedness. The occurrence of a
change of control may also have an adverse impact on the ability of GFSI to
obtain additional financing in the future. The ability of holders of notes to
require that we purchase notes upon a change of control may deter persons from
effecting a takeover of GFSI. Except as described above with respect to a change
of control, the indenture will not contain provisions that permit the holders of
notes to require that GFSI purchase or redeem the notes in the event of a
takeover, recapitalization or similar restructuring. See "Risk Factors."
Asset Sales. The indenture provides that we may not, and may not permit
any Restricted Subsidiary to, directly or indirectly, consummate an Asset Sale
(including the sale of any of the Capital Stock of any Restricted Subsidiary)
providing for Net Proceeds in excess of $2.5 million unless at least 75% of the
Net Proceeds from such Asset Sale are applied (in any manner otherwise permitted
by the indenture) to one or more of the following purposes in such combination
as GFSI shall elect: (a) an investment in another asset or business in the same
line of business as, or a line of business similar to that of, the line of
business of GFSI and its Restricted Subsidiaries at the time of the Asset Sale
or the making of a capital expenditure otherwise permitted by the indenture;
provided that such investment occurs within 365 days of the date of such Asset
Sale (the "Asset Sale Disposition Date"), (b) to reimburse GFSI or its
Restricted Subsidiaries for expenditures made, and costs incurred, to repair,
rebuild, replace or restore property subject to loss, damage or taking to the
extent that the Net Proceeds consist of insurance proceeds received on account
of such loss, damage or taking, (c) to cash collateralize letters of credit;
provided any such cash collateral released to GFSI or its Restricted
Subsidiaries upon the expiration of such letters of credit shall again be deemed
to be Net Proceeds received on the date of such release, (d) the permanent
purchase, redemption or other prepayment or repayment of outstanding Senior
Indebtedness of GFSI or Indebtedness of our Restricted Subsidiaries (with a
corresponding reduction in any commitment relating thereto) on or prior to the
365th day following the Asset Sale Disposition Date or (e) an offer expiring on
or prior to the Purchase Date (as defined herein). The indenture also provides
that we may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, consummate an Asset Sale unless at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Marketable Securities; provided that, solely for purposes of calculating
such 75% of the consideration, the amount of (x) any liabilities (as shown on
GFSI's or such Restricted Subsidiary's most recent balance sheet or in the notes
thereto, excluding contingent liabilities and trade payables) of GFSI or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the notes) that are assumed by the transferee of any such assets
and (y) any notes or other obligations received by us or any such Restricted
Subsidiary from such transferee that are promptly, but in no event more than 90
days after receipt, converted by GFSI or such Restricted Subsidiary into cash
(to the extent of the cash received), shall be deemed to be cash and cash
equivalents for purposes of this provision. Any Net Proceeds from any Asset Sale
that are not applied or invested as provided in the first sentence of this
paragraph shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10 million (such
date being an "Asset Sale Trigger Date"), we shall make an offer to all holders
of notes to purchase the maximum principal amount of the notes then outstanding
that may be purchased out of Excess Proceeds, at an offer price in cash in an
amount equal to 100% of principal amount thereof plus any accrued and unpaid
58
interest, to the Purchase Date in accordance with the procedures set forth in
the indenture. Notwithstanding the foregoing, to the extent that any or all of
the Net Proceeds of an Asset Sale is prohibited or delayed by applicable local
law from being repatriated to the United States, the portion of such Net
Proceeds so affected will not be required to be applied as described in this or
the preceding paragraph, but may be retained for so long, but only for so long,
as the applicable local law prohibits repatriation to the United States.
To the extent that any Excess Proceeds remain after completion of an
offer, we may use such remaining amount for general corporate purposes. If the
aggregate principal amount of notes surrendered by holders thereof exceeds the
amount of Excess Proceeds, the Trustee shall select the notes to be purchased on
a pro rata basis. Upon completion of an Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
indenture, GFSI shall mail a notice to each holder of notes at such holder's
registered address a notice stating: (a) that an offer is being made pursuant to
a Change of Control or an Asset Sale Trigger Date, as the case may be, the
length of time the offer shall remain open and the maximum principal amount of
notes that will be accepted for payment pursuant to such offer, (b) the purchase
price, the amount of accrued and unpaid interest as of the purchase date, and
the purchase date (which shall be no earlier than 30 days and no later than 40
days from the date such notice is mailed (the "Purchase Date")), and (c) such
other information required by the indenture and applicable law and regulations.
On the Purchase Date for any offer, we will, to the extent required by
the indenture and such offer, (1) in the case of an offer resulting from a
change of control, accept for payment all notes or portions thereof tendered
pursuant to such offer and, in the case of an offer resulting from an Asset Sale
Trigger Date, accept for payment the maximum principal amount of notes or
portions thereof tendered pursuant to such offer that can be purchased out of
Excess Proceeds, (2) deposit with the Paying Agent the aggregate purchase price
of all notes or portions thereof accepted for payment and any accrued and unpaid
interest on such notes as of the Purchase Date, and (3) deliver or cause to be
delivered to the Trustee all notes tendered pursuant to the offer. The Paying
Agent shall promptly mail to each holder of notes or portions thereof accepted
for payment an amount equal to the purchase price for such notes plus any
accrued and unpaid interest thereon, and the Trustee shall promptly authenticate
and mail (or cause to be transferred by book-entry) to such holder of notes
accepted for payment in part a new note equal in principal amount to any
unpurchased portion of the notes and any note not accepted for payment in whole
or in part shall be promptly returned to the holder thereof. We will publicly
announce the results of the offer on or as soon as practicable after the
Purchase Date.
GFSI will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with an offer
required to be made by us to repurchase the notes as a result of a Change of
Control or an Asset Sale Trigger Date. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the indenture, we
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached our obligations under the indenture by virtue
thereof.
Selection and Notice. In the event of a redemption or purchase of less
than all of the notes, the notes to be redeemed or purchased will be chosen by
the Trustee pro rata, by lot or by any other method that the Trustee considers
fair and appropriate and, if the notes are listed on any securities exchange, by
a method that complies with the requirements of such exchange; provided that, if
less than all of a holder's notes are to be redeemed or accepted for payment,
only principal amounts of $1,000 or multiples thereof may be selected for
redemption or accepted for payment. On and after any redemption or purchase
date, interest shall cease to accrue on the notes or portions thereof called for
59
redemption or accepted for payment. Notice of any redemption or offer to
purchase will be mailed at least 30 days but not more than 60 days before the
redemption or purchase date to each holder of notes to be redeemed or purchased
at such holder's registered address.
Certain Covenants
The indenture contains, among other things, the following material
covenants:
Limitation on Restricted Payments. The indenture provides that GFSI
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on account
of our or any Restricted Subsidiary's Equity Interests (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
GFSI and dividends or distributions payable by a Restricted Subsidiary pro rata
to its shareholders; (ii) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of GFSI or any of its Restricted Subsidiaries, other
than any such Equity Interests purchased from us or any Restricted Subsidiary
for fair market value determined by the Board of Directors in good faith; (iii)
make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness, except a
payment of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), if, at the
time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving
effect thereto on a Pro Forma Basis, GFSI shall not be able to issue $1.00 of
additional Indebtedness pursuant to the first sentence of the "Limitation on
Incurrence of Indebtedness" covenant; or
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made after the 1997 Notes Issue Date, without
duplication, exceeds the sum of: (1) 50% of the aggregate Consolidated Net
Income (including, for this purpose, gains from Asset Sales and, to the extent
not included in Consolidated Net Income, any gain from a sale or disposition
of a Restricted Investment) of GFSI (or, in case such aggregate is a loss,
100% of such loss) for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing immediately after the 1997
Notes Issue Date and ended as of our most recently ended fiscal quarter at the
time of such Restricted Payment; plus (2) 100% of the aggregate net cash
proceeds and the fair market value of any property or securities, as
determined by the Board of Directors in good faith, received by us from the
issue or sale of Equity Interests of GFSI or GFSI Holdings (to the extent
contributed to GFSI) subsequent to the 1997 Notes Issue Date (other than (x)
Equity Interests issued or sold to a Restricted Subsidiary and (y)
Disqualified Stock); plus (3) $5 million; plus (4) the amount by which the
principal amount of and any accrued interest on either Senior Indebtedness of
GFSI or any Restricted Subsidiary is reduced on our consolidated balance sheet
upon the conversion or exchange (other than by a Restricted Subsidiary)
subsequent to the 1997 Notes Issue Date of any Indebtedness of GFSI or any
Restricted Subsidiary (not held by GFSI or any Restricted Subsidiary) for
Equity Interests (other than Disqualified Stock) of GFSI (less the amount of
any cash, or the fair market value of any other property or securities (as
determined by the Board of Directors in good faith), distributed by us or any
Restricted Subsidiary (to persons other than GFSI or any other Restricted
Subsidiary) upon such conversion or exchange); plus (5) if any Non-Restricted
Subsidiary is redesignated as a Restricted Subsidiary, the value of the
Restricted Payment that would result if such Subsidiary were redesignated as a
Non-Restricted Subsidiary at such time, as determined in accordance with the
second sentence of the "Designation of Restricted and Non-Restricted
Subsidiaries" covenant; provided, however, that for purposes of this clause
(5), the value of any redesignated Non-Restricted Subsidiary shall be reduced
by the amount that any such redesignation replenishes or increases the amount
60
of Restricted Investments permitted to be made pursuant to clause (ii) of the
next sentence.
Notwithstanding the foregoing, the indenture shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would comply
with all covenants of such indenture (including, but not limited to, the
"Limitation on Restricted Payments" covenant);
(ii) making Restricted Investments at any time, and from time to
time, in an aggregate outstanding amount of $10 million after the 1997 Notes
Issue Date (it being understood that if any Restricted Investment after the
1997 Notes Issue Date pursuant to this clause (ii) is sold, transferred or
otherwise conveyed to any person other than GFSI or a Restricted Subsidiary,
the portion of the net cash proceeds or fair market value of securities or
properties paid or transferred to us and our Restricted Subsidiaries in
connection with such sale, transfer or conveyance that relates or corresponds
to the repayment or return of the original cost of such a Restricted
Investment will replenish or increase the amount of Restricted Investments
permitted to be made pursuant to this clause (ii), so that up to $10 million
of Restricted Investments may be outstanding under this clause (ii) at any
given time); provided that, without otherwise limiting this clause (ii), any
Restricted Investment in a Subsidiary made pursuant to this clause (ii) is
made for fair market value (as determined by the Board of Directors in good
faith);
(iii) the repurchase, redemption, retirement or acquisition of Equity
Interests of GFSI or GFSI Holdings from the executives, management, employees
or consultants of GFSI or its Restricted Subsidiaries in an aggregate amount
not to exceed $7.5 million;
(iv) any loans, advances, distributions or payments from GFSI to its
Restricted Subsidiaries, or any loans, advances, distributions or payments by
a Restricted Subsidiary to GFSI or to another Restricted Subsidiary, in each
case pursuant to intercompany Indebtedness, intercompany management agreements
and other intercompany agreements and obligations;
(v) the purchase, redemption, retirement or other acquisition
of the notes pursuant to the "--Change of Control" or "--Asset Sales"
provisions of the indenture;
(vi) the payment of (a) consulting, financial and investment banking
fees under the TJC Agreement, provided, that no Default or Event of Default
shall have occurred and be continuing or shall occur as a consequence thereof,
and our Obligations to pay such fees under the TJC Agreement shall be
subordinated expressly to our Obligations in respect of the notes, and (b)
indemnities, expenses and other amounts under the TJC Agreement;
(vii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of GFSI or any Restricted Subsidiary in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of GFSI) of other Equity Interests of GFSI (other than any
Disqualified Stock) or the redemption, repurchase, retirement or other
acquisition of any Equity Interests of any Restricted Subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale (other than
to us or one of our Subsidiaries) of other Equity Interests of such Restricted
Subsidiary; provided that, in each case, any net cash proceeds that are
utilized for any such redemption, repurchase, retirement or other acquisition,
and any Net Income resulting therefrom, shall be excluded from clauses (c)(1)
and (c)(2) of the preceding paragraph;
(viii) the defeasance, redemption or repurchase of Subordinated
Indebtedness of GFSI or any Restricted Subsidiary with the net cash proceeds
61
from an issuance of permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of GFSI) of Equity Interests of
GFSI (other than Disqualified Stock) or the defeasance, redemption or
repurchase of Subordinated Indebtedness of any Restricted Subsidiary with the
net cash proceeds from the substantially concurrent sale (other than to a
Subsidiary of GFSI) of Equity Interests of such Restricted Subsidiary (other
than Disqualified Stock); provided that, in each case, any net cash proceeds
that are utilized for any such defeasance, redemption or repurchase, and any
Net Income resulting therefrom, shall be excluded from clauses (c)(1) and
(c)(2) of the preceding paragraph;
(ix) Restricted Investments made or received in connection with the
sale, transfer or disposition of any business, properties or assets of GFSI or
any Restricted Subsidiary, provided, that if such sale, transfer or
disposition constitutes an Asset Sale, we comply with the "Asset Sale"
provisions of the indenture;
(x) any Restricted Investment constituting securities or instruments
of a person issued in exchange for trade or other claims against such person
in connection with a financial reorganization or restructuring of such person;
(xi) payments to GFSI Holdings in an amount sufficient to permit
GFSI Holdings to make required payments on the Holdings Subordinated Notes;
(xii) payments in connection with the Transactions as described under
"The Transactions" and "Use of Proceeds";
(xiii) payments of fees, expenses and indemnities to the directors of
GFSI Holdings, GFSI and its restricted subsidiaries;
(xiv) payments to GFSI Holdings in respect of accounting, legal or
other professional or administrative expenses or reimbursements or franchise
or similar taxes and governmental charges incurred by it relating to the
business, operations or finances of GFSI and its Restricted Subsidiaries and
in respect of fees and related expenses associated with any registration
statements relating to the notes filed with the Commission and subsequent
ongoing public reporting requirements with respect to the notes;
(xv) so long as GFSI Holdings files consolidated income tax returns
that include GFSI, payments to GFSI Holdings pursuant to the Tax Sharing
Agreement;
(xvi) payments, if any, relating to any purchase price adjustment
pursuant to the terms of the Acquisition Agreement;
(xvii) payments in respect of the Wolff Noncompetition Agreement;
and
(xviii) shareholder loans in an aggregate principal amount not to
exceed $1 million.
In addition, GFSI Holdings has agreed, for the benefit of the holders
of the Senior Indebtedness under the Existing Credit Agreement and the holders
of the notes, under certain circumstances to repay to GFSI amounts received
from us in violation of the restricted payments covenants set forth in the
Existing Credit Agreement and the indenture.
Limitation on Incurrence of Indebtedness. The indenture provides that
we will not, and will not permit any Restricted Subsidiary to, issue any
Indebtedness (other than the Indebtedness represented by the notes) unless our
62
Cash Flow Coverage Ratio for our four full fiscal quarters next preceding the
date such additional Indebtedness is issued would have been at least 2 to 1
determined on a Pro Forma Basis (including, for this purpose, any other
Indebtedness incurred since the end of the applicable four quarter period) as
if such additional Indebtedness and any other Indebtedness issued since the
end of such four quarter period had been issued at the beginning of such four
quarter period.
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of GFSI and/or its Restricted Subsidiaries
under the Existing Credit Agreement in an aggregate principal amount
outstanding on such date of issuance not to exceed the greater of (A) $115
million and (B) the sum of: (1) 85% of the book value of accounts receivable
of GFSI and its Restricted Subsidiaries on a consolidated basis and (2) 65% of
the book value of the inventories of GFSI and its Restricted Subsidiaries;
provided that the aggregate principal amount of Indebtedness outstanding under
this clause (i) together with the aggregate principal amount of Indebtedness
outstanding under clause (iii) below shall not exceed $140 million at any one
time outstanding (less the amount of any permanent reductions as set forth
under "Asset Sales");
(ii) Indebtedness of GFSI and its Restricted Subsidiaries in
connection with capital leases, sale and leaseback transactions, purchase
money obligations, capital expenditures or similar financing transactions
relating to: (A) their properties, assets and rights as of the 1997 Notes
Issue Date not to exceed $7.5 million in aggregate principal amount at any one
time outstanding, or (B) their properties, assets and rights acquired after
the 1997 Notes Issue Date, provided that the aggregate principal amount of
such Indebtedness under this clause (ii)(B) does not exceed 100% of the cost
of such properties, assets and rights;
(iii) additional Indebtedness of GFSI and its Restricted Subsidiaries
in an aggregate principal amount up to $25 million (all or any portion of
which may be issued as additional Indebtedness under the Existing Credit
Agreement) provided that the aggregate principal amount of Indebtedness
outstanding under this clause (iii) together with the aggregate principal
amount of Indebtedness outstanding under clause (i) above shall not exceed
$140 million at any one time outstanding (less the amount of any permanent
reductions as set forth under "Asset Sales"); and
(iv) Other Permitted Indebtedness.
No Senior Subordinated Debt. The indenture will provide that (i) GFSI
will not incur, create, issue, assume, guarantee or otherwise become liable for
any Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment to the notes, and
(ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to any Senior Indebtedness and senior in any respect in right of payment
to the Note Guarantees.
Limitation on Liens. The indenture will provide that GFSI shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien, other than
Permitted Liens, upon any property or asset now owned or hereafter acquired by
them, or any income or profits therefrom, or assign or convey any right to
receive income therefrom unless all payments due under the indenture and the
notes are secured on an equal and ratable basis with the obligations so secured
until such time as such obligations are no longer secured by a Lien.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The indenture will provide that GFSI will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective, any encumbrance or
63
restriction on the ability of any Restricted Subsidiary to: (a) pay dividends or
make any other distributions on its Capital Stock or any other interest or
participation in, or measured by, its profits, owned by us or any Restricted
Subsidiary, or pay any Indebtedness owed to, GFSI or any Restricted Subsidiary,
(b) make loans or advances to GFSI, or (c) transfer any of its properties or
assets to GFSI, except for such encumbrances or restrictions existing under or
by reason of:
(i) applicable law,
(ii) Indebtedness permitted (A) under the first sentence of the
first paragraph of the "Limitation on Incurrence of Indebtedness" covenant and
(B) under clauses (i), (ii) and (iii) of the second paragraph of the
"Limitation on Incurrence of Indebtedness" covenant and clauses (iv), (vii)
and (x) of the definition of "Other Permitted Indebtedness," provided that
such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more restrictive
with respect to the items set forth in clauses (a), (b) and (c) of the first
paragraph of this covenant than those contained in the Existing Credit
Agreement as in effect on the date of the indenture,
(iii) customary provisions restricting subletting or assignment of
any lease or license of GFSI or any Restricted Subsidiary,
(iv) customary provisions of any franchise, distribution or similar
agreement,
(v) any instrument governing Indebtedness or preferred stock or
any other encumbrance or restriction of a person acquired by GFSI or any
Restricted Subsidiary at the time of such acquisition, which encumbrance or
restriction is not applicable to any person, or the properties or assets of
any person, other than the person, or the property or assets of the person, so
acquired,
(vi) Indebtedness or other agreements existing on the 1997 Notes
Issue Date,
(vii) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant, provided that the restrictions contained
in the agreements governing such Refinancing Indebtedness are no more
restrictive in any material respect with regard to the interests of the
holders of the notes than those contained in the agreements governing the
Indebtedness being refinanced,
(viii) any restrictions, with respect to a Restricted Subsidiary,
imposed pursuant to an agreement that has been entered into for the sale or
disposition of the stock, business, assets or properties of such Restricted
Subsidiary,
(ix) the terms of purchase money or capital lease obligations,
but only to the extent such purchase money obligations restrict or prohibit
the transfer of the property so acquired, or
(x) any instrument governing the sale of assets of GFSI or any
Restricted Subsidiary, which encumbrance or restriction applies solely to the
assets of GFSI or such Restricted subsidiary being sold in such transaction.
Nothing contained in this covenant shall prevent us from entering into
any agreement or instrument providing for the incurrence of Permitted Liens or
restricting the sale or other disposition of property or assets of GFSI or any
of its Restricted Subsidiaries that are subject to Permitted Liens.
Limitation on Transactions With Affiliates. The indenture will provide
that neither GFSI nor any of its Restricted Subsidiaries may make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or dispose of any properties or assets to, or for the benefit
of, or purchase or lease any property or assets from, or enter into any or amend
any contract, agreement or understanding with, or for the benefit of, an
64
Affiliate (each such transaction or series of related transactions that are
part of a common plan are referred to as an "Affiliate Transaction"), except
in good faith and on terms that are no less favorable to GFSI or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction on an arm's length basis from an unrelated person.
The indenture will further provide that GFSI will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by GFSI and its Restricted
Subsidiaries in excess of $5 million (including cash and non-cash payments and
benefits valued at their fair market value by our Board of Directors in good
faith) unless we deliver to the Trustee:
(i) a resolution of our Board of Directors stating that the Board of
Directors (including a majority of the disinterested directors, if any) has,
in good faith, determined that such Affiliate Transaction complies with the
provisions of the indenture, and
(ii) (A) with respect to any Affiliate Transaction involving the
incurrence of Indebtedness, a written opinion of a nationally recognized
investment banking or accounting firm experienced in the review of similar
types of transactions, (B) with respect to any Affiliate Transaction involving
the transfer of real property, fixed assets or equipment, either directly or
by a transfer of 50% or more of the Capital Stock of a Restricted Subsidiary
which holds any such real property, fixed assets or equipment, a written
appraisal from a nationally recognized appraiser, experienced in the review of
similar types of transactions or (C) with respect to any Affiliate Transaction
not otherwise described in (A) and (B) above, a written certification from a
nationally recognized professional or firm experienced in evaluating similar
types of transactions, in each case, stating that the terms of such
transaction are fair to GFSI or such Restricted Subsidiary, as the case may
be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant
will not apply to:
(1) transactions between GFSI and any Restricted Subsidiary or
between Restricted Subsidiaries;
(2) payments under the TJC Agreement;
(3) any other payments or transactions permitted pursuant to the
"Limitation on Restricted Payments" covenant;
(4) (A) payments and transactions under Incentive Arrangements and
(B) reasonable compensation paid to officers, employees or consultants of GFSI
or any Restricted Subsidiary as determined in good faith by GFSI's Board of
Directors or executives;
(5) payments and transactions in connection with the Transactions and
the application of the net proceeds therefrom as described under "The
Transactions" and "Use of Proceeds;" or
(6) the sale, transfer and/or termination of the officers' life
insurance policies in effect on the 1997 Notes Issue Date.
In addition, notwithstanding the foregoing, any Affiliate Transaction
between GFSI and Affiliated Embroiderers relating to the provision of
embroidery services in the ordinary course of business shall not be subject to
the provisions of clause (ii) above.
Subsidiary Guarantees. The indenture will provide that if GFSI or any
of its Restricted Subsidiaries shall acquire or create another Restricted
65
Subsidiary after the date of the indenture, then such newly acquired or created
Subsidiary shall execute a Subsidiary Guarantee and deliver an opinion of
counsel in accordance with the terms of the indenture.
Designation of Restricted and Non-Restricted Subsidiaries. The
indenture will provide that, subject to the exceptions described below, from and
after the date of original issuance of the notes, GFSI may designate any
existing or newly formed or acquired Subsidiary as a Non-Restricted Subsidiary;
provided that (i) either (A) the Subsidiary to be so designated has total assets
of $1 million or less or (B) immediately before and after giving effect to such
designation on a Pro Forma Basis: (1) GFSI could incur $1.00 of additional
Indebtedness pursuant to the first sentence of the "Limitation on Incurrence of
Indebtedness" covenant determined on a Pro Forma Basis; and (2) no Default or
Event of Default shall have occurred and be continuing, and (ii) all
transactions between the Subsidiary to be so designated and its Affiliates
remaining in effect are permitted pursuant to the "Limitation on Transactions
with Affiliates" covenant. Any Investment made by GFSI or any Restricted
Subsidiary which is redesignated from a Restricted Subsidiary to a
Non-Restricted Subsidiary shall be considered a Restricted Payment (to the
extent not previously included as a Restricted Payment) made on the day such
Subsidiary is designated a Non-Restricted Subsidiary in the amount of the
greater of (i) the fair market value (as determined by our Board of Directors in
good faith) of the Equity Interests of such Subsidiary held by GFSI and its
Restricted Subsidiaries on such date, and (ii) the amount of the Investments
determined in accordance with GAAP made by GFSI and any of its Restricted
Subsidiaries in such Subsidiary.
A Non-Restricted Subsidiary may be redesignated as a Restricted
Subsidiary. We may not, and may not permit any Restricted Subsidiary to, take
any action or enter into any transaction or series of transactions that would
result in a Person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise, but
not including through the creation of a new Restricted Subsidiary) unless,
immediately before and after giving effect to such action, transaction or series
of transactions on a Pro Forma Basis, (a) we could incur at least $1.00 of
additional Indebtedness pursuant to the first sentence of "Limitation on
Incurrence of Indebtedness" and (b) no Default or Event of Default shall have
occurred and be continuing.
The designation of a Subsidiary as a Restricted Subsidiary or the
removal of such designation is required to be made by a resolution adopted by a
majority of our Board of Directors stating that the Board of Directors has made
such designation in accordance with the indenture, and GFSI is required to
deliver to the Trustee such resolution together with an Officers' Certificate
certifying that the designation complies with the indenture. Such designation
will be effective as of the date specified in the applicable resolution, which
may not be before the date the applicable Officers' Certificate is delivered to
the Trustee.
Merger or Consolidation
The indenture provides that GFSI shall not consolidate or merge with or
into, or sell, lease, convey or otherwise dispose of all or substantially all of
its assets to, any person (any such consolidation, merger or sale being a
"Disposition") unless: (a) the successor corporation of such Disposition or the
corporation to which such Disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (b) the successor corporation of such Disposition or
the corporation to which such Disposition shall have been made expressly assumes
the Obligations of GFSI, pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee, under the indenture and the notes; (c)
immediately after such Disposition, no Default or Event of Default shall exist;
and (d) the corporation formed by or surviving any such Disposition, or the
corporation to which such Disposition shall have been made, shall (i) have
Consolidated Net Worth (immediately after the Disposition but prior to giving
any pro forma effect to purchase accounting adjustments or Restructuring Charges
resulting from the Disposition) equal to or greater than the Consolidated Net
Worth of GFSI immediately preceding the Disposition, (ii) be permitted
immediately after the Disposition by the terms of the indenture to issue at
66
least $1.00 of additional Indebtedness determined on a Pro Forma Basis, and
(iii) have a Cash Flow Coverage Ratio for the four fiscal quarters immediately
preceding the applicable Disposition, determined on a Pro Forma Basis, equal to
or greater than the actual Cash Flow Coverage Ratio of GFSI for such four
quarter period. The limitations in the indenture on our ability to make a
Disposition described in this paragraph do not restrict our ability to sell less
than all or substantially all of GFSI's assets, such sales being governed by the
"Asset Sales" provisions of the indenture as described herein.
Prior to the consummation of any proposed Disposition, GFSI shall
deliver to the Trustee an Officers' Certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the indenture.
Provision of Financial Information to Holders of Notes
So long as the notes are outstanding, whether or not GFSI is subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, GFSI and
the Guarantors shall file with the Commission (unless the Commission will not
accept such filing) the annual reports, quarterly reports and other documents
relating to GFSI and its Restricted Subsidiaries that we would have been
required to file with the Commission pursuant to Section 13 or 15(d) if GFSI
were subject to such reporting requirements. GFSI and the Guarantors will also
provide to all holders of notes and file with the Trustee copies of such annual
reports, quarterly reports and other documents required to be furnished to
stockholders generally under the Exchange Act. In addition, GFSI and the
Guarantors have agreed that, for so long as any notes remain outstanding, they
will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The indenture provides that an Event of Default is: (a) a default for
30 days in payment of interest with respect to the notes (whether or not
prohibited by the subordination provisions of the indenture); (b) a default in
payment when due of principal or premium, if any, with respect to the notes
(whether or not prohibited by the subordination provisions of the indenture);
(c) the failure of GFSI to comply with any of its other agreements or covenants
in, or provisions of, such indenture or the notes outstanding under such
indenture and the Default continues for the period, if applicable, and after the
notice specified in the next paragraph; (d) a default by GFSI or any Restricted
Subsidiary under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by GFSI or any Restricted Subsidiary (or the payment of which is
guaranteed by GFSI or any Restricted Subsidiary), whether such Indebtedness or
guarantee now exists or shall be created hereafter, if (1) either (A) such
default results from the failure to pay principal of or interest on any such
Indebtedness (after giving effect to any extensions thereof) or (B) as a result
of such default the maturity of such Indebtedness has been accelerated prior to
its expressed maturity, and (2) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default for
failure to pay principal or interest thereon, or, because of the acceleration of
the maturity thereof, aggregates in excess of $10 million; (e) a failure by GFSI
or any Restricted Subsidiary to pay final judgments (not covered by insurance)
aggregating in excess of $5 million which judgments a court of competent
jurisdiction does not rescind, annul or stay within 45 days after their entry;
(f) certain events of bankruptcy or insolvency involving GFSI or any Significant
Subsidiary and (g) except as permitted by the indenture, any Note Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Note Guarantee. In the case of any Event of Default
pursuant to clause (a) or (b) above occurring by reason of any willful action
67
(or inactions) taken (or not taken) by or on behalf of GFSI with the intention
of avoiding payment of the premium that we would have to pay pursuant to a
redemption of notes as described under "--Redemption of Notes--Optional
Redemption," an equivalent premium shall also become and be immediately, due and
payable to the extent permitted by law.
A Default or Event of Default under clause (c) (other than an Event of
Default arising under the "Merger or Consolidation" covenant which shall be an
Event of Default with the notice but without the passage of time specified in
this paragraph) is not an Event of Default under the indenture until the Trustee
or the holders of at least 25% in principal amount of the notes then outstanding
notify GFSI of the Default and GFSI does not cure the Default within 30 days
after receipt of the notice. A Default or Event of Default under clause (f) of
the preceding paragraph will result in the notes automatically becoming due and
payable without further action or notice.
Upon the occurrence of an Event of Default, the Trustee or the holders
of at least 25% in principal amount of the then outstanding notes may declare
all notes to be due and payable by notice in writing to GFSI and the Trustee
specifying the respective Event of Default and that it is a "notice of
acceleration" (the "Acceleration Notice") and the same shall become immediately
due and payable or, if there are any amounts outstanding under the Existing
Credit Agreement, shall become immediately due and payable upon the first to
occur of acceleration of the Existing Credit Agreement or five business days
after receipt by GFSI of such Acceleration Notice, but only if such Event of
Default is then continuing. The holders of a majority in principal amount of the
notes then outstanding under the indenture, by notice to the Trustee, may
rescind any declaration of acceleration of such notes and its consequences (if
the rescission would not conflict with any judgment or decree) if all existing
Events of Default (other than the nonpayment of principal of or interest on such
notes that shall have become due by such declaration) shall have been cured or
waived. Subject to certain limitations, holders of a majority in principal
amount of the notes then outstanding under the indenture may direct the Trustee
in its exercise of any trust or power. Holders of the notes may not enforce the
indenture, except as provided therein. The Trustee may withhold from holders of
notes notice of any continuing Default or Event of Default (except a Default or
an Event of Default in payment of principal, premium, if any, or interest) if
the Trustee determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes
then outstanding may on behalf of all holders of such notes waive any existing
Default or Event of Default under the indenture and its consequences, except a
continuing Default in the payment of the principal of, or premium, if any,
interest, on such notes, which may only be waived with the consent of each
holder of the notes affected.
Upon any payment or distribution of assets of GFSI and its subsidiaries
in a total or partial liquidation, dissolution, reorganization or similar
proceeding, including a Default under clause (f) above involving certain events
of bankruptcy or insolvency of GFSI or a Significant Subsidiary, there may not
be sufficient assets remaining to satisfy the claims of any holders of notes
given the subordination of the notes to the obligations of GFSI under Senior
Indebtedness and to the obligations of our Subsidiaries.
We are required to deliver to the Trustee annually a statement
regarding compliance with the indenture, and upon an officer of GFSI becoming
aware of any Default or Event of Default, a statement specifying such Default or
Event of Default.
No Personal Liability of Officers, Directors, Employees, Stockholders and
Subsidiaries
No officer, employee, director, stockholder or Subsidiary of GFSI shall
have any liability for any Obligations of GFSI under the notes or the indenture,
68
or for any claim based on, in respect of, or by reason of, such Obligations or
the creation of any such Obligation, except, in the case of a Subsidiary, for an
express guarantee or an express creation of any Lien by such Subsidiary of
GFSI's Obligations under the notes issued in accordance with the indenture. Each
holder of the notes by accepting a note waives and releases all such liability,
and such waiver and release is part of the consideration for issuance of the
notes. The foregoing waiver may not be effective to waive liabilities under the
Federal securities laws and the Commission is of the view that such a waiver is
against public policy.
Satisfaction and Discharge of the Indenture
GFSI at any time may terminate all of its and the Guarantors'
obligations under the notes, the Note Guarantees and the indenture ("legal
defeasance option"), except for certain obligations (including those with
respect to the defeasance trust (as defined herein) and obligations to register
the transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes and to maintain a registrar and paying agent in respect of the
notes). We at any time may terminate (1) our obligations under the "Change of
Control" and "Asset Sales" provisions described herein and the covenants
described under "Certain Covenants" and certain other covenants in the
indenture, (2) the operation of clauses (c), (d) and (e) contained in the first
paragraph of the "Events of Default and Remedies" provisions described herein
and (3) the limitations contained in clauses (c) and (d) under the "Merger or
Consolidation" provisions described herein (collectively, a "covenant defeasance
option").
GFSI may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If GFSI exercises its legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default with respect thereto. If GFSI exercises its covenant defeasance
option, payment of the notes shall not be accelerated because of an Event of
Default specified in clauses (c), (d) or (e) in the first paragraph under the
"Events of Default and Remedies" provisions described herein or because of our
failure to comply with clauses (c) and (d) under the "Merger or Consolidation"
provisions described herein.
To exercise either defeasance option with respect to the notes
outstanding, we must irrevocably deposit in trust (the "defeasance trust") with
the Trustee money or U.S. Government Obligations (as defined in the indenture)
for the payment of principal of and premium and unpaid interest, on the notes
then outstanding to redemption or maturity, as the case may be, and must comply
with certain other conditions, including the passage of 91 days and the delivery
to the Trustee of an opinion of counsel to the effect that holders of such notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit and defeasance and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred (and, in the case
of legal defeasance only, such opinion of counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable federal income tax
law).
Transfer and Exchange
Holders of notes may transfer or exchange their notes in accordance
with the indenture, but the Registrar may require a holder, among other things,
to furnish appropriate endorsements and transfer documents, and to pay any taxes
and fees required by law or permitted by the indenture, in connection with any
such transfer or exchange. Neither GFSI nor the Registrar is required to issue,
register the transfer of, or exchange (i) any note selected for redemption or
tendered pursuant to an offer, or (ii) any note during the period between (a)
the date the Trustee receives notice of a redemption from GFSI and the date the
notes to be redeemed are selected by the Trustee or (b) a record date and the
next succeeding interest payment date. The registered holder of a note will be
treated as its owner for all purposes.
69
Amendment, Supplement and Waiver
Subject to certain exceptions, the indenture may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the notes then outstanding under the indenture, and any existing
Default or Event of Default (other than a payment default) or compliance with
any provision may be waived with the consent of the holders of a majority in
principal amount of the notes then outstanding under the indenture. Without the
consent of any holder of notes, GFSI and the Trustee may amend or supplement the
indenture or the notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated notes in addition to or in place of certificated
notes, to provide for the assumption by a successor corporation of GFSI's
obligations to the holders of notes in the case of a Disposition, to comply with
the Trust Indenture Act, or to make any change that does not adversely affect
the legal rights of any holder of notes.
Without the consent of each holder of notes affected, GFSI may not (i)
reduce the principal amount of notes whose holders must consent to an amendment
to the indenture or a waiver under the indenture; (ii) reduce the rate of or
change the interest payment time of the notes, or alter the redemption
provisions with respect thereto (other than the provisions relating to the
covenants described above under the caption "--Mandatory Offers to Purchase
Notes-- Change of Control" and "--Asset Sales") or the price at which GFSI is
required to offer to purchase the notes; (iii) reduce the principal of or change
the fixed maturity of the notes; (iv) make the notes payable in money other than
stated in the notes; (v) make any change in the provisions concerning waiver of
Defaults or Events of Default by holders of the notes, or rights of holders of
the notes to receive payment of principal or interest; or (vi) waive any default
in the payment of principal of or premium, or unpaid interest on the notes. In
addition, any amendment to the provisions of Article 10 of the indenture (which
relate to subordination) will require the consent of the holders of at least 75%
in aggregate principal amount of the notes then outstanding if such amendment
would adversely affect the rights of holders of notes.
Concerning the Trustee
The indenture will contain certain limitations on the rights of the
Trustee, if it becomes a creditor of GFSI, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Trust Indenture Act) it must eliminate such conflict or resign.
The holders of a majority in principal amount of the notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The indenture provides that if an Event of
Default occurs (and has not been cured), the Trustee will be required, in the
exercise of its power, to use the degree of care and skill of a prudent person
in similar circumstances in the conduct of its own affairs. Subject to the
provisions of the indenture, the Trustee will be under no obligation to exercise
any of its rights or powers under its indenture at the request of any of the
holders of the notes, unless such holders shall have offered to the Trustee
security and indemnity satisfactory to it.
Book-Entry, Delivery and Form
Except as set forth in the next paragraph, the new notes to be
exchanged as set forth herein will initially be issued in the form of one Global
New Note (the "Global New Note"). The Global New Note will be deposited on the
expiration date with, or on behalf of, the Depositary and registered in the name
of Cede & Co., as nominee of the Depositary (such nominee being referred to
herein as the "Global New Note Holder").
70
New notes that are issued as described below under "--Certificated New
Notes" will be issued in the form of registered definitive certificates (the
"Certificated New Notes"). Such Certificated New Notes may, unless the Global
New Note has previously been exchanged for Certificated New Notes, be exchanged
for an interest in the Global New Note representing the principal amount of new
notes being transferred.
The Depositary is a limited-purpose trust company that was created to
hold securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchasers), banks and trust companies, clearing corporations and
certain other organizations. Access to the Depositary's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
So long as the Global New Note Holder is the registered owner of any
new notes, the Global New Note Holder will be considered the sole holder under
the indenture of any new notes evidenced by the Global New Note. Beneficial
owners of new notes evidenced by the Global New Note will not be considered the
owners or holders thereof under the indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither GFSI nor the Trustee will have any responsibility or
liability for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the new
notes.
Payments in respect of the principal of, premium, if any, and interest
on new notes registered in the name of the Global New Note Holder on the
applicable record date will be payable by the Trustee to or at the direction of
the Global New Note Holder in its capacity as the registered holder under the
indenture. Under the terms of the indenture, GFSI and the Trustee may treat the
persons in whose names new notes, including the Global New Note, are registered
as the owners thereof for the purpose of receiving such payments. Consequently,
neither GFSI nor the Trustee has or will have any responsibility or liability
for the payment of such amounts to beneficial owners of new notes. We believe,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of new notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
71
Certificated New Notes
Subject to certain conditions, any person having a beneficial interest
in the Global New Note may, upon request to the Trustee, exchange such
beneficial interest for new notes in the form of Certificated New Notes. Upon
any such issuance, the Trustee is required to register such Certificated New
Notes in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof). In addition, if (i) GFSI notifies the
Trustee in writing that the Depositary is no longer willing or able to act as a
depositary and GFSI is unable to locate a qualified successor within 90 days or
(ii) GFSI, at its option, notifies the Trustee in writing that it elects to
cause the issuance of new notes in the form of Certificated New Notes under the
indenture, then, upon surrender by the Global New Note Holder of its Global New
Note, new note in such form will be issued to each person that the Global New
Note Holder and the Depositary identify as being the beneficial owner of the
related new notes.
Neither GFSI nor the Trustee will be liable for any delay by the Global
New Note Holder or the Depositary in identifying the beneficial owners of new
notes and GFSI and the Trustee may conclusively rely on, and will protected in
relying on, instructions from the Global New Note Holder or the Depositary for
all purposes.
Same-Day Settlement and Payment
The indenture requires that payments in respect of the new notes
represented by the Global New Note (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global New Note Holder. With respect to Certificated
New Notes, GFSI will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. Secondary trading in long-term
notes and debentures of corporate issuers is generally settled in clearinghouse
or next-day funds. In contrast, new notes represented by the Global New Note are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such new notes will, therefore, be required by the
Depositary to be settled in immediately available funds. We expect that
secondary trading in the Certificated New Notes will also be settled in
immediately available funds.
Certain Definitions
Set forth below are certain of the defined terms used in the indenture.
Reference is made to the Indenture for the definition of all other terms used in
the Indenture.
"Acquisition Agreement" means the agreement, dated as of January 24,
1997, among Holdings, the Company and the shareholders party thereto, relating
to the purchase and sale of the stock of Winning Ways, Inc.
"Affiliate" means any of the following: (i) any Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company, (ii) any spouse, immediate family member or other
relative who has the same principal residence as any Person described in clause
(i) above, (iii) any trust in which any such Persons described in clause (i) or
(ii) above has a beneficial interest and (iv) any corporation or other
organization of which any such Persons described above collectively own 50% or
more of the equity of such entity, provided, however that MCIT PLC shall not be
deemed an Affiliate of the Company.
72
"Affiliated Embroiderers" means the affiliated entities that provide
embroidery services for the Company as of the 1997 Notes Issue Date.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means the sale, lease, conveyance or other disposition by
the Company or a Restricted Subsidiary of assets or property whether owned on
the date of original issuance of the Notes or thereafter acquired, in a single
transaction or in a series of related transactions; provided that Asset Sales
will not include such sales, leases, conveyances or dispositions in connection
with (i) the sale or disposition of any Restricted Investment, (ii) any Equity
Offering by the Company, (iii) the surrender or waiver of contract rights or the
settlement, release or surrender of contract, tort or other claims of any kind,
(iv) the sale or lease of inventory, equipment, accounts receivable or other
assets in the ordinary course of business, (v) a sale-leaseback of assets within
one year following the acquisition of such assets, (vi) the grant of any license
of patents, trademarks, registration therefor and other similar intellectual
property, (vii) a transfer of assets by the Company or a Restricted Subsidiary
to the Company or a Restricted Subsidiary, (viii) the designation of a
Restricted Subsidiary as a Non-Restricted Subsidiary pursuant to the
"Designation of Restricted and Non-Restricted Subsidiaries" covenant, (ix) the
sale, lease, conveyance or other disposition of all or substantially all of the
assets of the Company as permitted under the "Merger or Consolidation" covenant,
(x) the sale or disposition of obsolete equipment or other obsolete assets, (xi)
Restricted Payments permitted by the "Limitation on Restricted Payments"
covenant, (xii) the exchange of assets for other non-cash assets that (a) are
useful in the business of the Company and its Restricted Subsidiaries and (b)
have a fair market value at least equal to the fair market value of the assets
being exchanged (as determined by the Board of Directors in good faith), (xiii)
the sale, transfer and/or termination of the officers' life insurance policies
in effect on the 1997 Notes Issue Date.
"Capital Stock" means any and all shares, interests, participations or
other equivalents (however designated) of corporate stock, including any
preferred stock.
"Cash Flow" means, for any given period and Person, the sum of, without
duplication, Consolidated Net Income, plus (a) any provision for taxes based on
income or profits to the extent such income or profits were included in
computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to
the extent deducted in computing Consolidated Net Income, plus (c) the
amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs, and Incentive
Arrangements), plus (d) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees, including those
in connection with the Transactions), to the extent deducted in computing
Consolidated Net Income, plus (e) all depreciation and all other non-cash
charges (including, without limitation, those charges relating to purchase
accounting adjustments and LIFO adjustments), to the extent deducted in
computing Consolidated Net Income, plus (f) any interest income, to the extent
such income was not included in computing Consolidated Net Income, plus (g) all
dividend payments on preferred stock (whether or not paid in cash) to the extent
deducted in computing Consolidated Net Income, plus (h) any extraordinary or
nonrecurring charge or expense arising out of the implementation of SFAS 106 or
SFAS 109 to the extent deducted in computing Consolidated Net Income, plus (i)
to the extent not covered in clause (d) above, fees paid or payable in respect
of the TJC Agreement to the extent deducted in computing Consolidated Net
Income, plus (j) the net loss of any Person, other than those of a Restricted
Subsidiary, to the extent deducted in computing Consolidated Net Income, plus
(k) net losses in respect of any discontinued operations as determined in
accordance with GAAP, to the extent deducted in computing Consolidated Net
Income, minus (l) the portion of Consolidated Net Income attributable to
minority interests in other Persons, except the amount of such portion received
in cash by the Company or its Restricted Subsidiaries; provided, however, that
if any such calculation includes any period during which an acquisition or sale
73
of a Person or the incurrence or repayment of Indebtedness occurred, then such
calculation for such period shall be made on a Pro Forma Basis.
"Cash Flow Coverage Ratio" means, for any given period and Person, the
ratio of: (i) Cash Flow to (ii) the sum of Consolidated Interest Expense and all
dividend payments on any series of preferred stock of such Person (except
dividends paid or payable in additional shares of Capital Stock (other than
Disqualified Stock) and except for accrued and unpaid dividends with respect to
the Holdings Preferred Stock outstanding on the 1997 Notes Issue Date), in each
case, without duplication; provided, however, that if any such calculation
includes any period during which an acquisition or sale of a Person or the
incurrence or repayment of Indebtedness occurred, then such calculation for such
period shall be made on a Pro Forma Basis.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than the Principals or their Related Parties, (ii) the adoption of a
plan relating to the liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a subsequent
condition), directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares), (iv) the
consummation of the first transaction (including, without limitation, any merger
or consolidation) the result of which is that any "person" (as defined above)
becomes the "beneficial owner" (as defined above), directly or indirectly, of
more of the Voting Stock of the Company (measured by voting power rather than
number of shares) than is at the time "beneficially owned" (as defined above) by
the Principals and their Related Parties in the aggregate or (v) the first day
on which a majority of the members of the Board of Directors of the Company are
not Continuing Directors. For purposes of this definition, any transfer of an
equity interest of an entity that was formed following the 1997 Notes Issue Date
for the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"Consolidated Interest Expense" means, for any given period and Person,
the aggregate of the interest expense in respect of all Indebtedness of such
Person and its Restricted Subsidiaries for such period, on a consolidated basis,
determined in accordance with GAAP (including amortization of original issue
discount on any such Indebtedness, all non-cash interest payments, the interest
portion of any deferred payment obligation and the interest component of capital
lease obligations, but excluding amortization of deferred financing fees if such
amortization would otherwise be included in interest expense); provided,
however, that for the purpose of the Cash Flow Coverage Ratio, Consolidated
Interest Expense shall be calculated on a Pro Forma Basis; provided further that
any premiums, fees and expenses (including the amortization thereof) payable in
connection with the Transactions or any other refinancing of Indebtedness shall
be excluded. For purposes of this definition, the Consolidated Interest Expense
of the Company shall include the cash interest expense of Holdings paid in
respect of the Holdings Subordinated Notes.
"Consolidated Net Income" means, for any given period and Person, the
aggregate of the Net Income of such Person and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that: (a) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
74
shall be excluded and (b) Consolidated Net Income of any Person will not
include, without duplication, any deduction for: (i) any increased amortization
or depreciation resulting from the write-up of assets pursuant to Accounting
Principles Board Opinion Nos. 16 and 17, as amended or supplemented from time to
time, (ii) the amortization of all intangible assets (including amortization
attributable to inventory write-ups, goodwill, debt and financing costs, and
Incentive Arrangements), (iii) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees), (iv) any
extraordinary or nonrecurring charges relating to any premium or penalty paid,
write-off or deferred financing costs or other financial recapitalization
charges in connection with redeeming or retiring any Indebtedness prior to its
stated maturity and (v) any Restructuring Charges; provided, however, that for
purposes of determining the Cash Flow Coverage Ratio, Consolidated Net Income
shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" with respect to any Person means, as of any
date, the consolidated equity of the common stockholders of such Person
(excluding the cumulated foreign currency translation adjustment), all
determined on a consolidated basis in accordance with GAAP, but without any
reduction in respect of the payment of dividends on any series of such Person's
preferred stock if such dividends are paid in additional shares of Capital Stock
(other than Disqualified Stock); provided, however, that Consolidated Net Worth
shall also include, without duplication: (a) the amortization of all write-ups
of inventory, (b) the amortization of all intangible assets (including
amortization of goodwill, debt and financing costs, and Incentive Arrangements),
(c) any non-capitalized transaction costs incurred in connection with actual or
proposed financings, acquisitions or divestitures (including, but not limited
to, financing and refinancing fees), (d) any increased amortization or
depreciation resulting from the write-up of assets pursuant to Accounting
Principles Board Opinion Nos. 16 and 17, as amended and supplemented from time
to time, (e) any extraordinary or nonrecurring charges or expenses relating to
any premium or penalty paid, write-off or deferred financing costs or other
financial recapitalization charges incurred in connection with redeeming or
retiring any Indebtedness prior to its stated maturity, (f) any Restructuring
Charges and (g) any extraordinary or non-recurring charge arising out of the
implementation of SFAS 106 or SFAS 109; provided, however, that Consolidated Net
Worth shall be calculated on a Pro Forma Basis.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the 1997 Notes Issue Date or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Corporate Trust Office" means the office at which the Trustee
administers the trust created by the Indenture, which office now is located at
225 Asylum Street, Hartford, Connecticut 06103, Attention: Corporate Trust
Administration (GFSI, Inc. 9 5/8% Senior Subordinated Notes due 2007, issued on
December 31, 2002).
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depositary" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified as the Depositary with
respect to the Notes, until a successor shall have been appointed and become
such pursuant to Section 2.06 of the Indenture, and, thereafter, "Depositary"
shall mean or include such successor.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the Existing Credit Agreement and (ii) any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $10.0 million or
more and that has been designated by the Company as "Designated Senior
Indebtedness."
75
"Disqualified Stock" means any Capital Stock that by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part on, or prior to, the
maturity date of the Notes.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500,000,000 or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Contribution" means, collectively, (a) a contribution of
$13,600,000 from the Jordan Investors to Holdings in exchange for Holdings
Preferred Stock and approximately 50% of the common stock of Holdings; (b) a
contribution of $13,600,000 from certain members of management of the Company to
Holdings in exchange for Holdings Preferred Stock and approximately 50% of the
common stock of Holdings; and (c) a loan of $25,000,000 from a Jordan Investor
to Holdings in exchange for Holdings Subordinated Notes.
"Equity Interests" means Capital Stock or partnership interests or
warrants, options or other rights to acquire Capital Stock or partnership
interests (but excluding (i) any debt security that is convertible into, or
exchangeable for, Capital Stock or partnership interests and (ii) any other
Indebtedness or Obligation); provided, however, that Equity Interests will not
include any Incentive Arrangements or obligations or payments thereunder.
"Equity Offering" means a public or private offering by the Company for
cash of Equity Interests and all warrants, options or other rights to acquire
Capital Stock, other than (i) an offering of Disqualified Stock or (ii)
Incentive Arrangements or obligations or payments thereunder.
"Existing Credit Agreement" means that certain credit facility, dated
as of March 28, 2002 and amended as of December 31, 2002, by and among the
Company, Holdings, each of the financial institutions a party thereto and Bank
of America, N.A. as agent for the financial institutions a party thereto,
together with all loan documents and instruments thereunder (including, without
limitation, any guarantee agreements and security documents), in each case as
such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including, without limitation, increasing the amount of available
borrowings, letters of credit or other financial accommodations thereunder, all
or any portion of the Obligations under any such agreement or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders).
"Existing Indebtedness" means the Indebtedness of Winning Ways, Inc.
at December 31, 1996.
"GAAP" means generally accepted accounting principles, consistently
applied, as of the date of original issuance of the Notes. All financial and
accounting determinations and calculations under the Indenture will be made in
accordance with GAAP.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantors" means each Restricted Subsidiary that executes a Note
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
76
"Hedging Obligations" means, with respect to any Person, the
Obligations of such Persons under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, (ii) foreign exchange
contracts, currency swap agreements or similar agreements and (iii) other
agreements or arrangements designed to protect such Person against fluctuations,
or otherwise to establish financial hedges in respect of, exchange rates,
currency rates or interest rates.
"Holdings" means GFSI Holdings, Inc., a Delaware corporation.
"Holdings Preferred Stock" means the 12% cumulative preferred stock due
2009 of Holdings, as in effect on the 1997 Notes Issue Date.
"Holdings Subordinated Notes" means $25.0 million in aggregate
principal amount of 12% subordinated notes due 2008 of Holdings as in effect on
the 1997 Notes Issue Date or any Indebtedness of Holdings issued or given in
exchange for, or the proceeds of which are used to, extend, refinance, renew,
replace, substitute or refund such Holdings Subordinated Notes; provided that
any such Indebtedness (i) is issued in a principal amount not exceeding the then
outstanding principal amount of the Holdings Subordinated Notes, (ii) has an
interest rate not exceeding 12%, (iii) is subordinated to other Indebtedness of
Holdings to the same extent as the Holdings Subordinated Notes and (iv) has a
Weighted Average Life to Maturity no less than the Weighted Average Life to
Maturity of the Holdings Subordinated Notes.
"Incentive Arrangements" means any earn-out agreements, stock
appreciation rights, "phantom" stock plans, employment agreements,
non-competition agreements, subscription and stockholders agreements and other
incentive and bonus plans, including the Incentive Compensation Plan, and
similar arrangements made in connection with acquisitions of Persons or
businesses by the Company or the Restricted Subsidiaries or the retention of
consultants, executives, officers or employees by Holdings, the Company or the
Restricted Subsidiaries.
"Incentive Compensation Plan" means the incentive compensation plan for
providing annual cash bonuses that the Company expects to adopt following
consummation of the Transactions.
"Indebtedness" means, with respect to any Person, any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or representing the deferred and unpaid balance
of the purchase price of any property (including pursuant to capital leases),
except any such balance that constitutes an accrued expense or a trade payable,
and any Hedging Obligations, if and to the extent such indebtedness (other than
a Hedging Obligation) would appear as a liability upon a balance sheet of such
Person prepared on a consolidated basis in accordance with GAAP and also
includes, to the extent not otherwise included, the guarantee of items that
would be included within this definition; provided, however, that "Indebtedness"
will not include any Incentive Arrangements or obligations or payments
thereunder.
"Insolvency or Liquidation Proceeding" means (i) any insolvency or
bankruptcy or similar case or proceeding, or any reorganization, receivership,
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, or (ii) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of the Company.
"Investment" means any capital contribution to, or other debt or equity
investment in, any Person.
"issue" means create, issue, assume, guarantee, incur or otherwise
become directly or indirectly liable for any Indebtedness or Capital Stock, as
applicable; provided, however, that any Indebtedness or Capital Stock of a
77
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition, redesignation of a Non-Restricted
Subsidiary or otherwise) shall be deemed to be issued by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary. For this definition,
the terms "issuing," "issuer," "issuance" and "issued" have meanings correlative
to the foregoing.
"Jordan Investors" means The Jordan Company, affiliates of The Jordan
Company and MCIT PLC.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell and any filing of or
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Marketable Securities" means (a) Government Securities, (b) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution, (c)
commercial paper maturing not more than 270 days after the date of acquisition
of an issuer (other than an Affiliate of the Company) with a rating, at the time
as of which any investment therein is made, of "A-2" (or higher) according to
S&P or "P-2" (or higher) according to Moody's or carrying an equivalent rating
by a nationally recognized rating agency if both of the two named rating
agencies cease publishing ratings of investments, (d) any bankers acceptances or
money market deposit accounts issued by an Eligible Institution and (e) any fund
investing exclusively in investments of the types described in clauses (a)
through (d) above.
"Moody's" means Moody's Investors Services, Inc.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP, excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate
amount of cash proceeds (including any cash received by way of deferred payment
pursuant to a note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or similar
account established in connection with any such Asset Sale, but, in either such
case, only as and when so received) received by the Company or any of its
Restricted Subsidiaries in respect of such Asset Sale, net of: (i) the cash
expenses of such Asset Sale (including, without limitation, the payment of
principal of, and premium, if any, and interest on, Indebtedness required to be
paid as a result of such Asset Sale (other than the Notes) and legal,
accounting, management and advisory and investment banking fees and sales
commissions), (ii) taxes paid or payable as a result thereof, (iii) any portion
of cash proceeds that the Company determines in good faith should be reserved
for post-closing adjustments, it being understood and agreed that on the day
that all such post-closing adjustments have been determined, the amount (if any)
by which the reserved amount in respect of such Asset Sale exceeds the actual
post-closing adjustments payable by the Company or any of its Restricted
Subsidiaries shall constitute Net Proceeds on such date, (iv) any relocation
expenses and pension, severance and shutdown costs incurred as a result thereof,
and (v) any deduction or appropriate amounts to be provided by the Company or
any of its Restricted Subsidiaries as a reserve in accordance with GAAP against
any liabilities associated with the asset disposed of in such transaction and
retained by the Company or such Restricted Subsidiary after such sale or other
disposition thereof, including, without limitation, pension and other
post-employment benefit liabilities and liabilities related to environmental
78
matters or against any indemnification obligations associated with such
transaction.
"1997 Notes" means the $125,000,000 aggregate principal amount of 9
5/8% Senior Subordinated Notes of the Company issued pursuant to an indenture
dated February 27, 1997 by and between the Company and U.S. Bank National
Association (formerly known as State Street Bank and Trust Company (as successor
in interest to Fleet National Bank)).
"1997 Notes Issue Date" means February 27, 1997, the date of issuance
of the 1997 Notes.
"Non-Restricted Subsidiary" means any Subsidiary of the Company other
than a Restricted Subsidiary.
"Notes" means the Series A Notes and the Series B Notes.
"Obligations" means, with respect to any Indebtedness, all principal,
interest, premiums, penalties, fees, indemnities, expenses (including legal fees
and expenses), reimbursement obligations and other liabilities payable to the
holder of such Indebtedness under the documentation governing such Indebtedness,
and any other claims of such holder arising in respect of such Indebtedness.
"Offering" means the offer and sale of the 9 5/8% Senior Subordinated
Notes of the Company issued under the Indenture dated as of February 27, 1997
between the Company and U.S. Bank National Association (formerly known as State
Street Bank and Trust Company (as successor in interest to Fleet National
Bank)), as trustee.
"Offering Memorandum" means the Offering Memorandum, dated February 20,
1997, relating to the Company's offering and placement of the 1997 Notes.
"Officer" means, with respect to any Person, the Chairman of the Board,
the Chief Executive Officer, the President, the Chief Operating Officer, the
Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary or any Vice-President of such Person.
"Other Permitted Indebtedness" means: (i) Indebtedness of the Company
and its Restricted Subsidiaries existing as of the 1997 Notes Issue Date
(including the 1997 Notes) and all related Obligations as in effect on such
date; (ii) Indebtedness of the Company and its Restricted Subsidiaries in
respect of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims) issued
in the ordinary course of business, or other Indebtedness in respect of
reimbursement-type obligations regarding workers' compensation claims; (iii)
Refinancing Indebtedness, provided that: (A) the principal amount of such
Refinancing Indebtedness shall not exceed the outstanding principal amount of
Indebtedness (including unused commitments) extended, refinanced, renewed,
replaced, substituted or refunded plus any amounts incurred to pay premiums,
fees and expenses in connection therewith, (B) the Refinancing Indebtedness
shall have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being extended,
refinanced, renewed, replaced, substituted or refunded; provided, however, that
this limitation in this clause (B) does not apply to Refinancing Indebtedness of
Senior Indebtedness, and (C) in the case of Refinancing Indebtedness of
Indebtedness that is subordinated in right of payment to the Notes, such
79
Refinancing Indebtedness shall be subordinated to the Notes at least to the same
extent as the Subordinated Indebtedness being extended, refinanced, renewed,
replaced, substituted or refunded; (iv) intercompany Indebtedness of and among
the Company and its Restricted Subsidiaries; (v) Indebtedness of the Company and
its Restricted Subsidiaries incurred in connection with making permitted
Restricted Payments under clauses (iii), (iv) (but only to the extent that such
Indebtedness is provided by the Company or a Restricted Subsidiary) or (x)
paragraph (b) under the "Limitation on Restricted Payments" covenant; provided
that any Indebtedness incurred pursuant to this clause (v) is expressly
subordinate in right of payment to the Notes; (vi) Indebtedness of any
Non-Restricted Subsidiary created after the date of original issuance of the
Notes, provided that such Indebtedness is nonrecourse to the Company and its
Restricted Subsidiaries and the Company and its Restricted Subsidiaries have no
Obligations with respect to such Indebtedness; (vii) Indebtedness of the Company
and its Restricted Subsidiaries under Hedging Obligations; (viii) Indebtedness
of the Company and its Restricted Subsidiaries arising from the honoring by a
bank or other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts, which will not be, and
will not be deemed to be, inadvertent) drawn against insufficient funds in the
ordinary course of business; (ix) Indebtedness of the Company and its Restricted
Subsidiaries in connection with performance, surety, statutory, appeal or
similar bonds in the ordinary course of business; (x) Indebtedness of the
Company and its Restricted Subsidiaries in connection with agreements providing
for indemnification, purchase price adjustments and similar obligations in
connection with the sale or disposition of any of their business, properties or
assets; (xi) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that was
permitted to be incurred by the "Limitation on Incurrence of Indebtedness"
covenant; and (xii) Indebtedness of any Person at the time it is acquired as a
Restricted Subsidiary, provided that such Indebtedness was not issued by such
Person in connection with or in anticipation of such acquisition.
"Permitted Junior Securities" means Equity Interests in the Company or
subordinated debt securities of the Company that (a) are subordinated to all
Senior Indebtedness (and any debt securities issued in exchange for Senior
Indebtedness) to at least the same extent as the Notes are subordinated to
Senior Indebtedness pursuant to Article 10 of the Indenture, (b) have a Weighted
Average Life to Maturity no shorter than the Weighted Average Life to Maturity
of the Notes and (c) if there are any amounts outstanding under the Existing
Credit Agreement, have a Weighted Average Life to Maturity at least as long as
the sum of (i) the Weighted Average Life to Maturity of the Existing Credit
Agreement or any debt securities issued in exchange therefor (whichever is
longer) plus (ii) the positive difference, if any, between the Weighted Average
Life to Maturity of the Notes and the Weighted Average Life to Maturity of the
Existing Credit Agreement, in each case measured immediately prior to the
issuance of such Permitted Junior Securities.
"Permitted Liens" means: (i) Liens securing Senior Indebtedness of the
Company or any Guarantor that was permitted by the terms of the Indenture to be
incurred; (ii) Liens for taxes, assessments, governmental charges or claims
which are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (iii) statutory Liens of landlords and carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor; (iv) Liens incurred on
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (v)
Liens incurred on deposits made to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, government contracts,
performance and return of money bonds and other obligations of a like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (vi) easements, rights-of-way, zoning or other
restrictions, minor defects or irregularities in title and other similar charges
80
or encumbrances not interfering in any material respect with the business of the
Company or any of its Restricted Subsidiaries incurred in the ordinary course of
business; (vii) Liens (including extensions, renewals and replacements thereof)
upon property acquired (the "Acquired Property") after the date of original
issuance of the Notes, provided that: (A) any such Lien is created solely for
the purpose of securing Indebtedness representing, or issued to finance,
refinance or refund, the cost (including the cost of construction) of the
Acquired Property, (B) the principal amount of the Indebtedness secured by such
Lien does not exceed 100% of the cost of the Acquired Property, (C) such Lien
does not extend to or cover any property other than the Acquired Property and
any improvements on such Acquired Property, and (D) the issuance of the
Indebtedness to purchase the Acquired Property is permitted by the "Limitation
on Incurrence of Indebtedness" covenant; (viii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (ix) judgment and attachment
Liens not giving rise to an Event of Default; (x) leases or subleases granted to
others not interfering in any material respect with the business of the Company
or any of its Restricted Subsidiaries; (xi) Liens securing Indebtedness under
Hedging Obligations; (xii) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty requirements; (xiii)
Liens arising out of consignment or similar arrangements for the sale of goods
entered into by the Company or its Restricted Subsidiaries in the ordinary
course of business; (xiv) any interest or title of a lessor in property subject
to any capital lease obligation or operating lease; (xv) Liens arising from
filing Uniform Commercial Code financing statements regarding leases; (xvi)
Liens existing on the date of original issuance of the Notes and any extensions,
refinancings, renewals, replacements, substitutions or refundings thereof;
(xvii) any Lien granted to the Trustee and any substantially equivalent Lien
granted to any trustee or similar institution under any indenture for Senior
Indebtedness permitted by the terms of the Indenture; (xviii) Liens in favor of
the Company or any Restricted Subsidiary; (xix) additional Liens at any one time
outstanding in respect of properties or assets where aggregate fair market value
does not exceed $2.0 million (the fair market value to be determined on the date
such Lien is granted on such properties or assets); and (xx) Liens securing
intercompany Indebtedness issued by any Restricted Subsidiary to the Company or
another Restricted Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Principals" means (a) The Jordan Company, Jordan/Zalaznick Capital
Corporation and MCIT PLC, and their respective Affiliates, principals, partners
and employees, family members of any of the foregoing and trusts for the benefit
of any of the foregoing, including, without limitation, Leucadia National
Corporation and Jordan Industries, Inc., and their respective Subsidiaries, (b)
the officers, directors and employees of the Company on the date of issuance of
the Notes and their respective Affiliates and family members and trusts for the
benefit of any of the foregoing. For the purpose of the definition of
"Principals," The Jordan Company, Jordan/Zalaznick Capital Corporation and MCIT
PLC shall be deemed to be Affiliates.
"Post-Petition Interest" means any interest accruing subsequent to the
filing of a petition of bankruptcy at the rate provided for in the documentation
with respect thereto, whether or not such interest is an allowed claim under
applicable law.
"Pro Forma Basis" means, for purposes of determining Consolidated Net
Income in connection with the Cash Flow Coverage Ratio (including in connection
with the "Limitation on Restricted Payments", "Designation of Restricted and
Non-Restricted Subsidiaries" and "Merger or Consolidation" covenants, the
incurrence of Indebtedness pursuant to paragraph (a) of the "Limitation on
Incurrence of Indebtedness" covenant and Consolidated Net Worth for purposes of
"Merger or Consolidation" covenant), giving pro forma effect to (x) any
acquisition or sale of a Person, business or asset, related incurrence,
repayment or refinancing of Indebtedness or other related transactions,
81
including any Restructuring Charges which would otherwise be accounted for as an
adjustment permitted by Regulation S-X under the Securities Act or on a pro
forma basis under GAAP, or (y) any incurrence, repayment or refinancing of any
Indebtedness and the application of the proceeds therefrom, in each case, as if
such acquisition or sale and related transactions, restructurings,
consolidations, cost savings, reductions, incurrence, repayment or refinancing
were realized on the first day of the relevant period permitted by Regulation
S-X under the Securities Act or on a pro forma basis under GAAP. Furthermore, in
calculating the Cash Flow Coverage Ratio, (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the determination date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the determination date; (2) if interest on any
Indebtedness actually incurred on the determination date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the determination date will be deemed to have been in effect during
the relevant period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to interest rate swaps or similar interest rate
protection Hedging Obligations, shall be deemed to accrue at the rate per annum
resulting after giving effect to the operation of such agreements.
"Redeemable Preferred Stock" means preferred stock that by its terms or
otherwise is required to be redeemed or is redeemable at the option of the
holder thereof on, or prior to, the maturity date of the Notes.
"Refinancing Indebtedness" means (i) Indebtedness of the Company and
its Restricted Subsidiaries issued or given in exchange for, or the proceeds of
which are used to, extend, refinance, renew, replace, substitute or refund any
Indebtedness permitted under the Indenture or any Indebtedness issued to so
extend, refinance, renew, replace, substitute or refund such Indebtedness, (ii)
any refinancings of Indebtedness issued under the Existing Credit Agreement, and
(iii) any additional Indebtedness issued to pay premiums and fees in connection
with clauses (i) and (ii).
"Related Party" with respect to any Principal means (a) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (b) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (a).
"Restricted Investment" means any Investment in any Person; provided
that Restricted Investments will not include: (i) Investments in Marketable
Securities; (ii) any Incentive Arrangements; (iii) Investments in the Company;
or (iv) Investments in any Restricted Subsidiary (provided that any Investment
in a Restricted Subsidiary was made for fair market value (as determined by the
Board of Directors in good faith)). The amount of any Restricted Investment
shall be the amount of cash and the fair market value at the time of transfer of
all other property (as determined by the Board of Directors in good faith)
initially invested or paid for such Restricted Investment, plus all additions
thereto, without any adjustments for increases or decreases in value of or
write-ups, write-downs or write-offs with respect to, such Restricted
Investment.
"Restricted Subsidiary" means: (i) any Subsidiary of the Company
existing on the date of original issuance of the Notes, and (ii) any other
Subsidiary of the Company formed, acquired or existing after the date of
original issuance of the Notes that is designated as a "Restricted Subsidiary"
by the Company pursuant to a resolution approved a majority of the Board of
Directors, provided, however, that the term Restricted Subsidiary shall not
include any Subsidiary of the Company that has been redesignated by the Company
pursuant to a resolution approved by a majority of the Board of Directors as a
Non-Restricted Subsidiary in accordance with the "Designation of Restricted and
Non-Restricted Subsidiaries" covenant unless such Subsidiary shall have
subsequently been redesignated a Restricted Subsidiary in accordance with clause
(ii) of this definition.
82
"Restructuring Charges" means any charges or expenses in respect of
restructuring or consolidating any business, operations or facilities, any
compensation or headcount reduction, or any other cost savings, of any Persons
or businesses either alone or together with the Company or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Rating Services, a division of
McGraw-Hill Companies, Inc.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means, with respect to any Person, (i) all
Indebtedness of such Person outstanding under the Existing Credit Agreement and
all Hedging Obligations with respect thereto, (ii) any other Indebtedness of
such Person permitted to be incurred under the terms of the Indenture, provided,
however, that Senior Indebtedness shall not include any Indebtedness which by
the terms of the instrument creating or evidencing the same is subordinated or
junior in right of payment to any other Senior Indebtedness in any respect, and
(iii) all Obligations (including any Post-Petition Interest) with respect to the
foregoing, in each case whether outstanding on the date of the Indenture or
thereafter incurred. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness will not include (w) any liability for federal, state, local
or other taxes owed or owing by the Company, (x) any Indebtedness of such Person
to any of its Subsidiaries or other Affiliates (other than Indebtedness arising
under the Existing Credit Agreement), (y) any trade payables or other liability
to trade creditors arising in the ordinary course of business (including
guarantees thereof or instruments evidencing such liabilities) or (z) any
Indebtedness that is incurred in violation of the Indenture.
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means any Restricted Subsidiary of the Company
that would be a "significant subsidiary" as defined in clause (2) of the
definition of such term in Rule 1-02 of Regulation S-X under the Securities Act
and the Exchange Act.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subordinated Indebtedness" means all Obligations with respect to
Indebtedness if the instrument creating or evidencing the same, or pursuant to
which the same is outstanding, designates such Obligations as subordinated or
junior in right of payment to Senior Indebtedness.
"Subsidiary" of any Person means any entity of which the Equity
Interests entitled to cast at least a majority of the votes that may be cast by
all Equity Interests having ordinary voting power for the election of directors
or other governing body of such entity are owned by such Person (regardless of
whether such Equity Interests are owned directly by such Person or through one
or more Subsidiaries).
"Tax Sharing Agreement" means the tax sharing agreement between the
Company and Holdings, as in effect on the 1997 Notes Issue Date.
83
"TJC Agreement" means the Management Consulting Agreement, dated the
1997 Notes Issue Date, between the Company and TJC Management Corporation, as in
effect on the 1997 Notes Issue Date.
"Transactions" means, collectively, the Equity Contribution, the
consummation of the Offering, the execution of the Existing Credit Agreement,
the consummation by the Company of the acquisition of Winning Ways, Inc.
pursuant to the Acquisition Agreement, the repayment by the Company of the
Existing Indebtedness.
"Transfer Restricted Notes" means a "restricted security" as such term
is defined in Rule 144(a)(3) under the Securities Act; provided that the Trustee
shall be entitled to request and conclusively rely on an Opinion of Counsel with
respect to whether any Note constitutes a Transfer Restricted Note.
"Trustee" means U.S. Bank National Association (formerly know as State
Street Bank and Trust Company) until a successor replaces it in accordance with
the applicable provisions of the Indenture, and thereafter means the successor.
"Trust Officer" means any officer in the Corporate Trust Office of the
Trustee.
"U.S. Government Obligations" means direct obligations of the United
States of America for the payment of which the full faith and credit of the
United States of America is pledged, provided that no U.S. Government Obligation
shall be callable at the issuer's option.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect the board of directors.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the then
outstanding principal amount of such Indebtedness into (ii) the sum of the
product(s) obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other requirement payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wolff Noncompetition Agreement" means the agreement, dated the 1997
Notes Issue Date, between Holdings and Robert M. Wolff, relating to certain
covenants not to compete with the business of the Company, as in effect on the
1997 Notes Issue Date.
84
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of important terms of certain indebtedness
of GFSI:
Revolving Bank Credit Agreement
During fiscal 2002, we replaced our existing bank credit agreement by
entering into a Revolving Bank Credit Agreement with a group of financial
institutions to provide a $65 million revolving line of credit which matures in
January 2005. At December 28, 2002, $28.4 million was available for future
borrowing under the Revolving Bank Credit Agreement. We believe that cash flows
from operating activities and borrowings under the Revolving Bank Credit
Agreement will be adequate to meet our short-term and future liquidity
requirements prior to the maturity of the Revolving Bank Credit Agreement in
fiscal 2005, although no assurance can be given in this regard.
The Revolving Bank Credit Agreement contains customary covenants,
including a material covenant relating to minimum fixed charge coverage ratio
and restrictions on, among other things, granting of liens, asset sales, mergers
and consolidations, investments and acquisitions, prepayments or redemptions of
the notes and incurring additional indebtedness. The Revolving Bank Credit
Agreement also contains customary events of default, including, as a material
event of default, without limitation, change of control. We were not in
violation of any covenant under any agreement with respect to the existing
indebtedness and are currently in compliance with all of the covenants contained
in the Revolving Bank Credit Agreement.
85
CERTAIN TRANSACTIONS
The Jordan Company
In connection with the acquisition of Winning Ways, Inc. in 1997, GFSI
Holdings entered into an agreement (the "TJC Agreement") with The Jordan Company
Management Corporation, an affiliate of The Jordan Company. Messrs. Jordan,
Zalaznick and Caputo, directors of GFSI, are also managing directors of The
Jordan Company and Messrs. Jordan and Zalaznick are the principals of The Jordan
Company Management Corporation. Under the TJC Agreement, GFSI Holdings retained
The Jordan Company Management Corporation to render services to GFSI, its
financial and business affairs, its relationships with its lenders and
stockholders, and the operation and expansion of its business. The TJC Agreement
expires in 2007, but is automatically renewed for successive one-year terms,
unless either party provides written notice of termination 60 days prior to the
scheduled renewal date. For the first two years, the TJC Agreement provides for
an annual consulting fee of $500,000 payable on a quarterly basis. For the
remaining term of the TJC Agreement, GFSI Holdings will pay The Jordan Company
Management Corporation an annual consulting fee payable on a quarterly basis
equal to the higher of (a) $500,000 or (b) 1.5% of EBITA (as defined in the TJC
Agreement), provided that in years three through five of the TJC Agreement, the
annual fee does not exceed $750,000 and thereafter the annual fee does not
exceed $1 million. In addition, the TJC Agreement provides for payment to The
Jordan Company Management Corporation of (i) an investment banking and
sponsorship fee of up to 2% of the purchase price of certain acquisitions or
sales involving GFSI Holdings or GFSI and (ii) a financial consulting fee of up
to 1% of any debt, equity or other financing arranged by GFSI Holdings or GFSI
with the assistance of The Jordan Company Management Corporation. Both such fees
are subject to Board of Directors approval. See "Risk Factors."
Tax Sharing Agreement
In connection with the Transactions, on February 27, 1997, GFSI and
GFSI Holdings entered into a tax sharing agreement for purposes of filing a
consolidated federal income tax return and paying federal income taxes on a
consolidated basis. Pursuant to the tax sharing agreement, GFSI and each of its
consolidated subsidiaries will pay to GFSI Holdings on an annual basis an amount
determined by reference to the separate tax liability of GFSI as calculated
pursuant to Section 1552(a)(1) of the Code and applicable regulations
thereunder.
Future Transactions
We have adopted a policy to provide that future transactions between us
and our officers, directors and other affiliates, including transactions
involving conflicts of interest must (i) be approved by a majority of the
members of the Board of Directors and by a majority of the disinterested members
of the Board of Directors and (ii) be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
86
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account as a
result of market-making activities or other trading activities in connection
with the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. In addition, until ___________ ___, 2003, all dealers
effecting transactions in the new notes may be required to deliver a prospectus.
We will receive no proceeds in connection with the exchange offer. New
notes received by broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
87
FEDERAL INCOME TAX CONSEQUENCES
To Exchanging and Nonexchanging Holders
The exchange of an old note for a new note pursuant to the exchange
offer will not be taxable to the exchanging holders for federal income tax
purposes. As a result (i) an exchanging holder will not recognize any gain or
loss on the exchange, (ii) the holding period for the new note will include the
holding period for the old note and (iii) the basis of the new note will be the
same as the basis of the old note.
The exchange offer will result in no federal income tax consequences to
a nonexchanging holder.
The preceding discussion reflects the opinion of Mayer, Brown, Rowe &
Maw, counsel to GFSI, as to the material federal income tax consequences
expected to result from the exchange offer. Each holder should consult its own
tax adviser as to these and any other federal income tax consequences of the
exchange offer as well as any tax consequences to it under state, local or other
law. This summary is based on the current provisions of the Internal Revenue
Code of 1986, as amended, and applicable Treasury regulations, judicial
authority and administrative rulings and practice. Those consequences could be
modified by future changes in the relevant law (which changes could be applied
retroactively).
LEGAL MATTERS
The validity of the notes will be passed upon for GFSI by Mayer, Brown,
Rowe & Maw, Chicago, Illinois.
EXPERTS
Consolidated Financial Statements
The 2000 consolidated financial statements included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements as of June 29, 2001 and for the
year then ended included in this prospectus have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The 2002 consolidated financial statements included in this prospectus
have been audited by KPMG LLP, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
Changes in Accountants
As of December 20, 2000 through and until May 28, 2002, we engaged
PricewaterhouseCoopers LLP as our independent accountants. Our audit committee
recommended the dismissal of our former independent accountants, Deloitte &
Touche LLP, and the Board of Directors approved the decision to change
independent accountants. Deloitte & Touche LLP's report on our financial
statements for the fiscal year ended June 30, 2000 and through December 20, 2000
did not contain an adverse opinion or a disclaimer of an opinion nor was the
report qualified or modified as to uncertainty, audit scope, or accounting
principals. In connection with its audit for the fiscal year ended June 30,
2000, and through December 20, 2000, there were no disagreement(s) with Deloitte
& Touche LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement(s), if
88
not resolved to the satisfaction of Deloitte & Touche LLP, would have caused it
to make reference to the subject matter of the disagreement(s) in connection
with its report.
We engaged KPMG LLP as our independent accountants as of May 28, 2002.
Our audit committee recommended the dismissal of our former independent
accountants, PricewaterhouseCoopers LLP, and the Board of Directors approved the
decision to change independent accountants. During the two most recent fiscal
years prior to the change and through May 28, 2002, we had not consulted with
KPMG LLP regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements. PricewaterhouseCoopers LLP's
report on our financial statements for the fiscal year ended June 29, 2001 and
through May 28, 2002 did not contain an adverse opinion or a disclaimer of an
opinion nor was the report qualified or modified as to uncertainty, audit scope,
or accounting principals. In connection with its audit for the fiscal year ended
June 29, 2001, and through May 28, 2002, there were no disagreement(s) with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused it to make reference to the subject matter of the
disagreement(s) in connection with its report.
AVAILABLE INFORMATION
We have filed with the Commission the registration statement pursuant
to the Securities Act, and the rules and regulations promulgated thereunder,
covering the new notes being offered hereby. This prospectus does not contain
all the information set forth in the registration statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to GFSI and the new notes,
reference is hereby made to the registration statement. Statements made in this
prospectus as to the contents of any contract, agreement or other document
referred to in the registration statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the registration statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. We will continue to be
subject to the periodic and other informational requirements of the Exchange
Act. Periodic reports and other information filed by GFSI with the Commission
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20540, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048 at
prescribed rates. Such materials may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.
89
GFSI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements and Supplementary Data
Page
Consolidated Balance Sheet -- December 28, 2002 and
June 29, 2002 (unaudited)........................................ F-2
Consolidated Statements of Income-- Six months ended
December 28, 2002 and December 28, 2001 (unaudited) ............... F-3
Consolidated Statements of Cash Flows-- Six months ended
December 28, 2002 and December 28, 2001 (unaudited) ............... F-4
Notes to Consolidated Financial Statements (unaudited) .............. F-5
Independent Auditors' Report......................................... F-10
Report of Independent Accountants.................................... F-11
Independent Auditors' Report......................................... F-12
Consolidated Balance Sheets -- June 29, 2002 and June 29, 2001........ F-13
Consolidated Statements of Income -- Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000................................. F-14
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) -- Years Ended June 29, 2002, June 29, 2001
and June 30, 2000................................................ F-15
Consolidated Statements of Cash Flows -- Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000................................. F-16
Notes to Consolidated Financial Statements........................... F-17
F-1
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
December 28, June 29,
2002 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 3,739 $ 313
Accounts receivable, net 32,776 32,626
Inventories, net 43,470 45,729
Prepaid expenses and other current assets 1,383 1,269
Deferred income taxes 1,195 845
------------ ----------
Total current assets 82,563 80,782
Property, plant and equipment, net 20,263 19,671
Other assets:
Deferred financing costs, net 3,423 3,873
Other 509 1,010
------------ ----------
Total assets $ 106,758 $ 105,336
============ ==========
Liabilities and stockholders' equity (deficiency)
Current liabilities:
Accounts payable $ 10,099 $ 12,010
Accrued interest expense 4,174 4,366
Accrued expenses 6,292 5,983
Income taxes payable 8,020 5,087
Current portion of long-term debt 197 177
------------ ----------
Total current liabilities 28,782 27,623
Deferred income taxes 762 699
Other long-term obligations 527 527
Long-term debt, less current portion 152,053 156,132
Stockholders' equity (deficiency):
Common stock, $.01 par value, 10,000 shares authorized, one
share issued and outstanding at December 28, 2002 and
June 29, 2002 -- --
Additional paid-in capital 59,127 59,127
Accumulated deficiency (134,493) (138,772)
------------ ----------
Total stockholders' deficiency (75,366) (79,645)
------------ ----------
Total liabilities and stockholders' equity (deficiency) $ 106,758 $ 105,336
============ ==========
See notes to consolidated financial statements.
F-2
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
Six Months Ended
----------------------------------
December 28, December 28,
2002 2001
---- ----
Net sales $ 115,844 $ 106,377
Cost of sales 73,553 66,090
----------- ------------
Gross profit 42,291 40,287
Operating expenses:
Selling 14,375 11,950
General and administrative 13,479 12,909
----------- ------------
27,854 24,859
----------- ------------
Operating income 14,437 15,428
Other income (expense):
Interest expense (7,309) (8,080)
Other, net 11 11
----------- ------------
(7,298) (8,069)
----------- ------------
Income before income taxes 7,139 7,359
Income tax expense 2,786 2,870
----------- ------------
Net income $ 4,353 $ 4,489
=========== ============
See notes to consolidated financial statements.
F-3
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
-------------------------------
December 28, December 28,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 4,353 $ 4,489
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,576 1,576
Amortization of deferred financing costs 487 549
Amortization of other intangibles 500 500
(Gain) loss on sale or disposal of property, plant and equipment (11) 8
Gain (loss) on foreign currency translation 7 --
Deferred income taxes (287) (81)
Changes in operating assets and liabilities:
Accounts receivable, net (150) (8,883)
Inventories, net 2,259 (1,334)
Prepaid expenses, other current assets and other assets (114) 283
Income taxes payable 2,933 3,542
Accounts payable, accrued expenses and other
long-term obligations (1,792) (1,342)
---------- ---------
Net cash provided by (used in) operating activities 9,761 (693)
---------- ---------
Cash flows from investing activities
Proceeds from sales of property, plant and equipment 14 1
Purchases of property, plant and equipment (2,172) (1,988)
---------- ---------
Net cash used in investing activities (2,158) (1,987)
---------- ---------
Cash flows from financing activities:
Net change in short term borrowings and revolving credit agreement (4,422) 1,200
Cash paid for financing costs (37) --
Distributions to GFSI Holdings, Inc. (81) (49)
Issuance of long-term debt 450 --
Payments on long-term debt and capital lease obligations (87) (1,722)
---------- ---------
Net cash used in financing activities (4,177) (571)
---------- ---------
Net increase (decrease) in cash and cash equivalents 3,426 (3,251)
Cash and cash equivalents at beginning of period 313 5,309
---------- ---------
Cash and cash equivalents at end of period $ 3,739 $ 2,058
========== =========
Supplemental cash flow information:
Interest paid $ 7,013 $ 6,868
========== =========
Income taxes paid (refunded) $ 139 $ (962)
========== =========
See notes to consolidated financial statements.
F-4
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 28, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of GFSI
include the accounts of GFSI and the accounts of its wholly owned subsidiaries,
Event 1, Inc., CC Products, Inc. ("Champion Custom Products") and GFSI Canada
Company. All intercompany balances and transactions have been eliminated. The
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statement reporting purposes. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position,
operations and cash flows of GFSI 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMMITMENTS AND CONTINGENCIES
GFSI, 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 GFSI.
F-5
3. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not necessarily intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with accounting principles
generally accepted in the United States of America. Each of the subsidiary
guarantors are 100% owned by GFSI. The subsidiary guarantees of GFSI's debts are
full and unconditional.
As of December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ----------- ----------
Assets:
Current assets $ 69,957 $ 16,575 $ (3,969) $ 82,563
Investment in equity of subsidiaries 13,592 -- (13,592) --
Property, plant and equipment, net 19,862 401 -- 20,263
Other assets 4,902 2 (972) 3,932
--------- ---------- ----------- ------------
Total assets $ 108,313 $ 16,978 $ (18,533) $ 106,758
========= ========== =========== ============
Liabilities and stockholders' equity:
Current liabilities $ 30,435 $ 2,316 $ (3,969) $ 28,782
Deferred income taxes 664 98 -- 762
Other long-term obligations 527 -- -- 527
Long-term debt 152,053 972 (972) 152,053
Stockholders' equity (deficiency) (75,366) 13,592 (13,592) (75,366)
--------- ---------- ----------- ------------
Total liabilities and stockholders' equity
(deficiency) $ 108,313 $ 16,978 $ (18,533) $ 106,758
========= ========== =========== ============
Six months ended December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ----------- ----------
Net sales $ 76,832 $ 41,052 $ (2,040) $ 115,844
Costs and expenses 70,299 33,148 (2,040) 101,407
--------- --------- ------------ -----------
Operating Income 6,533 7,904 -- 14,437
Equity in net earnings of subsidiaries 4,812 -- (4,812) --
Interest expense (7,285) (13) -- (7,298)
--------- --------- ------------ -----------
Income before income taxes 4,060 7,891 (4,812) 7,139
Income tax expense (benefit) (293) 3,079 -- 2,786
--------- --------- ------------ -----------
Net income $ 4,353 $ 4,812 $ (4,812) $ 4,353
========= ========= ============ ===========
F-6
Six months ended December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ----------- ----------
Net cash flows provided by (used in) operating
activities $ 10,637 $ (876) $ -- $ 9,761
Net cash flows used in investing activities (2,126) (32) -- (2,158)
Cash flows from financing activities:
Net borrowings under revolving credit agreements (4,422) -- -- (4,422)
Payments on long-term debt (87) -- -- (87)
Intercompany borrowings (972) 972 -- --
Cash paid for financing costs (37) -- -- (37)
Issuance of long-term debt 450 -- -- 450
Distributions to GFSI Holdings, Inc. (81) -- -- (81)
-------- --------- ----------- -----------
Net cash provided (used) by financing
activities (5,149) 972 -- (4,177)
-------- --------- ----------- -----------
Net change in cash and cash equivalents 3,362 64 -- 3,426
Cash and cash equivalents at beginning of period 334 (21) -- 313
-------- --------- ----------- -----------
Cash and cash equivalents end of period $ 3,696 $ 43 $ -- $ 3,739
======== ========= =========== ===========
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ----------- ----------
Assets:
Current assets $ 70,942 $ 10,923 $ (1,083) $ 80,782
Investment in equity of subsidiaries 8,773 -- (8,773) --
Property, plant and equipment, net 19,120 551 -- 19,671
Other assets 4,881 4 (2) 4,883
--------- --------- ----------- -----------
Total assets $ 103,716 $ 11,478 $ (9,858) $ 105,336
========= ========= =========== ===========
Liabilities and stockholders' equity:
Current liabilities $ 26,198 $ 2,510 $ (1,085) $ 27,623
Deferred income taxes 504 195 -- 699
Other long-term obligations 527 -- -- 527
Long-term debt 156,132 -- -- 156,132
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
--------- --------- ----------- -----------
Total liabilities and stockholders' equity
(deficiency) $ 103,716 $ 11,478 $ (9,858) $ 105,336
========= ========= =========== ===========
F-7
Six months ended December 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ----------- ----------
Net sales $ 78,206 $ 30,108 $ (1,937) $ 106,377
Costs and expenses 67,994 24,892 (1,937) 90,949
--------- -------- -------- ----------
Operating Income 10,212 5,216 -- 15,428
Equity in net earnings of subsidiaries 3,181 -- (3,181) --
Interest expense (8,069) -- -- (8,069)
--------- -------- -------- ----------
Income before income taxes 5,324 5,216 (3,181) 7,359
Income tax expense 835 2,035 -- 2,870
--------- -------- -------- ----------
Net income $ 4,489 $ 3,181 $ (3,181) $ 4,489
========= ======== ======== ==========
Six months ended December 28, 2001 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------- ---------- ------------- ------------
Net cash flows provided by (used in) operating
activities $ (933) $ 240 $ -- $ (693)
Net cash flows used in investing activities (1,772) (215) -- (1,987)
Cash flows from financing activities:
Net borrowings under revolving credit agreement 1,200 -- -- 1,200
Payments on long-term debt (1,722) -- -- (1,722)
Distributions to GFSI Holdings, Inc. (49) -- -- (49)
-------- --------- ----------- -----------
Net cash flows used in financing activities (571) -- -- (571)
-------- --------- ----------- -----------
Net change in cash and cash equivalents (3,276) 25 -- (3,251)
Cash and cash equivalents at beginning of period 5,263 46 -- 5,309
-------- --------- ----------- -----------
Cash and cash equivalents end of period $ 1,987 $ 71 $ -- $ 2,058
======== ========= =========== ===========
4. RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2002
consolidated and condensed consolidating financial statements to conform to the
fiscal 2003 presentation.
5. SUBSEQUENT EVENT
On December 31, 2002, we 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 GFSI
Holdings' 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 is considered an early extinguishment of GFSI Holdings' debt, and
accordingly, GFSI Holdings will record a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs, in the third quarter of
fiscal 2003.
F-8
The Exchange Notes are unsecured obligations of GFSI, 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 Senior Subordinated Notes issued on February 27, 1997. The Exchange
Notes were guaranteed by each of GFSI's wholly-owned subsidiaries (Event 1,
Champion Custom Products, 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. This registration statement, once
effective, will enable the holder of the Exchange Notes to exchange them
for publicly registered notes having terms substantially identical to the
Exchange Notes.
F-9
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GFSI, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of GFSI, Inc. (a
wholly owned subsidiary of GFSI Holdings, Inc.) and subsidiaries (the Company)
as of June 29, 2002, and the related consolidated statements of income, changes
in stockholders' equity (deficiency) and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GFSI, Inc. and
subsidiaries as of June 29, 2002, and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Kansas City, Missouri
August 23, 2002, except as to Note 1
which is as of March 12, 2003
F-10
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
GFSI, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity
(deficiency) and of cash flows present fairly, in all material respects, the
financial position of GFSI, Inc. and its subsidiaries at June 29, 2001, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
September 12, 2001
F-11
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI, Inc. and subsidiary
Lenexa, Kansas
We have audited the accompanying consolidated balance sheet of GFSI,
Inc. (a wholly owned subsidiary of GFSI Holdings, Inc.) and subsidiaries as of
June 30, 2000, and the related consolidated statements of income, stockholders'
equity (deficiency) and cash flows for the year ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards general
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of June 30,
2000, and the results of its operations and its cash flows for the year ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
September 8, 2000
F-12
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 29, June 29,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 312,981 $ 5,308,854
Accounts receivable, net of allowance for doubtful accounts of
$766,577 and $696,988 at June 29, 2002 and June 29, 2001.............. 32,626,432 22,694,322
Inventories, net......................................................... 45,728,918 37,735,617
Deferred income taxes.................................................... 844,513 910,828
Prepaid expenses and other current assets................................ 1,268,478 1,143,310
--------------- ---------------
Total current assets................................................ 80,781,322 67,792,931
Property, plant and equipment, net............................................ 19,670,864 18,574,473
Other assets:
Deferred financing costs, net of accumulated amortization of
$3,556,183 and $5,040,750 at June 29, 2002 and June 29, 2001......... 3,873,368 5,193,506
Other................................................................... 1,010,267 2,006,082
--------------- ---------------
4,883,635 7,199,588
--------------- ---------------
Total assets.................................................. $ 105,335,821 $ 93,566,992
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable........................................................ $ 12,010,292 $ 12,777,790
Accrued interest expense................................................ 4,364,497 3,774,778
Accrued expenses........................................................ 5,983,237 5,895,123
Income taxes payable.................................................... 5,087,122 198,710
Current portion of long-term debt....................................... 177,087 6,699,631
--------------- ---------------
Total current liabilities.......................................... 27,622,235 29,346,032
Deferred income taxes........................................................ 699,338 1,189,369
Long-term debt, less current portion......................................... 156,132,252 145,641,802
Other long-term obligations.................................................. 526,804 526,804
Commitments and contingencies (Notes 2 and 5)................................
Stockholders' equity (deficiency):
Common Stock, $.01 par value, 10,000 shares authorized, one
share issued at June 29, 2002 and June 29, 2001........................ -- --
Additional paid-in capital............................................. 59,127,463 59,127,463
Accumulated deficiency................................................. (138,772,271) (142,264,478)
-------------- ---------------
Total stockholders' equity (deficiency).............................. (79,644,808) (83,137,015)
-------------- ---------------
Total liabilities and stockholders' equity (deficiency) ....... $ 105,335,821 $ 93,566,992
============== ===============
See notes to consolidated financial statements.
F-13
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended
---------------------------------------------------
June 29, June 29, June 30,
2002 2001 2000
---- ---- ----
Net sales $ 197,249,505 $ 185,304,630 $ 205,500,222
Cost of sales 123,622,656 114,578,443 126,173,741
-------------- ---------------- ----------------
Gross profit 73,626,849 70,726,187 79,326,481
Operating expenses:
Selling 24,582,462 22,303,126 23,293,887
General and administrative 26,350,017 26,378,351 24,799,427
Restructuring costs -- 836,291 --
Acquisition of business -- 1,110,331 --
Gain on disposition of business -- (629,787) --
------------- ---------------- ----------------
50,932,479 49,998,312 48,093,314
-------------- ---------------- ----------------
Operating income 22,694,370 20,727,875 31,233,167
Other income (expense):
Interest expense (15,747,032) (16,660,774) (17,661,033)
Loss on early extinguishment of debt (993,899) -- --
Other 20,877 414,320 211,279
------------- ---------------- ----------------
(16,720,054) (16,246,454) (17,449,754)
------------- ---------------- ----------------
Income before income taxes 5,974,316 4,481,421 13,783,413
Income tax expense (2,329,954) (1,630,880) (5,177,684)
------------- ---------------- ----------------
Net income $ 3,644,362 $ 2,850,541 $ 8,605,729
============= ================ ================
See notes to consolidated financial statements.
F-14
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
Years Ended June 29, 2002, June 29, 2001 and June 30, 2000
Additional
Common Stock Paid-In Accumulated Total Stockholders'
------------
Share Amounts Capital Deficiency Equity (Deficiency)
----- ------- ---------- ----------- -------------------
Balance, July 2, 1999.......... 1 $ -- $ 54,527,463 $(153,541,960) $ (99,014,497)
Net income................. -- -- 8,605,729 8,605,729
Capital contributions from
GFSI Holdings, Inc..... -- 3,600,000 -- 3,600,000
---- ------- ------------- -------------- --------------
Balance, June 30, 2000......... 1 -- 58,127,463 (144,936,231) (86,808,768)
Net income................. -- -- 2,850,541 2,850,541
Capital contributions from
GFSI Holdings, Inc...... -- 1,000,000 -- 1,000,000
Distributions to
GFSI Holdings, Inc...... -- -- (178,788) (178,788)
---- ------- ------------- -------------- --------------
Balance, June 29, 2001......... 1 -- 59,127,463 (142,264,478) (83,137,015)
Net income................. -- -- 3,644,362 3,644,362
Distributions to
GFSI Holdings, Inc...... -- -- (152,155) (152,155)
---- ------- ------------- -------------- --------------
Balance, June 29, 2002......... 1 $ -- $ 59,127,463 $(138,772,271) $ (79,644,808)
===== ======= ============= ============== ==============
See notes to consolidated financial statements.
F-15
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
---------------------------------------------
June 29, June 29, June 30,
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income.................................................. $ 3,644,362 $ 2,850,541 $ 8,605,729
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation ............................................. 3,094,579 3,045,912 3,235,324
Amortization of deferred financing costs.................. 1,152,495 1,188,816 1,155,580
Amortization of other intangibles......................... 1,000,000 -- --
Gain on disposition of business........................... -- (629,787) --
(Gain) loss on sale or disposal of property, plant and
equipment............................................... (1,561) (99,015) 56,545
Deferred income taxes..................................... (423,716) 156,388 534,079
Loss on early extinguishment of debt...................... 993,899 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (9,932,110) 5,109,405 (1,420,388)
Inventories, net.......................................... (7,993,301) 8,498,301 (3,816,043)
Prepaid expenses, other current assets and other assets... (129,353) (113,918) (555,784)
Accounts payable, accrued expenses and other long-term
obligations............................................ (3,948) 1,434,463 (3,920,226)
Income taxes payable...................................... 4,888,412 105,440 (319,921)
------------- ------------- -------------
Net cash provided by (used in) operating activities... (3,710,242) 21,546,546 3,554,895
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment........ 13,600 202,919 61,489
Purchases of property, plant and equipment.................. (4,203,011) (1,787,532) (1,998,240)
Proceeds from disposition of business....................... -- 2,672,458 --
Acquisition of business..................................... -- (9,500,000) --
------------- ------------- -------------
Net cash used in investing activities................. (4,189,411) (8,412,155) (1,936,751)
------------- ------------- -------------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowing......... 30,527,000 -- --
Issuance of long-term debt.................................. 300,000 -- --
Payments on long-term debt.................................. (26,859,092) (15,061,032) (14,035,648)
Distributions to GFSI Holdings, Inc........................ (152,155) (178,788) --
Capital contributions from GFSI Holdings, Inc.............. -- 1,000,000 3,600,000
Cash paid for financing costs............................... (911,973) (189,922) --
Seller financing for acquisition of business................ -- 5,158,000 --
------------- ------------- -------------
Net cash provided by (used in) financing activities... 2,903,780 (9,271,742) (10,435,648)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.. (4,995,873) 3,862,649 (8,817,504)
Cash and cash equivalents:
Beginning of period......................................... 5,308,854 1,446,205 10,263,709
------------- ------------- -------------
End of period............................................... $ 312,981 $ 5,308,854 $ 1,446,205
============= ============= =============
Supplemental cash flow information:
Interest paid....................................... $ 14,004,814 $ 15,697,623 $ 16,329,449
============= ============= =============
Income taxes paid................................... $ (2,391,366) $ 359,451 $ 1,530,298
============= ============= =============
Non-cash investing and financing activities:
Equipment purchased under capital lease............. $ -- $ 93,920 $ 468,338
============= ============= =============
See notes to consolidated financial statements.
F-16
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 29, 2002, June 29, 2001 and June 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--GFSI, Inc. is a leading designer,
manufacturer and marketer of high quality, custom designed sportswear and
activewear bearing names, logos and insignia of resorts, corporations,
colleges and professional sports organizations. GFSI's customer base is
spread throughout the United States.
Ownership--GFSI is a wholly-owned subsidiary of GFSI Holdings, Inc.
Principles of Consolidation--The consolidated financial statements
include the accounts of GFSI and its wholly-owned subsidiaries, Event 1, CC
Products, Inc. and GFSI Canada Company. All significant intercompany accounts
and transactions have been eliminated.
Fiscal Year--GFSI utilizes a 52/53 week fiscal year which ends on the
Saturday nearest June 30. The twelve month periods ended June 29, 2002, June 29,
2001 and June 30, 2000, each contain 52 weeks.
Revenue Recognition--GFSI recognizes revenues when goods are shipped,
title has passed, the sales price is fixed and collectibility is reasonably
assured. Returns, discounts and sales allowance estimates are based on projected
sales trends, historical data and other known factors. If actual returns,
discounts and sales allowances are not consistent with the historical data used
to calculate these estimates, net sales could either be understated or
overstated.
Cash and Cash Equivalents--GFSI considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Accounts Receivable--Accounts receivable consist of amounts due from
customers and business partners. GFSI maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of GFSI's customers were to deteriorate causing
an impairment of their ability to make payments, additional provisions for bad
debts may be required in future periods.
Inventories--Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. GFSI writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required. GFSI also records changes in valuation
allowances due to changes in its 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. Inventories consist primarily of non-decorated apparel ("blanks").
Included in inventories are markdown allowances of $507,000 and $1,174,000 at
June 29, 2002 and June 29, 2001 respectively.
F-17
Property, Plant and Equipment--Property, plant and equipment are
recorded at cost. Major renewals and betterments that extend the life of the
asset are capitalized; other repairs and maintenance are expensed when incurred.
Depreciation and amortization are provided for on the straight-line
method over the following estimated useful lives:
Buildings and improvements............................ 40 years
Furniture and fixtures................................ 3-10 years
Long-Lived Assets--GFSI, using its best estimates based on reasonable
and supportable assumptions and projections, reviews for impairment its
long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstance indicate that the carrying amount of
its assets might not be recoverable. GFSI has concluded no financial statement
adjustment is required.
Deferred Financing Costs--Deferred financing costs are amortized using
the straight-line method over the shorter of the terms of the related loans or
the period such loans are expected to be outstanding. Amortization of deferred
financing costs is included in interest expense.
Advertising Costs-- All costs related to advertising GFSI's products
are expensed in the period incurred. Advertising expenses totaled $1,537,768,
$1,811,190 and $1,676,842 for the years ended June 29, 2002, June 29, 2001 and
June 30, 2000, respectively.
Income Taxes--GFSI accounts for income taxes using the liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
The liability method provides that deferred tax assets and liabilities are
recorded based on the difference between tax basis of assets and liabilities and
their carrying amount for financial reporting purposes, as measured by the
enacted tax rates which will be in effect when these differences are expected to
reverse.
GFSI is a party to a tax-sharing agreement with GFSI Holdings. As such,
the taxable income of GFSI is included in the consolidated federal and certain
state income tax returns of GFSI Holdings. GFSI's income tax provision has been
calculated as if GFSI would have filed separate federal and state income tax
returns.
Use of Estimates--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.
Segment Information-- No single customer represents ten percent or more
of consolidated net sales. In addition, substantially all of GFSI's net sales
are derived from sources within the United States of America and substantially
all of its assets are located within the United States of America.
F-18
New Accounting Standards--The FASB's Emerging Issues Task Force
("EITF") released its consensus No. 00-22, "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to be Delivered in the Future" and consensus No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products". The consensus' concluded that consideration from a
vendor to a reseller of the vendor's products is generally presumed to be an
adjustment to the selling prices of the vendor's products and, therefore, should
be classified as a reduction of revenue.
GFSI implemented both of these pronouncements during fiscal 2002, and
as a result, decreased net sales by $0.9 million and $1.2 million for fiscal
2001 and 2000, respectively, to reclassify certain customer incentive programs
and volume rebates that had previously been recorded as operating expenses.
GFSI adopted Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations: and SFAS No. 142, "Goodwill and Other Intangible
Assets", in fiscal 2002. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001, and contains certain transition provisions, that
apply to purchase method business combinations with an acquisition date before
July 1, 2002. SFAS No. 142 addresses the financial accounting and reporting for
goodwill and other intangible assets acquired in a business combination after
they have been initially recognized in the financial statements, eliminates
amortization of goodwill, and requires that goodwill be tested for impairment at
least annually. The adoption of SFAS No. 141 and SFAS No. 142 did not have an
impact on GFSI's consolidated financial statements.
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 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 adoption of this new standard.
Reclassifications-- Certain reclassifications have been made to the
fiscal 2001 and 2000 consolidated financial statements to conform to the fiscal
2002 presentation.
F-19
2. RESTRUCTURING, ACQUISITION AND DISPOSITION
During fiscal 2001, GFSI recorded $836,291 in severance and employee
termination benefits related to the execution of a restructuring plan that
eliminated approximately 50 positions.
On April 20, 2001, GFSI signed a Stock Purchase Agreement to purchase
100% of the issued and outstanding stock of Champion Products, Inc. through a
wholly-owned subsidiary, CC Products, Inc. ("Champion Custom Products"), and on
June 25, 2001 the transaction closed. GFSI paid approximately $9.5 million for
the common stock of Champion Products and a non-competition agreement which was
payable in four installments through October 1, 2001. In addition, GFSI entered
into a 15 year license agreement with Sara Lee Corporation (the former parent
company of Champion Products) for the exclusive use of the Champion logo and
related trademarks on certain products sold beginning July 1, 2001. Under the
license agreement, GFSI will pay a royalty to Sara Lee Corporation based upon
net sales beginning in fiscal 2004. The royalty rate ranges from 3% to 6% of net
sales from years 3 to 15 of the license agreement. The license agreement
provides for guaranteed minimum royalties of $1 million per year in years 3 and
4 of the license agreement. Champion Custom Products was designated a restricted
subsidiary under the senior subordinated notes and executed a guaranty for that
debt instrument in June 2001.
GFSI used the purchase method of accounting to record this transaction
as follows:
Inventory $ 7,250,000
Other long-term asset acquired 500,000
Non-competition agreement 2,000,000
Deferred tax liability (195,000)
--------------
$ 9,555,000
==============
During fiscal 2002 Champion Custom Products had sales of $43.4 million
and produced an operating contribution of $7.7 million. Champion Custom Products
had no sales and incurred $1,110,331 of preparatory and integration costs in
fiscal 2001.
Unaudited pro-forma consolidated results of operations for the years
ended June 30, 2000 and June 29, 2001, as if GFSI had acquired Champion Products
as of the beginning of each year, follow. The pro-forma results include
estimates and assumptions which management believes are reasonable and exclude
the $1,110,331 of non-recurring preparatory and integration costs incurred in
fiscal 2001 related to the acquisition. However, pro-forma results are not
necessarily indicative of the results which would have occurred if the
acquisition had occurred as of the beginning of the periods indicated.
Pro-forma Supplemental Data
(Unaudited)
Years Ended
June 29, 2001 June 30, 2000
------------- -------------
Net sales..................... $226,959,327 $249,589,000
Operating income.............. 24,414,206 32,333,167
Net income (loss)............. 5,058,308 9,123,649
On June 29, 2001, GFSI sold the assets related to its Tandem Marketing
division for approximately $2.7 million in cash, net of closing costs, and the
buyer's assumption of $1.2 million in Tandem Marketing business-related
F-20
liabilities. GFSI recognized a $629,787 gain on the sale of the Tandem Marketing
division. The Tandem Marketing division had revenues of $11.7 million and $13.5
million for the fiscal years ended June 29, 2001, and June 30, 2000,
respectively. The Tandem Marketing division had operating income of $0.5 million
and $1.9 million for the fiscal years ended June 29, 2001, and June 30, 2000,
respectively.
3. PROPERTY, PLANT AND EQUIPMENT
June 29, 2002 June 29, 2001
------------- -------------
Land........................................... $ 2,455,373 $ 2,455,373
Buildings and improvements..................... 21,648,710 21,004,636
Furniture and fixtures......................... 19,461,891 18,285,124
------------ ----------
43,565,974 41,745,133
Less: accumulated depreciation................. 25,928,438 23,202,103
------------ ----------
17,637,536 18,543,030
Construction in progress....................... 2,033,328 31,443
------------ ------------
$ 19,670,864 $ 18,574,473
============ ============
Assets under capital leases were summarized as follows:
June 29, 2002 June 29, 2001
------------- -------------
Furniture and fixtures ........................ $ 571,264 $ 565,777
Less: accumulated amortization................. 255,426 143,383
------------- ------------
Net assets under capital lease................. $ 315,838 $ 422,394
============ ============
The following are the minimum lease payments that will be made in each of
the years indicated based on capital and operating leases in effect as of
June 29, 2002:
Fiscal Year: Capital Operating
------- ---------
2003....................................... $ 105,069 $ 734,856
2004....................................... 97,765 562,039
2005....................................... 95,527 127,832
2006....................................... 9,846 37,755
2007....................................... -- --
--------- ----------
Total minimum lease payments............... 308,207 $1,462,482
==========
Amount representing interest............... (39,881)
----------
Present value of minimum lease payments.... $ 268,326
==========
Rental expense for all operating leases aggregated $726,516, $598,349 and
$659,338 in fiscal years 2002, 2001 and 2000, respectively. It is anticipated
the leases that expire will be renewed or replaced, and future lease commitments
are not expected to aggregate less than the amount shown in fiscal 2003.
F-21
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of:
June 29, June 29,
2002 2001
--------------- ---------------
Senior Subordinated Notes, 9.625% interest rate, due 2007....................... $ 125,000,000 $ 125,000,000
Revolving Bank Credit Agreement, variable interest rate, due 2005............... 30,527,000 --
Term Loan A, variable interest rate, 7.5%
at June 29, 2001, due 2002.................................................. -- 11,053,395
Term Loan B, variable interest rate, 8.0%
at June 29, 2001, due 2004.................................................. -- 15,604,794
Mortgage payable to the City of Bedford, Iowa, 7.60% interest rate.............. 219,293 275,957
Capital lease obligations....................................................... 268,326 407,287
Other........................................................................... 294,720 --
------------- -------------
156,309,339 152,341,433
Less current portion............................................................ 177,087 6,699,631
------------- -------------
$ 156,132,252 $ 145,641,802
============= =============
During the third quarter of fiscal 2002, GFSI replaced its existing
bank Credit Agreement by entering into a Revolving Bank Credit Agreement with a
group of financial institutions to provide a revolving line of credit which
matures in January 2005. Proceeds from borrowings under the replacement
Revolving Bank Credit Agreement were used to retire GFSI's existing bank debt
which was comprised of both term loans and revolving debt. GFSI incurred fees
and expenses totaling approximately $906,000 to close the credit facility. The
Revolving Bank Credit Agreement provides for borrowings on a revolving basis of
up to $65 million at an interest rate based upon LIBOR or prime. The weighted
average interest rate in effect at June 29, 2002 was 4.7%. In addition, the
Revolving Bank Credit Agreement provides for the issuance of letters of credit
on behalf of GFSI. At June 29, 2002, GFSI had $8.8 million in letters of credit
outstanding and $23.2 million in unused borrowing availability under the
Revolving Bank Credit Agreement. At June 29, 2001, GFSI had $26.7 million in
borrowings and $8.2 million in letters of credit outstanding under the previous
bank Credit Agreement.
The Revolving Bank Credit Agreement is secured by substantially all of
GFSI's assets and is guaranteed by GFSI's wholly-owned subsidiaries. GFSI
Holdings is a co-obligor under the Revolving Bank Credit Agreement. Borrowings
under the Revolving Bank Credit Agreement are subject to certain restrictions
and covenants. GFSI is limited with respect to paying dividends and
distributions (except certain permitted distributions to GFSI Holdings), the
incurrence of certain debt, the incurrence of certain liens, and restricted
regarding certain consolidations, mergers and business combinations, asset
acquisitions and dispositions. The Revolving Bank Credit Agreement requires
GFSI, among other things, to maintain a minimum fixed charge coverage ratio as
defined in the Revolving Bank Credit Agreement. At the most restrictive level,
GFSI must maintain a fixed charge coverage ratio of 1.15 to 1.0. As of June 29,
2002, GFSI was in compliance with the restrictions and covenants of the
Revolving Bank Credit Agreement.
On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes
due 2007 in the aggregate principal amount of $125,000,000. Interest on the
senior subordinated notes is payable
F-22
semi-annually in cash in arrears on September 1 and March 1 each year. The
senior subordinated notes mature on March 1, 2007 and are redeemable, in whole
or in part, at the option of GFSI at any time on or after March 1, 2002 at the
redemption prices listed below:
Year Percentage
- -------------------------------------------------------------------------------
2002........................................................ 104.813%
2003........................................................ 103.208
2004........................................................ 101.604
2005 and thereafter......................................... 100.000
Upon the occurrence of a change of control, GFSI will be required,
subject to certain conditions, to make an offer to purchase the senior
subordinated notes at a price equal to 101% of the principal amount plus accrued
and unpaid interest to the date of purchase. The senior subordinated notes are
publicly traded over the counter. At June 29, 2002, the quoted market price for
the senior subordinated notes was 85/100. At June 29, 2002, the senior
subordinated notes estimated fair value approximated $106,250,000.
The senior subordinated notes are senior unsecured obligations of GFSI
and pursuant to the terms of the senior subordinated notes indenture, rank pari
passu in right of payment to any future subordinated indebtedness of GFSI, and
effectively rank junior to secured indebtedness of GFSI, including borrowings
under the Revolving Bank Credit Agreement. The senior subordinated notes
indenture includes covenants that, among other things, limit payments of
dividends and other restricted payments and the incurrence of additional
indebtedness. As of June 29, 2002, GFSI was in compliance with all such
covenants.
On June 1, 1998, GFSI purchased a building and land in Bedford, Iowa
for approximately $428,000 in the form of a mortgage note payable at $6,325 per
month from July 1998 through June 2004 with a lump sum payment of $97,600 in
June 2004. The note payable to the City of Bedford, Iowa is secured by the
property mortgaged.
Aggregate maturities of GFSI's long-term debt as of June 29, 2002 are
as follows:
Year
----
2003 $ 177,087
2004 261,528
2005 30,643,110
2006 37,663
2007 125,029,380
Thereafter 160,571
------------
Total $156,309,339
============
F-23
5. COMMITMENTS AND CONTINGENCIES
GFSI, in the normal course of business, is 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 GFSI.
Various state and local taxing authorities have examined, or are in the
process of examining GFSI's sales and use tax returns. GFSI has reviewed 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 accrued an amount adequate to cover the assessments.
6. PROFIT SHARING AND 401(K) PLAN
GFSI has a defined contribution (401k) plan which includes employee
directed contributions with an annual matching contribution of 50% on up to 4%
of a participant's annual compensation. In addition, GFSI may make additional
profit sharing contributions at the discretion of the Board of Directors.
Participants exercise control over the assets of their account and choose from a
broad range of investment alternatives. Contributions made by GFSI to the plan
related to the 401(k) match and profit sharing portions totaled $528,313,
$616,756 and $716,624 for the years ended June 29, 2002, June 29, 2001 and June
30, 2000 respectively.
7. INCOME TAXES
The provisions for income taxes for the years ended June 29, 2002,
June 29, 2001 and June 30, 2000 consist of the following:
June 29, June 29, June 30,
2002 2001 2000
---- ---- ----
Current income tax provision...................................... $ 2,366,071 $ 1,474,492 $ 4,643,605
Deferred income tax provision (benefit)........................... (36,117) 156,388 534,079
------------ ----------- -----------
Total income tax provision................................... $ 2,329,954 $ 1,630,880 $ 5,177,684
============ =========== ===========
The income tax provisions from operating activities differ from amounts computed
at the statutory federal year ended income tax rate as follows:
June 29, 2002 June 29, 2001 June 30, 2000
------------- ------------- -------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Income tax provision at the statutory rate $ 2,091,010 35.0% $ 1,568,497 35.0% $ 4,724,195 34.3%
Effect of state income taxes,
net of federal benefit................ 237,737 4.0 149,004 3.3 467,750 3.4
Other..................................... 1,207 -- (86,621) (1.9) (14,261) (.1)
----------- ------- ------------ ------- ------------ ------
$ 2,329,954 39.0% $ 1,630,880 36.4% $ 5,177,684 37.6%
=========== ======= ============ ======= ============ ======
F-24
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The sources of the differences that give rise to the
deferred income tax assets and liabilities as of June 29, 2002 and June 29,
2001, along with the income tax effect of each, were as follows:
June 29, 2002 June 29, 2001
Deferred Income Tax Deferred Income Tax
------------------- -------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Allowance for doubtful accounts ............. $ 298,957 $ -- $ 271,825 $ --
Property, plant, and equipment............... -- 1,037,903 -- 1,031,191
Accrued expenses............................. 345,574 -- 779,277 --
Deferred financing costs..................... -- -- -- 523,975
Other assets, non current.................... 338,000 -- -- --
Other........................................ 348,315 147,768 369,697 144,174
---------- ---------- ---------- ----------
Total........................................ $1,330,846 $1,185,671 $1,420,799 $1,699,340
========== ========== ========== ==========
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that GFSI disclose estimated fair
values for its financial instruments which include cash and cash equivalents,
accounts receivables, short-term borrowings, accounts payables, long-term debt.
Cash and cash equivalents--The carrying amount reported on the balance
sheet represents the fair value of cash and cash equivalents.
Accounts receivable--The carrying amount of accounts receivable
approximates fair value because of the short-term nature of the financial
instruments.
Accounts payable--The carrying amount of accounts payable approximates
fair value because of the short-term nature of the financial instruments.
Long-term debt-- Current market values, if available, are used to
determine fair values of debt issues with fixed rates. The carrying value of
floating rate debt is a reasonable estimate of its fair value because of the
short-term nature of its pricing.
The following summarizes the estimated fair value of financial instruments, by
type:
June 29, 2002 June 29, 2001
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- --------------
Assets and liabilities:
Cash and cash equivalents................ $ 312,981 $ 312,981 $ 5,308,854 $ 5,308,854
Accounts receivable...................... 32,626,432 32,626,431 22,694,322 22,694,322
Accounts payable......................... 12,010,292 12,010,292 12,777,790 12,777,790
Long-term debt........................... 156,309,339 137,559,339 152,341,433 123,591,433
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
F-25
9. RELATED PARTY TRANSACTIONS
The Jordan Company Management Corporation has an agreement to render
services to GFSI including consultation on its financial and business affairs,
its relationship with its lenders and stockholders, and the operation and
expansion of its business. The agreement will renew for successive one year
terms unless either party, within 60 days prior to renewal, elects to terminate
3.00
the agreement. GFSI incurred consulting fees totaling $500,000, $440,000 and
$365,000 for years ended June 29, 2002, June 29, 2001 and June 30, 2000,
respectively.
GFSI Holdings has a non-competition agreement with a shareholder and an
officer. In exchange for the covenant not to compete, the shareholder will be
paid $250,000 per annum for a period of ten years. For each of the years ended,
June 29, 2002, June 29, 2001 and June 30, 2001, $250,000 of expense related to
this agreement was included in general and administrative expenses.
GFSI has employment agreements with Robert M. Wolff, Chairman and Chief
Executive Officer, a Director and a stockholder of GFSI. The terms of the
employment agreements provide for Mr. Wolff to serve as Chairman of GFSI in
exchange for a base salary and other employee benefits through 2016. Under the
terms of the employment agreements, Mr. Wolff received a annual salary of
approximately $195,000, $209,000, and $145,000, and use of a company vehicle for
the years ended June 29, 2002, June 29, 2001 and June 30, 2000.
GFSI and GFSI Holdings have entered into a tax sharing agreement for
purposes of filing a consolidated federal income tax return and paying federal
income taxes on a consolidated basis. Pursuant to the tax sharing agreement,
GFSI and each of its consolidated subsidiaries will pay to GFSI Holdings on an
annual basis an amount determined by reference to the separate tax liability of
GFSI as calculated pursuant to Section 1552(a)(1) of the Code and applicable
regulations thereunder. For the years ended June 29, 2002, June 29, 2001 and
June 30, 2000 payments (refunds) under this agreement, net of capital
contributions from GFSI Holdings of $0, $1,000,000 and $3,600,000, respectively,
aggregated ($2,391,366), $359,451 and $1,530,298, respectively.
10. LOSS ON EARLY EXTINGUISHMENT OF DEBT
In March 2002, GFSI entered into a $65 million bank credit facility and
repaid its existing $40 million bank credit facility ahead of its scheduled
expiration. A loss on early extinguishment of debt of approximately $994,000 was
recorded in the third quarter of fiscal 2002 to write off deferred debt
origination costs related to the previous bank facility.
11 CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not necessarily intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with accounting principles
generally accepted in the United States of America. Each of the subsidiary
guarantors are 100% owned by GFSI. The subsidiary guarantees of GFSI's debts are
full and unconditional.
F-26
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets $ 70,942 $ 10,923 $ (1,084) $ 80,781
Investment in equity of subsidiaries 8,773 -- (8,773) --
Property, plant and equipment 19,120 551 -- 19,671
Other assets 4,882 4 (2) 4,884
----------- --------- --------- ------------
Total assets $ 103,717 $ 11,478 $ (9,859) $ 105,336
=========== ========= ========= ============
Liabilities and stockholders' equity:
Current liabilities $ 26,199 $ 2,510 $ (1,086) $ 27,623
Deferred income taxes 504 195 -- 699
Other liabilities 527 -- -- 527
Long-term debt 156,132 -- -- 156,132
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
----------- --------- --------- ------------
Total liabilities and
stockholders' equity (deficiency) $ 103,717 $ 11,478 $ (9,859) $ 105,336
=========== ========= ========= ============
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Revenues $ 145,512 $ 55,705 $ (3,968) $ 197,249
Costs and expenses 132,351 46,172 (3,968) 174,555
----------- --------- --------- ------------
Operating Income 13,161 9,533 -- 22,694
Equity in net earnings of subsidiaries 5,813 -- (5,813) --
Interest expense and other (16,718) (1) -- (16,719)
----------- --------- --------- ------------
Income before income taxes 2,256 9,532 (5,813) 5,975
Provision for income taxes (benefit) (1,388) 3,719 -- 2,331
----------- --------- --------- ------------
Net income $ 3,644 $ 5,813 $ (5,813) $ 3,644
=========== ========= ========= ============
F-27
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net cash flows from operating activities $ (3,921) $ 211 $ -- $ (3,710)
Net cash flows used in investing activities (3,911) (279) -- (4,190)
Cash flows from financing activities:
Net borrowings under revolving credit agreements 30,527 -- -- 30,527
Payments on long-term debt (26,859) -- -- (26,859)
Cash paid for financing costs (912) -- -- (912)
Issuance of long-term debt 300 -- -- 300
Distributions to GFSI Holdings, Inc. (152) -- -- (152)
---------- --------- ---------- ----------
2,904 -- -- 2,904
---------- --------- ---------- ----------
Net decrease in cash and cash equivalents (4,928) (68) -- (4,996)
Cash and cash equivalents at beginning of period 5,263 46 -- 5,309
---------- ---------- ---------- ----------
Cash and cash equivalents end of period $ 335 $ (22) $ -- $ 313
========== ========== ========== ==========
As of June 29, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets $ 62,634 $ 16,151 $ (10,992) $ 67,793
Investment in equity of subsidiaries 10,515 -- (10,515) --
Property, plant and equipment 17,952 622 -- 18,574
Other assets 7,202 -- (2) 7,200
------------ --------- ------------ -------------
Total assets $ 98,303 $ 16,773 $ (21,509) $ 93,567
============ ========= ============ =============
Liabilities and stockholders' equity:
Current liabilities $ 34,277 $ 6,063 $(10,994) $ 29,346
Deferred income taxes 994 195 -- 1,189
Other liabilities 527 -- -- 527
Long-term debt 145,642 -- -- 145,642
Stockholder's equity (deficiency) (83,137) 10,515 (10,515) (83,137)
------------ --------- ------------ -------------
Total liabilities and
stockholders' equity (deficiency) $ 98,303 $ 16,773 $ (21,509) $ 93,567
============ ========= ============ =============
F-28
Year ended June 30, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Revenues $ 178,568 $ 10,536 $ (3,799) $ 185,305
Costs and expenses 158,504 9,872 (3,799) 164,577
----------- ---------- --------- ------------
Operating Income 20,064 664 -- 20,728
Equity in net earnings of subsidiaries 455 -- (455) --
Interest expense (16,745) 85 -- (16,660)
Other, net 417 (3) -- 414
----------- ---------- --------- ------------
Income before income taxes 4,191 746 (455) 4,482
Provision for income taxes 1,340 291 -- 1,631
----------- ---------- --------- ------------
Net income $ 2,851 $ 455 $ (455) $ 2,851
=========== ========== ========= ============
Year ended June 30, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net cash flows from operating activities $ 21,448 $ 99 $ -- $ 21,547
Investing activities:
Proceeds from sales of property, plant and
equipment 203 -- -- 203
Purchase of property, plant and equipment (1,769) (19) -- (1,788)
Proceeds from disposition of business 2,672 -- -- 2,672
Acquisition of business (9,500) -- -- (9,500)
----------- ---------- ------------ -------------
(8,394) (19) -- (8,413)
Cash flows from financing activities:
Payments on long-term debt (15,061) -- -- (15,061)
Cash paid for financing costs (190) -- -- (190)
Capital contribution from GFSI Holdings, Inc. 1,000 -- -- 1,000
Seller financing for acquisition of business 5,158 -- -- 5,158
Distributions to GFSI Holdings, Inc. (178) -- -- (178)
----------- ---------- ------------ -------------
(9,271) -- -- (9,271)
----------- ---------- ------------ -------------
Net increase in cash and cash equivalents 3,783 80 -- 3,863
Cash and cash equivalents at beginning of period 1,479 (33) -- 1,446
----------- ---------- ------------ -------------
Cash and cash equivalents end of period $ 5,262 $ 47 $ -- $ 5,309
=========== ========== ============ =============
F-29
Year ended June 30, 2000 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Revenues $ 199,014 $ 10,777 $ (4,291) $ 205,500
Costs and expenses 169,444 9,114 (4,291) 174,267
----------- ----------- ----------- ------------
Operating Income 29,570 1,663 -- 31,233
Equity in net earnings of subsidiaries 989 -- (989) --
Interest expense and other (17,456) 6 -- (17,450)
----------- ----------- ----------- ------------
Income before income taxes 13,103 1,669 (989) 13,783
Provision for income taxes 4,497 680 -- 5,177
----------- ----------- ----------- ------------
Net income $ 8,606 $ 989 $ (989) $ 8,606
=========== =========== =========== ============
Year ended June 30, 2000 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net cash flows from operating activities $ 3,548 $ 7 $ -- $ 3,555
Net cash flows used in investing activities (1,852) (85) -- (1,937)
Cash flows from financing activities:
Payments on long-term debt (14,035) -- -- (14,035)
Contributions from GFSI Holdings, Inc. 3,600 -- -- 3,600
----------- ----------- ----------- ------------
(10,435) -- -- (10,435)
----------- ----------- ----------- ------------
Net decrease in cash and cash equivalents (8,739) (78) -- (8,817)
Cash and cash equivalents at beginning of period 10,218 45 -- 10,263
----------- ----------- ----------- ------------
Cash and cash equivalents end of period $ 1,479 $ (33) $ -- $ 1,446
=========== =========== =========== ============
F-30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
(a) The Delaware General Corporation Law (Section 145) gives Delaware
corporations broad powers to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative by
reason of the fact that the person is or was a director, officer, employee or
agent of the registrant, or is or was serving at the request of the registrant
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, so
long as such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the registrant. For
actions or suits by or in the right of the registrant, no indemnification is
permitted in respect of any claim, issue or matter as to which such person is
adjudged to be liable to the registrant, unless, and only to the extent that,
the Delaware Court of Chancery or the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses which the Court of Chancery
or such other court deems proper.
Section 145 also authorizes the registrant to buy directors' and
officers' liability insurance and gives a director, officer, employee or agent
of the registrant who has been successful on the merits or otherwise in defense
of any action, suit or proceeding of a type referred to in the preceding
paragraph the right to be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Any indemnification (unless ordered by a court) will be made by the registrant
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth above. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (3) by the
stockholders. Such indemnification is not exclusive of any other rights to which
those indemnified may be entitled under any by-laws, agreement, vote of
stockholders or otherwise.
(b) The Certificate of Incorporation of the registrant requires, and
the By- Laws of the registrant provides for, indemnification of directors,
officers, employees and agents to the full extent permitted by law.
(c) The Purchase Agreement and the Registration Rights Agreement (the
forms of which are included as Exhibits 1 and 4.4 to this registration
statement) provide for the indemnification under certain circumstances of the
registrant, its directors and certain of its officers by the Underwriters.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
A list of the exhibits filed with, or incorporated by reference into,
this registration statement is in the Exhibit Index that immediately precedes
such exhibits and is incorporated herein by reference.
II-1
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required, are inapplicable or the required information has already
been provided elsewhere in this registration statement.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on March 13, 2003.
GFSI, INC.
By /s/ Robert M. Wolff
-----------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities indicated on March 13, 2003.
Signatures Title
---------- -----
/s/ Larry D. Graveel President, Chief Operating Officer
- ------------------------------------ and a Director
Larry D. Graveel
/s/ J. Craig Peterson Senior Vice President, Chief
- ------------------------------------ Financial Officer (Principal
J. Craig Peterson Financial and Accounting Officer)
/s/ Michael H. Gary Senior Vice President and a Director
- ------------------------------------
Michael H. Gary
/s/ A. Richard Caputo, Jr. Director
- ------------------------------------
A. Richard Caputo, Jr.
/s/ John W. Jordan II Director
- ------------------------------------
John W. Jordan II
/s/ David W. Zalaznick Director
- ------------------------------------
David W. Zalaznick
/s/ Robert M. Wolff Director
- ------------------------------------
Robert M. Wolff
II-3
EXHIBIT INDEX
Exhibit
Number Description Page
------- ----------- ----
1 Purchase Agreements, dated February 27, 1997, by and among GFSI, Inc., Donaldson, *
Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc.
2.1 Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI *
Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc.
2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997, *
among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc.
2.3 Stock Purchase Agreement, dated as of April 20, 2001, by and among Sara Lee ***
Corporation, Champion Products, Inc. and GFSI, Inc.
2.4 First Amendment to Stock Purchase Agreement, dated June 25, 2001, by and among Sara ****
Lee Corporation, Champion Products, Inc. and GFSI, Inc.
3.1 Certificate of Incorporation of GFSI, Inc. *
3.2 Bylaws of GFSI, Inc. *
4.1 Indenture, dated February 27, 1997, between GFSI, Inc. and Fleet National Bank, as *
Trustee.
4.2 Global Series A Senior Subordinated Note. *
4.3 Form of Global Series B Senior Subordinated Note. *
4.4 Registration Rights Agreement, dated February 27, 1997, by and among GFSI, Inc., *
Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc.
4.5 Subscription and Stockholders Agreement, dated February 27, 1997, by and among GFSI, *
Inc. and the investors listed thereto.
4.6 Deferred Limited Interest Guaranty, dated February 27, 1997 by GFSI, Inc. to MCIT PLC. *
4.7 Indenture, dated September 17, 1997, between GFSI Holdings, Inc. and State Street **
Bank and Trust Company, as Trustee.
4.8 Global Series A Senior Discount Note. **
4.9 Form Global Series B Senior Discount Note. **
4.10 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, **
Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.
4.11 Indenture, dated as of December 31, 2002 between GFSI, Inc. and State Street Bank and +++
Trust Company.
4.12 9 5/8% Series A Senior Subordinated Note due 2007. +++
5 Opinion of Mayer, Brown, Rowe & Maw
8 Tax Opinion
II-4
10.1(a) Credit Agreement, dated February 27, 1997, by and among GFSI, Inc., the lenders *
listed thereto and The First National Bank of Chicago, as Agent.
10.1(b) Amendment No. 1 to Credit Agreement dated September 17, 1997 by **
and among GFSI, Inc., the lenders listed thereto and the
First National Bank of Chicago, as agent.
10.2 Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First *
National Bank of Chicago, as Agent.
10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The *
First National Bank of Chicago, as Agent.
10.4 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases, *
dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago.
10.5(a) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and *
Boatmen's National Bank.
10.5(b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and *
Hillcrest Bank.
10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, *
Inc.
10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc. *
and TJC Management Corporation.
10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff. *
10.9 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and *
Robert M. Wolff.
10.10 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings. *
Inc. and its director and executive officers.
10.11 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Impact Design, *
Inc.
10.12 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Kansas Custom *
Embroidery.
10.13 Form of Promissory Note, dated February 27, 1997, between GFSI Holdings, Inc. and the *
Management Investors.
10.14 License Agreement, dated April 1, 1994, by and between Winning Ways, Inc. and *
Softwear Athletics, Inc.
10.15 License Agreement, dated October 27, 1998, by and between GFSI, Inc. and Bonmax Co., *
Ltd.
10.16 License Agreement, dated January 1, 1999, by and between GFSI, Inc. and Gear For *
Sports Ltd.
10.17 CEBA Loan Agreement, dated April 28, 1998, by and among the Iowa Department of *
Economic Development, the City of Bedford and GFSI, Inc.
II-5
10.18 Employment Agreement, dated as of April 1, 2001, by and between GFSI, Inc. and Robert ****
G. Shaw.
10.19 Non-competition Agreement, dated as of April 1, 2001, by and between GFSI, Inc. and ****
Robert G. Shaw.
10.20 License Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC ****
Products Acquisition, Inc., CC Products, Inc. and GFSI, Inc.
10.21 Supply Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC ****
Products Acquisition, Inc., CC Products, Inc. and GFSI, Inc.
10.22 Fall 2001 Merchandise Agreement, dated as of June 25, 2001, by and among Sara Lee ****
Corporation, CC Products Acquisition, Inc., CC Products, Inc. and GFSI, Inc.
10.23 Credit Agreement dated March 29, 2002, among the financial institutions named therein +
as the Lenders, and Bank of America, N.A. as the Agent and GFSI, Inc. as the Borrower.
10.24 Supplemental Employment Agreement, dated March 31, 2002 between GFSI, Inc. and Robert ++
M. Wolff.
10.25 Exchange Agreement, dated as of December 31, 2002, between GFSI, Inc. and Jefferies +++
Company, Inc.
10.26 Consent and Amendment, dated as of December 31, 2002, to the Credit Agreement, dated +++
March 28, 2002.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Mayer, Brown, Rowe & Maw (included in the legal opinion filed as Exhibits
5 and 8)
II-6
25.1 Statement of Eligibility of Trustee.
99.1 Letter of Transmittal
99.2 Notice of Guaranteed Delivery
* Incorporated by reference to the exhibits filed with the Registration
Statement on Form S-4 of GFSI, Inc. filed with the Securities and
Exchange Commission on July 22, 1997 (Commission File
No. 333-24189) and all supplements thereto.
** Incorporated by reference to Exhibit 10.2 of the Registration Statement
on Form S-4 of GFSI Holdings, Inc. filed with the Securities and
Exchange Commission of December 17, 1997 (Commission file No. 333-38951)
and all supplements thereto.
*** Incorporated by reference to Exhibit 2.3 of the Quarterly Report
on Form 10-Q of GFSI, Inc. filed with the Securities and Exchange
Commission on May 14, 2001 (Commission File No. 333-24189).
**** Incorporated by reference to the exhibits filed on Form 10-K of GFSI, Inc.
filed with the Securities and Exchange Commission on September 27,
2001 (Commission File No. 333-38951).
+ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc.,
filed with the Securities and Exchange Commission on May 10, 2002
(Commission File No. 333-24189).
++ Incorporated by reference to the exhibits filed on Form 10-K of GFSI, Inc.
filed with the Securities and Exchange Commission on September 25, 2002
(Commission File No. 333-38951).
+++ Incorporated by reference to the exhibits on Form 10-Q of GFSI, Inc. filed
with the Securities and Exchange Commission on February 6, 2003
(Commission File No. 333-24189).
II-7