As filed with the Securities and Exchange Commission on April 30, 2003
Registration No. 333-103872
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
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 Maximum Proposed Maximum Amount Of
Title of Each Class of Securities to Be Amount to Be Offering Price Per Aggregate Offering Registration
Registered Registered Unit(1) Price(1) Fee
- ---------------------------------------------------------------------------------------------------------------------
9 5/8% Series B Senior Subordinated Notes $9,900,000 100% $9,900,000 $800.91 (3)
Due 2007...............................
- ---------------------------------------------------------------------------------------------------------------------
Guarantees related to the 9 5/8% Series B N/A N/A N/A N/A(2)
Senior Subordinated Notes Due 2007.....
=====================================================================================================================
(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.
(3) Previously paid.
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
Jurisdiction of Standard Industrial
Name of 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, SOLICATATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 30, 2003
PROSPECTUS
GFSI, INC.
Offer To Exchange $9,900,000 of 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. Other
than borrowings under our Revolving Bank Credit Agreement, 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.
o The new notes will be fully and unconditionally guaranteed, jointly
and severally, on a senior subordinated basis, by our subsidiaries:
CC Products, Inc., Event 1, Inc. and GFSI Canada Company.
-------------------
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
Summary.......................................................................1
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.........................................................55
Description of Certain Indebtedness..........................................91
Plan of Distribution.........................................................92
Federal Income Tax Consequences..............................................93
Legal Matters................................................................93
Experts ....................................................................93
Available Information........................................................94
Index to Consolidated Financial Statements..................................F-1
-i-
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
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."
2
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. All conditions to
the exchange offer must be satisfied or waived
prior to the expiration of the exchange offer.
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
5
o you must comply with the registration
requirements of the Securities Act in
connection with any resale transaction.
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
95/8% 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 95/8% 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 equal 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, including outstanding letters of credit,
to which the notes would have been subordinated
would have been approximately $32 million,
including $26 million of borrowings under the
Revolving Bank Credit Agreement. As of December
28, 2002, we could have borrowed an additional
$28 million under the Revolving Bank Credit
Agreement. As of December 28, 2002, GFSI had
$125 million of outstanding indebtedness that
ranked equally with the new notes. See
"Description of Notes--Certain Covenants" and
"Description of Certain Indebtedness."
The indenture pursuant to which the notes are
issued permits GFSI and its subsidiaries to
incur additional indebtedness, subject to
certain limitations, including a specified cash
flow coverage ratio (as defined in the
indenture). That indebtedness may be senior
indebtedness (as defined in the indenture) or
may rank equal in right of payment with the
notes or junior in right of payment. GFSI is
not permitted to incur indebtedness that is not
senior indebtedness that would rank senior in
right of payment to the notes.
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."
9
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.
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 make it more difficult for holders to sell
their new notes and may have an adverse effect on the price at which the new
notes might be sold.
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.
12
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 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.
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 refinance, the new terms governing our debt may
not be similar to the terms governing such debt currently and may be more
costly and difficult for us to satisfy. If we are required to obtain
additional financing, the increase in our indebtedness would require us to
dedicate additional cash flow to service our debt which would reduce funds
available for other business purposes. If we change our operations and/or
business plans, we may continue to be unable to generate sufficient cash flow
to service our debt.
In addition, we may not be able to take any of these actions or such
actions may be prohibited under the terms of our various debt instruments,
including the indenture governing the new notes. If we were unable to take any
of the foregoing actions, we could continue to be unable to generate
sufficient cash flow to service our debt.
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 allow our secured creditors to foreclose on our assets which serve
as collateral and would allow our creditors to force us into bankruptcy.
13
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:
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. 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 on
commercially reasonable terms acceptable to us. If we are unable to satisfy
our accelerated debt, our lenders may foreclose on our assets which serve as
collateral or may force us into bankruptcy. 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.
14
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 $32 million
of secured indebtedness, including outstanding letters of credit, 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.
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
15
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.
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, which would permit the holders of the new notes to accelerate
the maturity of the new notes and the lenders under the Revolving Bank
Credit Agreement to accelerate the repayment of borrowings under that
agreement.
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.
16
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
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
17
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. We generally do
not have long-term contracts with any of our customers, 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 result in a
decrease in net sales and/or require us to spend additional funds on
marketing, either of which could cause a material decrease in our net income
and operating cash flows.
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
net income and operating cash flows could be materially adversely affected
due to a decrease in net sales and/or an increase in marketing expenses.
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 could result in a decrease in net sales and/or
require us to spend additional funds on marketing, either of which could cause
a material decrease in our net income and operating cash flows.
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 could
result in a decrease in our net sales which could cause a material decrease in
our net income and operating cash flows.
We depend 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. If we do not
receive timely delivery of products or the products do not meet our quality
standards, we will fail to satisfy our customers' requirements, leading to our
customers canceling orders, demanding reduced prices, refusing to accept
orders or reducing future orders, any of which could materially adversely
affect our net income and operating cash flows.
18
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. 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 result in a decrease in net sales and have a material adverse
effect on our net income and operating cash flows.
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 interfere with our ability to
receive blank products. Such interference could materially adversely affect
our net sales, net income and operating cash flows.
We depend upon our licenses with respect to some of our products and we may
not 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. We
depend upon our licenses with respect to some of our products and we may not
be able to retain or renew these licenses. 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 may not 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, we would lose the right to use the
trademarks our customers recognize which could result in a material decrease
in net sales or require us to devote additional funds to marketing, either of
which could cause a material decrease in our net income and operating cash
flows.
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. Third-parties may assert claims to our
trademarks and other intellectual property, and we may not be able to
successfully resolve those claims. In addition, 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. We could also 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 net income. If we are unable
to successfully defend any such legal action and lose the protection of our a
trademark or other intellectual property, our net sales could decrease and/or
our marketing expenses may increase, either of which could have a material
adverse effect on our net income and operating cash flows.
19
The demand for some of our products is cyclical and seasonal. An economic
downturn or unseasonably warm weather may reduce 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 inventory for extended
periods of time, sell excess inventory at reduced prices or write down our
inventories, any of which could materially adversely affect our net income.
Reduced demand could also result in lower decoration equipment and plant
utilization and lower fixed operating cost absorption, any of which could have
a material negative impact on our net income and operating cash flows.
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.
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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 are also subject to taxation in foreign jurisdictions. Applicable
tax rates in foreign jurisdictions differ from those of the United States and
change periodically.
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. Future trade agreements may provide our competitors an
advantage over us or increase our costs, either of which could have a material
adverse effect on our net income and operating cash flows.
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 negative effect on our net
sales and may require us to increase our expenses related to marketing, either
of which could have a material adverse effect on our net income and operating
cash flows.
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 net income and operating cash flows.
21
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.
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 net income.
In addition, if we misjudge consumer preferences, our brand image may be
significantly impaired. At the same time, our inventory management practices
may result in not having an adequate supply of products to meet our customers
demand and cause us to lose sales which could have a material adverse effect
on our net sales, net income and operating cash flows.
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.
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.
22
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 our net income and
operating cash flows. We, and other participants in our industry, face
competition on many fronts, including:
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. Furthermore, we may not 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 net sales,
net income and operating cash flows. 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 may not 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 may not 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 Relationships and Related Transactions--Wolff Employment
Agreement."
23
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 net sales, net
income and operating cash flows.
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 may not be able to:
o identify suitable acquisition candidates or finance or consummate
the transactions we select;
o select acquisition targets that will be profitable or successfully
integrated into our operations;
o retain and motivate key personnel and retain the clients of
acquired businesses;
o prevent acquisitions and integrations from diverting management
resources; or
o consummate acquisitions and integrations that will not have a
material adverse effect on our results of operations or financial
condition.
Reduced economic activity and reduced travel could have a material adverse
effect on our business.
Reduced economic activity and reduced travel may result from a
variety of events beyond our control, such as future terrorist attacks in the
United States, such as the attacks that occurred in New York and Washington,
D.C. on September 11, 2001, other acts of terrorism or war, and travel
restrictions imposed by governments, governmental agencies or the World Health
Organization. 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 net income and operating cash flows 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
Saturday nearest June 30, 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
interest....................... (19,284) (18,345) (17,450) (16,247) (15,726) (8,069) (7,298)
Loss on early extinguishment
of debt........................ -- -- -- -- (993) -- --
--------- --------- --------- --------- --------- --------- ---------
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
(deficiency)................... (109,627) (99,014) (86,809) (83,137) (79,645) (78,648) (75,366)
Other Data:
Cash flows from operating
activities..................... $ 3,703 $ 18,222 $ 3,555 $ 21,547 $ (3,710) $ (693) $ 9,761
Cash flows from investing
activities..................... (2,648) (2,041) (1,937) (8,412) (4,189) (1,987) (2,158)
Cash flows from financing
activities.................... (825) (7,263) (10,436) (9,272) 2,904 (571) (4,177)
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, pursuant to the Tax Sharing Agreement
(See "Description of Notes--Certain Definitions" and "Certain Relationships
and Related Transactions--Tax Sharing Agreement"), interest on subordinated
discount notes issued by GFSI Holdings (the "Holdings Discount Notes"), fees
payable under the TJC Agreement, a consulting agreement (See "Certain
31
Relationships and Related Transactions--The Jordan Company"), fees payable
under a non-competition agreement between GFSI Holdings and Robert M. Wolff,
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 March 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 in semi-annual cash
installments of $6.2 million on March 15 and September 15 of each year.
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.
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
----- ------ --------- --------- -------------
Direct cash obligations:
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 --
Guaranteed minimum royalties and
operating lease obligations 5,517,464 1,807,482 3,672,227 37,755 --
Other 2,825,000 285,000 630,000 710,000 1,200,000
----------- ------------ ----------- ------------ ------------
Total direct contractual cash
obligations 164,651,803 2,269,569 35,206,865 125,814,798 1,360,571
Indirect cash obligations:
GFSI Holdings, Inc. 93,367,470 750,000 7,669,105 26,176,420 58,771,945
------------ ------------ --------- ----------- ------------
Total direct and indirect cash
obligations $258,019,273 $ 3,019,569 $ 42,875,970 $ 151,991,218 $ 60,132,516
============ ============ ============ ============= ------------
Under our Champion product license we have guaranteed the payment of
$1 million as minimum royalty payments in each of fiscal 2004 and fiscal 2005.
There are no guaranteed minimum royalty payments thereafter.
It is anticipated that other product licenses with annual guaranteed
minimum royalty payments and leases that expire will be renewed or replaced,
and future guaranteed minimum royalty commitments and lease commitments are
not expected to aggregate less than the amount shown in year 1.
Indirect cash obligations include the contractual obligations of GFSI
Holdings for which we anticipate providing the necessary funding to GFSI
Holdings, provided we are permitted by our Revolving Bank Credit Agreement and
by our 9.625% Senior Subordinated notes indentures. These obligations include
payments to enable GFSI Holdings to pay interest on its subordinated discount
notes, fees under non-competition and consulting agreements and cash dividends
on GFSI Holdings preferred stock.
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
32
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.
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 (through our subsidiary, CC Products, Inc.), 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. The Fletcher Leisure Group Inc. provides
certain selling, marketing, product distribution and administrative services
to GFSI Canada Company under the management agreement.
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.
On July 1, 2001, we entered into a 15 year license agreement with Sara
Lee Corporation for the exclusive use of the Champion logo and related
trademarks in the licensed apparel and resort markets. Under the license
agreement we 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 fiscal 2004 through fiscal 2017.
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, Director
J. Craig Peterson........ 50 Senior Vice President, Chief Financial
Officer, Director
Michael H. Gary.......... 51 Senior Vice President, Sales
Administration, Director
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 a director and 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, an on-line,
internet-based marketplace (2000 - 2001), Chief Financial Officer at Gold
Bancshares Corp. (1999 - 2000), and Chief Financial Officer at Unitog Company,
a uniform apparel manufacturer (1991 - 1998). Prior to those positions, Mr.
Peterson was a partner at KPMG LLP, a public accounting firm.
Michael H. Gary has served as a director since September 2000 and 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.
39
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.
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 a
total of $20,000 per year for serving as a director of both GFSI Holdings and
GFSI. In addition, GFSI reimburses directors for their travel and other
expenses incurred in connection with attending meetings of the Board of
Directors of GFSI Holdings and GFSI.
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.
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.
42
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the issued and outstanding capital stock of GFSI, Inc. is
owned by GFSI Holdings. GFSI Holdings has common stock and three series of
preferred stock issued and outstanding (the "Preferred Shares"). The table
below sets forth certain information regarding beneficial ownership of the
common stock of GFSI Holdings and the Preferred Shares held by (i) each of its
directors and executive officers, (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 and/or Preferred Shares. 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)
----------------------------------------------------
Common Shares Preferred Shares
----------------------------------------------------
Executive Officers and Number of Percentage Number of Percentage
Directors: Shares Owned Shares Owned
- ------------------------------------------------------------------------------------------
Robert M. Wolff (2)(3) 60.0 3.3% 106.4352 3.3%
Larry D. Graveel (2)(4) 225.0 12.4 399.132 12.4
Michael H. Gary (2)(5) 225.0 12.4 399.132 12.4
J. Craig Peterson (2)(6) 75.0 4.1 133.044 4.1
John W. Jordan II (7)(8) 78.3125 4.3 138.92011 4.3
David W. Zalaznick (7) 78.3125 4.3 138.92011 4.3
A. Richard Caputo, Jr. (7) 50.0 2.7 88.696 2.7
All directors and executive
officers as a group (7 persons) 791.625 42.9 1403.6142 42.9
Other Principal Stockholders:
- --------------------------------
JZ Equity Partners PLC (9) 500.0 27.5 886.96 27.5
Leucadia Investors, Inc. (10) 125.0 6.9 221.74 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. As of December 28, 2002, there were approximately
3,228.5 Preferred Shares 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.
(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.
43
(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 ("JZEP") is c/o
Jordan/Zalaznick Advisers, Inc., 767 Fifth Avenue, New York, NY 10153.
JZEP is a unitary investment trust organized under the laws of the
United Kingdom. Investment and voting discretion rests with the board of
directors of JZEP. No member of JZEP's board of directors is an officer
or director of GFSI or GFSI Holdings.
(10) The principal address of Leucadia Investors, Inc. is 315 Park Avenue
South, New York, NY 10010. Leucadia Investors, Inc. is a wholly-owned
subsidiary of Leucadia National Corporation ("Leucadia"). Ian M.
Cumming is the Chairman of the Board of Leucadia and Joseph S.
Steinberg is a director and President of Leucadia. By virtue of their
positions with Leucadia and their respective 16.6% and 15.4%
beneficial interest in the shares of Leucadia, Messrs. Cumming and
Steinberg may be deemed to be beneficial owners of the shares owned
by Leucadia Investors, Inc.
44
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.
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
45
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 earnings before interest, taxes and amortization, 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
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 equal to the amount of the
tax liability of GFSI Holdings apportioned to GFSI and each of its
consolidated subsidiaries, which, in each case, is apportioned in accordance
with the ratio that GFSI Holdings' consolidated federal income attributable to
GFSI or any of its consolidated subsidiaries bears to GFSI Holdings'
consolidated federal income. For the years ended June 29, 2002, June 29, 2001
and June 30, 2000 payments (refunds) under this agreement aggregated
($2,391,366), $359,451 and $1,530,298, respectively. No payments have been
made for the six months ended December 28, 2002 under the tax sharing
agreement.
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.
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. If we
exercise the foregoing right to waive a condition of the exchange offer for
one security holder, we will waive such condition for all security holders.
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. With respect to
each security holder, all conditions to the exchange offer must be satisfied
or waived prior to the expiration of the exchange offer before we will issue
new notes to such security holder.
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 the expiration
of the exchange offer. The conditions to the exchange offer must be satisfied
or waived prior to the expiration of the exchange offer. 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
50
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.
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, promptly
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;
51
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.
Conditions to the exchange offer must be satisfied or waived prior to the
expiration date of the exchange offer.
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.
52
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.
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
53
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."
54
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
indenture and the exchange agreement are available as set forth below under
"--Available 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 New
Notes and with respect to Certificated New 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 circumstances under which the notes will be issued in the
form of Global New Notes and Certificated New Notes are described below under
"--Book-Entry, Delivery and Form" and "--Certificated New Notes." 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.
55
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 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."
56
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 part, on at least 30 but not more than 60 days' notice to each holder of
57
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. If a Change of Control occurs, each holder of
notes will have the right to require GFSI to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of that holder's notes pursuant to
an Offer. The Date upon which a Change of Control occurs is called the "Change
of Control Trigger Date". In the Offer, GFSI will offer a payment in cash
equal to 101% of the aggregate principal amount of notes repurchased plus
accrued and unpaid interest thereon, if any, to the date of purchase. GFSI is
required to 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 in this section, 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 accepted such offer or (ii) obtain the requisite consents
58
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, we may not
have sufficient funds 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. See
"Risk Factors."
Asset Sales. The indenture provides that GFSI will not, and will not
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
at least 75% of the consideration received by GFSI or any Restricted
Subsidiary is in the form of cash or Marketable Securities. Solely for
purposes of calculating such 75% of the consideration, the following shall be
deemed to be cash and cash equivalents for purposes of this section:
o 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
o 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).
GFSI will not, and will not permit any of its Restricted Subsidiaries
to, 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:
o to 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 to a capital expenditure otherwise permitted by the
indenture; provided that the investment occurs within 365 days of
the date of the Asset Sale (the "Asset Sale Disposition Date"),
o 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,
o 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,
59
o to 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
o to an Offer expiring on or prior to the Purchase Date (as
hereinafter defined).
Any Net Proceeds from any Asset Sale that are not applied or invested
as provided above will 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. The offer price will be equal to 100% of the 100% of
principal amount thereof plus any accrued and unpaid interest, to the Purchase
Date, and will be payable in cash. 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
or Asset Sale Trigger Date, subject to the provisions of the indenture, GFSI
will mail a notice to each holder of notes stating:
o that an Offer is being made pursuant to a Change of Control
Trigger Date or an Asset Sale Trigger Date, the length of time the
Offer will remain open and the maximum principal amount of notes
that will be accepted for payment pursuant to such Offer,
o 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 the
notice is mailed (the "Purchase Date")), and
o 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 the Offer:
o in the case of an Offer resulting from a Change of Control, accept
for payment all notes or portions thereof tendered pursuant to the
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 the Offer that can
be purchased out of Excess Proceeds,
o 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
o deliver or cause to be delivered to the Trustee all notes tendered
pursuant to the Offer.
60
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. 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 redemption or accepted for payment. Notice of any redemption or Offer 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"),
61
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 February
27, 1997, 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 February 27, 1997 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 February 27, 1997
(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 February 27, 1997 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 of Restricted Investments
permitted to be made pursuant to clause (ii) of the
next sentence.
62
The preceding provisions will not prohibit:
(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 February 27, 1997 (it being understood that if
any Restricted Investment after February 27, 1997 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 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
63
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;
(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 between the Company
and Holdings, as in effect on February 27, 1997;
(xvi) payments, if any, relating to any purchase price
adjustment pursuant to the terms of 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.;
(xvii) payments in respect of the agreement, dated February 27,
1997, between Holdings and Robert M. Wolff, relating to
certain covenants not to compete with the business of the
Company, as in effect on February 27, 1997; 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.
64
Limitation on Incurrence of Indebtedness. We will not, and will not
permit any Restricted Subsidiary to, issue any Indebtedness (other than the
Indebtedness represented by the notes) unless our Cash Flow Coverage Ratio for
our four full fiscal quarters immediately 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 February
27, 1997 not to exceed $7.5 million in aggregate
principal amount at any one time outstanding, or
(B) their properties, assets and rights acquired
after February 27, 1997, 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. 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. 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. GFSI shall not, and will 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
65
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. GFSI will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
to exist or become effective, any encumbrance or 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
February 27, 1997,
(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,
66
(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.
The restrictions above will not 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. GFSI will not, and will
not permit any of its Restricted Subsidiaries to, 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 Affiliate
(each, 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.
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.
This Affiliate Transactions covenant will not apply to:
(1) transactions between GFSI and any Restricted Subsidiary
or between Restricted Subsidiaries;
67
(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; or
(6) the sale, transfer and/or termination of the officers'
life insurance policies in effect on February 27, 1997.
Any Affiliate Transaction between GFSI and the affiliated entities
that provide embroidery services for the Company as of February 27, 1997
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. If GFSI or any of its Restricted Subsidiaries
acquire or create another Restricted Subsidiary after the date of the
indenture, then the newly acquired or created Subsidiary must 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. 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 will
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
68
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
GFSI will 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 has been made:
(i) has 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) is permitted immediately after the Disposition by
the terms of the indenture to issue at least $1.00
of additional Indebtedness determined on a Pro
Forma Basis, and
(iii) has 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.
These limitations do not restrict our ability to sell less than all
or substantially all of GFSI's assets. Those sales are governed by the "Asset
Sales" provisions described above.
69
Prior to the consummation of any proposed Disposition, GFSI is
required to deliver to the Trustee an officers' certificate stating that the
above conditions have been complied with 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
Each of the following is an Event of Default:
(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 after the date of
the indenture, if that default:
(A) results from the failure to pay principal of or
interest on any such Indebtedness (after giving
effect to any extensions thereof) or
(B) results in the acceleration of such Indebtedness
prior to its expressed maturity,
and, in each case, 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 $10 million
or more;
70
(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 (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) 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
71
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, 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).
72
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.
Amendment, Supplement and Waiver
Except as described in the next sentence or in the next paragraph,
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, 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.
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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 Depository Trust Company
("DTC") and registered in the name of Cede & Co., as nominee of DTC (such
nominee being referred to herein as the "Global New Note Holder").
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.
DTC is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "DTC'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. DTC's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain
other organizations. Access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or the "DTC'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 DTC only through DTC's Participants or
DTC'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 DTC or for maintaining,
supervising or reviewing any records of DTC relating to the new notes.
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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
DTC 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 DTC. Payments by
DTC's Participants and DTC'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 DTC's Participants or DTC's Indirect
Participants.
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 DTC 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 DTC 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 DTC 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 DTC 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 DTC's Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such new notes will, therefore, be
required by DTC 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.
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"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.
"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 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 (a) an offering of
Disqualified Stock or (b) Incentive Arrangements or
obligations or payments thereunder,
(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), and
(xiii) the sale, transfer and/or termination of the officers' life
insurance policies in effect on February 27, 1997.
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"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 Statement of Financial
Accounting Standards No. 106 or Statement of Financial
Accounting Standards No. 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;
77
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.
"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 12%
cumulative preferred stock due 2009 of Holdings, outstanding
on February 27, 1997), 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 February 27, 1997 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. For purposes of this definition,
78
"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 February 27, 1997 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.
"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 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
79
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 Statement of Financial Accounting
Standards No. 106 or Statement of Financial Accounting
Standards No. 109;
provided, however, that Consolidated Net Worth shall be calculated on a Pro
Forma Basis.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"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."
"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.
"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.
"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
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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).
"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.
"Guarantors" means each Restricted Subsidiary that executes a Note
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"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 Subordinated Notes" means $25.0 million in aggregate
principal amount of 12% subordinated notes due 2008 of Holdings as in effect
on February 27, 1997 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 for
providing annual cash bonuses that the Company expects to adopt following
consummation of the Transactions, 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.
"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.
"Investment" means any capital contribution to, or other debt or
equity investment in, any person.
81
"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
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.
"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 Standard & Poor's Rating Services or "P-2" (or higher)
according to Moody's Investors Services, Inc. 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.
As used in this definition, "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 Standard & Poor's Rating Services or Moody's
Investors Services, Inc. at the time as of which any investment or rollover
therein is made. As used in this definition, "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.
"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
82
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 matters or against any
indemnification obligations associated with such
transaction.
"Non-Restricted Subsidiary" means any Subsidiary of the Company other
than a Restricted Subsidiary.
"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.
"Other Permitted Indebtedness" means:
(i) Indebtedness of the Company and its Restricted Subsidiaries
existing as of February 27, 1997 (including the 9 5/8%
Senior Subordinated Notes of the Company) 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;
83
(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 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.
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"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 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;
85
(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.
"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.
86
"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, 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.
"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).
87
"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.
"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.
"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 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) with respect to the foregoing, in each case
whether outstanding on the date of the Indenture or
thereafter incurred.
88
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.
"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).
"TJC Agreement" means the Management Consulting Agreement, dated
February 27, 1997, between the Company and TJC Management Corporation.
"Transactions" means, collectively:
(i) (a) a contribution of $13,600,000 from The Jordan Company,
affiliates to Holdings in exchange for 12% cumulative
preferred stock due 2009 of Holdings, as in effect on
February 27, 1997, 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 12% cumulative preferred stock due 2009 of Holdings, as
in effect on February 27, 1997 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,
(ii) the consummation of the offer and sale of the 9 5/8% Senior
Subordinated Notes of the Company,
(iii) the execution of the Existing Credit Agreement,
(iv) the consummation by the Company of the acquisition of
Winning Ways, Inc. pursuant to 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. and
89
(v) the repayment by the Company of the Indebtedness of Winning
Ways, Inc. at December 31, 1996.
"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.
90
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.
91
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.
92
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 is 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 opinion 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
93
Deloitte & Touche 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 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 read and copied at the Public Reference Room maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20540
at prescribed rates. The public may obtain information regarding the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. Such
materials may also be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
94
GFSI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements and Supplementary Data
Page
Consolidated Balance Sheets -- 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-11
Report of Independent Accountants........................................ F-12
Independent Auditors' Report............................................. F-13
Consolidated Balance Sheets -- June 29, 2002 and June 29, 2001............ F-14
Consolidated Statements of Income -- Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000..................................... F-15
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) -- Years Ended June 29, 2002, June 29, 2001
and June 30, 2000.................................................... F-16
Consolidated Statements of Cash Flows -- Years Ended June 29, 2002,
June 29, 2001 and June 30, 2000..................................... F-17
Notes to Consolidated Financial Statements............................... F-18
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.
3. INVENTORIES
The following is a summary of inventories as of December 28, 2002 and
June 29, 2002:
(In Thousands) (unaudited) December 28, 2002 June 29, 2002
Undecorated apparel ("blanks") and supplies $ 41,501 $ 41,976
Work in process 925 1,114
Finished goods 1,044 2,639
----------- -----------
Total $ 43,470 $ 45,729
=========== ===========
F-5
4. 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 and joint and several.
As of December 28, 2002 (in thousands) (unaudited):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 3,694 $ 45 $ -- $ 3,739
Accounts receivable 21,828 14,917 (3,969) 32,776
Inventories 41,887 1,583 -- 43,470
Prepaid expenses 1,353 30 -- 1,383
Deferred income taxes 1,195 -- -- 1,195
--------- ---------- ----------- ------------
Total 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:
Accounts payable $ 13,281 $ 787 $ (3,969) $ 10,099
Accrued interest 4,174 -- -- 4,174
Accrued expenses 4,766 1,526 -- 6,292
Income tax payable 8,017 3 -- 8,020
Current portion of long-term debt 197 -- -- 197
--------- ---------- ----------- ------------
Total current liabilities 30,435 2,316 (3,969) 28,782
Deferred income taxes 664 98 -- 762
Long-term debt, less current portion 152,053 -- -- 152,053
Other long-term obligations 527 972 (972) 527
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
========= ========== =========== ============
F-6
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
Cost of sales 49,887 25,706 (2,040) 73,553
Selling expenses 9,215 5,160 -- 14,375
General and administrative expense 11,197 2,282 -- 13,479
--------- --------- ------------ -----------
Total 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 (7,296) (13) -- (7,309)
Other income (expense) 11 -- -- 11
--------- --------- ------------ -----------
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
========= ========= ============ ===========
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
======== ========= =========== ===========
F-7
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 334 $ (21) $ -- $ 313
Accounts receivable 25,199 8,511 (1,804) 32,626
Inventories 43,402 2,327 -- 45,729
Prepaid expenses 1,163 106 -- 1,269
Deferred income taxes 845 -- -- 845
--------- --------- ----------- -----------
Total current assets 70,943 10,923 (1,084) 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 $ 103,717 $ 11,478 $ (9,859) $ 105,336
========= ========= =========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 11,466 $ 1,630 $ (1,086) 12,010
Accrued interest 4,366 -- -- 4,366
Accrued expenses 5,034 949 -- 5,983
Income taxes payable 5,156 (69) -- 5,087
Current portion of long-term debt 177 -- -- 177
--------- --------- ----------- -----------
Total current liabilities 26,199 2,510 (1,086) 27,623
Deferred income taxes 504 195 -- 699
Long-term debt, less current portion 156,132 -- -- 156,132
Other long-term obligations 527 -- -- 527
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
========= ========= =========== ===========
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
Cost of sales 49,241 18,786 (1,937) 66,090
Selling expenses 8,324 3,626 -- 11,950
General and administrative expense 10,429 2,480 -- 12,909
--------- --------- ----------- -----------
Total 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 (8,080) -- -- (8,080)
Other income (expense) 11 -- -- 11
--------- --------- ----------- -----------
Income before income taxes 5,324 5,216 (3,181) 7,359
Income tax expense (benefit) 835 2,035 -- 2,870
--------- --------- ----------- -----------
Net income $ 4,489 $ 3,181 $ (3,181) $ 4,489
========= ========= =========== ===========
F-8
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
======== ======== ========= ==========
5. RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2002
consolidated and condensed consolidating financial statements to conform to
the fiscal 2003 presentation.
6. 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.
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
As a result of the completion on December 31, 2002 of the private
placement of $9.9 million of Exchange Notes for $24 million aggregate
principal amount at maturity of Holdings Discount Notes with an accreted book
value of $19.9 million, GFSI's financial statements for the periods after
December 31, 2002, on a pro forma basis, will initially reflect additional
long-term debt of $9.9 million and a corresponding non-current investment in
Holdings Discount Notes. In future periods, GFSI's financial statements will
reflect additional annual interest expense of approximately $1.0 million and
additional annual interest income of approximately $2.3 million.
F-10
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-11
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-12
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI, Inc. and subsidiary
Lenexa, Kansas
We have audited the accompanying consolidated statements of income,
stockholders' equity (deficiency) and cash flows of GFSI, Inc. (a wholly owned
subsidiary of GFSI Holdings, Inc.) and subsidiaries 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 results of the Company's operations and
the Company's 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-13
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-14
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-15
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-16
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-17
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.
GFSI recognizes the costs of customer incentive programs and volume
rebates as a reduction of net sales. GFSI records as revenue amounts billed to
customers for shipping and handling.
Cost of Sales, Selling, General and Administrative Costs--Cost of
sales includes the cost of blank garment acquisition, freight, decoration,
warehousing, related overhead costs and shipping and handling costs to deliver
product to customers.
Selling, general and administrative expenses includes, sales
commissions, license royalties, marketing expenses, salaries, profit sharing,
technology, professional services and other similar costs.
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.
F-18
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.
The following is a summary of inventories at June 29, 2002 and June 29, 2001:
June 29, 2002 June 29, 2001
------------- -------------
Undecorated apparel ("Blanks")
and supplies........................... $41,976,386 $35,182,343
Work in process.......................... 1,113,768 1,023,919
Finished goods........................... 2,638,764 1,529,355
------------ -----------
$45,728,918 $37,735,617
============ ===========
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.
F-19
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.
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-20
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
F-21
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 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-22
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 and its wholly-owned subsidiary guarantors are limited
with respect to paying dividends, providing loans 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 transfers,
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-23
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 equal 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-24
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-25
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-26
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 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, 2000, $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 and joint and several.
F-27
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 334 $ (21) $ -- $ 313
Accounts receivable 25,199 8,511 (1,084) 2,626
Inventories 43,402 2,327 -- 45,729
Prepaid expenses 1,163 106 -- 1,269
Deferred income taxes 845 -- -- 845
---------- ---------- ----------- -----------
Total current assets 70,943 10,923 (1,084) 80,782
Investment in equity of subsidiaries 8,773 -- (8,773) --
Property, plant and equipment 19,120 551 -- 19,671
Other assets 4,881 4 (2) 4,883
---------- ---------- ----------- -----------
Total assets $ 103,717 $ 11,478 $ (9,859) $ 105,336
========== ========== =========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 11,466 $ 1,630 $ (1,086) $ 12,010
Accrued interest 4,366 -- -- 4,366
Accrued expenses 5,034 949 -- 5,983
Income taxes payable 5,156 (69) -- 5,087
Current portion of long-term debt 177 -- -- 177
---------- ---------- ----------- -----------
Total current liabilities 26,199 2,510 (1,086) 27,623
Deferred income taxes 504 195 -- 699
Long-term debt, less current portion 156,132 -- -- 156,132
Other long-term obligations 527 -- -- 527
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
========== ========== =========== ===========
F-28
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net sales $ 145,512 $ 55,705 $ (3,968) $ 197,249
Cost of sales 94,379 33,212 (3,968) 123,623
Selling expenses 16,250 8,332 -- 24,582
General and administrative expense 21,722 4,628 -- 26,350
---------- ----------- --------- ----------
Total 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 (15,747) -- -- (15,747)
Loss on early extinguishment of debt (994) -- -- (994)
Other income (expense) 23 (1) -- 22
---------- ----------- --------- ----------
Income before income taxes 2,256 9,532 (5,813) 5,975
Income tax expense (benefit) (1,388) 3,719 -- 2,331
---------- ----------- --------- ----------
Net income $ 3,644 $ 5,813 $ (5,813) $ 3,644
========== =========== ========= ==========
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
========= ========= ========== ==========
F-29
As of June 29, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Assets:
Current assets:
Cash and cash equivalents $ 5,262 $ 47 $ -- $ 5,309
Accounts receivable 25,272 8,414 (10,992) 22,694
Inventories 30,117 7,619 -- 37,736
Prepaid expenses 1,072 71 -- 1,143
Deferred income taxes 911 -- -- 911
----------- ----------- ------------ ------------
Total 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:
Accounts payable $ 17,934 $ 5,837 $ (10,994) $ 12,777
Accrued interest 3,775 -- -- 3,775
Accrued expenses 5,619 276 -- 5,895
Income taxes payable 249 (50) -- 199
Current portion of long-term debt 6,700 -- -- 6,700
----------- ----------- ------------ ------------
Total current liabilities 34,277 6,063 (10,994) 29,346
Deferred income taxes 994 195 -- 1,189
Long-term debt, less current portion 145,642 -- -- 145,642
Other long-term obligations 527 -- -- 527
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-30
Year ended June 29, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net sales $ 178,568 $ 10,536 $ (3,799) $ 185,305
Cost of sales 113,672 4,706 (3,799) 114,579
Selling expenses 19,673 2,630 -- 22,303
General and administrative expense 24,952 1,426 -- 26,378
Restructuring costs 836 -- -- 836
Acquisition of business -- 1,110 -- 1,110
Gain on disposition of business (629) -- -- (629)
---------- ----------- ------------ ------------
Total 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 income (expense) (16,745) 85 -- (16,660)
Other income (expense) 417 (3) -- 414
---------- ----------- ------------ -----------
Income before income taxes 4,191 746 (455) 4,482
Income tax expense (benefit) 1,340 291 -- 1,631
---------- ----------- ------------ -----------
Net income $ 2,851 $ 455 $ (455) $ 2,851
========== =========== ============ ===========
Year ended June 29, 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-31
Year ended June 30, 2000 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net sales $ 199,014 $ 10,777 $ (4,291) $ 205,500
Cost of sales 125,700 4,765 (4,291) 126,174
Selling expenses 20,437 2,857 -- 23,294
General and administrative expense 23,307 1,492 -- 24,799
---------- ----------- ---------- -----------
Total 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 (17,667) 6 -- (17,661)
Loss on early extinguishment of debt -- -- -- --
Other income (expense) 211 -- -- 211
---------- ----------- ---------- -----------
Income before income taxes 13,103 1,669 (989) 13,783
Income tax expense (benefit) 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-32
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.
II-2
(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-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, GFSI, Inc., the registrant, has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lenexa, State of Kansas, on April 28, 2003.
GFSI, INC.
By /s/ Robert M. Wolff
-------------------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of GFSI, Inc., a Delaware
corporation, and the undersigned directors and officers of GFSI, Inc., hereby
constitutes and appoints, Robert M. Wolff and J. Craig Peterson, and each of
them, his true and lawful attorneys-in-fact and agents, for him and in his
name, place and stead, in any and all capacities, with full power to act
alone, to sign any and all amendments to this registration statement
(including any post-effective amendment and any registration statement to be
filed with the Securities and Exchange Commission pursuant to Rule 462(b)),
and to file each such amendment to this registration statement or registration
statement pursuant to Rule 462(b), with all exhibits thereto, and any and all
documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
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 April 28, 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 financial and
J. Craig Peterson accounting officer), Treasurer
and Director
/s/ Michael H. Gary Senior Vice President, Secretary and
- ----------------------------- 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 Chief Executive Officer and Director
- -----------------------------
Robert M. Wolff
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, CC Products, Inc., the registrant, has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lenexa, State of Kansas, on April 28, 2003.
CC PRODUCTS, INC.
By /s/ Larry D. Graveel
---------------------------------
Larry D. Graveel
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of CC Products, Inc., a
Delaware corporation, and the undersigned directors and officers of CC
Products, Inc., hereby constitutes and appoints, Larry D. Graveel and J. Craig
Peterson, and each of them, his true and lawful attorneys-in-fact and agents,
for him and in his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this registration
statement (including any post-effective amendment and any registration
statement to be filed with the Securities and Exchange Commission pursuant to
Rule 462(b)), and to file each such amendment to this registration statement
or registration statement pursuant to Rule 462(b), with all exhibits thereto,
and any and all documents in connection therewith, with the Securities and
Exchange Commission, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
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 April 28, 2003.
Signatures Title
/s/ Larry D. Graveel Chief Executive Officer, President
- ---------------------------------- and Director
Larry D. Graveel
/s/ J. Craig Peterson Secretary, Treasurer (principal
- ---------------------------------- financial and accounting
J. Craig Peterson officer) and Director
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Event 1, Inc., the registrant, has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lenexa, State of Kansas, on April 28, 2003.
EVENT 1, INC.
By /s/ Larry D. Graveel
-------------------------------
Larry D. Graveel
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of Event 1, Inc., a Kansas
corporation, and the undersigned directors and officers of Event 1, Inc.,
hereby constitutes and appoints, Larry D. Graveel and J. Craig Peterson, and
each of them, his true and lawful attorneys-in-fact and agents, for him and in
his name, place and stead, in any and all capacities, with full power to act
alone, to sign any and all amendments to this registration statement
(including any post-effective amendment and any registration statement to be
filed with the Securities and Exchange Commission pursuant to Rule 462(b)),
and to file each such amendment to this registration statement or registration
statement pursuant to Rule 462(b), with all exhibits thereto, and any and all
documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform any and all acts and
things requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
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 April 28, 2003.
Signatures Title
/s/ Larry D. Graveel Chief Executive Officer, President and
- -------------------------------- Director
Larry D. Graveel
/s/ J. Craig Peterson Vice President, Secretary and Treasurer
- -------------------------------- (principal financial principal
J. Craig Peterson accounting officer)
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, GFSI Canada Company, the registrant, has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Lenexa, State of Kansas, on April
28, 2003.
GFSI CANADA COMPANY
By /s/ Larry D. Graveel
-------------------------------
Larry D. Graveel
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of GFSI Canada Company, a
Canadian corporation, and the undersigned directors and officers of GFSI
Canada Company, hereby constitutes and appoints, Larry D. Graveel and J. Craig
Peterson, and each of them, his true and lawful attorneys-in-fact and agents,
for him and in his name, place and stead, in any and all capacities, with full
power to act alone, to sign any and all amendments to this registration
statement (including any post-effective amendment and any registration
statement to be filed with the Securities and Exchange Commission pursuant to
Rule 462(b)), and to file each such amendment to this registration statement
or registration statement pursuant to Rule 462(b), with all exhibits thereto,
and any and all documents in connection therewith, with the Securities and
Exchange Commission, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.
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 April 28, 2003.
Signatures Title
/s/ Larry D. Graveel Chief Executive Officer,
- ------------------------------ President and Director
Larry D. Graveel
/s/ J. Craig Peterson Secretary and Director
- ------------------------------
J. Craig Peterson
/s/ David A. Scott Chief Financial Officer
- ------------------------------ (principal accounting
David A. Scott officer)
II-7
EXHIBIT INDEX
Exhibit Description Page
Number
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-8
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.
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.
II-9
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)
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 the exhibits filed with 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 the exhibits filed with 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).
++++ Previously filed.
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