AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GFSI HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2396 74-2810744
(STATE OF OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
GFSI HOLDINGS, 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)
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JOHN L. MENGHINI, PRESIDENT
GFSI HOLDINGS, 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)
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WITH A COPY TO:
PHILIP J. NIEHOFF
MAYER, BROWN & PLATT
190 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 701-7843
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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11.375% Series B Senior
Discount Notes Due
2009.................. $108,467,780 46.1% $50,000,000 $15,151.52
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(1) Estimated solely for the purposes of calculating the registration fee.
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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.
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SUBJECT TO COMPLETION, DATED OCTOBER 29, 1997
PROSPECTUS
GFSI HOLDINGS, INC.
OFFER TO EXCHANGE ITS 11.375% SERIES B SENIOR DISCOUNT NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ANY AND
ALL OF ITS OUTSTANDING 11.375% SERIES A SENIOR DISCOUNT NOTES DUE 2009
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GFSI Holdings, Inc., a Delaware corporation ("Holdings" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying letter of transmittal (the "Letter of
Transmittal") (which together constitute the "Exchange Offer"), to exchange up
to $50 million initial Accreted Value of 11.375% Series B Senior Discount
Notes due 2009 (the "New Notes"), of the Company for a like initial Accreted
Value of the Company's issued and outstanding 11.375% Series A Senior Discount
Notes due 2009 (the "Old Notes" and collectively with the New Notes, the
"Notes"), with the holders (each holder of Old Notes, a "Holder") thereof.
Holdings is a holding Company whose principal asset is all of the common stock
of GFSI, Inc., a Delaware company ("GFSI") . The Company will receive no
proceeds in connection with the Exchange Offer. The terms of the New Notes are
substantially identical to the terms of the Old Notes that are to be exchanged
therefor. See "Description of Notes."
The New Notes will be issued at a substantial discount from their principal
amount. See "Description of Notes" and "Certain Federal Income Tax
Considerations." The Notes will accrete at a rate of 11.375%, compounded semi-
annually to an aggregate principal amount of $108,467,780 at September 15,
2004. Thereafter, the Notes will accrue interest at the rate of 11.375% per
annum, payable semi-annually in cash on March 15 and September 15 of each
year, commencing on March 15, 2005. The Notes will be redeemable at the option
of Holdings, in whole or in part, at any time on or after September 15, 2002
in cash at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages (as defined), if any, thereon to the date of
redemption. In addition, at any time on or after March 15, 1998 and prior to
September 15, 2002, Holdings, at its option, may redeem the Notes, in whole or
in part, at a redemption price of 105.688% of the Accreted Value (determined
at the date of redemption), upon the occurrence of a Change of Control (as
defined) or with the net cash proceeds of an Equity Offering (as defined) of
Holdings or GFSI. See "Description of Notes--Redemption of Notes." In
addition, upon the occurrence of a Change of Control, each holder of Notes
will have the right to require Holdings to repurchase all or any part of such
holder's Notes at an offer price in cash equal to 100% of the Accreted Value
(determined at the date of redemption) thereof on the date of repurchase (if
such date of repurchase is prior to September 15, 2004) or 100% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase (if such date of
repurchase is on or after September 15, 2004). See "Description of Notes--
Mandatory Offers to Purchase Notes--Change of Control." There can be no
assurance that, in the event of a Change of Control, Holdings would have
sufficient funds to repurchase all Notes tendered. See "Risk Factors--Change
of Control."
Prior to the Exchange Offer, there has been no established trading market
for the Old Notes or the New Notes. The Company does not intend to apply for
listing or quotation of the New Notes on any securities exchange or stock
market. Therefore, there can be no assurance as to the liquidity of any
trading market for the New Notes or that an active public market for the New
Notes will develop. Any Old Notes not tendered and accepted in the Exchange
Offer will remain outstanding. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, or
tendered but unaccepted, Old Notes could be adversely affected. Following the
consummation of the Exchange Offer, the holders of the Old Notes will continue
to be subject to the existing restrictions on transfer thereof and the Company
will have no further obligations to such holders to provide for the
registration of the Old Notes under the Securities Act. See "The Exchange
Offer--Consequences of Not Exchanging Old Notes."
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1997, UNLESS EXTENDED.
(Cover continued on following page)
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FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF
OLD NOTES WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER, SEE "RISK FACTORS"
BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
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 , 1997
The Notes will be general unsecured obligations of Holdings, will rank pari
passu in right of payment to all existing and future Senior Indebtedness of
Holdings, and senior in right of payment to any future subordinated
indebtedness of Holdings. As indebtedness of Holdings, however, the Notes will
be effectively subordinated to all indebtedness of GFSI. As of June 27, 1997,
the aggregate principal amount of indebtedness of GFSI to which the Notes
would have been effectively subordinated would have been approximately $193.0
million. The Indenture (as defined) will permit the Company and its
subsidiaries to incur additional indebtedness, including Senior Indebtedness,
subject to certain limitations. See "Description of Notes."
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
, 1997, unless the Exchange Offer is extended (the "Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions which may be waived by the Company. The Company will pay the
expenses of the Exchange Offer.
GFSI and Holdings were organized by affiliates of The Jordan Company ("TJC")
and management to acquire Winning Ways, Inc. ("Winning Ways") in February 1997
(the "Acquisition"). The Old Notes were issued and sold as part of an offering
on September 17, 1997 (the "Old Offering"), in a transaction not registered
under the Securities Act of 1933, as amended (the "Securities Act"), in
reliance upon the exemption provided in Section 4(2) of the Securities Act. In
the Old Offering certain holders of Subordinated Discount Notes and Preferred
Stock issued and sold units (the "Units") consisting of 11.375% Subordinated
Discount Notes due 2009 (the "Subordinated Discount Notes") and 11.375% Series
D Preferred Stock due 2009 (the "Preferred Stock") which were exchangeable at
the option of Holdings any time on or after September 29, 1997 into Old Notes.
On October 23, 1997 the Units were exchanged into Old Notes (the "Old
Exchange"). Accordingly, the Old Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. The New Notes are being
offered for exchange in order to satisfy certain obligations of the Company
under a Registration Rights Agreement (as defined) between the Company and the
Initial Purchaser (as defined). The New Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes and will be entitled
to the benefits of the same Indenture, which governs both the Old Notes and
the New Notes. The form and terms (including principal amount, interest rate,
maturity and ranking) of the New Notes are the same as the form and terms of
the Old Notes, except that the New Notes (i) will be registered under the
Securities Act and therefore will not be subject to certain restrictions on
transfer applicable to the Old Notes, (ii) will not be entitled to
registration rights and (iii) will not provide for any Liquidated Damages. See
"The Exchange Offer--Registration Rights; Liquidated Damages."
The Company is making the Exchange Offer pursuant to the registration
statement of which this Prospectus is a part in reliance upon the position of
the staff of the Securities and Exchange Commission (the "Commission") set
forth in certain no-action letters addressed to other parties in other
transactions. However, the Company has not sought its own no-action letter and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the Exchange Offer. Based on these
interpretations by the staff of the Commission, the Company believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by Holders thereof (other than (i) any such
Holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act, (ii) an Initial Purchaser who acquired the Old Notes
directly from the Company solely in order to resell pursuant to Rule 144A of
the Securities Act or any other available exemption under the Securities Act
or (iii) a broker-dealer who acquired the Old Notes as a result of market
making or other trading activities) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes.
i
By tendering, each Holder which is not a broker-dealer will represent to the
Company that, among other things, the person receiving the New Notes, whether
or not such person is the Holder, (i) will acquire the New Notes in the
ordinary course of such person's business, (ii) has no arrangement or
understanding with any person to participate in a distribution of the New
Notes and (iii) is not engaged in and does not intend to engage in a
distribution of the New Notes. If any Holder or any such other person has an
arrangement or understanding with any person to participate in a distribution
of such New Notes, is engaged in or intends to engage in a distribution of
such New Notes, is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company, or acquired the Old Notes as a result of market making or
other trading activities, then such Holder or any such other person (i) can
not rely on the applicable interpretations of the staff of the Commission and
(ii) 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 pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such 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. 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 are acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has
agreed that, for a period of 120 days after the Expiration Date, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
ii
SUMMARY
The following summary is qualified in its entirety by reference to and should
be read in conjunction with the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Unless the context indicates or otherwise requires, references in
this Prospectus to the "Company" are to GFSI Holdings, Inc. and its
subsidiaries and their respective predecessors, including GFSI, Inc.,
references to "Holdings" are to GFSI Holdings, Inc., references to "GFSI" are
to GFSI, Inc., and references to a fiscal year are to the twelve months ended
June 30 of such year, except 1997, which is June 27.
THE COMPANY
Holdings and GFSI, a wholly owned subsidiary of Holdings, were organized by
affiliates of TJC and management to acquire Winning Ways in February 1997.
Holdings' current operations are conducted exclusively through GFSI and
Holdings' only significant asset is the outstanding capital stock of GFSI.
The Company, which operates primarily under the brand name GEAR For Sports(R)
("GEAR"), 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 teams and events. The
Company, which was founded in 1974, custom designs and decorates an extensive
line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts,
sweaters, shorts, headwear and sports luggage. The Company markets its products
to over 13,000 active customer accounts through its well-established and
diversified distribution channels, rather than through the price sensitive mass
merchandise, discount and department store distribution channels. The Company
believes that it has been able to compete successfully because of its ability
to create diverse and innovative designs, provide excellent customer service,
leverage its GEAR brand name and differentiate its products on the basis of
quality. For fiscal 1997, the Company generated net sales and EBITDA of $183.3
million and $39.1 million, respectively.
The Company believes it has achieved a record of strong sales and EBITDA
growth and stable operating margins primarily due to its: (i) leading positions
in niche markets; (ii) diversified and stable customer base; (iii) superior
product quality and customer service; (iv) broad product portfolio; (v) value-
added design and manufacturing capabilities; and (vi) innovative management.
The Company expects to continue to grow by leveraging the strength of the GEAR
brand name to expand its product lines and access underpenetrated segments of
its markets. The Company believes that it is less vulnerable to earnings
fluctuations than typical apparel manufacturers and marketers because: (i) the
Company designs and custom manufactures basic, classic products with low
fashion risk; (ii) consumer demand for sportswear and activewear continues to
increase; and (iii) the Company's products are customized based on firm
customer orders, minimizing its risk of excess inventory.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a sales force
with a specialized knowledge of its particular markets and customers. The
Company's network of approximately 140 independent sales representatives and
over 70 in-house artists and graphic designers work directly with the Company's
customers to create innovative sportswear and activewear products to meet
customer specifications. The Company's four divisions are:
. The Resort Division (36.5% of fiscal 1997 net sales) is a leading
marketer of custom logoed sportswear and activewear to over 6,100 active
customer accounts, including destination resorts, family entertainment
companies, hotel chains, golf clubs, cruise lines, casinos and United
States military bases. The division's customers include widely
recognized names such as The Walt Disney Company, Universal Studios, The
Ritz Carlton, Pebble Beach, Princess Cruise Lines and The Mirage. The
Company believes that the breadth of its coordinated product line and
its national scope provide it with a distinct competitive advantage in
the resort market. See "Business--Sales Divisions--Resort Division."
1
. The Corporate Division (30.6% of fiscal 1997 net sales) is a leading
marketer of corporate identity sportswear and activewear for use by a
diverse group of corporations in incentive and promotional programs as
well as for office casual wear and uniforms. The division services over
3,500 active customer accounts, including Toyota, Hershey, Dr.
Pepper/7Up, Anheuser-Busch, MCI and Exxon. The Company believes that it
has an advantage over its competitors because it is one of the few
national brand name suppliers of sportswear and activewear focused on
the corporate market. In addition, the Company recently formed Tandem
Marketing to leverage its existing corporate customer base by developing
and administering corporate fulfillment programs. The Company typically
implements corporate fulfillment programs in conjunction with a
catalogue featuring a full line of both apparel and non-apparel
merchandise customized with the corporate customer's name, logo or
message. See "Business--Sales Divisions--Corporate Division."
. The College Bookstore Division (20.8% of fiscal 1997 net sales) is a
leading marketer of custom-designed, embroidered and silk-screened
sportswear and activewear products to over 2,300 active customer
accounts, including nearly every major college and university in the
United States. The division's largest accounts include each of the major
college bookstore lease operators, such as Barnes & Noble College
Bookstores, Inc. as well as high volume, university-managed bookstores,
such as the University of Notre Dame, the University of Southern
California, Yale University, the University of Michigan and the United
States Air Force and Naval academies. The National Association of
College Stores has selected the Company as "Vendor of the Year" three
times, an honor no other supplier has won more than once. See
"Business--Sales Divisions--College Bookstore Division."
. The Sports Specialty Division (5.8% of fiscal 1997 net sales),
established in 1994, has entered into licensing agreements to design,
manufacture and market sportswear and activewear bearing the names,
logos and insignia of professional sports leagues and teams as well as
major sporting events. The Company's licensors include, among others,
Major League Baseball ("MLB"), the National Basketball Association
("NBA"), the National Hockey League ("NHL"), NASCAR and The Breeder's
Cup. The division targets the upscale adult sports enthusiast through
the Company's existing distribution channels as well as through new
channels such as stadium stores and team retail outlets. The division
marketed its products to over 600 active customer accounts, including
the Indianapolis Motor Speedway, the Chicago Bulls, the Cleveland
Indians, the Boston Bruins and Madison Square Garden. See "Business--
Sales Divisions--Sports Specialty Division."
BUSINESS STRATEGY
The Company's objective is to continue to increase sales, EBITDA and
operating margins, and is based upon the following strategic elements:
. Superior Product Quality and Customer Service. Each of the Company's
divisions focuses on high-end, customized sportswear, activewear and
related products. The Company's products uniquely address each account's
specific requirements, while providing the end-user with a high quality
product. The Company's ability to maintain consistency in product
quality and customer service, regardless of order size, enables it to
effectively service a broad range of customers. With over 70 in-house
artists and graphic designers and state-of-the-art manufacturing and
distribution facilities, the Company believes that it provides products
and service that are superior to those of its competitors in each of its
markets.
. Leading Position in Multiple Niche Markets. The Company has a leading
position in the resort, corporate and college bookstore markets. The
Company's superior service and product customization enable it to more
effectively serve the particular needs of these customers. As a result,
the Company believes that: (i) it is one of the few national competitors
in the highly fragmented resort and leisure market; (ii) it has a
leading share of the corporate identity market, where it competes
primarily with smaller local and regional companies as well as a few
national competitors; and (iii) it has the second largest share of the
college bookstore market.
2
. Leveraging the GEAR For Sports(R) Brand Name. The Company leverages its
GEAR brand name by introducing new products through its established
distribution channels. For example, the Company recently introduced new
headwear, sports luggage and Baby GEAR product lines. The Company
believes that the GEAR brand name is widely recognized by customers and
end-users in each of its markets and enjoys a reputation for high
quality products. The Company intends to continue to leverage this brand
name recognition through its existing distribution channels as well as
through alternative distribution channels and markets.
. Efficient Operations. The Company uses its state-of-the-art facilities
to design, embroider and screenprint a significant portion of its
products. In addition, the Company uses independent contractors to
manufacture its blanks and, where appropriate, to provide other value-
added manufacturing services in order to maximize sourcing flexibility
while minimizing overhead costs and fixed charges. Only one of these
independent contractors supplies such services exclusively to the
Company. The Company does not have a contract with this independent
contractor. The Company minimizes the risk of excess inventory by
designing and manufacturing its products against firm customer's orders.
. Experienced Management Team with Significant Equity Ownership. The
Company's management team has extensive experience in the sportswear and
activewear business. The top five senior executives have each been with
the Company for at least 13 years and have combined industry experience
of over 115 years. Approximately 20 members of the management team own
an aggregate of 50% of the capital stock of Holdings. See "The
Transactions." The management team has significant incentive to continue
to increase the Company's sales and EBITDA as a result of their
substantial equity ownership and performance based incentive
compensation programs.
----------------
Holdings was incorporated in the state of Delaware on December 23, 1996. On
February 27, 1997, GFSI and Holdings effected the Acquisition, in which Winning
Ways merged with and into GFSI. The principal executive offices of the Company
are located at 9700 Commerce Parkway, Lenexa, Kansas 66219 and their telephone
number is (913) 888-0445.
THE TRANSACTIONS
Holdings and GFSI were organized by affiliates of TJC and management,
including Jordan/Zalaznick Capital Corporation, A. Richard Caputo, Jr., John W.
Jordan II, David W. Zalaznick, MCIT PLC, Leucadia Investors, Inc., Jonathan F.
Boucher, Adam E. Max, John R. Lowden, James E. Jordan, Paul Rodzevik and
Douglas Zych (each of which may be deemed to be affiliates of TJC), John L.
Menghini, Robert G. Shaw, Robert M. Wolff, Larry D. Graveel, Michael H. Gary,
Barry S. Golden, Terry Glenn, Kirk Kowelewski, Mark Schimpf, Anthony Gagliano,
David Churchman, Dave Geenens, Steve Arnold, Frank Pikus, Jason Krakow, Carl
Allard, Howie Ellis, Scott Durham, Tom Martin, John White, Sue Agnitsch, Dave
Hosier and Jim Keaton (each of which are members of management), to effect the
acquisition of Winning Ways. Pursuant to an agreement for the purchase and sale
of stock, dated as of January 24, 1997 (the "Acquisition Agreement"), Holdings
and GFSI acquired all of the issued and outstanding capital stock of Winning
Ways on February 27, 1997, and Winning Ways immediately thereafter merged with
and into GFSI.
The aggregate purchase price for Winning Ways was $242.3 million consisting
of $173.1 million in cash at closing, a post closing payment at April 30, 1997
of $10.0 million and the repayment of $59.2 million of indebtedness of Winning
Ways, including a $2.4 million prepayment penalty. To finance the Acquisition,
including approximately $11.5 million of related fees and expenses: (i) TJC,
its affiliates and MCIT PLC (collectively, the "Jordan Investors") and certain
members of management (the "Management Investors") invested $52.2 million in
Holdings and Holdings contributed $51.4 million of this amount in cash to GFSI
(the "Equity Contribution"); (ii) GFSI consummated its offering (the "GFSI
Offering") of 9 5/8% Senior
3
Subordinated Notes Due 2007 (the "GFSI Senior Subordinated Notes"); and (iii)
GFSI entered into a credit agreement (the "Credit Agreement") providing for
borrowings of up to $115.0 million. The Equity Contribution was comprised of:
(i) a contribution of $13.6 million from the Jordan Investors to Holdings in
exchange for preferred stock (the "Holdings Preferred Stock") and approximately
50% of the common stock of Holdings; (ii) a contribution of $13.6 million from
the Management Investors to Holdings in exchange for preferred stock and
approximately 50% of the common stock of Holdings; and (iii) a contribution of
$25.0 million from a Jordan Investor to Holdings in exchange for subordinated
notes (the "Holdings Subordinated Notes") . Approximately $0.8 million of the
contribution from the Management Investors was financed by loans from Holdings.
For additional information, see "The Transactions."
The Equity Contribution, the consummation of the GFSI Offering, the execution
of the Credit Agreement, the consummation of the Acquisition and the repayment
of certain indebtedness of GFSI's are collectively referred to herein as the
"Transactions."
GFSI's predecessor, Winning Ways, terminated its income tax reporting status
as an S-Corporation immediately prior to the closing of the Transactions on
February 27, 1997. Immediately prior to the closing, Winning Ways distributed
to its shareholders $20.6 million, representing the accumulated and
undistributed S-Corporation earnings of GFSI as of February 27, 1997. GFSI
recognized, with a post-closing adjustment, approximately $1.0 million in net
deferred income tax liabilities upon the conversion from S-Corporation to C-
Corporation status for income tax reporting purposes. GFSI does not anticipate
any future material adverse tax liabilities arising from this distribution and
conversion.
THE EXCHANGE OFFER
Securities Offered............. $50 million initial Accreted Value of 11.375%
Series B Senior Discount Notes due 2009. 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 and except
for certain Liquidated Damages provisions
relating to the Old Notes described below
under "--Summary Description of the New
Notes."
Issuance of Units and Old
Notes; Registration Rights....
The Units were issued on September 17, 1997 to
Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchaser"), which
placed the Units with "qualified institutional
buyers" (as such term is defined in Rule 144A
promulgated under the Securities Act). On
October 23, 1997 the Units were exchanged for
the Old Notes. In connection therewith, the
Company executed and delivered for the benefit
of the holders of Old Notes a registration
rights agreement (the "Registration Rights
Agreement"), pursuant to which the Company
agreed (i) to file a registration statement
(the "Registration Statement") on or prior to
November 16, 1997 with respect to the Exchange
Offer and (ii) to use its best efforts to
cause the Registration Statement to be
declared effective by the Commission on or
prior to January 15, 1998. In certain
circumstances, the Company will be required to
provide a shelf registration statement (the
"Shelf Registration Statement") to cover
resales of the Old Notes by the holders
thereof. If the Company does not comply with
its obligations under the
4
Registration Rights Agreement, it will be
required to pay liquidated damages
("Liquidated Damages") to holders of the Old
Notes under certain circumstances. See "The
Exchange Offer--Registration Rights;
Liquidated Damages." Holders of Old Notes do
not have any appraisal rights in connection
with the Exchange Offer.
The Exchange Offer............. The New Notes are being offered in exchange
for a like Accreted Value of Old Notes. The
issuance of the New Notes is intended to
satisfy the obligations of the Company
contained in the Registration Rights
Agreement. Based upon the position of the
staff of the Commission set forth in no-action
letters issued to third parties in other
transactions substantially similar to the
Exchange Offer, the Company believes that the
New Notes issued pursuant to the Exchange
Offer may be offered for resale, resold and
otherwise transferred by holders thereof
(other than (i) any such holder that is an
"affiliate" of the Company within the meaning
of Rule 405 under the Securities Act; (ii) an
Initial Purchaser who acquired the Old Notes
directly from the Company solely in order to
resell pursuant to Rule 144A of the Securities
Act or any other available exemption under the
Securities Act; or (iii) a broker-dealer who
acquired the Old Notes as a result of market
making or other trading activities) without
further compliance with the registration and
prospectus delivery requirements of the
Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and such holder is not
participating and has no arrangement or
understanding with any person to participate
in a distribution (within the meaning of the
Securities Act) of such New Notes. By
tendering, each Holder, which is not a broker-
dealer will represent to the Company that,
among other things, the person receiving the
New Notes, whether or not such person is the
Holder, (i) will acquire the New Notes in the
ordinary course of such person's business,
(ii) has no arrangement or understanding with
any person to participate in a distribution of
the New Notes and (iii) is not engaged in and
does not intend to engage in a distribution of
the New Notes. If any Holder or any such other
person has an arrangement or understanding
with any person to participate in a
distribution of such New Notes, is engaged in
or intends to engage in a distribution of such
New Notes, is an "affiliate," as defined under
Rule 405 of the Securities Act, of the
Company, or acquired the Old Notes as a result
of market making or other trading activities,
then such Holder or any such other person (i)
cannot rely on the applicable interpretations
of the staff of the Commission and (ii) 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 pursuant to the Exchange Offer
must acknowledge
5
that it will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of such New Notes.
Although there has been no indication of any
change in the staff's position, there can be
no assurance that the staff of the Commission
would make a similar determination with
respect to the resale of the New Notes. See
"Risk Factors."
Procedures for Tendering....... Tendering Holders of Old Notes must complete
and sign the Letter of Transmittal in
accordance with the instructions contained
therein and forward the same by mail,
facsimile or hand delivery, together with any
other required documents, to the Exchange
Agent, either with the Old Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Old
Notes. Holders of the Old Notes desiring to
tender such Old Notes in exchange for New
Notes should allow sufficient time to ensure
timely delivery. Certain brokers, dealers,
commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. Holders of Old Notes registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee are urged to
contact such person promptly if they wish to
tender Old Notes pursuant to the Exchange
Offer. Letters of Transmittal and certificates
representing Old Notes should not be sent to
the Company. Such documents should only be
sent to the Exchange Agent. Questions
regarding how to tender the requests for
information should be directed to the Exchange
Agent. See "The Exchange Offer--Procedures for
Tendering Old Notes."
Tenders, Expiration Date;
Withdrawal....................
The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1997 or such
later date and time to which it is extended.
The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Note not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer. See "The Exchange Offer--Terms
of the Exchange Offer; Period for Tendering
Old Notes" and "--Withdrawal Rights."
Certain Conditions to the
Exchange Offer................
The Exchange Offer is subject to certain
customary conditions, all of which may be
waived by the Company, including the absence
of (i) threatened or pending proceedings
seeking to restrain the Exchange Offer or
resulting in a material delay to the Exchange
Offer; (ii) a general suspension of trading on
any national securities exchange or in the
over-the-counter market; (iii) a banking
moratorium; (iv) a commencement of war, armed
hostilities or other similar international
calamity directly or indirectly involving the
United States; and (v) change or threatened
change in the business, properties, assets,
liabilities,
6
financial condition, operations, results of
operations or prospects of Holdings and its
subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be
adverse to the Company. The Company shall not
be required to accept for exchange, or to
issue New Notes in exchange for, any Old
Notes, if at any time before the acceptance of
such Old Notes for exchange or the exchange of
New Notes for such Old Notes, any of the
foregoing events occurs which, in the sole
judgment of the Company, make it inadvisable
to proceed with the Exchange Offer and/or with
such acceptance for exchange or with such
exchange. In the event the Company asserts or
waives a condition to the Exchange Offer which
constitutes a material change to the terms of
the Exchange Offer, the Company will disclose
such change in a manner reasonably calculated
to inform prospective investors of such
change, and will extend the period of the
Exchange Offer by five business days. If the
Company fails to consummate the Exchange Offer
because the Exchange Offer is not permitted by
applicable law or Commission policy, it will
file with the Commission a Shelf Registration
Statement to cover resales of the Transfer
Restricted Securities (as defined) by the
holders thereof who satisfy certain
conditions. If the Company fails to consummate
the Exchange Offer or file a Shelf
Registration Statement in accordance with the
Registration Rights Agreement, the Company
will pay Liquidated Damages to each holder of
Transfer Restricted Securities until the cure
of all defaults. The Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Old Notes being tendered
for exchange. See "The Exchange Offer--
Registration Rights; Liquidated Damages" and
"--Certain Conditions to the Exchange Offer."
Federal Income Tax
Consequences..................
In the opinion of Mayer, Brown & Platt, tax
counsel to the Company, for federal income tax
purposes, the exchange of Old Notes for New
Notes pursuant to the Exchange Offer will not
result in any income, gain or loss to the
Holders or the Company. See "Certain Federal
Income Tax Considerations" for a discussion of
the material federal income tax consequences
expected to result from the Exchange Offer.
Use of Proceeds................ There will be no proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Appraisal Rights............... Holders of Old Notes will not have dissenters'
rights or appraisal rights in connection with
the Exchange Offer.
Exchange Agent................. State Street Bank and Trust Company is serving
as Exchange Agent in connection with the
Exchange Offer.
7
CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions 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 pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Risk
Factors--Consequences of Exchange and Failure to Exchange" and "The Exchange
Offer--Consequences of Exchanging Old Notes."
SUMMARY DESCRIPTION OF THE NEW NOTES
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 and except that, if the Exchange Offer is not
consummated by February 14, 1998, subject to certain exceptions, with respect
to the first 90-day period immediately following thereafter, the Company will
be obligated to pay liquidated damages to each Holder of Old Notes in an amount
equal to $.05 per week for each $1,000 principal amount of Old Notes, as
applicable, held by such Holder ("Liquidated Damages"). The amount of the
Liquidated Damages will increase by an additional $.05 per week with respect to
each subsequent 90-day period until the Exchange Offer is consummated, or any
other Registration Default (as defined) is cured, up to a maximum of $.40 per
week for each $1,000 principal amount of Old Securities, as applicable.
The New Notes will accrete from the most recent date to which accretion has
been recognized on the Old Notes or, if no accretion has been recognized on the
Old Notes, from September 17, 1997. 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 accretion from the most
recent date to which accretion has been recognized or, if no accretion has been
recognized, from September 17, 1997. Old Notes accepted for exchange will cease
to accrete from and after the date of consummation of the Exchange Offer.
Holders of Old Notes whose Old Notes are accepted will not receive any
accretion or payment in respect of interest on such Old Notes otherwise payable
on any interest payment or accretion date which occurs on or after the
consummation of the Exchange Offer.
THE NEW NOTES
Securities Offered............. $50 million initial Accreted Value of 11.375%
Series B Senior Discount Notes due 2009.
Maturity....................... September 15, 2009.
Accretion...................... The New Notes will accrete at a rate of
11.375%, compounded semi-annually to an
aggregate principal amount of $108,467,780 at
September 15, 2004.
Interest....................... The Old Notes were and the New Notes will be
issued at a substantial discount from their
principal amount at maturity, and there will
not be any cash payment of interest prior to
March 15, 2005. Commencing September 15, 2004,
interest on the Notes will accrue at the rate
of 11.375% per annum, payable semi-annually in
cash, on March 15 and September 15 of each
year, commencing March 15, 2005.
8
Original Issue Discount........ For U.S. federal income tax purposes, the Old
Notes were and the New Notes will be treated
as having been issued with "original issue
discount" ("OID"). Thus, although interest
will not be payable on the Exchange Notes
prior to March 15, 2005, holders of Notes will
be required to include amounts in gross income
for federal income tax purposes in advance of
the receipt of cash payment to which the
income is attributable. See "Certain Federal
Income Tax Considerations."
Optional Redemption............ On or after March 15, 1998 and prior to
September 15, 2002, the Notes will be
redeemable at the option of Holdings, in whole
or in part, at any time in cash at 105.688% of
Accreted Value thereof (determined at the date
of redemption) only (i) in the event of a
Change in Control of Holdings or GFSI and/or
(ii) with the net proceeds of one or more
Equity Offerings of Holdings or GFSI. On or
after September 15, 2002, the Notes will be
redeemable at the option of Holdings, in whole
or in part, at any time in cash at the
redemption prices set forth herein, plus
accrued and unpaid interest and Liquidation
Damages, if any, thereon to the date of
redemption. See "Description of New Notes--
Redemption of Notes--Optional Redemption."
Ranking........................ The Old Notes were and the New Notes will be
general unsecured obligations of Holdings,
will rank pari passu in right of payment with
all existing and all future senior
indebtedness of Holdings and will rank senior
in right of payment with any Subordinated
Indebtedness (as defined) incurred by Holdings
in the future. As indebtedness of Holdings,
however, the Notes will be effectively
subordinated to all indebtedness of GFSI. As
of June 27, 1997, on a pro forma basis, after
giving effect to the Old Offering and the
Exchange, the Exchange Notes would have been
effectively subordinated to approximately
$193.0 million of indebtedness of GFSI. See
"Risk Factors--Holding Company Structure;
Effective Subordination." The Indenture will
permit Holdings and GFSI to incur additional
Indebtedness subject to certain limitations.
See "Description of Notes--Certain Covenants"
and "Description of Certain Indebtedness."
Change of Control.............. Upon the occurrence of a Change of Control,
each holder of Notes will have the right to
require Holdings to repurchase all or any part
of such holder's Notes at a price equal to
100% of the Accreted Value thereof on the date
of repurchase (if such date of repurchase is
prior to September 15, 2004) or 100% of the
aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of
repurchase (if such date of repurchase is on
or after September 15, 2004). See "Description
of Notes--Mandatory Offers to Purchase Notes--
Change of Control" and "--Certain
Definitions." There can be no assurance that,
in the event of a
9
Change of Control, Holdings would have
sufficient funds to repurchase all Notes
tendered. See "Risk Factors--Change of
Control."
Certain Covenants.............. The Indenture contains covenants that, among
other things, limit the ability of Holdings
and its Restricted Subsidiaries (as defined)
to: (i) pay dividends or make certain other
Restricted Payments (as defined); (ii) incur
additional Indebtedness; (iii) encumber or
sell assets; (iv) enter into certain
guarantees of Indebtedness; (v) enter into
transactions with affiliates; and (vi) merge
or consolidate with any other entity and to
transfer or lease all or substantially all of
their assets. In addition, under certain
circumstances, Holdings will be required to
offer to purchase Notes at a price equal to
100% of the Accreted Value or principal amount
thereof, as applicable, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the date of purchase with the proceeds
of certain Asset Sales (as defined). See
"Description of Notes--Certain Covenants" and
"--Mandatory Offers to Purchase Notes--Asset
Sales."
For a more detailed description of the terms of the New Notes, see
"Description of Notes."
FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS OF
THE OLD NOTES, SEE "RISK FACTORS."
10
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Holdings is structured as a holding company whose only significant asset is
the capital stock of GFSI. The following table presents: (i) historical
operating and other data of the Company for fiscal 1993, 1994, 1995, 1996 and
1997; and (ii) pro forma data of the Company as of and for the year ended June
27, 1997. The historical financial statements for the Company for fiscal 1993,
1994 and 1995 have been audited by Donnelly Meiners Jordan Kline, and the
historical financial statements for fiscal 1996 and 1997 have been audited by
Deloitte & Touche LLP. The summary pro forma data does not purport to represent
what the Company's results of operations or financial position would have been
if the Transactions had been completed as of the date or for the periods
presented, nor does such data purport to represent the results of operations
for any future periods. The summary financial data set forth below should be
read in conjunction with "The Transactions," "Selected Historical Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition," the unaudited pro forma financial statements and the
historical financial statements of the Company and the related notes thereto
included elsewhere in this Prospectus.
Effective February 27, 1997, Winning Ways merged with and into GFSI, a new
entity with no previous operations, with GFSI as the surviving entity. The
statements of income data and other data presented below includes historical
information of Winning Ways through the merger date and the merged entity,
Holdings, subsequent thereto.
FISCAL YEAR ENDED,
----------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 27,
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ----------
STATEMENTS OF INCOME
DATA:
Net sales.............. $121,131 $128,171 $148,196 $ 169,321 $ 183,298
Gross profit........... 50,936 53,724 63,327 72,013 80,691
Operating expenses..... 28,201 29,151 34,428 39,179 44,752
Operating income(1).... 22,735 24,573 28,899 32,834 35,939
OTHER DATA:
EBITDA(2).............. $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 39,114
Cash flows from
operating activities.. 20,985 24,431 23,905 34,000 26,029
Cash flows from
investing activities.. (2,163) (2,597) (4,255) (2,480) 3,643
Cash flows from
financing activities.. (19,130) (21,921) (19,669) (31,493) (28,695)
Depreciation and
amortization.......... 1,998 2,303 2,860 3,201 3,175
Capital expenditures... 2,304 2,856 4,989 2,611 2,615
EBITDA margin(3)....... 20.4% 21.0% 21.4% 21.3% 21.3%
Ratio of earnings to
fixed charges(4)...... 9.1x 10.0x 11.4x 12.6x 3.5x
PRO FORMA DATA(5):
Operating income(1).... $ 36,022
Income before
extraordinary item.... 6,664
Ratio of earnings to
fixed charges(4)...... 1.4x
AS OF JUNE 27, 1997
----------------------
PRO
ACTUAL FORMA
---------- ----------
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 1,117 $ 1,147
Total assets........... 96,153 96,114
Long-term debt
(including current
portion) and
redeemable preferred
stock................. 246,080 246,080
Total stockholders'
equity (deficit)...... (174,215) (173,633)
11
- --------
(1) Operating income presented for the year ended June 27, 1997 does not
include the extraordinary loss related to the early extinguishment of debt
in the amount of $2,474 ($1,484 on an after-tax basis). See the audited
statements of income and the related notes thereto included elsewhere in
this prospectus.
(2) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles ("GAAP"), it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditures and working capital
requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company
to service its debt. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
(4) In the computation of the ratio of earnings to fixed charges, earnings
consist of income before income taxes, plus fixed charges. Fixed charges
consist of interest expense on indebtedness, plus that portion of lease
rental expense representative of the interest factor. Adjustments to pro
forma fixed charges include the additional interest expense related to the
new indebtedness and a decrease in redeemable preferred stock dividends
incurred upon completion of the Transactions and the Old Offering. See
"The Transactions."
(5) See the unaudited pro forma financial statements and the related notes
thereto included elsewhere in this Prospectus.
12
RISK FACTORS
Holders of the Old Notes should consider carefully the risk factors set
forth below as well as the other information set forth in this Prospectus
before tendering their Old Notes in the Exchange Offer. The risk factors set
forth below (other than "Consequences of Exchange and Failure to Exchange")
are generally applicable to the Old Notes as well as the New Notes. This
Prospectus contains certain forward-looking statements, including statements
containing the words "believes," "anticipates," "expects" and words of similar
import. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: adverse changes in national or local economic
conditions, increased competition, changes in availability, cost and terms of
financing, changes in operating expenses and other factors referenced in this
Prospectus, including, without limitation, under the captions "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
"Business." Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce
the results of any revisions to any of the forward-looking statements
contained in this Prospectus to reflect future events or developments.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act. In addition, upon the consummation of the Exchange
Offer holders of Old Notes which remain outstanding will not be entitled to
any rights to have such Old Notes registered under the Securities Act or to
any rights under the Registration Rights Agreement. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered, or tendered but unaccepted, Old Notes could be adversely
affected. See "The Exchange Offer--Consequences of Not Exchanging Old Notes."
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties in other transactions substantially
similar to the Exchange Offer, the Company believes that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act; (ii) an Initial Purchaser who acquired the Old Notes directly
from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act; or
(iii) a broker-dealer who acquired the Old Notes as a result of market making
or other trading activities) without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
New Notes are acquired in the ordinary course of such holder's business and
that such holder is not participating and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Notes. The Company has not, however, sought its
own no-action letter from the staff of the Commission. Although there has been
no indication of any change in the staff's position, there can be no assurance
that the staff of the Commission would make a similar determination with
respect to the resale of the New Notes. By tendering, each Holder which is not
a broker-dealer will represent to the Company that, among other things, the
person receiving the New Notes, whether or not such person is a Holder, (i)
will acquire the New Notes in the ordinary course of such person's business,
(ii) has no arrangement or understanding with any person to participate in a
distribution of the New Notes and (iii) is not engaged in and does not intend
to engage in a distribution of the New Notes. If any Holder or any such other
person has an arrangement or understanding with any person to participate in a
distribution of such New Notes, is engaged in or intends to engage in a
distribution of such New Notes, is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company, or acquired the Old Notes as a result
of market making or other
13
trading activities, then such Holder or any such other person (i) can not rely
on the applicable interpretations of the staff of the Commission and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless such
sale is made pursuant to an exemption from such requirements. See "The
Exchange Offer--Purpose of the Exchange Offer."
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
Holdings is a holding company and does not have any material operations or
assets other than ownership of capital stock of GFSI. Accordingly, the Notes
will be effectively subordinated to all existing and future liabilities of
GFSI, including indebtedness under the Credit Agreement and the GFSI Senior
Subordinated Notes. As of June 27, 1997, on a pro forma basis after giving
effect to the Old Offering and the Exchange Offer, the aggregate amount of
indebtedness of GFSI to which the holders of the Notes would be effectively
subordinated would have been approximately $193.0 million. Holdings and GFSI
may incur additional indebtedness in the future, subject to certain
limitations contained in the instruments governing their indebtedness.
Any right of Holdings to participate in any distribution of the assets of
GFSI upon liquidation, reorganization or insolvency of GFSI (and the
consequent right of the holders of the Notes to participate in distribution of
those assets) will be subject to the prior claims of GFSI's creditors. The
obligations of GFSI under the Credit Agreement are secured by substantially
all of its assets. See "Description of Certain Indebtedness--Credit
Agreement."
RANKING OF NOTES
The Notes will be senior unsecured obligations of Holdings and will rank
pari passu with all Senior Indebtedness of Holdings. In the event of the
insolvency, liquidation, reorganization, dissolution or other winding up of
Holdings, or upon the maturity of any Senior Indebtedness, whether by lapse of
time, acceleration or otherwise, the holders of Senior Indebtedness must be
paid in full in cash before any payment of principal or interest in respect of
the Notes. As a result, holders of Notes may recover ratably less than general
creditors of Holdings. The Notes will effectively rank junior to any secured
Indebtedness of Holdings and to Indebtedness and claims of creditors of
Holdings' subsidiaries, including Indebtedness incurred by GFSI under the
Credit Agreement. At June 27, 1997, the aggregate indebtedness of Holdings'
subsidiaries was approximately $193.0 million on a pro forma basis, after
giving effect to the Old Offering and the Exchange Offer. See "Description of
Notes--Ranking." The Indenture will permit Holdings and its subsidiaries to
incur additional Senior Indebtedness, subject to certain limitations. See
"Description of Certain Indebtedness and Other Obligations" and "Description
of Notes--Certain Covenants."
LIMITATION ON PAYMENT OF FUNDS TO HOLDINGS BY GFSI
Holdings' cash flow, and consequently its ability to pay dividends and debt
service, including its obligations under the Notes, is dependent on the cash
flow of GFSI and the payment of funds by GFSI to Holdings in the form of
loans, dividends or otherwise. GFSI has no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor. In addition, the Credit Agreement and the indenture
governing the GFSI Senior Subordinated Notes impose, and agreements entered in
the future may impose, significant restrictions on the payment of dividends
and the making of loans by GFSI to Holdings.
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The Old Notes were and the New Notes will be issued at a substantial
original issue discount from their principal amount at maturity. Consequently,
holders of the New Notes will be required to include amounts in gross income
for federal income tax purposes in advance of receipt of the cash payments to
which the income is attributable. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the holders of the New Notes resulting from the purchase,
ownership or disposition thereof.
14
Under the Indenture, in the event of an acceleration of the maturity of the
New Notes, upon the occurrence of an Event of Default, the holders of the New
Notes may be entitled to recover only the amount that may be declared due and
payable pursuant to the Indentures, which may be less than the principal
amount at maturity of the New Notes.
If a bankruptcy case is commenced by or against Holdings under the United
States Bankruptcy Code, the claim of a holder of New Notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i)
the consideration paid for the New Notes at the time of the Exchange Offer and
(ii) that portion of the OID (as determined on the basis of such issue price)
which is not deemed to constitute "unmatured interest" for purposes of the
United States Bankruptcy Code. Accordingly, holders of the New Notes under
such circumstances may, even if sufficient funds are available, receive a
lesser amount than they would be entitled to under the express terms of the
Indenture. In addition, there can be no assurance as to exactly how a
bankruptcy court would determine the amount of OID on the New Notes, assuming
such a court determines that the Exchange Offer created OID. Thus, there is no
assurance that a bankruptcy court would compute the accrual of interest under
the same rules as those used for the calculation of OID under federal income
tax law and, accordingly, a holder might be required to recognize a gain or
loss in the event of a distribution related to such a bankruptcy case.
LEVERAGE AND DEBT SERVICE
Holdings has substantial consolidated indebtedness and debt service
obligations. At June 27, 1997, Holdings' total indebtedness, including current
portion, would have been approximately $246.1 million (including redeemable
preferred stock) and its net capital deficiency would have been $173.6
million, in each case on a pro forma basis after giving effect to the Old
Offering and the Exchange Offer. In addition, subject to the restrictions
under the Credit Agreement and the indenture governing the GFSI Senior
Subordinated Notes, GFSI may incur additional indebtedness, from time to time,
and, subject to the restrictions under the Indenture, Holdings may incur
additional indebtedness from time to time. As a result of accounting for the
Transactions as a leveraged recapitalization under GAAP, total stockholders'
equity of Holdings changed from $38.7 million at December 31, 1996 to a
deficit of approximately $173.6 million as of June 27, 1997, on a pro forma
basis. See "The Transactions," "Capitalization" and "Description of Notes--
Limitation on Incurrence of Indebtedness."
The level of Holdings' indebtedness could have important consequences to
holders of the Notes including: (i) a substantial portion of GFSI's cash flow
from operations must be dedicated to debt service and will not be available
for other purposes; (ii) Holdings' ability to obtain additional debt financing
in the future for working capital, capital expenditures, acquisitions or
general corporate purposes may be limited; and (iii) Holdings' level of
indebtedness could limit its flexibility to react to changes in its operating
environment and economic conditions generally.
Holdings' ability to pay principal of and interest and Liquidated Damages,
if any, on the Notes and to satisfy its other debt obligations will depend
upon its future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of
which are beyond its control, as well as the availability of revolving credit
borrowings for GFSI under the Credit Agreement or a successor facility. If
Holdings is unable to service its indebtedness, it will be forced to take
actions such as reducing or delaying capital expenditures, selling assets,
restructuring or refinancing its indebtedness, or seeking additional equity
capital. There can be no assurance that any of these remedies can be effected
on satisfactory terms, if at all.
CONTROL BY PRINCIPAL STOCKHOLDERS AND CERTAIN TRANSACTIONS
The Company's executive officers and directors (and their respective
affiliates, including TJC) (collectively, the "Principal Stockholders") own a
majority of the issued and outstanding capital stock of Holdings. See
"Principal Stockholders." The Principal Stockholders, if voting together, have
sufficient voting power to elect the entire Board of Directors of the Company,
exercise control over the business, policies and affairs of the Company, and,
in general, determine the outcome of any corporate transaction or other
matters submitted to the
15
stockholders for approval such as any amendment to the certificate of
incorporation of the Company (the "Certificate of Incorporation"), the
authorization of additional shares of capital stock, and any merger,
consolidation, sale of all or substantially all of the assets of the Company
and could prevent or cause a Change of Control of the Company, all of which
may adversely affect the Company and holders of the Notes. Messrs. Caputo,
Jordan and Zalaznick, all directors of the Company, are partners of TJC. In
addition, the Company will maintain affiliate transactions with certain
members of senior management, and the Company has entered into certain
affiliate transactions with TJC. See "Certain Transactions."
RESTRICTIVE COVENANTS
The Indenture restricts, among other things, Holdings' ability to pay
dividends or make certain other Restricted Payments, to incur additional
Indebtedness, to encumber or sell assets, to enter into transactions with
affiliates, to enter into certain guarantees of Indebtedness, to merge or
consolidate with any other entity and to transfer or lease all or
substantially all of its assets. See "Description of Notes--Certain
Covenants." In addition, the Credit Agreement contains other and more
restrictive covenants and prohibits GFSI from prepaying other indebtedness.
The indebtedness outstanding under the Credit Agreement is secured by liens
on substantially all of the personal property and certain real property of
GFSI. The Credit Agreement includes certain covenants that, among other
things, restrict: (i) the making of investments, loans and advances and the
paying of dividends and other restricted payments; (ii) the incurrence of
additional indebtedness; (iii) the granting of liens, other than liens created
pursuant to the Credit Agreement and certain permitted liens; (iv) mergers,
consolidations, and sales of all or a substantial part of GFSI's business or
property; (v) the sale of assets; (vi) the making of capital expenditures; and
(vii) operating lease rentals. The Credit Agreement also requires GFSI to
comply with certain financial ratios, including minimum interest coverage,
minimum fixed charge coverage and maximum leverage ratios. The ability of GFSI
to comply with these and other provisions of the Credit Agreement may be
affected by events beyond GFSI's control. The breach of any of these covenants
could result in a default under the Credit Agreement, in which case, depending
on the actions taken by the lenders thereunder or their successors or
assignees, such lenders could elect to declare all amounts borrowed under the
Credit Agreement, together with accrued interest, to be due and payable, and
GFSI would be prohibited from making payments to Holdings until the default is
cured or all of the GFSI indebtedness under the Credit Agreement is paid or
satisfied in full. If Holdings were unable to repay such borrowings, such
lenders could proceed against their collateral. If the indebtedness under the
Credit Agreement were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness
and the other indebtedness of the Company, including the Notes. See
"Description of Notes" and "Description of Certain Indebtedness--Credit
Agreement."
CHANGE OF CONTROL
In the event of a Change of Control, each holder of Notes will be entitled
to require Holdings to purchase any or all of the Notes held by such holder at
the price stated herein. See "Description of Notes--Mandatory Offers to
Purchase Notes--Change of Control" and "--Certain Definitions--Change of
Control." In the event that a Change of Control occurs, the Company would
likely be required to refinance the indebtedness outstanding under the Credit
Agreement, the GFSI Senior Subordinated Notes and the Notes. There can be no
assurance that the Company would be able to refinance such indebtedness or, if
such refinancing were to occur, that such refinancing would be on terms
favorable to the Company.
The holders of Notes have limited rights to require Holdings 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 the Company, management of the Company or an
affiliate of the Company, if such transaction does not result in a Change of
Control. Moreover, the ability of Holdings to repurchase or redeem the Notes
following a Change of Control will be limited by Holdings' then-
16
available resources. Accordingly, the Change of Control provision is likely to
be of limited usefulness in such situations. The Change of Control provisions
may not be waived by the Board of Directors of Holdings or the Trustee (as
defined) without the consent of holders of at least a majority in principal
amount of the Notes. See "Description of Notes--Mandatory Offers to Purchase
Notes Change of Control." As a result, the Change of Control purchase feature
of the Notes may in certain circumstances discourage or make more difficult a
sale or takeover of Holdings and, thus, the removal of incumbent management.
ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFERS
The New Notes are being offered to Holders of the Old Notes. The Old Notes
were issued on October 23, 1997 pursuant to the Old Exchange to a small number
of institutional investors and are eligible for trading in the Private
Offering, Resale and Trading through Automated Linkages (PORTAL) Market, the
National Association of Securities Dealers' screenbased, automated market for
trading of securities eligible for resale under Rule 144A. The New Notes are
new securities for which there currently is no market. Although the Initial
Purchasers have advised the Company that they currently intend to make a
market in the New Notes, they are not obligated to do so and may discontinue
such market making at any time without notice. The Company does not intend to
list the Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation System. Accordingly, no assurance can be given that an active market
will develop for any of the Notes or as to the liquidity of the trading market
for any of the Notes. If a trading market does not develop or is not
maintained, holders of the Notes may experience difficulty in reselling such
Notes or may be unable to sell them at all. If a market for the Notes
develops, any such market may be discontinued at any time. If a trading market
develops for the Notes, future trading prices of such Notes will depend on
many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities.
Depending on prevailing interest rates, the market for similar securities and
other factors, including the financial condition of the Company, the Notes may
trade at a discount from their principal amount.
FRAUDULENT TRANSFER CONSIDERATIONS
Under fraudulent transfer law, if a court were to find, in a lawsuit by an
unpaid creditor or representative of creditors of the Company, that the
Company received less than fair consideration or reasonable equivalent value
for incurring the indebtedness represented by the Notes, and, at the time of
such incurrence, the Company (i) was insolvent or was rendered insolvent by
reason of such incurrence; (ii) was engaged or about to engage in a business
or transaction for which its remaining property constituted unreasonably small
capital; or (iii) intended to incur, or believed it would incur, debts beyond
its ability to pay as such debts mature, such court could, among other things,
(a) void all or a portion of the Company's obligations to the holders of the
Notes and/or (b) subordinate the Company's obligations to the holders of the
Notes to other existing and future indebtedness of GFSI, the effect of which
would be to entitle such other creditors to be paid in full before any payment
could be made on the Notes. The measure of insolvency for purposes of
determining whether a transfer is avoidable as a fraudulent transfer varies
depending upon the law of the jurisdiction which is being applied. Generally,
however, a debtor would be considered insolvent if the sum of all of its
liabilities were greater than the value of all of its property at a fair
valuation, or if the present fair salable value of the debtor's assets were
less than the amount required to repay its probable liability on its debts as
they become absolute and mature. There can be no assurance as to what standard
a court would apply in order to determine solvency. To the extent that
proceeds from the sale of the Notes are used to repay Existing Indebtedness, a
court may find that the Company did not receive fair consideration or
reasonably equivalent value for the incurrence of the Indebtedness represented
thereby.
On the basis of its historical financial information, its recent operating
history as discussed in "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and other factors, the Company believes
that, after giving effect to the Old Offering and Exchange Offer, the Company
was and
17
will be solvent, did and will have sufficient capital for the business in
which it is engaged and did not and will not have incurred debts beyond its
ability to pay such debts as they mature. There can be no assurance, however,
that a court would necessarily agree with these conclusions.
DEPENDENCE UPON LICENSING ARRANGEMENTS
The Company's business is dependent, in part, upon licensing agreements
pursuant to which the Company is granted the right to use certain names,
logos, emblems and other proprietary marks of licensors on the Company's
products. In fiscal 1997, the Company had 256 active licensing agreements with
licensors. Products manufactured and sold under the Company's licensing
agreements represented approximately 14% of the Company's total net sales in
fiscal 1997.
The length of the Company's license agreements vary, but typically are one
to three years. In addition, under the licensing agreements with certain
licensors such as MLB, the NBA and the NHL, the licensor may terminate the
agreement in the event of a change in control of the Company. To the extent
that the Company is unable to renew licenses scheduled to expire or to obtain
the consent of certain licensors to the change of control in connection with
the Acquisition, the loss of such licenses could have a material adverse
effect on the business, operating results, cash flows and financial condition
of the Company. See "Business--Licenses."
COMPETITION
The sportswear and activewear industry is highly competitive with respect to
price, product quality and speed and convenience of service. The Company's
ability to compete in each of its markets depends, in part, on its ability to
source quality blanks from suppliers and to recruit and maintain a high
quality sales force. There can be no assurance that the Company will be able
to maintain its current network of suppliers or its sales force or continue to
compete successfully with other competitors, some of which may have greater
resources, including financial resources, than the Company. To the extent that
any of the Company's competitors offer higher quality products, better service
or more attractive pricing, it could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business--Sales Divisions" and "--Design, Manufacturing and Materials
Sourcing."
SEASONALITY
Historically, the Company's sales have been seasonal with higher sales
during the first half of its fiscal year (July to December) primarily due to
increased sales in the Company's College Bookstore division during this
period. In fiscal 1997, net sales of the Company during the first and second
half of the fiscal year were approximately 57% and 43%, respectively. As a
result, the Company is required to predict appropriate inventory levels for
the upcoming seasonal demand. To the extent that the Company under-orders
inventories, sales and profits could be lost. To the extent that the Company
over-orders inventories, the Company may be forced to sell the inventory at
reduced prices or to write off the excess inventory as obsolete which could
have a material adverse effect on the Company's business, results of
operations and financial condition. Any seasonality problems experienced by
the Company in the past did not have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Results of Operation and Financial
Condition--Seasonality and Inflation" and "Description of Certain
Indebtedness--Credit Agreement."
FOREIGN SOURCING
In fiscal 1997, the Company sourced approximately 77% of its blanks through
its foreign suppliers located in Taiwan, Korea, Malaysia, Hong Kong,
Singapore, Indonesia, Pakistan, China, Honduras, Israel, Fiji and Sri Lanka.
The Company continually evaluates its sourcing options and strives to maintain
a concentration of no more than 20% sourced product from any one particular
foreign country. During fiscal 1997, approximately 70% of the foreign supplied
product was provided by Malaysia, Taiwan, Honduras and Korea, while
concentrations
18
from the other named foreign countries made up the remaining 30%. These
foreign suppliers provide supplies to the Company through short term purchase
orders supported by letters of credit. The majority of these foreign suppliers
do not supply such services exclusively to the Company and there are no
contracts between any of the foreign suppliers and the Company. As a result,
the Company may be adversely affected by political instability resulting in
(i) the disruption of trade from foreign countries in which the Company's
suppliers are located; (ii) the imposition of additional regulations relating
to imports, duties, taxes and other charges on imports; (iii) decreases in the
value of the dollar against foreign currencies; or (iv) restrictions on the
transfer of funds. These and other factors could result in the interruption of
production by the Company's foreign suppliers or a delay in the receipt of the
products by the Company in the United States. There have been no material
problems encountered with these foreign suppliers in the past. The Company's
future performance may be subject to such factors, which are beyond the
Company's control, and there can be no assurance that such factors would not
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Design, Manufacturing and Materials
Sourcing."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent on the abilities
and experience of its senior management team. The loss of services of one or
more of these senior executives could adversely affect the Company's ability
to retain quality suppliers of blanks, maintain tight inventory controls and
effectively manage the overall operations of the Company, any of which could
adversely affect the financial performance of the Company. In addition, the
Company believes that its continued success depends upon its ongoing ability
to attract and retain qualified management and employees, particularly in its
sales and customer service areas. The loss of a key manager could also
adversely affect the financial performance of the Company. The Company does
not currently maintain key man life insurance for any key personnel. The
Company has entered into an employment agreement with Robert M. Wolff, the
Chairman of the Company. See "Business--Employees," "Management" and "Certain
Transactions--Wolff Employment Agreement."
ENVIRONMENTAL MATTERS
The Company's facilities are subject to a broad range of federal, state and
local environmental laws and requirements, including those governing
discharges to the air and water, the handling of disposal of solid and
hazardous substances and wastes and remediation of contamination associated
with the release of hazardous substances at the Company's facilities and
offsite disposal locations. The Company has made, and will continue to make,
expenditures to comply with such laws and requirements. The Company believes,
based upon information currently available to management, that it is currently
in compliance with all applicable environmental laws and requirements and that
the Company will not require material capital expenditures to maintain its
environmental compliance during fiscal 1998 or in the foreseeable future.
However, future events, such as changes in existing laws and regulations or
the discovery of contamination at the Company's facilities, may give rise to
additional compliance or remediation costs which could have a material adverse
effect on the Company's results of operations or financial condition.
Moreover, the nature of the Company's business exposes it to some risk of
claims with respect to environmental matters, and there can be no assurance
that material costs or liabilities will not be incurred in connection with any
such claims.
FACTORS AFFECTING OPERATIONS
The financial performance of the Company is dependent, in part, on the
overall health of the markets it serves. A future downturn in any one market
could reduce demand for, and prices of, customized sportswear and activewear
products, including those manufactured by the Company. As a result, a
significant downturn in any one market could have a material adverse effect on
the Company's business, results of operations and financial conditions.
The Company's 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 the Company's major
competitors. Historically, on-campus bookstores have been owned and operated
by the
19
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., Follett Corporation and Nebraska Book Co. If any of these operators of
campus bookstores were to grant exclusive rights to one of the Company's
competitors, or if for any other reason the Company were unable to continue
selling its products through these college bookstore operators, the Company
would be forced to establish alternative distribution channels such as direct
marketing and off-campus bookstores, which could have a material adverse
effect on the operating results of the Company.
NEW MANAGEMENT INFORMATION SYSTEM
The Company is currently upgrading its existing management information
system ("MIS") with a new system designed to improve the overall efficiency of
the Company's operations and to enable management to more closely track the
financial performance of each of its sales and operating areas. Any difficulty
with the installation or initial operation of the new MIS could interfere with
the Company's inventory purchasing and control, sales or customer service,
which could adversely affect the Company's business, results of operations and
financial condition.
20
THE TRANSACTIONS
Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by
affiliates of TJC and management to acquire Winning Ways. Pursuant to the
Acquisition Agreement, Holdings and GFSI acquired all of the issued and
outstanding capital stock of Winning Ways on February 27, 1997, and Winning
Ways immediately thereafter merged with and into GFSI.
The aggregate purchase price for Winning Ways was $242.3 million, consisting
of $173.1 million in cash at closing, a post-closing payment at April 30, 1997
of $10.0 million and the repayment of $59.2 million of indebtedness of Winning
Ways, including a $2.4 million prepayment penalty. To finance the Acquisition,
including approximately $11.5 million of related fees and expenses: (i) the
Jordan Investors and Management Investors invested $52.2 million in Holdings
and Holdings contributed $51.4 million of this amount in cash to GFSI; (ii)
GFSI consummated the GFSI Offering; and (iii) GFSI entered into the Credit
Agreement providing for borrowings of up to $115.0 million. The Equity
Contribution is comprised of: (i) a contribution of $13.6 million from the
Jordan Investors to Holdings in exchange for preferred stock and approximately
50% of the common stock of Holdings; (ii) a contribution of $13.6 million from
the Management Investors to Holdings in exchange for Holdings Preferred Stock
and approximately 50% of the common stock of Holdings; and (iii) a contribution
of $25.0 million from a Jordan Investor to Holdings in exchange for the
Holdings Subordinated Notes. Approximately $0.8 million of the contribution
from the Management Investors was financed by loans from Holdings. Prior to the
closing of the Old Offering, the holders of Holdings Subordinated Notes and
preferred stock of Holdings exchanged those securities for the Subordinated
Discount Notes and Preferred Stock which constituted the Units.
GFSI's predecessor, Winning Ways, terminated its income tax reporting status
as an S-Corporation immediately prior to the closing of the Transactions on
February 27, 1997. Immediately prior to the closing, Winning Ways distributed
to its shareholders $20.6 million, representing the accumulated and
undistributed S-Corporation earnings of GFSI as of February 27, 1997. GFSI
recognized, with a post-closing adjustment, $1.0 million in net deferred income
tax liabilities upon the conversion from S-Corporation to C-Corporation status
for income tax reporting purposes. GFSI does not anticipate any future material
adverse tax liabilities arising from this distribution and conversion.
The following chart depicts the organizational structure and common equity
interest in Holdings and GFSI following consummation of the Transactions.
LOGO
21
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer.
CAPITALIZATION
(DOLLARS IN MILLIONS)
The following table sets forth the capitalization of Holdings as of June 27,
1997 and the pro forma capitalization of Holdings as of June 27, 1997, as
adjusted to reflect the Old Offering and the Exchange Offer. The table should
be read in conjunction with the financial statements of Holdings and related
notes thereto included elsewhere in the Prospectus. See "The Transactions,"
"Selected Financial Data," the unaudited pro forma financial statements of
Holdings and the historical financial statements of Holdings and the related
notes thereto included elsewhere in this Prospectus.
AS OF JUNE 27,
1997
----------------
PRO
ACTUAL FORMA
------- -------
Cash and cash equivalents............................... $ 1.1 $ 1.1
======= =======
Long-term debt (excluding current maturities)
GFSI:
Credit Agreement.................................... $ 64.6 $ 64.6
9 5/8% Senior Subordinated Notes due 2007........... 125.0 125.0
------- -------
Total GFSI long-term debt......................... 189.6 189.6
Holdings:
Senior Discount Exchange Notes due 2009............. 0.0 50.0
Subordinated Discount Notes......................... 25.0 0.0
------- -------
Total Holdings long-term debt..................... 25.0 50.0
Total long-term debt.................................... 214.6 239.6
Redeemable preferred stock.............................. 28.1 3.1
Holdings' stockholders' equity (deficit)................ (174.2) (173.6)
------- -------
Total capitalization.................................... $ 68.5 $ 69.1
======= =======
22
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The discussions set forth within may contain forward-looking comments based
on current expectations that involve a number of risks and uncertainties.
Actual results could differ materially from those projected or suggested in
the forward-looking comments. Factors that could cause the Company's actual
results in future periods to differ materially include, but are not limited
to, those which may be discussed herein, as well as those discussed or
identified from time to time in the Company's filings with the Commission.
Holdings is structured as a holding company whose only significant asset is
the capital stock of GFSI. The following table presents: (i) historical
operating and other data of the Company for fiscal 1993, 1994, 1995, 1996 and
1997; and (ii) balance sheet data as of June 30, 1993, 1994, 1995 and 1996,
and June 27, 1997. The historical financial statements for the Company for
fiscal 1993, 1994 and 1995 have been audited by Donnelly Meiners Jordan Kline,
and the historical financial statements for fiscal 1996 and 1997 have been
audited by Deloitte & Touche LLP. The selected financial data set forth below
should be read in conjunction with "The Transactions," "Management's
Discussion and Analysis of Results of Operations and Financial Condition," the
unaudited pro forma financial statements and the historical financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
Effective February 27, 1997, Winning Ways merged with and into GFSI, a new
entity with no previous operations, with GFSI as the surviving entity. The
statements of income data and other data presented below includes historical
information of Winning Ways through the merger date and the merged entity
Holdings subsequent thereto.
FISCAL YEAR ENDED,
-------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 27,
1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
STATEMENTS OF INCOME DATA:
Net sales................. $121,131 $128,171 $148,196 $169,321 $ 183,298
Gross profit.............. 50,936 53,724 63,327 72,013 80,691
Operating expenses........ 28,201 29,151 34,428 39,179 44,752
Operating income(1)....... 22,735 24,573 28,899 32,834 35,939
Income before
extraordinary item....... 20,055 22,105 26,220 30,226 25,500
OTHER DATA(2):
EBITDA(3)................. $ 24,733 $ 26,876 $ 31,759 $ 36,035 $ 39,114
Cash flows from operating
activities............... 20,985 24,431 23,905 34,000 26,029
Cash flows from investing
activities............... (2,163) (2,597) (4,255) (2,480) 3,643
Cash flows from financing
activities............... (19,130) (21,921) (19,669) (31,493) (28,695)
Depreciation and
amortization............. 1,998 2,303 2,860 3,201 3,175
Capital expenditures...... 2,304 2,856 4,989 2,611 2,615
EBITDA margin(4).......... 20.4% 21.0% 21.4% 21.3% 21.3%
Ratio of earnings to fixed
charges(5)............... 9.1x 10.0x 11.4x 12.6x 3.5x
BALANCE SHEET DATA:
Cash and cash equivalents. $ 219 $ 132 $ 112 $ 140 $ 1,117
Total assets.............. 67,510 70,176 76,938 78,711 96,153
Long-term debt (including
current portion)
and redeemable preferred
stock.................... 19,157 27,242 24,915 22,276 246,080
Total stockholders' equity
(deficit)................ 27,502 29,429 32,106 34,479 (174,215)
23
- --------
(1) Operating income presented for the year ended June 27, 1997 does not
include the extraordinary loss related to the early extinguishment of debt
in the amount of $2,474 ($1,484 on an after-tax basis). See the audited
statements of income and the related notes thereto included elsewhere in
this prospectus.
(2) Distributions per share totaled $16.91, $16.70, $19.82 and $23.37 for the
years ended June 30, 1993, 1994, 1995 and 1996 respectively. Distributions
per share in fiscal 1997 are not comparable nor meaningful due to the
leveraged recapitalization transactions and the conversion to a C-
corporation from an S-corporation for income tax reporting purposes which
occurred during fiscal 1997. See "The Transactions."
(3) EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flow from operating
activities, which are determined in accordance with GAAP, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. In addition, the Company believes that certain
investors find EBITDA to be a useful tool for measuring the ability of the
Company to service its debt. EBITDA is not necessarily a measure of the
Company's ability to fund its cash needs.
(4) EBITDA margin represents EBITDA as a percentage of net sales.
(5) The ratio of earnings to fixed charges computed on a pro forma basis would
have been 1.4x for the fiscal year ended June 27, 1997. In the computation
of the ratio of earnings to fixed charges, earnings consist of income
before income taxes, plus fixed charges. Fixed charges consist of interest
expense on indebtedness, plus that portion of lease rental expense
representative of the interest factor. Adjustments to pro forma fixed
charges include the additional interest expense related to the new
indebtedness and a decrease in redeemable preferred stock dividends
incurred upon completion of the Transactions and the Old Offering. See "The
Transactions."
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company 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 teams and events. The
Company, which was founded in 1974, custom designs and decorates an extensive
line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts,
sweaters, shorts, headwear and sports luggage. The Company markets its products
to over 13,000 active customer accounts through its well-established and
diversified distribution channels, rather than through the price sensitive mass
merchandise, discount and department store distribution channels.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a sales force
with a specialized knowledge of its particular markets and customers. The
Company's four divisions include: (i) the Resort division (36.5% of fiscal 1997
net sales); (ii) the Corporate division (30.6% of fiscal 1997 net sales); (iii)
the College Bookstore division (20.8% of fiscal 1997 net sales); and (iv) the
Sports Specialty division (5.8% of fiscal 1997 net sales). The Company believes
that it has been able to compete successfully because of its ability to create
diverse and innovative designs, provide excellent customer service, leverage
its GEAR brand name and differentiate its products on the basis of quality.
EBITDA represents operating income plus depreciation and amortization. While
EBITDA should not be construed as a substitute for operating income or a better
indicator of liquidity than cash flow from operating activities, which are
determined in accordance with GAAP, it is included herein to provide additional
information with respect to the ability of the Company to meet its future debt
service, capital expenditure and working capital requirements. In addition, the
Company believes that certain investors find EBITDA to be a useful tool for
measuring the ability of the Company to service its debt. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
SALES DIVISIONS
The Company markets its products, which include custom designed fleecewear,
jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and
sports luggage, through four sales divisions (dollars in thousands):
FISCAL 1997
NET SALES
--------------
NET % OF
DIVISION CUSTOMERS SALES TOTAL
-------- --------- ----- -----
Resort Destination resorts, family entertainment
companies, hotel chains, golf clubs, cruise
lines, and casinos $ 66,906 36.5%
Corporate Large and small companies serving a variety of
industries 56,179 30.6
College Bookstore Major colleges and universities as well as
college bookstore lease operators 38,053 20.8
Sports Specialty Sports specialty stores and catalogues, stadium
stores, and professional sports teams and their
staffs 10,678 5.8
Other Various institutions, organizations and
individuals 11,482 6.3
-------- -----
$183,298 100.0%
======== =====
25
The following sets forth the amount and percentage of net sales for each of
the periods indicated (dollars in thousands):
FISCAL YEAR ENDED
--------------------------------------------
JUNE 30, JUNE 30, JUNE 27,
1995 1996 1997
-------------- -------------- --------------
Resort............................. $ 60,047 40.5% $ 67,739 40.0% $ 66,906 36.5%
Corporate.......................... 38,316 25.9% 47,167 27.9% 56,179 30.6%
Bookstore.......................... 37,823 25.5% 37,733 22.3% 38,053 20.8%
Sports Specialty................... 3,154 2.1% 6,342 3.7% 10,678 5.8%
Other.............................. 8,856 6.0% 10,340 6.1% 11,482 6.3%
-------- -------- --------
Total.............................. $148,196 $169,321 $183,298
======== ======== ========
RESULTS OF OPERATIONS
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for fiscal 1995, 1996 and
1997:
FISCAL YEAR ENDED
--------------------------
JUNE 30, JUNE 30, JUNE 27,
1995 1996 1997
-------- -------- --------
Net sales...................................... 100.0% 100.0% 100.0%
Gross profit................................... 42.7 42.5 44.0
EBITDA......................................... 21.4 21.3 21.3
Operating income............................... 19.5 19.4 19.6
Fiscal Year Ended June 27, 1997 Compared to Fiscal Year Ended June 30, 1996
Net Sales. Net sales for fiscal 1997 increased 8.3% to $183.3 million from
$169.3 million in fiscal 1996. The increase in net sales primarily reflects
increases in net sales at the Company's Corporate and Sports Specialty
divisions of 19.1% and 68.4%, respectively, and was partially offset by a
slight decrease in net sales at the Resort division. These increases were
driven primarily by volume increases due to continued account expansion and the
introduction of new product lines through each distribution channel.
Gross Profits. Gross profit for fiscal 1997 increased 12.1% to $80.7 million
from $72.0 million in fiscal 1996, primarily as a result of the net sales
increase described above. Gross profit as a percentage of net sales increased
to 44.0% in fiscal 1997, from 42.5% in fiscal 1996. The increase in margin
reflects a decrease in the cost of materials sold, as a percentage of net
sales, from 50.0% in fiscal 1996 to 48.4% in fiscal 1997. These changes were
driven primarily by growth in the Corporate division, which focuses on higher
margin, production intensive embroidered products.
Operating Expenses. Operating expenses for fiscal 1997 increased 14.3% to
$44.8 million from $39.2 million in fiscal 1996 due primarily to increased
sales and staffing levels. Operating expenses as a percentage of net sales
increased to 24.4% for fiscal 1997, from 23.1% in fiscal 1996. The increase in
operating expenses, as a percentage of net sales, is primarily due to an
increase in non-recurring MIS consulting charges associated with the
installation of the Company's new MIS system which increased from $625,000 in
fiscal 1996 to $2.2 million in fiscal 1997.
EBITDA. EBITDA for fiscal 1997 increased 8.6% to $39.1 million from $36.0
million in fiscal 1996, primarily as a result of the net sales and related
gross profit increase described above. EBITDA as a percentage of net sales
remained consistent at 21.3% in fiscal 1997 and 21.3% in fiscal 1996. The
consistent margin level reflects the change in gross profit described above
offset by an increase in selling and general and administrative expenses.
26
Operating Income. Operating income for fiscal 1997 increased 9.5% to $35.9
million from $32.8 million in fiscal 1996, primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
increased to 19.6% in fiscal 1997, from 19.4% in fiscal 1996. This increase in
operating income reflects the change in EBITDA described above.
Other Income (Expense). Other expense for fiscal 1997 increased 246.2% to
$9.0 million from $2.6 million in fiscal 1996, primarily as a result of
increased interest expense associated with the Company's recapitalization and
subsequent issuance of $125 million Senior Subordinated Notes, borrowings of
$68.0 million under the Credit Agreement and the issuance of the $25 million of
subordinated notes. The effect of derivative financial instruments serve to
minimize unplanned changes in interest expense due to changes in interest
rates. Interest rate fluctuations and their effect were immaterial for the
periods presented. A reasonable likely change in the underlying rate, price or
index would not have a material impact on the financial position of the
Company.
Income Taxes. An income tax provision of $1.4 million was recorded for fiscal
1997 due to the Company's change in tax status from an S-Corporation to a C-
Corporation for income tax reporting purposes which was effective February 27,
1997. The Company earnings subsequent to February 27, 1997 are subject to
corporate income taxes. The effect of the change in income tax reporting status
from an S-Corporation to a C-Corporation was approximately $1.0 million and an
additional $400,000 of the income tax provision was related to operations,
subsequent to the change in tax status.
Extraordinary Item. The Company recognized an extraordinary loss for fiscal
1997 of $2.5 million ($1.5 million on after-tax basis) which consisted of a
penalty incurred in the prepayment of the Company's mortgage and a write-off of
previously capitalized deferred financing costs.
Net Income. Net income for fiscal 1997 was $24.0 million compared to $30.2
million in fiscal 1996. The decrease in net income is primarily the result of
interest expense, income taxes, and the extraordinary item, as mentioned above.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Net Sales. Net sales for fiscal 1996 increased 14.2% to $169.3 million from
$148.2 million in fiscal 1995. The increase in net sales primarily reflects
sales increases in the Resort, Corporate and Sports Specialty divisions of
12.8%, 23.1% and 101.1%, respectively, and was offset in part by a slight
decrease in net sales in the College Bookstore division. These increases were
primarily driven by unit volume increases resulting from account expansion,
further penetration of existing accounts and certain new product introductions.
Gross Profit. Gross profit for fiscal 1996 increased 13.7% to $72.0 million
from $63.3 million in fiscal 1995 primarily as a result of the net sales
increase described above. Gross profit as a percentage of net sales decreased
slightly to 42.5% in fiscal 1996 from 42.7% in fiscal 1995. This moderate
decline in margin reflects slight increases in the cost of materials sold, as a
percentage of net sales, from 49.9% in fiscal 1995 to 50.0% in fiscal 1996 and
the cost of production, as a percentage of net sales, from 7.4% in fiscal 1995
to 7.5% in fiscal 1996. These slight changes reflect a relatively consistent
product mix from fiscal 1995 to fiscal 1996.
Operating Expenses. Operating expenses for fiscal 1996 increased 14.0% to
$39.2 million from $34.4 million in fiscal 1995. Since certain of these costs
are fixed in nature, operating expenses as percentage of net sales decreased to
23.1% for fiscal 1996, from 23.2% for fiscal 1995.
EBITDA. EBITDA for fiscal 1996 increased 13.2% to $36.0 million from $31.8
million in fiscal 1995 primarily as a result of the net sales increase
described above. EBITDA as a percentage of net sales decreased slightly to
21.3% in fiscal 1996 from 21.4% in fiscal 1995. This moderate decline in margin
reflects the change in gross profit described above and increased operating
expenses, which included $625,000 of non-recurring MIS consulting charges
associated with the installation of the Company's new MIS system.
27
Operating Income. Operating income for fiscal 1996 increased 13.5% to $32.8
million from $28.9 million in fiscal 1995 primarily as a result of the net
sales increase described above. Operating income as a percentage of net sales
decreased slightly to 19.4% in fiscal 1996 from 19.5% in fiscal 1995. This
moderate decline in margin reflects the change in EBITDA described above.
Other Income (Expense). Other expense for fiscal 1996 decreased 3.7% to $2.6
million from $2.7 million in fiscal 1995. The decrease in expense reflects a
4% increase in interest expense from $2.5 million in fiscal 1995 to $2.6
million in fiscal 1996 offset by gains on disposals of fixed assets in fiscal
1996 as opposed to losses on disposals of fixed assets in fiscal 1995. The
effect of derivative financial instruments serve to minimize savings in
interest rates on floating rate debt. Interest rate fluctuations and their
effect were immaterial for the periods presented. A reasonable likely change
in the underlying rate, price or index would not have a material impact on the
financial position of the Company.
Income Taxes. Due to the Company's tax status during the period as an S-
Corporation under provisions of the Internal Revenue Code, no corporate income
taxes were recorded as the shareholders were taxed individually on the
Company's taxable income.
Net Income. Net income for fiscal 1996 increased 15.3% to $30.2 million from
$26.2 million in fiscal 1995, primarily as a result of the increase in net
operating results described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in fiscal 1997, 1996 and 1995 was
$26.0 million, $34.0 million and $23.9 million, respectively. Changes in
working capital resulted in cash sources (uses) of $(3.2) million, $0.9
million and $(4.8) million in fiscal 1997, 1996 and 1995, respectively. The
decrease in cash provided by operating activities in fiscal 1997 from fiscal
1996 resulted from a decrease in net income, as previously discussed, in
addition to increased inventory levels. The increase in cash provided by
operating activities in fiscal 1996 from fiscal 1995 resulted from increases
in net income and accounts payable and accrued expenses, coupled with a
decrease in inventories which were offset by an increase in accounts
receivables.
Cash provided by investing activities for fiscal 1997 was $3.6 million
compared to cash used of $2.5 million and $4.3 million for fiscal 1996 and
1995, respectively. The decrease in cash used was a result of cash value of
life insurance policy proceeds received of $5.3 million, in addition to
proceeds from the sale of the corporate aircraft to a shareholder of the
Company for its fair value of approximately $900,000. Capital expenditures in
fiscal 1995 were $5.0 million and related to the $1.6 million purchase of a
corporate aircraft from a non-affiliate of the Company. These expenditures
were therefore in excess of the Company's normal capital expenditure
requirements.
Cash used in financing activities for fiscal 1997 was $28.7 million compared
to cash used of $31.5 million and $19.7 million for fiscal 1996 and fiscal
1995, respectively. The cash used in financing activities for fiscal 1997
resulted from the cash used to complete the recapitalization transactions as
previously described net of new borrowings under the Credit Agreement, the
Senior Subordinated Notes and the Subordinated Notes. Cash used in financing
activities in fiscal 1996 and 1995 was primarily used to make Subchapter S
distributions to the Company's stockholders and scheduled loan principal
payments.
The Company believes that cash flow from operating activities and borrowings
under the Credit Agreement will be adequate to meet the Company's short-term
and long-term liquidity requirements prior to the maturity of its credit
facilities in 2007, although no assurance can be given in this regard. The
Company has no material capital commitments over the next twelve months. Under
the Credit Agreement, the revolver provides $50 million of revolving credit
availability (the "Revolver") (of which $3.0 million was borrowed as of June
27, 1997 and approximately $29.8 million was utilized for outstanding
commercial and stand-by letters of credit).
28
As part of the Company's upgrade of its MIS, the Company believes that its
new MIS will adequately address any concerns related to the year 2000 issue,
without any additional expenditures. See "Risk Factors-- New Management
Information System."
GFSI anticipates paying dividends to Holdings to enable Holdings to pay
corporate income taxes, interest on the Exchange Notes, fees payable under the
TJC Agreement (as defined herein) and certain other ordinary course expenses
incurred on behalf of GFSI. Holdings is dependent upon the cash flows of GFSI
to provide funds to service the indebtedness represented by the Exchange Notes
and will be dependent on the cash flows of GFSI to service the Exchange Notes.
The Company monitors market risk with respect to the derivative instruments
entered into by the Company, including the value of such instruments, by
regularly consulting with its senior financial managers. The Company enters
into such agreements for hedging purposes and not with a view toward
speculating in the underlying instruments. Accordingly, any reasonably likely
change in the level of the underlying rate, price or index would not be likely
to have either a favorable or adverse impact on the Company's business,
operations or financial condition, including with respect to interest expense.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," was implemented on July 1, 1996. The adoption of this statement
did not have a material impact on the Company's financial position or results
of operations.
SFAS No. 128, "Earnings per Share," was issued in February 1997. This
Statement establishes standards for computing and presenting earnings per
share by replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. This Statement is effective for the
Company's fiscal 1998 financial statements, including interim periods; earlier
application is not permitted. The Company does not expect the implementation
of this Statement to have a material impact on the Company's financial
statements.
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This Statement
is effective for the Company's fiscal 1998 financial statements. The Company
does not expect the implementation of this Statement to have a material impact
on its financial position or results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. This Statement is effective for the Company's fiscal 1998 financial
statements. The Company does not expect the implementation of the disclosure
requirements of this Statement to have a material impact on the Company's
financial statements.
SEASONALITY AND INFLATION
The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. In fiscal 1997, net sales of the Company
during the first half and second half of the fiscal year were approximately
57% and 43%, respectively. The seasonality of sales and profitability is
primarily due to higher volume at the College Bookstore division during the
first two fiscal quarters. Sales and profitability at the Company's Resorts,
Corporate and Sports Specialty divisions typically show no significant
seasonal variations. As the Company continues to expand into other markets in
its Resorts, Corporate and Sports Specialty divisions, seasonal fluctuations
in sales and profitability are expected to decline.
The impact of inflation on the Company's operations has not been significant
to date. However, there can be no assurance that a high rate of inflation in
the future would not have an adverse effect on the Company's operating
results.
29
BUSINESS
Holdings and GFSI, a wholly owned subsidiary of Holdings, were organized by
affiliates of TJC and management to effect the acquisition of Winning Ways.
Holdings current operations are conducted exclusively through GFSI and
Holdings' only significant asset is the capital stock of GFSI. The following
is a description of the business of GFSI.
The Company, which operates primarily under the brand name GEAR For
Sports(R), 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 teams and events. The
Company, which was founded in 1974, custom designs and decorates an extensive
line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts,
sweaters, shorts, headwear and sports luggage. The Company markets its
products to over 13,000 active customer accounts through its well-established
and diversified distribution channels, rather than through the price sensitive
mass merchandise, discount and department store distribution channels. The
Company believes that it has been able to compete successfully because of its
ability to create diverse and innovative designs, provide excellent customer
service, leverage its GEAR brand name and differentiate its products on the
basis of quality. For fiscal 1997, the Company generated net sales and EBITDA
of $183.3 million and $39.1 million, respectively.
The Company believes it has achieved a record of strong sales and EBITDA
growth and stable operating margins primarily due to its: (i) leading
positions in niche markets; (ii) diversified and stable customer base; (iii)
superior product quality and customer service; (iv) broad product portfolio;
(v) value-added design and manufacturing capabilities; and (vi) innovative
management. The Company expects to continue to grow by leveraging the strength
of the GEAR brand name to expand its product lines and access underpenetrated
segments of its markets. The Company believes that it is less vulnerable to
earnings fluctuations than typical apparel manufacturers and marketers
because: (i) the Company designs and custom manufactures basic, classic
products with low fashion risk; (ii) consumer demand for sportswear and
activewear continues to increase; and (iii) the Company's products are
customized based on firm customer orders, minimizing its risk of excess
inventory.
The Company markets its products primarily through four separate divisions,
each of which serves distinct distribution channels and utilizes a sales force
with a specialized knowledge of its particular markets and customers. The
Company's network of approximately 140 independent sales representatives and
over 70 in-house artists and graphic designers work directly with the
Company's customers to create innovative sportswear and activewear products to
meet customer specifications.
BUSINESS STRATEGY
The Company's objective is to continue to increase sales, EBITDA and
operating margins, and is based upon the following strategic elements:
. Superior Product Quality and Customer Service. Each of the Company's
divisions focuses on high-end, customized sportswear, activewear and
related products. The Company's products uniquely address each account's
specific requirements, while providing the end-user with a high quality
product. The Company's ability to maintain consistency in product quality
and customer service, regardless of order size, enables it to effectively
service a broad range of customers. With over 70 in-house artists and
graphic designers and state-of-the art manufacturing and distribution
facilities, the Company believes that it provides products and service
that are superior to those of its competitors in each of its markets.
. Leading Position in Multiple Niche Markets. The Company has a leading
position in the resort, corporate and college bookstore markets. The
Company's superior service and product customization enable it to more
effectively serve the particular needs of these customers. As a result,
the Company believes that: (i) it is one of the few national competitors
in the highly fragmented resort and leisure market; (ii) it has a leading
share of the corporate identity market, where it competes primarily with
smaller local and regional companies as well as a few national
competitors; and (iii) it has the second largest share of the college
bookstore market.
30
. Leveraging the GEAR for Sports(R) Brand Name. The Company leverages its
GEAR brand name by introducing new products through its established
distribution channels. For example, the Company recently introduced new
headwear, sports luggage and Baby GEAR product lines. The Company
believes that the GEAR brand name is widely recognized by customers and
end-users in each of its markets and enjoys a reputation for high quality
products. The Company intends to continue to leverage this brand name
recognition through its existing distribution channels as well as through
alternative distribution channels and markets.
. Efficient Operations. The Company uses its state-of-the-art facilities to
design, embroider and screenprint a significant portion of its products.
In addition, the Company uses independent contractors to manufacture its
blanks and, where appropriate, to provide other value-added manufacturing
services in order to maximize sourcing flexibility while minimizing
overhead costs and fixed charges. Only one of these independent
contractors supplies such services exclusively to the Company. The
Company does not have a contract with this independent contractor. The
Company minimizes the risk of excess inventory by designing and
manufacturing its products against firm customers orders.
. Experienced Management Team with Significant Equity Ownership. The
Company's management team has extensive experience in the sportswear and
activewear business. The top five senior executives have each been with
the Company for at least 13 years and have combined industry experience
of over 115 years. Approximately 20 members of the senior management team
own an aggregate of 50% of the capital stock of Holdings. The management
team will have significant incentive to continue to increase the
Company's sales and EBITDA as a result of their substantial equity
ownership and performance based incentive compensation programs.
SALES DIVISIONS
The Company markets its products, which include custom designed fleecewear,
jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and
sports luggage, through four sales divisions (dollars in millions):
FISCAL 1997 NET
SALES
--------------------
DIVISION CUSTOMERS NET SALES % OF TOTAL
-------- --------- --------- ----------
Resort Destination resorts, family $ 66.9 36.5%
entertainment companies, hotel
chains, golf clubs, cruise lines, and
casinos
Corporate Large and small companies serving a 56.2 30.6
variety of industries
College Bookstore Major colleges and universities as 38.0 20.8
well as college bookstore lease
operators
Sports Specialty Sports specialty stores and 10.7 5.8
catalogues, stadium stores, and
professional sports teams and their
staffs
Other Various institutions, organizations 11.5 6.3
and individuals
------ -----
$183.3 100.0%
====== =====
The following sets forth the amount and percentage of net sales for each of
the periods indicated (dollars in thousands):
FISCAL YEAR ENDED,
--------------------------------------------
JUNE 30, 1995 JUNE 30, 1996 JUNE 27, 1997
-------------- -------------- --------------
Resort............................. $ 60,047 40.5% $ 67,739 40.0% $ 66,906 36.5%
Corporate.......................... 38,316 25.9% 47,167 27.9% 56,179 30.6%
Bookstore.......................... 37,823 25.5% 37,733 22.3% 38,053 20.8%
Sports Specialty................... 3,154 2.1% 6,342 3.7% 10,678 5.8%
Other.............................. 8,856 6.0% 10,340 6.1% 11,482 6.3%
-------- -------- --------
Total.............................. $148,196 $169,321 $183,298
======== ======== ========
31
The Company believes that it enjoys distinct competitive advantages in each
of its sales divisions because of its ability to quickly deliver high quality,
customized products and provide excellent customer service. The Company
operates state-of-the-art design, embroidery and screenprint manufacturing and
distribution facilities which management believes have set the standard in the
sportswear and activewear industry for product quality and response time to
orders and re-orders. Most orders for new product designs can be filled in
four weeks and re-orders rarely take longer than two weeks. This allows the
Company's retail 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 6,100 active customer accounts, including
destination resorts, family entertainment companies, hotel chains, golf clubs,
cruise lines, casinos and United States military bases. The division's
customers include widely recognized names such as The Walt Disney Company,
Universal Studios, The Ritz Carlton, Pebble Beach, Princess Cruise Lines and
The Mirage.
The Resort division, with fiscal 1997 net sales of $66.9 million, accounted
for 36.5% of total net sales. The Resort division's net sales have grown from
$50.2 million in fiscal 1994 to $66.9 million in fiscal 1997. The division's
net sales have remained relatively constant as a percentage of total net
sales, decreasing slightly from 38.9% in fiscal 1994 to 36.5% in fiscal 1997.
The Company distributes its Resort division products through its national
sales force of approximately 70 independent sales agents, of which
approximately 5% represent the Company on an exclusive basis. There are no
contracts with any of the independent sales agents who represent the Company
on an exclusive basis. The Company believes that it is well known and
respected in the resort and leisure industry because of its quick turnaround
for new orders and re-orders along with its product innovation and quality and
high level of service.
The Company believes that future growth in its Resort division will come
from increased penetration of the golf, military, hotel and gaming segments of
the industry, and through new product introductions such as headwear, sports
luggage and Baby GEAR products for infants and toddlers.
Corporate Division. The Corporate division is a leading marketer of
corporate identity sportswear and activewear for use by a diverse group of
corporations in incentive and promotional programs as well as for office
casual wear and uniforms. The division services over 3,500 active customer
accounts, including Toyota, Hershey, Dr Pepper/7Up, Anheuser-Busch, MCI and
Exxon. In addition, the Company recently formed Tandem Marketing, which
develops and administers corporate fulfillment programs on behalf of its major
corporate customers. The Company's corporate fulfillment programs involve
providing its customers with a complete line of branded merchandise which is
marketed to the customer's clients and employees. For example, Toyota may
engage the Company to provide embroidered leisurewear which is then sold or
otherwise provided to Toyota's customers and prospective customers.
The Corporate division, with fiscal 1997 net sales of $56.2 million,
accounted for 30.6% of total net sales. The Corporate division's net sales
have grown from $30.2 million in fiscal 1994 to $56.2 million in fiscal 1997.
The division's net sales as a percentage of total net sales have increased
from 23.4% in fiscal 1994 to 30.6% in fiscal 1997, primarily as a result of
the increased penetration of the underserved corporate identity market and
increased sales by Tandem Marketing.
The Company believes that it has an advantage over its competitors because
it is one of the few brand name suppliers of sportswear and activewear focused
on the corporate market. The Corporate division markets its products to
various segments within the corporate market. Products are sold by the
Company's national sales force of over 50 independent sales agents, of which
approximately 10% represent the Company on an exclusive basis, directly to
corporate customers in connection with corporate incentive programs, employee
pride and recognition initiatives, corporate meetings and outings, company
retail stores and catalogue programs and dealer incentive programs. There are
no contracts with any of the independent sales agents who represent the
Company on an exclusive basis. Approximately 85% of the division's sales are
directly to corporations and the remaining 15% are to jobbers, who then resell
the Company's products to corporations. Jobbers are people who buy goods in
quantity from manufacturers and sell them directly to dealers.
32
The Company, through Tandem Marketing, leverages its existing corporate
customer base to market a full line of products, including articles of
merchandise imprinted or otherwise customized with the corporation's name,
logo or message. These products include sportswear and activewear designed and
manufactured by the Company, as well as other premium merchandise such as
glassware and stationary items. Currently, Tandem Marketing has active
catalogue programs with Lexus, Visa, Pirelli Tire, State Farm, Principal
Financial and Shelter Insurance. In fiscal 1997, Tandem Marketing accounted
for approximately $4.9 million, or 8.7%, of the Corporate division's net
sales, of which approximately 68% were derived from products designed and
manufactured by the Company.
The Company believes that significant opportunity for future growth exists
within the Corporate division through: (i) further penetration of its existing
corporate customers; (ii) targeting the thousands of unserved corporations
located in the division's key markets; and (iii) growth in the sales of Tandem
Marketing. In addition, the Company believes a specific opportunity exists
within the uniform market, as corporations switch from traditional uniforms to
more casual, higher quality sportswear and activewear.
College Bookstore Division. The College Bookstore division is a leading
marketer of custom designed, embroidered and silk-screened sportswear and
activewear products to over 2,300 active customer accounts, including nearly
every major college and university in the United States. The division's
largest accounts include each of the major college bookstore lease operators,
such as Barnes & Noble College Bookstores, Inc., as well as high volume,
university managed bookstores, such as the University of Notre Dame, the
University of Southern California, Yale University, the University of Michigan
and the United States Air Force and Naval academies. The National Association
of College Stores has selected the Company as "Vendor of the Year" three
times, an honor no other supplier has won more than once.
The College Bookstore division, with fiscal 1997 net sales of $38.0 million,
accounted for 20.8% of total net sales. The College Bookstore division's net
sales have grown from $35.9 million in fiscal 1994 to $38.0 million in fiscal
1997. As the Company has expanded into other markets, the College Bookstore
division's net sales as a percent of total net sales has decreased from 28.0%
in fiscal 1994 to 20.8% in fiscal 1997.
The Company believes that future growth in its College Bookstore division
will come primarily from new product introductions such as headwear, sports
luggage and Baby GEAR products as well as from general demographic trends. The
U.S. Department of Education projects significant growth in the number of
college and university students through 2006, following a modest decline in
enrollment from 1992 to 1996. The Company believes that the projected increase
in college and university enrollment, in the event such increase does in fact
occur, may have a positive effect on the Company's business, results of
operations and financial condition. However, there can be no assurance that
any such projected growth will occur.
Sports Specialty Division. The Sports Specialty division, with fiscal 1997
net sales of $10.7 million, accounted for 5.8% of total net sales. Established
in 1994, the division has entered into licensing agreements to design,
manufacture and market sportswear and activewear bearing the names, logos and
insignia of professional sports leagues and teams as well as major sporting
events. The Company's licensors include, among others, MLB, the NBA, the NHL,
NASCAR and the Breeder's Cup. The division targets the upscale adult sports
enthusiast through The Company's existing distribution channels as well as
through new channels such as stadium stores and team retail outlets. The
division markets its products to over 600 active customer accounts, including
the Indianapolis Motor Speedway, the Chicago Bulls, the Cleveland Indians, the
Boston Bruins and Madison Square Garden.
INDUSTRY OVERVIEW
The sportswear industry in which the Company participates encompasses a
broad assortment of merchandise, including activewear and outerwear products
such as sweatshirts and jackets. While activewear products have traditionally
been associated with athletic-related activities, over the past two decades
such products have been increasingly accepted by consumers for a variety of
leisure and work-related activities.
33
Activewear products have experienced significant sales growth over this time
period due to both this increased acceptance and consumers' increased pursuit
of physical fitness and active lifestyles. Moreover, activewear products have
registered a number of significant improvements in product characteristics
that have contributed to enhanced consumer appeal, including improvements in
fabric weight, blends, quality of construction, size, style and color
availability.
The sportswear and activewear market is characterized by a low fashion risk
as compared to other apparel markets. While substantial opportunity exists for
product innovation and differentiation, basic garment styles are not driven by
trends or fads. In those market segments where products have a lower relative
labor cost content, such as fleecewear and outerwear, the industry is also
characterized by barriers to entry as larger capital requirements, sourcing
relationships, brand-name recognition and established customer relationships
limit the entry of new competitors. Foreign competition is limited due to the
short delivery times required for inventory control by retail customers.
Sportswear and activewear is distributed through a wide variety of channels,
including department stores, chain stores, mass merchandisers, discount
retailers and specialty retailers. The Company, however, has avoided many of
these larger mass distribution channels and has instead focused on the
following niche markets, where the competition has been highly fragmented and
generally based more on quality of service and product rather than on price.
Resort Market. The Company has defined the resort market to include products
sold through niche market retailers at destination resorts, family
entertainment companies, hotel chains, cruise lines, casinos and United States
military bases. Products sold in this market are typically adorned with the
name of the resort and include a full range of activewear and related items.
The Company believes that this market is highly fragmented and served
primarily by local and regional competitors. In addition, the Company has
found that national competitors in this market generally focus on specific
market segments, offering a limited range of products.
Corporate Market. The corporate identity market is represented by companies
or large organizations which purchase articles of merchandise imprinted or
otherwise customized with the organization's name, logo or message. These
products are used for building corporate identity, marketing, employee
incentives or development of goodwill for a targeted audience. The Company
believes that future growth in this market will be fueled, in part, by the
continued acceptance of activewear products in the workplace. The Company
believes that it is one of the few brand name suppliers of sportswear and
activewear focused on the corporate market.
College Bookstore Market. The Company believes that the college bookstore
apparel market is relatively mature and stable. The Company estimates that the
top five suppliers to this market have an aggregate market share of
approximately 50%, with the share of each such competitor remaining relatively
constant over the last five years. Demand in this market is driven primarily
by demographic trends such as the number of entering college and university
students. As the following table illustrates, the U.S. Department of Education
projects significant growth in the numbers of college and university students
through 2006, following a modest decline in enrollment from 1992 to 1996.
However, there can be no assurance that any such projected growth will occur,
and, if so, at such rates.
34
HISTORICAL AND PROJECTED COLLEGE AND UNIVERSITY ENROLLMENT
LOGO
Source:
U.S. Department of Education, National Center for Education Statistics, Fall
Enrollment in Colleges and Universities surveys and Integrated Postsecondary
Education Data System surveys. (November, 1995)
Professional Sports Licensed Apparel Market. Most of the North American
professional sports leagues, including MLB, the NBA, the NFL and the NHL, as
well as other sports organizations and events, license the right to sell
products adorned with the insignia of its leagues, teams or events. These
licensed product sales have grown significantly since the mid-1980's through
aggressive management of the licensing programs and increased marketing
efforts. Much of the growth in demand for licensed sports apparel has been
advanced by increased television programming and sporting event attendance, as
well as introduction of a wide variety of products and styles. Although demand
has been impacted in recent years by labor disputes in the professional sports
leagues, the Company expects this growth to continue with the resolution of
the labor disputes and continued expansion of the professional sports leagues
to new geographic markets.
The number of competitors in the licensed apparel market has expanded with
an increase in the number of licenses granted by the professional sports
leagues in recent years. These licenses represent significant barriers to
entry as the professional leagues appear less likely to enter into licensing
agreements with new entrants. The industry has also been experiencing
consolidation in recent years as larger companies have been acquiring smaller
competitors.
PRODUCTS
The Company's extensive product offerings include: (i) fleecewear; (ii)
outerwear; (iii) polo shirts, woven shirts and sweaters; (iv) T-shirts and
shorts; and (v) other apparel items and accessories. These products are sold
in each of the Company's four markets and are currently offered in over 400
combinations of style and color. While its products are generally
characterized by a low fashion risk, the Company attempts to incorporate the
latest trends in style, color and fabrics with a heavy emphasis on innovative
graphics to create leading-edge fashion looks.
The Company believes that the quality and breadth of its product lines and
its innovative logo designs represent significant competitive advantages in
its markets. In order to further capitalize on these advantages, the
(STUDENTS IN MILLIONS)
35
Company intends to continue to expand both the depth and breadth of its
product lines. Currently, the Company has major product introductions in
headwear, sports luggage and Baby GEAR products for infants and toddlers.
The following illustrates the attributes of the Company's current product
lines:
Fleecewear. The Company's fleecewear products represented approximately 27%
of net sales for fiscal 1997. Current styles offered by the Company include
classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops,
vests, henleys 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.
Outerwear. The Company's outerwear products represented approximately 31% of
net sales for fiscal 1997. These products are designed to offer consumers
contemporary styling, functional features and quality apparel. Products
offerings include a variety of weights and styles, including heavy nylon
parkas, denim jackets, corduroy hooded pullovers, nylon windshirts and water-
resistant poplin jackets. The Company also provides a number of functional
features such as adjustable cuffs, windflaps, vented backs, drawstring bottoms
and heavyweight fleece lining.
Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt, woven
shirt and sweater products represented approximately 25% of net sales for
fiscal 1997. The Company's products in this category are designed to be
suitable for both leisure and work-related activities with full range of
materials and styles.
T-Shirts and Shorts. The Company's T-shirt and shorts products represented
approximately 13% of net sales for fiscal 1997. The Company's products are
designed to address consumer needs for comfort, fit and function while
providing innovative logo designs. The Company offers a full line of T-shirts
and shorts in a variety of styles, fabrics and colors.
Other. The Company also sells headwear, sports luggage, a line of children's
products and a number of other miscellaneous apparel items. In addition,
through its Tandem Marketing division, the Company distributes a full line of
corporate fulfillment products. Sales of "Other" items represented
approximately 4% of net sales for fiscal 1997.
DESIGN, MANUFACTURING AND MATERIALS SOURCING
The Company operates state-of-the-art design, embroidery and screenprint
manufacturing and distribution facilities in Lenexa, Kansas.
The Company's design group consists of more than 70 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
the Company's ability to provide value-added services and maintain superior
relations with its customers. Once the design and logo specifications have
been determined, the Company's in-plant manufacturing process begins. This
manufacturing process consists of embroidery and/or screenprinting
applications to Company-designed non-decorative apparel ("blanks").
Substantially all of the screenprinting and a significant portion of the
embroidery operations are performed by the Company in its Lenexa, Kansas
facilities. In addition, the Company outsources embroidery work to Impact
Design, Inc. and Kansas Custom Embroidery, each an affiliate of the Company,
as well as to independent contractors, when necessary. See "Certain
Transactions." The Company maintains the most updated machinery and equipment
available in order to ensure superior product quality and consistency.
All of the Company's blanks are sourced and manufactured to the Company's
specifications by third party vendors. The Company closely monitors each of
its vendors in order to ensure that its specifications and quality standards
are met. A significant portion (approximately 77%) of the Company's blanks are
contract manufactured
36
in various off-shore plants. The Company's imported items are currently
manufactured in Taiwan, Korea, Malaysia, Hong Kong, Singapore, Indonesia,
Pakistan, China, Honduras, Israel, Fiji and Sri Lanka. The Company continually
evaluates its sourcing options and strives to maintain a concentration of no
more than 20% sourced product from any one particular foreign country. During
fiscal 1997, approximately 70% of the foreign supplied product was provided by
Malaysia, Taiwan, Honduras and Korea, while concentrations from the other
named foreign countries made up the remaining 30%. In fiscal 1997,
approximately 23% of its blanks were contract manufactured in the United
States. The Company has long-standing contractual relationships with most of
its eight independent buying agents who assist the Company in its efforts to
control garment quality and delivery. None of these agents represent the
Company on an exclusive basis. The Company has independent buying agents in
each foreign country where it purchases blanks. See "Risk Factors--Foreign
Sourcing."
COMPETITION
The Company's primary competitors vary within each of its four distinct
markets. In the resort and leisure market, there are few national competitors
and even fewer that operate in all of the varied segments in which the Company
operates. In the corporate identity market, there are several large
manufacturers of corporate identity products. The Company believes it is one
of the few manufacturers and marketers of corporate identity products that
specializes in the activewear product segment. In the college bookstore
market, the top five competitors hold an aggregate market share of
approximately 50%, and the Company believes the market share of each such
competitor has remained relatively constant over the last five years. In the
sports specialty market, the Company competes with a large number of
manufacturers of licensed sportswear. The Company believes, however, that it
is one of the few manufacturers of sports specialty products with a primary
focus on the adult sports enthusiast.
The following table sets forth the Company's primary competitors in each of
its markets:
MARKET PRIMARY COMPETITORS
------ -------------------
Highly fragmented--primarily local and regional compet-
Resort itors
Corporate HA-LO Marketing, Hermann Marketing, Swingster (American
Marketing Industries)
College Bookstore Champion Products, Jansport (VF Corp.),
Cotton Exchange, Russell Athletic, M.V. Sports
Sports Specialty Champion Products, Russell Corporation, Starter
Competition in each of the Company's markets generally is based on product
design and decoration, customer service and overall product quality. The
Company believes that it has been able to compete successfully because of its
ability to create diverse and innovative designs, provide excellent customer
service, leverage its GEAR brand name and differentiate its products on the
basis of quality.
EMPLOYEES
The Company employs over 680 people at its two facilities in Lenexa, Kansas,
of which approximately 35 are members of management, 285 are involved in
either product design, customer service, sales support or administration and
360 are involved in manufacturing. In an effort to adjust employment levels in
accordance with its production schedule and reduce its operating costs, the
Company has instituted a voluntary time off program under which management
occasionally grants a limited number of employees extended time off (typically
four to six weeks). During extended time off periods, employees remain on call
and continue to receive employee benefits such as health insurance, but do not
receive hourly wages. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that the dedication of
its employees is critical to its success, and that its relations with its
employees are excellent.
37
TRADEMARKS
The Company markets its products primarily under the GEAR For Sports(R)
trademarked brand name. In addition, the Company markets its products under,
among others, the Pro GEAR(R), Tandem Marketing(R), Big Cotton(R) and Winning
Ways(R) trademarks. The Company is currently applying for a trademark for its
Baby GEAR brand name. However, there can be no assurance that the Company's
application will be approved. Generally, the Company's trademarks will remain
in effect as long as the trademark is used by the Company and the required
renewals are obtained.
The Company licenses its GEAR For Sports(R) trademark to Richmont Apparel
Group f.k.a. Softwear Athletics, Inc. ("Softwear") to produce and distribute
GEAR For Sports(R)J adult sportswear and activewear, headwear and sports
luggage products in Canada in accordance with a license agreement (the
"Softwear License Agreement"). Pursuant to the Softwear License Agreement,
Softwear has obtained an exclusive, non-transferable and non-assignable
license to manufacture, advertise and promote adult apparel, headwear and bags
in Canada. The Softwear License Agreement had an initial term of eighteen
months, ending September 30, 1995, but has been extended by Softwear, at its
option, for two successive one year terms. In consideration for the license
grant, Softwear pays the Company an annual royalty calculated as the greater
of: (i) $300,000 or (ii) 10% of Net Sales (as defined therein) to non-
affiliates. Such royalty payments are made to the Company on a quarterly
basis. In addition, for three years after the termination of the Softwear
License Agreement, Softwear will be prohibited from selling products covered
by the Softwear License Agreement or other similar products to any Softwear
customer who was not a Softwear customer prior to the commencement of the
Softwear License Agreement. The Company has entered into a three-year
extension of the license on terms comparable to those under the Softwear
License Agreement.
LICENSES
The Company markets its products, in part, under licensing agreements,
primarily in its College Bookstore and Sports Specialty divisions. In fiscal
1997, net sales under the Company's 256 active licensing agreements totaled
$25.0 million, or approximately 14% of the Company's net sales. In fiscal
1997, $18.5 million of College Bookstore division net sales, representing
approximately 48.6% of the division's net sales and 10.1% of total net sales,
were recorded under this division's 208 licensing agreements. In addition, in
fiscal 1997, $5.3 million of Sports Specialty division net sales, representing
approximately 50.0% of the division's net sales and 2.9% of total net sales,
were recorded under licensing agreements. The Company's licensing agreements
are mostly with (i) high volume, university managed bookstores such as the
University of Notre Dame, the University of Southern California and the
University of Michigan, (ii) professional sports leagues such as MLB, the NBA
and the NHL and (iii) major sporting events such as the Ryder Cup and the
Indianapolis 500. Such licensing agreements are generally renewable every one
to three years with the consent of the licensor.
PROPERTIES
The Company owns each of its two properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas and its 100,000
square foot manufacturing and distribution facility located approximately two
miles from its headquarters. Approximately 200,000 square feet and 100,000
square feet of the headquarter/manufacturing facility and
manufacturing/distribution facility, respectively, are devoted to the design
and manufacture of the Company's products and to customer service. The Company
believes that the two facilities (along with the embroidery facilities used by
the two affiliate companies) provide the Company with sufficient space to
support its expected expansion over the next several years.
LITIGATION
From time to time, the Company is involved in routine litigation incidental
to its business. The Company is not a party to any pending or threatened legal
proceeding which would have a material adverse effect on the Company's results
of operations, cash flows or financial condition.
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the names and ages of the Company's directors and
executive officers and the positions they hold as of October 1, 1997:
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
Robert M. Wolff......... 62 Chairman
John L. Menghini........ 47 President, Chief Operating Officer and Director
Robert G. Shaw.......... 46 Senior Vice President, Finance and Human Resources and Director
Larry D. Graveel........ 48 Senior Vice President, Merchandising and Director
Michael H. Gary......... 44 Senior Vice President, Sales Administration
A. Richard Caputo, Jr... 31 Vice President and Director
John W. Jordan II....... 49 Director
David W. Zalaznick...... 43 Director
ROBERT M. WOLFF has served as Chairman of the Company since its inception in
1974.
JOHN L. MENGHINI has served as President, Chief Operating Officer and a
director of the Company since 1984. Prior to that, Mr. Menghini served as a
merchandise manager of the Company since 1977.
ROBERT G. SHAW has served as Senior Vice President, Finance and Human
Resources and a director of the Company since 1993. Prior to that, Mr. Shaw
held several management positions with the Company since 1976, including Vice
President of Finance.
LARRY D. GRAVEEL has served as a director of the Company since February 1997
and as Senior Vice President, Merchandising of the Company since 1993. Prior
to that, Mr. Graveel served as a merchandising manager of the Company since
1984.
MICHAEL H. GARY has served as Senior Vice President, Sales Administration of
the Company since 1993. Prior to that, Mr. Gary held several management
positions in sales administration with the Company since 1982.
A. RICHARD CAPUTO, JR. has served as Vice President and a director of the
Company since February 1997. Mr. Caputo is a managing partner of TJC, a
private merchant banking firm, with which he has been associated since 1990.
Mr. Caputo is also a director of AmeriKing, Inc. as well as other privately
held companies.
JOHN W. JORDAN II has served as a director of the Company since February
1997. Mr. Jordan is a managing partner of TJC, which he founded in 1982. Mr.
Jordan is also a director of Jordan Industries, Inc., Carmike Cinemas, Inc.,
American Safety Razor Company, Apparel Ventures, Inc., AmeriKing, Inc., Motors
and Gears, Inc. and Rockshox, Inc. as well as other privately held companies.
DAVID W. ZALAZNICK has served as a director of the Company since February
1997. Mr. Zalaznick has been a managing partner of TJC 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., Motors and Gears, Inc. and The Great American Cookie
Company as well as other privately held companies.
STOCKHOLDERS AGREEMENT
In connection with the Acquisition, Holdings, the Management Investors and
the Jordan Investors entered into a subscription and stockholders agreement
(the "Stockholders Agreement") which sets forth certain rights and
restrictions relating to the ownership of Holdings stock and agreements among
the parties thereto as to the governance of the Company.
39
The Stockholders Agreement contains material provisions which, among other
things and subject to certain exceptions, including any restrictions imposed
by applicable law or by the Company's debt agreements, (i) provide for put and
call rights in the event a Stockholder (as defined therein) is no longer
employed by the Company, (ii) restrict the ability of all Stockholders to
transfer their respective ownership interests, other than with respect to
transfers to Permitted Transferees (as defined therein), 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 therein) in
which the holders of 75% or more of the common stock of Holdings who agree to
transfer their stock in an arm's-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 the Company.
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,
three directors (the "Jordan Directors") nominated by the Jordan Investors 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 the
Company, 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 the Company. The provisions described under
"Stockholders Agreement" represent all of the material provisions of such
agreement.
DIRECTOR COMPENSATION
Each director of the Company receives $20,000 per year for serving as a
director of the Company. In addition, the Company reimburses directors for
their travel and other expenses incurred in connection with attending meetings
of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the aggregate
compensation paid and accrued to the Company's top five executive officers for
services rendered to the Company during each of the three most recent fiscal
years.
FISCAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION(1)
-------- ------ -------- -------- ---------------
Robert M. Wolff........................ 1997 $147,498 $ 0 $16,822
Chairman 1996 240,000 0 40,019
1995 240,000 288,000 41,518
John L. Menghini....................... 1997 $249,038 $300,000 $14,773
President and Chief 1996 225,000 300,000 31,136
Operating Officer 1995 225,000 300,000 32,502
Robert G. Shaw......................... 1997 $159,615 $120,000 $14,773
Senior Vice President and 1996 150,000 120,000 31,353
Chief Financial Officer 1995 125,000 100,000 32,558
Larry D. Graveel....................... 1997 $179,615 $120,000 $17,809
Senior Vice President 1996 170,000 120,000 27,416
1995 145,000 120,000 28,915
Michael H. Gary........................ 1997 $185,769 $120,000 $18,973
Senior Vice President 1996 150,000 120,000 28,579
1995 125,000 100,000 30,078
- --------
(1) Other annual compensation consists of car allowances, profit sharing,
group medical benefits and individual beneficiary life insurance premiums
paid by the Company.
40
EMPLOYMENT/NONCOMPETITION AGREEMENTS
Wolff Employment Agreement. Effective upon the consummation of the
Transactions, the Company entered into an Employment Agreement with Robert M.
Wolff (the "Wolff Employment Agreement"). Pursuant to the Wolff Employment
Agreement, Mr. Wolff will serve as Chairman of the Company for a ten-year
period ending on the tenth anniversary of the Acquisition. In exchange for his
services, the Company 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 other Company 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 the Company due to his dismissal for Cause (as defined in
the Wolff Employment Agreement), he will no longer be entitled to any
compensation from the Company as of the date of his dismissal, subject to
certain rights of appeal.
Wolff Noncompetition Agreement. Effective upon the consummation of the
Transactions, the Company 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, (i) (a)
engage in or have any active interest in any sportswear or activewear business
comparable to that of the Company or (b) sell to, supply, provide goods or
services to, purchase from or conduct business in any form with the Company
for a ten-year period ending on the tenth anniversary of the Acquisition, (ii)
disclose at any time other than to the Company any Confidential Information
(as defined in the Wolff Noncompetition Agreement) and (iii) engage in any
business with the Company through an affiliate for as long as Mr. Wolff or any
member of his family is the beneficial owner of Holdings' capital stock. In
exchange for his covenant not to compete, the Company 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), the Company 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.
INCENTIVE COMPENSATION PLAN
The Company will adopt, on or prior to January 1, 1998, an incentive
compensation plan (the "Incentive Plan"), which will provide for annual cash
bonuses payable based on a percentage of EBITDA (as defined in the Incentive
Plan), if certain EBITDA targets are met.
41
PRINCIPAL STOCKHOLDERS
The table below sets forth as of October 1, 1997 certain information
regarding beneficial ownership of the common stock of Holdings held by (i)
each of the Company's directors and executive officers who own shares of
common stock of Holdings, (ii) all directors and executive officers of the
Company as a group and (iii) each person known by Holdings to own beneficially
more than 5% of its common stock. The Company believes that each individual or
entity named has sole investment and voting power with respect to shares of
common stock of Holdings indicated as beneficially owned by them, except as
otherwise noted.
AMOUNT OF
BENEFICIAL
OWNERSHIP(1)
-------------------
NUMBER
OF PERCENTAGE
SHARES OWNED
-------- ----------
EXECUTIVE OFFICERS AND DIRECTORS:
Robert M. Wolff(2)(3)...................................... 60.0000 3.0%
John L. Menghini(2)(4)..................................... 257.0000 12.9
Robert G. Shaw(2)(5)....................................... 235.0000 11.8
Larry D. Graveel(2)(6)..................................... 110.0000 5.5
Michael H. Gary(2)(7)...................................... 110.0000 5.5
John W. Jordan II(8)(9).................................... 78.3125 3.9
David W. Zalaznick(8)...................................... 78.3125 3.9
A. Richard Caputo, Jr.(8).................................. 50.0000 2.5
All directors and executive officers as a group (8
persons).................................................. 978.6300 48.9
OTHER PRINCIPAL STOCKHOLDERS:
MCIT PLC(10)............................................... 500.0000 25.0
Leucadia Investors, Inc.(11)............................... 125.0000 6.3
- --------
(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 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
February 27, 1997, there were 2,000 shares of common stock of Holdings
issued and outstanding.
(2) The address of each of Messrs. Wolff, Menghini, Shaw, 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) 197 shares are held by the John Leo Menghini Revocable Trust, of which
Mr. Menghini is a trustee. The remaining 60 shares are held in trust for
family members of Mr. Menghini.
(5) 175 shares are held by the Robert Shaw Living Trust, of which Mr. Shaw is
a trustee. The remaining 60 shares are held by Robert Shaw as custodian
of family members.
(6) All shares are held by the Larry D. Graveel Revocable Trust, of which Mr.
Graveel is a trustee.
(7) 90 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.
(8) The address of each of Messrs. Jordan, Zalaznick and Caputo is c/o The
Jordan Company, 9 West 57th Street, New York, New York 10019.
(9) All shares are held by the John W. Jordan II Revocable Trust, of which
Mr. Jordan is trustee.
(10) The principal address of MCIT PLC is c/o The Jordan Company, 9 West 57th
Street, New York, New York 10019.
(11) The principal address of Leucadia Investors, Inc. is 315 Park Avenue
South, New York, New York 10010.
42
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement, which requires the Company to
use its best efforts to effect the Exchange Offer. See "--Registration
Rights."
The Company is making the Exchange Offer in reliance upon the position of
the staff of the Commission set forth in certain no-action letters addressed
to other parties in other transactions. However, the Company has not sought
its own no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Based on these interpretations by the
Staff of the Commission, the New Notes issued pursuant to the Exchange Offer
may be offered for resale, resold and otherwise transferred by holders thereof
(other than (i) any such holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act; (ii) an Initial Purchaser
who acquired the Old Notes directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any other available exemption
under the Securities Act; or (iii) a broker-dealer who acquired the Old Notes
as a result of market making or other trading activities) without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not participating and has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such New Notes. By tendering, each Holder
which is not a broker dealer will represent to the Company that, among other
things, the person receiving the New Notes, whether or not such person is the
Holder, (i) will acquire the New Notes in the ordinary course of such person's
business, (ii) has no arrangement or understanding with any person to
participate in a distribution of the New Notes and (iii) is not engaged in and
does not intend to engage in a distribution of the New Notes. If any Holder or
any such other person has an arrangement or understanding with any person to
participate in a distribution of such New Notes, is engaged in or intends to
engage in a distribution of such New Notes, is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company, or acquired the Old
Notes as a result of market making or other trading activities, then such
Holder or any such other person (i) can not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless such sale is made
pursuant to an exemption from such requirements.
Holders of Old Notes not tendered will not have any further registration
rights and the Old Notes not exchanged will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the markets for the
Old Notes could be adversely affected.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION
AND REQUIREMENTS.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
In connection with the issuance of the Old Notes, the Company entered into
the Registration Rights Agreement with the Initial Purchasers of the Old
Notes.
Holders of the New Notes (other than as set forth below) are not entitled to
any registration rights with respect to the New Notes. Pursuant to the
Registration Rights Agreement, Holders of Old Notes are entitled to
43
certain registration rights. Under the Registration Rights Agreement, the
Company has agreed, for the benefit of the Holders of the Old Notes, that it
will, at its cost, (i) on or before November 16, 1997, file the Registration
Statement with the Commission and (ii) on or before January 15, 1998, use its
best efforts to cause such Registration Statement to be declared effective
under the Securities Act. The Registration Statement of which this Prospectus
is a part constitutes the Registration Statement. If (i) the Company is not
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of
Transfer Restricted Securities (as defined) notifies the Company within the
specified time period that (A) due to a change in law or policy it is not
entitled to participate in the Exchange Offer, (B) due to a change in law or
policy it may not resell the New Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and the prospectus contained in the
Registration Statement is not appropriate or available for such resales by
such holder or (C) it is a broker-dealer and acquired the Notes directly from
the Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Transfer
Restricted Securities by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer
Restricted Securities" means each Note, until (i) the date of which such
Transfer Restricted Security has been exchanged in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of a Transfer
Restricted Security for a New Note, the date on which such New Note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the Prospectus contained in the Registration Statement,
(iii) the date on which such security has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such security is distributed pursuant to
Rule 144 under the Act.
The Registration Rights Agreement also provides that, (i) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to issue
on or prior to 30 business days after the date on which the Registration
Statement was declared effective by the Commission, New Securities in exchange
for all Transfer Restricted Securities tendered prior thereto in the Exchange
Offer and (ii) if obligated to file the Shelf Registration Statement, the
Company will file the Shelf Registration Statement with the Commission on or
prior to 60 days after days after such filing obligation arises and use its
best efforts to cause the Shelf Registration to be declared effective by the
Commission on or prior to 120 days after such obligation arises. The Company
shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended until the third anniversary
of the Closing Date or such shorter period that will terminate when all the
Notes covered by the Shelf Registration Statement have been sold pursuant to
the Shelf Registration Statement. If (a) the Company fails to file any of the
registration statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such registration
statements are not declared effective by the Commission on or prior to the
date specified for such effectiveness (the "Effectiveness Target Date"), (c)
the Company fails to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the Registration Statement, or
(d) the Shelf Registration Statement or the Registration Statement is declared
effective but thereafter, subject to certain exceptions, ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (d) above a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of
Transfer Restricted Securities, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week for each $1,000 principal amount of Senior Notes held
by such Holder. The amount of the Liquidated Damages will increase by an
additional $.05 per week with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.40 per week for each $1,000 principal amount of Senior
Notes, as applicable. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Transfer Restricted Securities will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the
44
time periods set forth in the Registration Rights Agreement in order to have
their Transfer Restricted Securities included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set
forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1997; provided, however, that if the
Company, in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended; provided further that in no
event will the Exchange Offer be extended beyond , 1997. The
Company may extend the Exchange Offer at any time and from time to time by
giving oral or written notice to the Exchange Agent and by timely public
announcement. Without limiting the manner in which the Company may choose to
make any public announcement and subject to applicable law, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to an appropriate news
agency. During any extension of the Exchange Offer, all Old Notes previously
tendered pursuant to the Exchange Offer will remain subject to the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with
the applicable requirements of the Exchange Act and the rules and regulations
thereunder.
As of the date of this Prospectus, $50,000,000 initial Accreted Value of the
Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all Holders of
Old Notes known to the Company. The Company's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth under "--Certain Conditions to the Exchange Offer" below.
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 and rights to receive Liquidated Damages. See "--
Registration Rights; Liquidated Damages." The Old Notes were, and the New
Notes will be, issued under the Indenture and all such Notes are entitled to
the benefits of the Indenture.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering Holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer." The
Company will give oral or written notice of any amendment, nonacceptance or
termination to the Holders of the Old Notes as promptly as practicable. Any
amendment to the Exchange Offer will not limit the right of Holders to
withdraw tendered Old Notes prior to the Expiration Date. See "--Withdrawal
Rights."
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the
45
terms and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to State
Street Bank and Trust Company (the "Exchange Agent") at one of the addresses
set forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent along with the Letter of Transmittal; or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date; or (iii) the Holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered Holder of the Old Notes who
has not completed the box entitled "Special Issuance Instruction" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) 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, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States (collectively,
"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 determined by the
Company in its sole discretion, duly executed by the registered Holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes 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). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, all defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification. The
Exchange Agent intends to use reasonable efforts to give notification of such
defects and irregularities.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Notes, such Old Notes must be endorsed or
accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
46
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder and such person has no
arrangement or understanding with any person to participate in the
distribution of the New Notes. If any Holder or any such other person is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company,
is engaged in or intends to engage in or has an arrangement or understanding
with any person to participate in a distribution of such New Notes to be
acquired pursuant to the Exchange Offer, or acquired the Old Notes as a result
of market making or other trading activities, such Holder or any such other
person (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) 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
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resale of such 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.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer". For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent, with written confirmation of any
oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having an Accreted Value equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest accretion date following the consummation of the
Exchange Offer will receive accretion from the most recent date to which
interest has accreted on the Old Notes, or, if no interest has on the Old
Notes, from October 23, 1997. Old Notes accepted for exchange will cease to
accrete 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 accretion on such Old Notes otherwise recognizable on any interest
accretion date the record date for which occurs on or after consummation of
the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of (i) certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility; (ii) a properly completed and duly executed
Letter of Transmittal; and (iii) 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
amount than the Holder desires to exchange, such unaccepted or nonexchanged
Old Notes will be returned without expense to the tendering Holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such nonexchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility)
designated by the tendering Holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through
47
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent has received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form of the corresponding
exhibit to the Registration Statement of which this Prospectus constitutes a
part (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the Holder of Old Notes and the amount
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE") 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, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a Book-
Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of the withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such 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 such
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 such 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 the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the Holder) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
48
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be 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 at any time
before the acceptance of such Old Notes for exchange or the exchange of the
New Notes for such Old Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market; (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer; (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit; or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of Holdings and its subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have an adverse effect on the value of the Old Notes
or the New Notes.
Holders of Old Notes will have registration rights and the right to Liquidated
Damages as described under "--Registration Rights; Liquidated Damages" if the
Company fails to consummate the Exchange Offer.
To the Company's knowledge as of the date of this Prospectus, none of the
above events has occurred.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time. In the event the Company
asserts or waives a condition to the Exchange Offer which constitutes a
material change to the terms of the Exchange Offer, the Company will disclose
such change in a manner reasonably calculated to inform prospective investors
of such change, and will extend the period of the Exchange Offer by five
business days.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with
49
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as the Exchange Agent
for the Exchange Offer. All executed Letters of Transmittal and Notices of
Guaranteed Delivery should be directed to the Exchange Agent at the addresses
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:
Deliver to: State Street Bank and Trust Company, Exchange Agent:
By Registered or By Overnight Courier or Hand:
Certified Mail: State Street Bankand Trust Company Two
International Place
*State Street Bankand
Trust Company 61
Broadway, Concourse
Level Corporate Trust
Window New York, New
York 10006 *only
during business hours
State Street Bankand Trust Company P.O. Box 778 Boston, MA 02102-0078 Attn:
Kellie Mullen
or
Boston, MA 02110 Attn: Kellie Mullen
By Facsimile for Eligible Institutions:
(617) 664-5395
For confirmation call:
(617) 664-5587
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will, however, pay the Exchange Agent reasonable and customary
fees for its services and will reimburse it for reasonable out-of-pocket
expenses in connection therewith. The Company will also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Prospectus and related
documents to the beneficial owners of Old Notes, and in handling tenders for
their customers. The expenses to be incurred in connection with the Exchange
Offer, including the fees and expenses of the Exchange Agent and printing,
accounting, registration, and legal fees, will be paid by the Company and are
estimated to be approximately $100,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company 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 will be responsible for the payment
of any applicable transfer tax thereon.
50
APPRAISAL RIGHTS
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions 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
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based upon no-action letters issued by the staff of the Commission to
third parties, the Company believes the New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
or otherwise transferred by a Holder thereof (other than any (i) Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act); (ii) an Initial Purchaser who acquired the Old Notes directly
from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act; or
(iii) a broker-dealer who acquired the Old Notes as a result of market making
or other trading activities) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and has no arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such New Notes. However, the Company has not sought its own no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. Each Holder, other than a broker-dealer, must acknowledge
that it is not engaged in, and does not intend to engage in, a distribution of
New Notes, and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Company, is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, or acquired the Old Notes as a result of market making or
other trading activities, such Holder (i) could not rely on the relevant
determinations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes must
acknowledge that such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities and that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. See "Plan of Distribution." In
addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company
has agreed to register or qualify the sale of the New Notes in such
jurisdiction only in limited circumstances and subject to certain conditions.
ACCOUNTING TREATMENT
The exchange of the New Notes for the Old Notes will have no impact on the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. Expenses of the Exchange
Offer and expenses related to the Old Notes will be amortized, pro rata, over
the term of the New Notes.
51
DESCRIPTION OF NOTES
GENERAL
The Old Notes were and the New Notes will be issued pursuant to the
indenture (the "Indenture") between Holdings and 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. 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 (the
"Trust Indenture Act"), as in effect on the date of original issuance of the
Notes. The Notes are subject to all such terms, and holders of the Notes are
referred to the Indenture and the Trust Indenture Act for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
Copies of the proposed form of Indenture and Registration Rights Agreement are
available as set forth below under "--Additional Information." The definitions
of certain terms used in the following summary are set forth below under "--
Certain Definitions."
Under certain circumstances, Holdings will be able to designate any of its
Subsidiaries as Non-Restricted Subsidiaries. Non-Restricted Subsidiaries will
not be subject to many of the restrictive covenants set forth in the
Indenture. As of date of the Indenture, none of Holdings' Subsidiaries will be
Non-Restricted Subsidiaries.
The Old Notes were and the New Notes will be general unsecured obligations
of Holdings, will rank pari passu in right of payment to all existing and
future senior indebtedness of Holdings and will rank senior in right of
payment to all subordinated indebtedness of Holdings. As obligations of a
holding company, the Notes will be effectively subordinated to all obligations
of the Subsidiaries of Holdings, including the Senior Subordinated Notes and
the Credit Agreement.
The Old Notes were and the New Notes will be issued at a substantial
discount from their principal amount and will mature on September 15, 2009.
The Notes will accrete from September 17, 1997 at a rate of 11.375%,
compounded semi-annually, to an aggregate principal amount of $108,467,780 on
September 15, 2004. Thereafter, the Notes will accrue interest at the rate of
11.375% per annum, payable semi-annually in cash on March 15 and September 15
of each year, commencing on March 15, 2005, to holders of record on the
immediately preceding September 1 and March 1. 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 September 15, 2004. Interest will be computed on
the basis of a 360-day year of twelve 30-day months. All references to the
principal amount of the Notes herein are, unless otherwise indicated,
references to the principal amount at final maturity. The Notes will be issued
in denominations of $1,000 principal amount and integral multiples thereof.
Principal of and premium, interest and Liquidated Damages, if any, 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 Holdings may pay principal and interest by check and may mail
checks to a holder's registered address; provided that all payments with
respect to Global Notes and with respect to Certificated Notes, the holders of
which have given wire transfer instructions to Holdings, will be required to
be made by wire transfer of immediately available funds to the accounts
specified by the holders thereof. The Registrar may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection with certain transfers or exchanges. See "--Transfer and Exchange."
The Trustee will initially act as Paying Agent and Registrar. Holdings may
change the Paying Agent or Registrar without prior notice to holders of Notes,
and Holdings or any of its Subsidiaries may act as Paying Agent or Registrar.
REDEMPTION OF NOTES
Optional Redemption. Except as set forth below, the Notes may not be
redeemed at the option of Holdings prior to September 15, 2002. During the 12-
month period beginning on September 15 of the years indicated below, the Notes
will be redeemable, at the option of Holdings, in whole or in part, on at
least 30 but not more
52
than 60 days' notice to each holder of Notes to be redeemed in cash, at the
redemption prices (expressed as percentages of the Accreted Value for all
redemption dates prior to September 15, 2004 and of the principal amount for
all redemption dates including September 15, 2004 and hereafter) set forth
below, plus any accrued and unpaid interest and Liquidated Damages, if any, to
the redemption date:
YEAR PERCENTAGE
---- ----------
2002.......................... 105.688%
2003.......................... 103.792%
2004.......................... 101.896%
2005 and thereafter........... 100.000%
Notwithstanding the foregoing, on or after March 15, 1998 and prior to
September 15, 2002, Holdings may (but shall not have the obligation to)
redeem, in whole or in part, the outstanding Notes at a redemption price in
cash equal to 105.688% of the of the Accreted Value (determined at the date of
redemption) thereof, with the net proceeds of one or more Equity Offerings of
Holdings or the Company; provided, that any such redemption shall occur within
60 days of the date of the closing of any such Equity Offering.
In addition, upon the occurrence of a Change of Control on or after March
15, 1998 and prior to September 15, 2002, Holdings, at its option, may redeem,
in whole or in part, the outstanding Notes at a redemption price in cash equal
to 105.688% of the Accreted Value (determined at the date of redemption)
thereof. The Company shall give not less than 30 and not more than 60 days'
notice of such redemption within 30 days following a Change of Control.
The restrictions on optional redemptions contained in the Indenture do not
limit Holdings' 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," Holdings is not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the Notes.
MANDATORY OFFERS TO PURCHASE NOTES
Change of Control. Upon the occurrence of a Change of Control (such date
being the "Change of Control Trigger Date"), each holder of Notes shall have
the right to require Holdings to purchase all or any part (equal to $1,000 or
an integral multiple thereof) of such holder's Notes pursuant to an Offer (as
defined) at a purchase price in cash equal to 100% of the Accreted Value
(determined at the date of redemption) thereof (if such offer is prior to
September 15, 2004) or 100% of the outstanding principal amount thereof (if
such offer is on or after September 15, 2004), plus any accrued and unpaid
interest and Liquidated Damages, if any. Holdings shall furnish to the
Trustee, at least two Business Days before notice of an Offer is mailed to all
holders of Notes pursuant to the procedures described below under "--
Procedures for Offers," notice that the Offer is being made. Transactions
constituting a Change of Control are not limited to hostile takeover
transactions not approved by the current management of Holdings. Except as
described under "--Change of Control," the Indenture does not contain
provisions that permit the holders of Notes to require Holdings 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 Holdings, management of Holdings or an affiliate of
Holdings, if such transaction does not result in a Change of Control. In
addition, the ability of Holdings to repurchase Notes following a Change of
Control will be limited by Holdings' then-available resources. The Change of
Control provisions may not be waived by the Board of Directors of Holdings or
the Trustee without the consent of holders of at least a majority in principal
amount of the Notes. See "--Amendment, Supplement and Waiver."
Holdings expects that a Change of Control would constitute a default under
certain indebtedness of Holdings' Subsidiaries. The occurrence of a Change of
Control may also have an adverse impact on the ability of Holdings to obtain
additional financing in the future. The ability of holders of Notes to require
that Holdings
53
purchase Notes upon a Change of Control may deter persons from effecting a
takeover of Holdings. Except as described above with respect to a Change of
Control, the Indenture will not contain provisions that permit the holders of
Notes to require that Holdings purchase or redeem the Notes in the event of a
takeover, recapitalization or similar restructuring. See "Risk Factors--
Leverage and Debt Service."
Asset Sales. The Indenture provides that Holdings may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, consummate an
Asset Sale (including the sale of any of the Capital Stock of any Restricted
Subsidiary) providing for Net Proceeds in excess of $4.0 million unless at
least 75% of the Net Proceeds from such Asset Sale are applied (in any manner
otherwise permitted by the Indenture) to one or more of the following purposes
in such combination as Holdings shall elect: (a) an investment in another
asset or business in the same line of business as, or a line of business
similar to that of, the line of business of Holdings and its Restricted
Subsidiaries at the time of the Asset Sale or the making of a capital
expenditure otherwise permitted by the Indenture; provided that such
investment occurs within 365 days of the date of such Asset Sale (the "Asset
Sale Disposition Date"), (b) to reimburse Holdings or its Restricted
Subsidiaries for expenditures made, and costs incurred, to repair, rebuild,
replace or restore property subject to loss, damage or taking to the extent
that the Net Proceeds consist of insurance proceeds received on account of
such loss, damage or taking, (c) to cash collateralize letters of credit;
provided any such cash collateral released to Holdings or its Restricted
Subsidiaries upon the expiration of such letters of credit shall again be
deemed to be Net Proceeds received on the date of such release, (d) the
permanent purchase, redemption or other prepayment or repayment of outstanding
Indebtedness of Holdings' Restricted Subsidiaries (with a corresponding
reduction in any commitment relating thereto) on or prior to the 365th day
following the Asset Sale Disposition Date or (e) an Offer expiring on or prior
to the Purchase Date (as defined herein). The Indenture also provides that
Holdings may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, consummate an Asset Sale unless at least 75% of the consideration
thereof received by Holdings or such Restricted Subsidiary is in the form of
cash or Marketable Securities; provided that, solely for purposes of
calculating such 75% of the consideration, the amount of (x) any liabilities
(as shown on Holdings' or such Restricted Subsidiary's most recent balance
sheet or in the Notes thereto, excluding contingent liabilities and trade
payables) of Holdings or any Restricted Subsidiary (other than liabilities
that are by their terms subordinated to the Notes) that are assumed by the
transferee of any such assets and (y) any Notes or other obligations received
by Holdings or any such Restricted Subsidiary from such transferee that are
promptly, but in no event more than 90 days after receipt, converted by
Holdings or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash and cash equivalents for purposes of
this provision. Any Net Proceeds from any Asset Sale that are not applied or
invested as provided in the first sentence of this paragraph shall constitute
"Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $15.0 million (such
date being an "Asset Sale Trigger Date"), Holdings shall make an Offer to all
holders of Notes to purchase the maximum principal amount of the Notes then
outstanding that may be purchased out of Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the Accreted Value (determined at the date
of redemption) thereof to the Purchase Date (if such Purchase Date is prior to
September 15, 2004) or 100% of the outstanding principal amount thereof to the
Purchase Date (if such Purchase Date is on or after September 15, 2004), plus
any accrued and unpaid interest and Liquidated Damages, if any, in accordance
with the procedures set forth in the Indenture. Notwithstanding the foregoing,
to the extent that any or all of the Net Proceeds of an Asset Sale is
prohibited or delayed by applicable local law from being repatriated to the
United States, the portion of such Net Proceeds so affected will not be
required to be applied as described in this or the preceding paragraph, but
may be retained for so long, but only for so long, as the applicable local law
prohibits repatriation to the United States.
To the extent that any Excess Proceeds remain after completion of an Offer,
Holdings may use such remaining amount for general corporate purposes. If the
Accreted Value or aggregate principal amount, as the case may be, 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 based upon
their Accreted Value or principal amount, as applicable, as described below
under "Selection and Notice." Upon completion of an Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.
54
Procedures for Offers. Within 30 days following any Change of Control
Trigger Date or Asset Sale Trigger Date, subject to the provisions of the
Indenture, Holdings shall mail a notice to each holder of Notes at such
holder's registered address a notice stating: (a) that an offer (an "Offer")
is being made pursuant to a Change of Control or an Asset Sale Trigger Date,
as the case may be, the length of time the Offer shall remain open and the
maximum principal amount of Notes that will be accepted for payment pursuant
to such Offer, (b) the purchase price, the amount of accrued and unpaid
interest as of the purchase date, and the purchase date (which shall be no
earlier than 30 days and no later than 40 days from the date such notice is
mailed (the "Purchase Date")), and (c) such other information required by the
Indenture and applicable law and regulations.
On the Purchase Date for any Offer, Holdings will, to the extent required by
the Indenture and such Offer, (1) in the case of an Offer resulting from a
Change of Control, accept for payment all Notes or portions thereof tendered
pursuant to such Offer and, in the case of an Offer resulting from an Asset
Sale Trigger Date, accept for payment the maximum principal amount or Accreted
Value, as applicable, of Notes or portions thereof tendered pursuant to such
Offer that can be purchased out of Excess Proceeds, (2) deposit with the
Paying Agent the aggregate purchase price of all Notes or portions thereof
accepted for payment and any accrued and unpaid interest on such Notes as of
the Purchase Date, and (3) deliver or cause to be delivered to the Trustee all
Notes tendered pursuant to the Offer. The Paying Agent shall promptly mail to
each holder of Notes or portions thereof accepted for payment an amount equal
to the purchase price for such Notes plus any accrued and unpaid interest
thereon, and the Trustee shall promptly authenticate and mail (or cause to be
transferred by book-entry) to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes and any Note not accepted for payment in whole or in part shall be
promptly returned to the holder thereof, provided that each new Note will be
in a principal amount of $1,000 or an integral multiple thereof. Holdings will
publicly announce the results of the Offer on or as soon as practicable after
the Purchase Date.
Holdings will comply with any tender offer rules under the Act which may
then be applicable, including Rule 14e-1, in connection with an offer required
to be made by Holdings 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,
Holdings shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the Indenture by
virtue thereof.
Selection and Notice. In the event of a redemption or purchase of less than
all of the Notes, the Notes to be redeemed or purchased will be chosen by the
Trustee pro rata, by lot or by any other method that the Trustee considers
fair and appropriate and, if the Notes are listed on any securities exchange,
by a method that complies with the requirements of such exchange; provided
that, if less than all of a holder's Notes are to be redeemed or accepted for
payment, only principal amounts of $1,000 or multiples thereof may be selected
for redemption or accepted for payment. On and after any redemption or
purchase date, interest and Liquidated Damages, if any, shall cease to accrue
on the Notes (and the Accreted Value will cease to accrete if prior to
September 15, 2004) or portions thereof called for redemption or accepted for
payment. Notice of any redemption or offer to purchase will be mailed at least
30 days but not more than 60 days before the redemption or purchase date to
each holder of Notes to be redeemed or purchased at such holder's registered
address.
CERTAIN COVENANTS
The Indenture contains, among other things, the following covenants:
Limitation on Restricted Payments. The Indenture provides that Holdings 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
Holdings' or any Restricted Subsidiary's Equity Interests (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Holdings 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 Holdings or any
of its Restricted Subsidiaries, other than any such Equity Interests purchased
from Holdings 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
55
retire for value any Subordinated Indebtedness of Holdings, except a payment
of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
if, at the time of such Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; or
(b) immediately after such Restricted Payment and after giving effect
thereto on a Pro Forma Basis, Holdings shall not be able to issue $1.00 of
additional Indebtedness pursuant to the first sentence of the "Limitation
on Incurrence of Indebtedness" covenant; or
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made after the date of original issuance of the Notes,
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 Holdings (or, in
case such aggregate is a loss, 100% of such loss) for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing immediately after the date of original issuance of the Notes and
ended as of Holdings' 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 Holdings from the issue
or sale of Equity Interests of Holdings subsequent to the date of original
issuance of the Notes (other than (x) Equity Interests issued or sold to a
Restricted Subsidiary and (y) Disqualified Stock); plus (3) $7.5 million;
plus (4) the amount by which the principal amount of and any accrued
interest on Indebtedness of any Restricted Subsidiary is reduced on
Holdings' consolidated balance sheet upon the conversion or (other than by
a Restricted Subsidiary) subsequent to the date of original issuance of the
Notes of any Indebtedness of Holdings or any Restricted Subsidiary (not
held by Holdings or any Restricted Subsidiary) for Equity Interests (other
than Disqualified Stock) of Holdings (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 Holdings or any
Restricted Subsidiary (to persons other than Holdings 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.
Notwithstanding the foregoing, the Indenture shall not prohibit as
Restricted Payments:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, such payment would
comply with all covenants of such Indenture (including, but not limited to,
the "Limitation on Restricted Payments" covenant);
(ii) making Restricted Investments at any time, and from time to time, in
an aggregate outstanding amount of $15.0 million after the date of original
issuance of the Notes (it being understood that if any Restricted
Investment after the date of original issuance of the Notes pursuant to
this clause (ii) is sold, transferred or otherwise conveyed to any person
other than Holdings or a Restricted Subsidiary, the portion of the net cash
proceeds or fair market value of securities or properties paid or
transferred to Holdings and its 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 $15.0 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);
56
(iii) the repurchase, redemption, retirement or acquisition of Equity
Interests of Holdings or the Company from the executives, management,
employees or consultants of Holdings or its Restricted Subsidiaries in an
aggregate amount not to exceed $10.0 million;
(iv) any loans, advances, distributions or payments from Holdings to its
Restricted Subsidiaries, or any loans, advances, distributions or payments
by a Restricted Subsidiary to Holdings 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 Holdings' Obligations to pay such fees under the TJC Agreement
shall be subordinated expressly to Holdings' 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 Holdings or any Restricted Subsidiary in for, or out of
the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Holdings) of other Equity Interests of Holdings (other than
any Disqualified Stock) or the redemption, repurchase, retirement or other
acquisition of any Equity Interests of any Restricted Subsidiary in for, or
out of the proceeds of, the substantially concurrent sale (other than to
Holdings or a Subsidiary of Holdings) 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 with the net cash proceeds from an issuance of permitted
Refinancing Indebtedness or the substantially concurrent sale (other than
to a Subsidiary of Holdings) of Equity Interests of Holdings (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 Holdings
or any Restricted Subsidiary, provided, that if such sale, transfer or
disposition constitutes an Asset Sale, Holdings complies with the "Asset
Sale" provisions of the Indenture;
(x) any Restricted Investment constituting securities or instruments of a
person issued in for trade or other claims against such person in
connection with a financial reorganization or restructuring of such person;
(xi) payments in connection with the Offering, including, but not limited
to, the expenses of the Offering;
(xii) payments of fees, expenses and indemnities to the directors of
Holdings and its Restricted Subsidiaries;
(xiii) payments in respect of the Wolff Noncompetition Agreement; and
(xiv) shareholder loans in an aggregate principal amount not to exceed
$1.0 million.
Limitation on Incurrence of Indebtedness. The Indenture provides that
Holdings will not, and will not permit any Restricted Subsidiary to, issue
any Indebtedness (other than the Indebtedness represented by the Notes)
unless Holdings' Cash Flow Coverage Ratio for its four full fiscal quarters
next preceding the date such additional Indebtedness is issued would have
been at least 1.5 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.
57
The foregoing limitations will not apply to the issuance of:
(i) Indebtedness of Holdings and/or its Restricted Subsidiaries under
Credit Facilities in an aggregate principal amount at any one time
outstanding (with letters of credit being deemed to have a principal amount
equal to the maximum potential liability of Holdings and/or any of its
Restricted Subsidiaries thereunder) not to exceed the greater of (A) $135
million and (B) the sum of: (1) 85% of the book value of accounts
receivable of Holdings and its Restricted Subsidiaries on a consolidated
basis and (2) 65% of the book value of the inventories of Holdings 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 $160 million at any one time outstanding (less the amount of any
permanent reductions as set forth under "Asset Sales");
(ii) Indebtedness of Holdings and its Restricted Subsidiaries in
connection with capital leases, sale and leaseback transactions, purchase
money obligations, capital expenditures or similar financing transactions
relating to: (A) their properties, assets and rights as of the date of
original issuance of the Notes not to exceed $10.0 million in aggregate
principal amount at any one time outstanding, or (B) their properties,
assets and rights acquired after the date of original issuance of the
Notes, 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 Holdings and its Restricted Subsidiaries
in an aggregate principal amount up to $35 million (all or any portion of
which may be issued as additional Indebtedness under Credit Facilities),
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 $160
million at any one time outstanding (less the amount of any permanent
reductions as set forth under "Asset Sales"); and
(iv) Other Permitted Indebtedness.
Limitation on Liens. The Indenture will provide that Holdings shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or suffer to exist any Lien, other than
Permitted Liens, upon any property or asset now owned or hereafter acquired by
them, or any income or profits therefrom, or assign or convey any right to
receive income therefrom unless all payments due under the Indenture and the
Notes are secured on an equal and ratable basis with the obligations so
secured until such time as such obligations are no longer secured by a Lien.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture will provide that Holdings will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective, any encumbrance or
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 Holdings or any
Restricted Subsidiary, or pay any Indebtedness owed to, Holdings or any
Restricted Subsidiary, (b) make loans or advances to Holdings, or (c) transfer
any of its properties or assets to Holdings, 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;"
(iii) customary provisions restricting subletting or assignment of any
lease or license of Holdings 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 Holdings or any
Restricted Subsidiary at the time of such acquisition, which
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encumbrance or restriction is not applicable to any person, or the
properties or assets of any person, other than the person, or the property
or assets of the person, so acquired;
(vi) Indebtedness or other agreements existing on the date of original
issuance of the Notes;
(vii) any Refinancing Indebtedness permitted under the "Limitation on
Incurrence of Indebtedness" covenant, provided that the restrictions
contained in the agreements governing such Refinancing Indebtedness are no
more restrictive in any material respect with regard to the interests of
the holders of the Notes than those contained in the agreements governing
the Indebtedness being refinanced;
(viii) any restrictions, with respect to a Restricted Subsidiary, imposed
pursuant to an agreement that has been entered into for the sale or
disposition of the stock, business, assets or properties of such Restricted
Subsidiary;
(ix) the terms of purchase money or capital lease obligations, but only
to the extent such purchase money obligations restrict or prohibit the
transfer of the property so acquired; or
(x) any instrument governing the sale of assets of Holdings or any
Restricted Subsidiary, which encumbrance or restriction applies solely to
the assets of Holdings or such Restricted Subsidiary being sold in such
transaction.
Nothing contained in this covenant shall prevent Holdings or any Restricted
Subsidiary 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 Holdings or any of its Restricted Subsidiaries that are
subject to Permitted Liens.
Limitation on Transactions With Affiliates. The Indenture provides that
neither Holdings nor any of its Restricted Subsidiaries may make any loan,
advance, guarantee or capital contribution to, or for the benefit of, or sell,
lease, transfer or dispose of any properties or assets to, or for the benefit
of, or purchase or lease any property or assets from, or enter into any or
amend any contract, agreement or understanding with, or for the benefit of, an
Affiliate (each such transaction or series of related transactions that are
part of a common plan are referred to as an "Affiliate Transaction"), except
in good faith and on terms that are no less favorable to Holdings or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction on an arm's length basis from an unrelated person.
The Indenture will further provide that Holdings will not, and will not
permit any Restricted Subsidiary to, engage in any Affiliate Transaction
involving aggregate payments or other transfers by Holdings and its Restricted
Subsidiaries in excess of $7.5 million (including cash and non-cash payments
and benefits valued at their fair market value by the Board of Directors of
Holdings in good faith) unless Holdings delivers to the Trustee:
(i) a resolution of the Board of Directors of Holdings 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 Holdings or such
Restricted Subsidiary, as the case may be, from a financial point of view.
Notwithstanding the foregoing, this Affiliate Transactions covenant will not
apply to:
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(1) transactions between Holdings and any Restricted Subsidiary or
between Restricted Subsidiaries;
(2) payments under the TJC Agreement;
(3) any other payments or transactions permitted pursuant to the
"Limitation on Restricted Payments" covenant;
(4) (a) payments and transactions under Incentive Arrangements and (B)
reasonable compensation paid to officers, employees or consultants of
Holdings or any Restricted Subsidiary as determined in good faith by
Holdings' Board of Directors or executives; or
(5) the sale, transfer and/or termination of the officers' life insurance
policies in effect on the date of issuance of the Notes.
In addition, notwithstanding the foregoing, any Affiliate Transaction
between the Company and Affiliated Embroiderers relating to the provision of
embroidery services in the ordinary course of business shall not be subject to
the provisions of clause (ii) above.
Designation of Restricted and Non-Restricted Subsidiaries. The Indenture
provides that, subject to the exceptions described below, from and after the
date of original issuance of the Notes, Holdings 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
$1.0 million or less or (B) immediately before and after giving effect to such
designation on a Pro Forma Basis: (1) Holdings 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 Holdings or any Restricted
Subsidiary which is redesignated from a Restricted Subsidiary to a Non-
Restricted Subsidiary shall be considered a Restricted Payment (to the extent
not previously included as a Restricted Payment) made on the day such
Subsidiary is designated a Non-Restricted Subsidiary in the amount of the
greater of (i) the fair market value (as determined by the Board of Directors
of Holdings in good faith) of the Equity Interests of such Subsidiary held by
Holdings and its Restricted Subsidiaries on such date, and (ii) the amount of
the Investments determined in accordance with GAAP made by Holdings and any of
its Restricted Subsidiaries in such Subsidiary.
A Non-Restricted Subsidiary may be redesignated as a Restricted Subsidiary.
Holdings may not, and may not permit any Restricted Subsidiary to, take any
action or enter into any transaction or series of transactions that would
result in a Person becoming a Restricted Subsidiary (whether through an
acquisition, the redesignation of a Non-Restricted Subsidiary or otherwise,
but not including through the creation of a new Restricted Subsidiary) unless,
immediately before and after giving effect to such action, transaction or
series of transactions on a Pro Forma Basis, (a) Holdings 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 the Board of Directors of Holdings stating that the Board of Directors has
made such designation in accordance with the Indenture, and Holdings 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. As of the Closing Date, all
Subsidiaries of Holdings will be Restricted Subsidiaries.
MERGER OR CONSOLIDATION
The Indenture provides that Holdings shall not consolidate or merge with or
into, or sell, lease, convey or otherwise dispose of all or substantially all
of its assets to, any person (any such consolidation, merger or sale
60
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 Holdings, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee, under
the Indenture and the Notes; (c) immediately after such Disposition, no
Default or Event of Default shall exist; and (d) the corporation formed by or
surviving any such Disposition, or the corporation to which such Disposition
shall have been made, shall (i) have Consolidated Net Worth (immediately after
the Disposition but prior to giving any pro forma effect to purchase
accounting adjustments or Restructuring Charges resulting from the
Disposition) equal to or greater than the Consolidated Net Worth of Holdings
immediately preceding the Disposition, (ii) be 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) have a Cash
Flow Coverage Ratio for the four fiscal quarters immediately preceding the
applicable Disposition, determined on a Pro Forma Basis, equal to or greater
than the actual Cash Flow Coverage Ratio of Holdings for such four quarter
period. The limitations in the Indenture on Holdings' ability to make a
Disposition described in this paragraph do not restrict Holdings' ability to
sell less than all or substantially all of its assets, such sales being
governed by the "Asset Sales" provisions of the Indenture as described herein.
Prior to the consummation of any proposed Disposition, Holdings shall
deliver to the Trustee an Officers' Certificate to the foregoing effect and an
opinion of counsel stating that the proposed Disposition and such supplemental
indenture comply with the Indenture.
PROVISION OF FINANCIAL INFORMATION TO HOLDERS OF NOTES
So long as the Notes are outstanding, whether or not Holdings is subject to
the reporting requirements of Section 13 or 15(d) of the Act, Holdings shall
file with the Commission (unless the Commission will not accept such filing)
the annual reports, quarterly reports and other documents relating to Holdings
and its Restricted Subsidiaries that Holdings would have been required to file
with the Commission pursuant to Section 13 or 15(d) if Holdings were subject
to such reporting requirements. Holdings 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 Act. In addition, Holdings has agreed that, for so long as any Notes
remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that an Event of Default is: (a) a default for 30
days in payment of interest on or Liquidated Damages, if any, with respect to
the Notes; (b) a default in payment when due of principal or premium, if any,
with respect to the Notes; (c) the failure of Holdings 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 Holdings 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 Holdings or any
Restricted Subsidiary (or the payment of which is guaranteed by Holdings or
any Restricted Subsidiary), whether such Indebtedness or guarantee now exists
or shall be created hereafter, if (1) either (a) such default results from the
failure to pay principal of or interest on any such Indebtedness (after giving
effect to any extensions thereof) or (B) as a result of such default the
maturity of such Indebtedness has been accelerated prior to its expressed
maturity, and (2) the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to pay
principal or interest thereon, or, because of the acceleration of the maturity
thereof, aggregates in excess of $12.5 million; (e) a failure by Holdings or
any Restricted Subsidiary to pay final judgments (not covered by insurance)
aggregating in excess of $7.5 million which judgments a court of competent
jurisdiction does not rescind, annul or stay within 45 days after their entry;
61
and (f) certain events of bankruptcy or insolvency involving Holdings or any
Significant Subsidiary. 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 Holdings with the intention of
avoiding payment of the premium that Holdings 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 Holdings of the Default and Holdings does not cure the
Default within 30 days after receipt of the notice. a Default or Event of
Default under clause (f) of the preceding paragraph will result in the Notes
automatically becoming due and payable without further action or notice.
Upon the occurrence of an Event of Default, the Trustee or the holders of at
least 25% in principal amount at maturity of the then outstanding Notes may
declare all Notes to be due and payable by notice in writing to Holdings and
the Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice") and the principal of (or,
if prior to September 15, 2004, the Accreted Value of), premium, if any, and
accrued and unpaid interest and Liquidated Damages, if any, shall become
immediately due and payable, 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, if prior to
September 15, 2004, the Accreted Value), or premium, if any, interest or
Liquidated Damages, if any, on, such Notes, which may only be waived with the
consent of each holder of the Notes affected.
Holdings is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and upon an officer of Holdings
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 Holdings shall
have any liability for any Obligations of Holdings 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 Holdings' 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.
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SATISFACTION AND DISCHARGE OF THE INDENTURE
Holdings at any time may terminate all of its obligations under the Notes
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 of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain a registrar and paying agent
in respect of the Notes). Holdings at any time may terminate (1) its
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").
Holdings may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Holdings exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect thereto. If Holdings 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 Holdings' 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,
Holdings 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 (or, if prior to September 15, 2004, the Accreted
Value) of and premium and unpaid interest and Liquidated Damages, if any, on
the Notes then outstanding to redemption or maturity, as the case may be, and
must comply with certain other conditions, including the passage of 91 days
and the delivery to the Trustee of an opinion of counsel to the effect that
holders of such Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such opinion of
counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law).
TRANSFER AND EXCHANGE
Holders of Notes may transfer or exchange their Exchange 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 Holdings 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 Holdings and the date the Exchange 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
Subject to certain exceptions, the Indenture may be amended or supplemented
with the consent of the holders of at least a majority in principal amount of
the Exchange Notes then outstanding under the Indenture, and any existing
Default or Event of Default (other than a payment default) or compliance with
any provision may be waived with the consent of the holders of a majority in
principal amount of the Exchange Notes then outstanding under the Indenture.
Without the consent of any holder of Exchange Notes, Holdings and the Trustee
may amend or supplement the Indenture or the Exchange 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
63
by a successor corporation of Holdings' obligations to the holders of Exchange
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 Exchange Notes.
Without the consent of each holder of Exchange Notes affected, Holdings may
not (i) reduce the principal amount at maturity of Exchange 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
Exchange 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 Exchange Notes--Change of Control" and
"--Asset Sales") or the price at which Holdings is required to offer to
purchase the Exchange Notes; (iii) reduce the principal amount at maturity of
or change the fixed maturity of the Exchange Notes; (iv) make the Exchange
Notes payable in money other than stated in the Exchange Notes; (v) make any
change in the provisions concerning waiver of Defaults or Events of Default by
holders of the Exchange Notes, or rights of holders of the Exchange Notes to
receive payment of principal or interest; or (vi) waive any default in the
payment of principal of or premium, or unpaid interest or Liquidated Damages,
if any, on the Exchange Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee, if
it becomes a creditor of Holdings, 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 Exchange 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 Exchange 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 and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred
to herein as the "Global New Note Holder").
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 exchange for Certificated New Notes, be exchanged
for an interest in the Global New Note representing the principal amount of
New Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. the Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") and to facilitate
the clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other
64
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively,
the "Indirect Participants" or the "Depositary's Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly ro indirectly. Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through the
Depositary's Participants or the Depositary's Indirect participants.
So long as the Global New Note Holder is the registered owner of any New
Notes, the Global New Note Holder will be considered the sole holder under the
Indenture of any New Notes evidenced by the Global New Note. Beneficial owners
of New Notes evidenced by the Global New Note will not be considered the
owners or holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of the Depositary or
for maintaining, supervising or reviewing any records of the Depositary
relating to the New Notes.
Payments in respect of the principal of, premium, if any, and interest on
New Notes registered in the name of the Global New Note Holder on the
applicable record date will be payable by the Trustee to or at the direction
of the Global New Note Holder in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, the Company 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 the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of New Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's participants and the
Depositary's Indirect Participants to the beneficial owners of New Notes will
be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
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) the Company notifies the
Trustee in writing that the Depositary is no longer willing or able to act as
a depositary and the Company is unable to locate a qualified successor within
90 days or (ii) the Company, at its option, notifies the Trustee in writing
that it elects to cause the issuance of New Notes in the form of Certificated
New Notes under the Indenture, then, upon surrender by the Global New Note
Holder of its Global New Note, New Note in such form will be issued to each
person that the Global New Note Holder and the Depositary identify as being
the beneficial owner of the related New Notes.
Neither the Company nor the Trustee will be liable for any delay by the
global New Note Holder or the Depositary in identifying the beneficial owners
of New Notes and the Company and the Trustee may conclusively rely on, and
will protected in relying on, instructions from the global New Note Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes represented
by the Global New Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available funds to the accounts specified
by the Global New Note Holder. with respect to Certificated New Notes, the
Company 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
65
generally settled in clearinghouse or next-day funds. In contrast, new Notes
represented by the Global New note are expected to be eligible to trade in the
PORTAL market and to trade in the Depositary's Same-Day funds Settlement
System, and any permitted secondary market trading activity in such New Notes
will, therefore, be required by the Depositary to be settled in immediately
available funds. The Company expects 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.
"Accreted Value" means, as of any date of determination prior to September
15, 2004, the sum of (a) the initial offering price of each Note and (b) that
portion of the excess of the principal amount of each Note over such initial
offering price as shall have been accreted thereon through such date, such
amount to be so accreted on a daily basis at the rate of 11.375% per annum of
the initial offering price of the Notes, compounded semi-annually on each
September 15, and each March 15, from the date of issuance of the Notes
through the date of determination computed on the basis of a 360-day year of
twelve 30-day months. The Accreted Value of any Notes on or after September
15, 2004 shall be 100% of the principal amount thereof.
"Affiliate" means any of the following: (i) any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with Holdings, (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.
"Affiliated Embroiderers" means the affiliated entities that provide
embroidery services for the Company on the date of issuance of the Notes.
"Asset Sale" means the sale, lease, conveyance or other disposition by
Holdings or a Restricted Subsidiary of assets or property whether owned on the
date of original issuance of the Notes or thereafter acquired, in a single
transaction or in a series of related transactions; provided that Asset Sales
will not include such sales, leases, conveyances or dispositions in connection
with (i) the sale or disposition of any Restricted Investment, (ii) any Equity
Offering by Holdings, (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 Holdings or a
Restricted Subsidiary to Holdings 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 Holdings as permitted under "--Merger or Consolidation,"
(x) the sale or disposition of obsolete equipment or other obsolete assets,
(xi) Restricted Payments permitted by the "Limitations on Restricted Payments"
covenant, (xii) the exchange of assets for other non-cash assets that (a) are
useful in the business of Holdings 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) or
(xiii) the sale, transfer and/or termination of the officers' life insurance
policies in effect on the date of issuance of the Notes.
"Board of Directors" means Holdings' board of directors or any authorized
committee of such board of directors.
"Capital Stock" means any and all shares, interests, participation or other
equivalents (however designated) of corporate stock, including any preferred
stock.
66
"Cash Flow" means, for any given period and person, the sum of, without
duplication, Consolidated Net Income, plus (a) any provision for taxes based
on income or profits to the extent such income or profits were included in
computing Consolidated Net Income, plus (b) Consolidated Interest Expense, to
the extent deducted in computing Consolidated Net Income, plus (c) the
amortization of all intangible assets, to the extent such amortization was
deducted in computing Consolidated Net Income (including, but not limited to,
inventory write-ups, goodwill, debt and financing costs, and Incentive
Arrangements), plus (d) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees, including
those in connection with the Transactions), to the extent deducted in
computing Consolidated Net Income, plus (e) all depreciation and all other
non-cash charges (including, without limitation, those charges relating to
purchase accounting adjustments and LIFO adjustments), to the extent deducted
in computing Consolidated Net Income, plus (f) any interest income, to the
extent such income was not included in computing Consolidated Net Income, plus
(g) all dividend payments on preferred stock (whether or not paid in cash) to
the extent deducted in computing Consolidated Net Income, plus (h) any
extraordinary or nonrecurring charge or expense arising out of the
implementation of SFAS 106 or SFAS 109 to the extent deducted in computing
Consolidated Net Income, plus (i) to the extent not covered in clause (d)
above, fees paid or payable in respect of the TJC Agreement to the extent
deducted in computing Consolidated Net Income, plus (j) the net loss of any
person, other than those of a Restricted Subsidiary, to the extent deducted in
computing Consolidated Net Income, plus (k) net losses in respect of any
discontinued operations as determined in accordance with GAAP, to the extent
deducted in computing Consolidated Net Income, minus (l) the portion of
Consolidated Net Income attributable to the minority interests in other
persons, except the amount of such portion received in cash by Holdings or its
Restricted Subsidiaries; 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)), 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 Holdings 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 Holdings,
(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 Holdings (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 Holdings
(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, (v) the first day on which a majority of the members
of the Board of Directors of Holdings are not Continuing Directors or (vi) the
first day on which Holdings ceases to be the owner of record of 100% of the
Voting Stock of GFSI. For purposes of this definition, any transfer of an
equity interest of an entity that was formed following the date of issuance of
the Notes for the purpose of acquiring Voting Stock of Holdings 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.
67
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of Holdings' assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of Notes to require Holdings to repurchase such Notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Holdings and its Subsidiaries to another person may be uncertain.
"Closing Date" means the date on which the Units were issued.
"Commission" means the U.S. Securities and Exchange Commission.
"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 Offering or any other
refinancing of Indebtedness will be excluded.
"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: (i) 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 (ii) Consolidated Net Income of any person
will not include, without duplication, any deduction for: (a) 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, (B) the amortization of all intangible assets (including
amortization attributable to inventory write-ups, 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 extraordinary or nonrecurring charges relating to any premium or
penalty paid, write-off of deferred financing costs or other financial
recapitalization charges in connection with redeeming or retiring any
Indebtedness prior to its stated maturity and (E) any Restructuring Charges;
provided, however, that for purposes of determining the Cash Flow Coverage
Ratio, Consolidated Net Income shall be calculated on a Pro Forma Basis.
"Consolidated Net Worth" with respect to any person means, as of any date,
the consolidated equity of the common stockholders of such person (excluding
the cumulated foreign currency translation adjustment), all determined on a
consolidated basis in accordance with GAAP, but without any reduction in
respect of the payment of dividends on any series of such person's preferred
stock if such dividends are paid in additional shares of Capital Stock (other
than Disqualified Stock); provided, however, that Consolidated Net Worth shall
also include, without duplication: (a) the amortization of all write-ups of
inventory, (b) the amortization of all intangible assets (including
amortization of goodwill, debt and financing costs, and Incentive
Arrangements), (c) any non-capitalized transaction costs incurred in
connection with actual or proposed financings, acquisitions or divestitures
(including, but not limited to, financing and refinancing fees), (d) any
increased amortization or depreciation resulting from the write-up of assets
pursuant to Accounting Principles Board Opinion Nos. 16 and 17, as amended and
supplemented from time to time, (e) any extraordinary or nonrecurring charges
or expenses relating to any premium or penalty paid, write-off of deferred
financing costs or other financial recapitalization charges incurred in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity, (f) any Restructuring Charges and (g) any extraordinary or non-
recurring charge arising out of the implementation of SFAS 106 or SFAS 109;
provided, however, that Consolidated Net Worth shall be calculated on a Pro
Forma Basis.
68
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Holdings who (i) was a member of such Board of
Directors on the date of the Indenture 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.
"Credit Facilities" means, with respect to Holdings and its Restricted
Subsidiaries, one or more debt facilities or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables
to such lenders or to special purpose entities formed to borrow from such
lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part on, or
prior to, the maturity date of the Notes.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "a" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Equity Interests" means Capital Stock or partnership interests or warrants,
options or other rights to acquire Capital Stock or partnership interests (but
excluding (i) any debt security that is convertible into, or exchangeable for,
Capital Stock or partnership interests and (ii) any other Indebtedness or
Obligation); provided, however, that Equity Interests will not include any
Incentive Arrangements or obligations or payments thereunder.
"Equity Offering" means a public or private offering by Holdings or GFSI, as
applicable, for cash of Equity Interests and all warrants, options or other
rights to acquire Capital Stock, other than (i) an offering of Disqualified
Stock or (ii) Incentive Arrangements or obligations or payments thereunder.
"GAAP" means generally accepted accounting principles, consistently applied,
as of the date of original issuance of the Notes. All financial and accounting
determinations and calculations under the Indenture will be made in accordance
with GAAP.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"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.
"Incentive Arrangements" means any earn-out agreements, stock appreciation
rights, "phantom" stock plans, employment agreements, non-competition
agreements, subscription and stockholders agreements and other incentive and
bonus plans, including the Incentive Compensation Plan, and similar
arrangements made in connection with acquisitions of persons or businesses by
Holdings or the Restricted Subsidiaries or the retention of consultants,
executives, officers or employees by Holdings 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,
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
69
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.
"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.
"Issue Date" means the date upon which the Units were exchanged for the Old
Notes.
"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 Holdings) with a rating, at the time as of which
any investment therein is made, of "a-2" (or higher) according to S&P or "P-2"
(or higher) according to Moody's or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments, (d) any bankers acceptances or money
market deposit accounts issued by an Eligible Institution and (e) any fund
investing exclusively in investments of the types described in clauses (a)
through (d) above.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any person, the net income (loss) of
such person, determined in accordance with GAAP excluding, however, any gain
or loss, together with any related provision for taxes, realized in connection
with any Asset Sale (including, without limitation, dispositions pursuant to
sale and leaseback transactions).
"Net Proceeds" means, with respect to any Asset Sale, the aggregate amount
of cash proceeds (including any cash received by way of deferred payment
pursuant to a Note receivable issued in connection with such Asset Sale, other
than the portion of such deferred payment constituting interest, and including
any amounts received as disbursements or withdrawals from any escrow or
similar account established in connection with any such Asset Sale, but, in
either such case, only as and when so received) received by Holdings 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 Holdings 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 Holdings 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
70
deduction or appropriate amounts to be provided by Holdings 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 Holdings 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 Holdings 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 Holdings and its Restricted Subsidiaries existing as
of the date of original issuance of the Notes and all related Obligations
as in effect on such date;
(ii) Indebtedness of Holdings and its Restricted Subsidiaries in respect
of bankers acceptances and letters of credit (including, without
limitation, letters of credit in respect of workers' compensation claims)
issued in the ordinary course of business, or other Indebtedness in respect
of reimbursement-type obligations regarding workers' compensation claims;
(iii) Refinancing Indebtedness, provided that: (a) the principal amount
of such Refinancing Indebtedness shall not exceed the outstanding principal
amount of Indebtedness (including unused commitments) extended, refinanced,
renewed, replaced, substituted or refunded plus any amounts incurred to pay
premiums, fees and expenses in connection therewith, (B) the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being extended, refinanced, renewed, replaced, substituted or refunded;
provided, however, that this limitation in this clause (B) does not apply
to Refinancing Indebtedness of Senior Indebtedness, and (C) in the case of
Refinancing Indebtedness of Subordinated Indebtedness, 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 Holdings and its Restricted
Subsidiaries;
(v) Indebtedness of Holdings 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 Holdings
or a Restricted Subsidiary) or (x) of the second sentence of 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 Holdings and its Restricted Subsidiaries and Holdings and
its Restricted Subsidiaries have no Obligations with respect to such
Indebtedness;
(vii) Indebtedness of Holdings and its Restricted Subsidiaries under
Hedging Obligations;
(viii) Indebtedness of Holdings 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 Holdings and its Restricted Subsidiaries in
connection with performance, surety, statutory, appeal or similar bonds in
the ordinary course of business;
(x) Indebtedness of Holdings 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;
71
(xi) The guarantee by Holdings or any of the Restricted Subsidiaries of
Indebtedness of Holdings or a Restricted Subsidiary of Holdings that was
permitted to be incurred by another provision of the covenant entitled
"Limitation on Incurrence of Indebtedness;" and
(xii) Indebtedness of any person at the time it is acquired as a
Restricted Subsidiary, provided that such Indebtedness was not issued by
such person in connection with or in anticipation of such acquisition.
"Permitted Liens" means:
(i) Liens securing Indebtedness of Holdings or any Restricted Subsidiary
that was permitted to be incurred pursuant to clauses (i) and (iii) of the
second paragraph of the covenant entitled "Limitation on Incurrence of
Indebtedness;"
(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
Holdings or any of its Restricted Subsidiaries incurred in the ordinary
course of business;
(vii) Liens (including extensions, renewals and replacements thereof)
upon property acquired (the "Acquired Property") after the date of original
issuance of the Notes, provided that: (a) any such Lien is created solely
for the purpose of securing Indebtedness representing, or issued to
finance, refinance or refund, the cost (including the cost of construction)
of the Acquired Property, (B) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of the cost of the Acquired
Property, (C) such Lien does not extend to or cover any property other than
the Acquired Property and any improvements on such Acquired Property, and
(D) the issuance of the Indebtedness to purchase the Acquired Property is
permitted by the "Limitation on Incurrence of Indebtedness" covenant;
(viii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(ix) judgment and attachment Liens not giving rise to an Event of
Default;
(x) leases or subleases granted to others not interfering in any material
respect with the business of Holdings 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 Holdings 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;
72
(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
Indebtedness permitted by the terms of the Indenture;
(xviii) Liens in favor of Holdings 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 $3.0
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 Holdings 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 Holdings 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.
"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" covenant, the "Designation of
Restricted and Non-Restricted Subsidiaries" covenant, the "Merger or
Consolidation" covenant, the incurrence of Indebtedness pursuant to the first
sentence of the "Limitation on Incurrence of Indebtedness" covenant and
Consolidated Net Worth for purposes of the "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.
"Redeemable Preferred Stock" means preferred stock that by its terms or
otherwise is required to be redeemed or is redeemable at the option of the
holder thereof on, or prior to, the maturity date of the Notes.
"Refinancing Indebtedness" means (i) Indebtedness of Holdings 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 this Indenture or any Indebtedness issued to so
extend, refinance, renew, replace, substitute or refund such Indebtedness,
(ii) any refinancings of Indebtedness issued under Credit Facilities, and
(iii) any additional Indebtedness issued to pay premiums and fees in
connection with clauses (i) and (ii).
73
"Related Party" with respect to any Principal means (a) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (a).
"Restricted Investment" means any Investment in any person; provided that
Restricted Investments will not include: (i) Investments in Marketable
Securities and other negotiable instruments permitted by the Indenture; (ii)
any Incentive Arrangements; (iii) Investments in Holdings; 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 Holdings existing on
the date of original issuance of the Notes, and (ii) any other Subsidiary of
Holdings formed, acquired or existing after the date of original issuance of
the Notes that is designated as a "Restricted Subsidiary" by Holdings 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 Holdings that has been redesignated by Holdings 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 Holdings or any Restricted
Subsidiary, as permitted by GAAP or Regulation S-X under the Securities Act.
"S&P" means Standard & Poor's Corporation.
"Senior Indebtedness" means the same thing as it does in "Description of
Units--Certain Definitions."
"SFAS 106" means Statement of Financial Accounting Standards No. 106.
"SFAS 109" means Statement of Financial Accounting Standards No. 109.
"Significant Subsidiary" means any Restricted Subsidiary of Holdings 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 created or evidencing the same, or pursuant to
which the same is outstanding, designates such Obligations as subordinated or
junior in right of payment to the Notes.
"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).
74
"TJC Agreement" means the Management Consulting Agreement among Holdings,
GFSI and TJC Management Corporation, as in effect on the date of original
issuance of the Notes.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect the board of directors.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the sum of the product(s)
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other requirement payment of principal,
including payment at final maturity, in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) which will elapse between such
date and the making of such payment.
"Wolff Noncompetition Agreement" means the agreement between Holdings and
Robert M. Wolff, relating to certain covenants not to compete with the
business of Holdings, as in effect on the date of issuance of the Notes.
75
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of important terms of certain indebtedness of the
Company:
CREDIT AGREEMENT
Concurrently with the completion of the GFSI Offering, GFSI entered into the
Credit Agreement with The First National Bank of Chicago ("FNBC"), as
contractual representative, and other lenders thereunder. The Credit Agreement
provides for borrowings of up to $115.0 million under three credit facilities:
a term loan ("Term Loan a") in the principal amount of $40.0 million which
matures in 2002, a term loan ("Term Loan B") in the principal amount of $25.0
million which matures in 2004 and the Revolver in the principal amount of up to
$50.0 million (based upon availability) which matures in 2002. At the
completion of the Transactions, $40.0 million, $25.0 million and approximately
$3.0 million was outstanding under Term Loan a, Term Loan B and the Revolver,
respectively, leaving approximately $47.0 million available under the Revolver
for future borrowings and letter of credit issuances. Approximately $22.9
million of letters of credit were issued at the Closing of the Transactions.
See "The Transactions."
GFSI will pay interest (i) under each of Term Loan a and the Revolver based
on, at GFSI's option, either of FNBC's base rate plus 1.25% or the Eurodollar
Rate (as defined in the Credit Agreement) plus 2.25% and (ii) under Term Loan B
based on, at GFSI's option, either of FNBC's base rate plus 1.75% or the
Eurodollar Rate plus 2.75%. The interest rate under each of Term Loan a, Term
Loan B and the Revolver is subject to reduction based upon GFSI's Leverage
Ratio (as defined in the New Credit Agreement). a commitment fee of 0.50% will
be paid by GFSI for unutilized commitments under the Revolver, subject to
reduction based upon GFSI's Leverage Ratio. GFSI's obligations under the Credit
Agreement are secured by a security interest in all of GFSI's assets. In
addition, GFSI's obligations under the Credit Agreement are guaranteed by
substantially all of GFSI's future subsidiaries.
The Credit Agreement contains customary covenants, including as material
covenants, covenants relating to minimum interest expense coverage ratio,
minimum fixed charge coverage ratio, maximum leverage ratio and maximum rentals
and restrictions on, among other things, granting of liens, asset sales,
mergers and consolidations, investments and acquisitions, prepayments or
redemptions of Subordinated Discount Notes and incurring additional
indebtedness. The Credit Agreement also contains customary events of default,
including, as material events of default, without limitation, change of
control. Holdings and GFSI 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 Credit Agreement.
Concurrently with the closing of the Old Offering, GFSI entered into an
amendment to the Credit Agreement in order to change certain definitions,
obtain consents for the Old Offering and change various representations and
covenants to allow for the Old Offering.
GFSI SENIOR SUBORDINATED NOTES
On February 27, 1997, GFSI issued the GFSI Senior Subordinated Notes pursuant
to an indenture, in a private transaction that was not subject to the
registration requirements of the Securities Act. The GFSI Senior Subordinated
Notes were then exchanged for similar Senior Subordinated Notes which were
registered under the Securities Act on July 24, 1997. The GFSI Senior
Subordinated Notes were limited to $125 million aggregate principal amount and
bear interest at 9 5/8% payable semi-annually in cash in amounts on March 1 and
September 1 in each year. The GFSI Senior Subordinated Notes mature on March 1,
2007. The GFSI Senior Subordinated Notes are subordinated to the prior payment
in full in cash or Marketable Securities (as defined in the indenture) of all
Senior Indebtedness (as defined in the indenture). The GFSI Senior Subordinated
Notes are fully and unconditionally guaranteed by GFSI's Restricted
Subsidiaries (as defined in the indenture). The remaining terms of the
indenture governing the GFSI Senior Subordinated Notes are similar to the
Indenture.
76
CERTAIN TRANSACTIONS
The Jordan Company. In connection with the Acquisition, on February 27,
1997, Holdings entered into an agreement (the "TJC Agreement") with TJC
Management Corporation ("JMC"), an affiliate of TJC. Messrs. Jordan, Zalaznick
and Caputo, directors of Holdings, are also managing directors of TJC and
Messrs. Jordan and Zalaznick are the principals of JMC. Under the TJC
Agreement, Holdings retained JMC to render services to GFSI, its financial and
business affairs, its relationships with its lenders and stockholders, and the
operation and expansion of its business. The TJC Agreement expires in 2007,
but is automatically renewed for successive one-year terms, unless either
party provides written notice of termination 60 days prior to the scheduled
renewal date. For the first two years, the TJC Agreement provides for an
annual consulting fee of $500,000 payable on a quarterly basis. For the
remaining term of the TJC Agreement, Holdings will pay JMC an annual
consulting fee payable on a quarterly basis equal to the higher of (a)
$500,000 or (b) 1.5% of EBITDA (as defined in the TJC Agreement), provided
that in years three through five of the TJC Agreement, the annual fee does not
exceed $750,000 and thereafter the annual fee does not exceed $1.0 million. In
addition, the TJC Agreement provides for payment to JMC of (i) an investment
banking and sponsorship fee of up to 2.0% of the purchase price of certain
acquisitions or sales involving Holdings or GFSI and (ii) a financial
consulting fee of up to 1.0% of any debt, equity or other financing arranged
by Holdings or GFSI with the assistance of JMC. Both such fees are subject to
Board of Directors approval. In connection with the Transactions, GFSI paid
JMC consulting and investment banking fees of $3.25 million pursuant to the
terms of the TJC Agreement. The parties involved in the negotiation of the TJC
Agreement included Mr. Caputo on behalf of JMC and TJC and Mr. Shaw on behalf
of GFSI. a conflict of interest could be deemed to exist in that Mr. Jordan
and Mr. Zalaznick, the principals of JMC, the recipient of the consulting and
investment banking fees, are also directors and stockholders of Holdings, the
entity paying the consulting and investment banking fees. This conflict was
fully disclosed to the entire Board of Directors of Holdings, which
unanimously, including the disinterested members, approved the TJC Agreement.
Furthermore, GFSI believes that the terms of the TJC Agreement are comparable
to the terms that it would obtain from disinterested third parties for
comparable services. See "Risk Factors--Control by Principal Stockholders."
Tax Sharing Agreement. In connection with the Transactions, on February 27,
1997, the Company entered into a tax sharing agreement (the "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
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.
The parties involved in the negotiation of the Tax Sharing Agreement
included Mr. Caputo on behalf of Holdings and Mr. Shaw on behalf of GFSI. The
Tax Sharing Agreement does not give rise to any conflicts of interest as GFSI
will only pay Holdings to the extent of Holdings' tax liability attributable
to the operations of GFSI.
Embroidery Service. The Company has an ongoing relationship with Kansas
Custom Embroidery and Impact Design, Inc., which are affiliated companies (the
"Affiliates"). Mr. Graveel is a 50% owner and vice president of Kansas Custom
Embroidery and Mr. Menghini and his family own 100% of Impact Design, Inc.
This relationship was memorialized in a memorandum of understanding (the
"Memorandum") on July 1, 1996. The Memorandum has no set time limit or renewal
terms. The Memorandum allows the Company to outsource embroidery work to the
Affiliates in the event that demand for such work exceeds the Company's
manufacturing capacity. Over the three fiscal years ended June 30, 1996, the
Company had purchased $5.3 million of embroidered products under the
Memorandum and the Company purchased $4.6 million during fiscal 1997.
Embroidery work is outsourced only in response to firm customer orders. Under
the Memorandum, the Affiliate embroiders blanks according to designs provided
by the Company and under terms established by the Company with payment terms
based on a combination of the number of units ordered and the stitch range of
the embroidered items. The Memorandum could be deemed to give rise to a
conflict of interest in that Mr. Graveel and Mr. Menghini, who are principals
of Kansas Custom Embroidery and Impact Design, Inc., respectively, are also
directors of the Company. Payments for embroidery services are made from the
Company to the Affiliates.
77
The Company believes that the terms of the Memorandum are comparable to the
terms it would obtain from disinterested third parties for comparable
services. This conflict was fully disclosed to the entire Board of Directors
of the Company, which unanimously, including all disinterested members,
approved the Memorandum. The Memorandum will be subject to the future review
of the Board of Directors of the Company regarding affiliate transactions. See
"--Future Transactions."
Affiliate Loans. In March 1996, the Company sold a portion of its embroidery
equipment to Impact Design, Inc. for $181,000. The purchase price for the
equipment was determined by reference to its book value and resulted in no
gain or loss to the Company. To finance the acquisition of embroidery
equipment by the Affiliate and to provide for working capital for both of the
Affiliates, the Company loaned $150,000 to Kansas City Embroidery (the "Kansas
Loan") and $700,000 to Impact Design, Inc. (the "Impact Loan") under separate
promissory notes. Each of the promissory notes is unsecured, has an interest
rate of 6.8% per annum and matures July 1, 2000. The Impact Loan, which was
executed on August 12, 1996, was paid off subsequent to year end while the
Kansas Loan, which was executed on August 12, 1996, was paid off on June 17,
1997. The Impact Loan was repaid through monthly installments of interest,
which commenced on August 31, 1996, and semiannual repayments of principal of
$87,500, which commenced on January 1, 1997, with a final payment of principal
of $525,000 subsequent to year end. The Kansas Loan was repaid in monthly
installments of interest, which commenced on August 31, 1996, a repayment of
principal on January 1, 1997 of $25,000, and a final repayment of principal of
$125,000 on June 17, 1997. The Company believes the terms of the loans and the
sale of the equipment were on terms as favorable as could have been received
from disinterested third parties.
Wolff Employment Agreement. Effective upon the consummation of the
Transactions, the Company entered into the Wolff Employment Agreement. See
"Management." Pursuant to the Wolff Employment Agreement, Mr. Wolff will serve
as Chairman of the Company for a ten-year period ending on the tenth
anniversary of the Acquisition. In exchange for his services, the Company 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 other Company
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 the
Company due to his dismissal for Cause (as defined in the Wolff Employment
Agreement), he will no longer be entitled to any compensation from the Company
as of the date of his dismissal, subject to certain rights of appeal.
Wolff Noncompetition Agreement. Effective upon the consummation of the
Transactions, the Company entered into the Wolff Noncompetition Agreement. See
"Management." Pursuant to the Wolff Noncompetition Agreement, Mr. Wolff will
not, directly or indirectly, (i) (a) engage in or have any active interest in
any sportswear or activewear business comparable to that of the Company or (b)
sell to, supply, provide goods or services to, purchase from or conduct
business in any form with the Company for a ten-year period ending on the
tenth anniversary of the Acquisition, (ii) disclose at any time other than to
the Company any Confidential Information (as defined in the Wolff
Noncompetition Agreement) and (iii) engage in any business with the Company
through an affiliate for as long as Mr. Wolff or any member of his family is
the beneficial owner of Holdings' capital stock. In exchange for his covenant
not to compete, Holdings will pay to 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), the
Company 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.
Management Investors Loans. In connection with the consummation of the
Transactions, Holdings loaned approximately $0.8 million to certain Management
Investors to finance a portion of their purchase of capital stock of Holdings.
The aggregate outstanding balances on the loans is $788,500. Each of these
loans was executed on February 27, 1997, is secured by a pledge of the common
stock, has an interest rate of 6.75% per annum and matures on June 30, 2007.
The principal amount of each loan is due and payable on the earlier of June
30, 2007 or within ninety days after the borrower ceases to be employed by the
Company. Interest is due and payable on June 30 of each year at which point
the borrower, at his or her option, may pay one-half of the
78
interest accrued from July 1 of the prior year, with the other one-half
continuing to accrue interest at the same rate of interest, or pay all
interest accrued from July 1 of the prior year. The Company believes the terms
of the loans were on terms comparable to terms that could have been received
from disinterested third parties.
The Management Investors who borrowed from Holdings are as follows:
LOAN AMOUNT INTEREST RATE
----------- -------------
Jason Krakow.................................... $100,000 6.75%
Frank Pikus..................................... 115,600 6.75%
Carl Allard..................................... 173,400 6.75%
Howie Ellis..................................... 144,500 6.75%
Scott Durham.................................... 57,800 6.75%
Tom Martin...................................... 57,800 6.75%
John White...................................... 57,800 6.75%
Sue Agnitsch.................................... 28,900 6.75%
Dave Hosier..................................... 23,800 6.75%
Jim Keaton...................................... 28,900 6.75%
--------
Total........................................... $788,500
========
Management Stock Purchases. On July 1, 1995, Mr. Gary and Mr. Menghini
purchased 6,000 and 7,000 shares of the common stock of Holdings (at $70.00
per share), respectively, for an aggregate purchase price of $420,000 and
$490,000, respectively.
Incentive Compensation Plan. The Company will adopt on or prior to January
1, 1998, the Incentive Plan, which will provide for annual cash bonuses
payable based on a percentage of EBITDA (as defined in the Incentive Plan), if
certain EBITDA targets are met.
Indemnification Agreements. Simultaneously with the consummation of the GFSI
Offering, the Company and each of its directors entered into indemnification
agreements. The indemnification agreements provide that GFSI 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 the Company) 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 the Company, or serving at the request of the Company in any other capacity
for or on behalf of the Company; provided that (i) such director acted in good
faith and in a manner not opposed to the best interest of the Company, (ii)
with respect to any criminal proceedings had no reasonable cause to believe
his or her conduct was unlawful, (iii) such director is not finally adjudged
to be liable for negligence or misconduct in the performance of his or her
duty to the Company, unless the court views in light of the circumstances the
director is nevertheless entitled to indemnification, and (iv) 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 the Company, 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 the Company.
Future Transactions. The Company has adopted a policy, effective
simultaneously with the consummation of the GFSI Offering, to provide that
future transactions between the Company and its 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 the Company than could be obtained from
unaffiliated third parties.
79
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 meeting the
requirements of the Securities Act 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. The Company has agreed
that for a period of 120 days after the Expiration Date, it will make available
a prospectus meeting the requirements of the securities Act to any broker-
dealer for use in connection with any such resale. In addition, until
, 1997, all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company 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 and 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.
80
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion is a summary of the material United States federal
income tax considerations relevant to the acquisition, ownership and
disposition of the New Notes acquired in the Exchange Offer by holders of Old
Notes, but does not purport to be a complete analysis of all potential tax
effects. To the extent that it relates to matters of law or legal conclusions,
this summary constitutes the opinion of Mayer, Brown & Platt. The discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service ("Service") rulings and
pronouncements and judicial decisions all in effect as of the date hereof, all
of which are subject to change at any time, and any such change may be applied
retroactively in a manner that could adversely affect a holder of the New
Notes. The discussion does not address all of the federal income tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as
certain financial institutions, insurance companies, dealers in securities and
persons holding the New Notes as part of a "straddle," "hedge" or "conversion
transaction." Moreover, the effect of any applicable state, local or foreign
tax laws is not discussed. The discussion deals only with New Notes held as
"capital assets" within the meaning of section 1221 of the Code.
Unless otherwise indicated, the term "Holder" as used herein means a "U.S.
Holders," which is a beneficial owner of a New Note who or which is for U.S.
federal income tax purposes (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a "U.S. Trust." A U.S. Trust is (a) for
taxable years beginning after December 31, 1996, or if the trustee of a trust
elects to apply the following definition to an earlier taxable year ending
after August 20, 1996, any trust if, and only if, (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more U.S. persons have the authority to control
all substantial decisions of the trust and (b) for all other taxable years,
any trust whose income is includible in gross income for U.S. federal income
tax purposes regardless of its source. The term U.S. Holder also includes
certain former U.S. citizens whose income and gain on the New Notes will be
subject to U.S. taxation. As used herein, the term "Non-U.S. Holder" means a
beneficial owner of a New Note that is not a U.S. Holder.
Holdings has not sought and will not seek any rulings from the Service with
respect to any position of Holdings discussed below. There can be no assurance
that the Service will not take a different position from Holdings concerning
aspects of the tax consequences of the acquisition, ownership or disposition
of the New Notes or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS.
CONSEQUENCES OF THE EXCHANGE OFFER 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 an exchanging Holder for U.S. 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; (iii) the basis of the New Note will be
the same as the basis for the Old Note; and (iv) the original issue discount
("OID") on the New Note will be the same as on the Old Note.
The Exchange Offer will result in no federal income tax consequences to a
nonexchanging Holder of Old Notes.
81
CLASSIFICATION OF NOTES
Although the characterization of an instrument as debt is a facts and
circumstances determination that cannot be predicted with certainty, the Old
Notes and the New Notes (collectively, the "Notes") should be treated as debt
for federal income tax purposes. Accordingly, Holdings intends to treat the
Notes as debt for federal income tax purposes, and the remainder of this
discussion assumes that such treatment will be respected.
LIQUIDATED DAMAGES
Payments on Registration Default. Because the Notes provide for the payment
of additional amounts of interest under the circumstances described in "The
Exchange Offer--Registration Rights; Liquidated Damages," the Notes will be
subject to the Treasury Regulations that apply to debt instruments that
provide for one or more contingent payments. Under those Treasury Regulations,
however, a payment is not a contingent payment merely because of a contingency
that, as of the issue date, is either "remote" or "incidental." Holdings
intends to take the position that, solely for these purposes, the payment of
such additional interest is a remote or incidental contingency, in which case
the possibility of such payment would not, as of the issue date, cause the
Notes to be treated as having been issued with original issue discount, and
the rules described below under "--Consequences of Holding New Notes" would
apply. Holdings' determination that such payments are a remote or incidental
contingency for these purposes is binding on a Holder, unless such Holder
discloses in the proper manner to the Service that it is taking a different
position.
If Holdings becomes obligated to pay additional interest as a result of a
Registration Default, a Holder would generally be required to include any such
amounts in income as ordinary income when received or accrued, in accordance
with such Holder's method of accounting for federal income tax purposes. In
addition, the Notes would be treated as having been reissued for purposes of
applying the OID rules. If, at the time of such deemed reissuance, the
possibility that Holdings would be required to make additional payments of
interest is not a remote or incidental contingency, a Holder could be required
to accrue all payments on the Notes (including amounts that would otherwise
constitute de minimus OID and projected payments of additional interest) on a
constant yield basis (including Holders who otherwise use a cash method of
accounting for federal income tax purposes), and in certain circumstances to
include market discount in income sooner than otherwise required and to treat
as interest income any gain recognized on the disposition of the debt
instrument (rather than as capital gain).
CONSEQUENCES OF HOLDING NEW NOTES
Original Issue Discount. If the stated redemption price at maturity of the
New Notes exceeds their issue price by more than a de minimis amount, the New
Notes will be treated as having OID equal to the entire amount of such excess.
Holdings intends to treat the Old Exchange attributable to the Subordinated
Note portion of the Unit exchanged for Old Notes as a non-event (i.e., not
resulting in an "exchange") for federal income tax purposes; rather, to that
extent, Holdings will treat such Old Notes as continuations of the
Subordinated Discount Notes. Holdings intends to take the position that the
Old Notes received in the Old Exchange for the Preferred Stock are part of the
same "issue" as the Old Notes exchanged for the Subordinated Discount Notes.
If such treatment is respected, for federal income tax purposes, the Old
Notes, whether exchanged for the Preferred Stock or the Subordinated Discount
Notes, and the New Notes will be treated as having the same issue price as the
Subordinated Discount Notes. Holdings intends to take the position that the
Subordinated Discount Notes have an issue price equal to their Issue Price. In
addition, the original issue discount on Old Notes will be the same as the
original issue discount on the Subordinated Discount Notes exchange for such
Old Notes. Since the portion of the Old Notes received in exchange for the
Preferred Stock will have been acquired in a taxable exchange, however the
holding period of the portion of the Old Notes received for the Preferred
Stock, and hence of the New Notes received in exchange for such Old Notes,
will start on the date following the Old Exchange, and the basis of such
portion of the New Notes will equal the adjusted issue price of the Old Notes
as of the date of the Old Exchange.
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The Service might take a different position, however, as to whether the Old
Notes exchanged for Preferred Stock and the Old Notes exchanged for the
Subordinated Discount Notes are part of the same "issue." If the Service takes
the view that an Old Note exchanged for the Preferred Stock (a "Preferred
Stock Exchange Note") is not part of the same "issue" as an Old Note exchanged
for the Subordinated Discount Notes (a "Subordinated Discount Exchange Note"),
and such view is respected, the tax characteristics of the Preferred Stock
Exchange Notes might be different from those of the Subordinated Discount
Exchange Notes and such Preferred Stock Exchange Notes might trade separately.
In such event, if the Preferred Stock Exchange Notes are deemed to be traded
on an established securities market on or at any time during the 60-day period
ending 30 days after their issue date, the issue price of the Preferred Stock
Exchange Notes would be their fair market value as determined as of their
issue date (the first date on which a substantial amount of the Old Notes is
issued). Subject to certain limitations described in the applicable Treasury
regulations, the Preferred Stock Exchange Notes will be deemed to be traded on
an established securities market if, among other things, price quotations are
readily available from dealers, brokers or traders or the Preferred Stock
Exchange Notes are listed on certain exchanges or interdealer quotation
systems. Similarly, if the Units, but not the Old Notes issued and exchanged
therefor, are deemed to be traded on an established securities market at the
time of the Old Exchange, then the issue price of each Preferred Stock
Exchange Note would be the fair market value of the portion of the Units
exchanged therefor at the time of the Old Exchange. In the event that neither
the Preferred Stock nor the Units are deemed to be traded on an established
securities market, the issue price of the Preferred Stock Exchange Notes would
be determined under the rules of Section 1274. Under Section 1274, the issue
price of the Preferred Stock Exchange Notes generally would be their "stated
principal amount" or, in the event the Preferred Stock Exchange Notes do not
bear "adequate stated interest" within the meaning of Section 1274, their
"imputed principal amount," which is generally the sum of the present values
of all payments due under the Preferred Stock Exchange Notes, discounted from
the date of payment to their issue date at the appropriate "applicable federal
rate."
Payments and Accruals on New Notes. The stated redemption price at maturity
of the New Notes will equal the total of all payments required to be made
thereon, other than payments of qualified stated interest. Qualified stated
interest generally is stated interest that is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually at a
single fixed rate. Therefore, because no interest is required to be paid in
cash on the New Notes until March 15, 2005, the New Notes should be treated as
having been issued without any qualified stated interest. Accordingly, the sum
of all interest payable pursuant to the stated interest rate on the New Notes
over the entire term should be treated as part of the stated redemption price
at maturity.
A Holder of a New Note will be required to include OID in income
periodically over the term of an New Note before receipt of the cash or other
payment attributable to such income. In general, a Holder must include in
gross income for federal income tax purposes the sum of the daily portions of
OID with respect to the New Notes for each day during the taxable year or
portion of a taxable year on which such Holder holds the New Note ("Accrued
OID"). The daily portion is determined by allocating to each day of any
accrual period within a taxable year a pro rata portion of an amount equal to
the adjusted issue price of the New Note at the beginning of the accrual
period multiplied by the yield to maturity of the New Note. For purposes of
computing OID, Holdings will use six-month accrual periods which end on the
date in the calendar year corresponding to the maturity date of the New Notes
and the date six months prior to such maturity date, with the exception of a
short initial accrual period. The adjusted issue price of a New Note at the
beginning of any accrual period is the issue price of the New Note increased
by the Accrued OID for all prior accrual periods (less any cash payments on
the New Notes other than qualified stated interest). Under these rules,
Holders will have to include in gross income increasingly greater amounts of
OID in each successive accrual period. Each payment made under a New Note
(except for payments of qualified stated interest) will be treated first as a
payment of OID to the extent of OID that has accrued as of the date of payment
and has not been allocated to prior payments and second as a payment of
principal.
Optional Redemption. Holdings' option to redeem the New Notes at any time on
or after March 15, 1998 should be treated as a "call option" within the
meaning of the OID Regulations. See "Description of Notes--Redemption of
Notes--Optional Redemption." As a result, Holdings would be presumed under the
OID
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Regulations to exercise its option to redeem the New Notes if by utilizing the
date of exercise of a call option as the maturity date and the amount for
which the New Notes could be redeemed in accordance with the terms of the
redemption feature (that is, the principal amount plus redemption premium, if
any, plus accrued interest) as the stated redemption price at maturity, the
yield on the New Notes would be lower than such yield would be if the option
was not exercised. Because the exercise by Holdings of its call option at any
time on or after March 15, 1998 and before September 15, 2005 would result in
a higher yield than if such call option were not exercised, such call option
should be presumed to not be exercised under the OID Regulations.
In addition to the optional redemption described above, a Holder will have
the right to tender New Notes to Holdings for redemption should Holdings
experience a Change of Control. See "Description of Notes--Mandatory Offers to
Purchase Notes." Such additional redemption rights should not affect, and will
be treated by Holdings as not affecting, the determination of the yield or
maturity of the New Notes.
TAXABLE DISPOSITION OF NEW NOTES
Generally, any sale or redemption of New Notes will result in taxable gain
or loss equal to the difference between the amount of cash or other property
received (except to the extent the consideration received is attributable to
qualified stated interest not previously taken into account, which
consideration is treated as interest received) and the Holder's adjusted tax
basis in the New Notes. A Holder's initial tax basis in a New Note will be the
sum of (1) the Holder's basis in the Subordinated Note portion of the Unit for
which the Old Note was issued (and, if the Old Exchange is treated as an
exchange for federal income tax purposes, such basis will be increased by the
amount of gain, if any, recognized by such Holder on the Old Exchange with
respect to such Subordinated Note and reduced by the fair market value of (x)
the excess, if any, of the "principal amount" of the Old Notes received by
such Holder in the Old Exchange for Subordinated Discount Notes over the
"principal amount" of the Subordinated Discount Notes given up in the Old
Exchange, and (2) the issue price of the portion of the Old Note that is
attributable to the Preferred Stock portion of the Unit. A Holder's adjusted
tax basis will be the Holder's initial tax basis, increased by any Accrued OID
with respect to any New Note includable in such Holder's gross income and
decreased by the amount of any cash payments (other than payments of qualified
stated interest) received by such Holder regardless of whether such payments
are denominated as interest. Any gain or loss upon a sale or disposition of an
New Note by an original Holder will generally be capital gain or loss. The
recently enacted Taxpayer Relief Act of 1997 made certain changes to the Code
with respect to taxation of capital gains of taxpayers other than corporations
that are U.S. Holders. In general, the maximum tax rate for non-corporate
taxpayers on long-term capital gains has been lowered to 20% from the previous
28% rate for most capital assets (including the New Notes) held for more than
18 months. For taxpayers in the 15% regular tax bracket, the maximum tax rate
on long-term capital gains is now 10%. Capital gain on such assets having a
holding period of more than one year but not more than 18 months will be
subject to a maximum tax rate of 28%.
Treatment of New Notes Purchased at a Premium or Market Discount. A Holder
that purchases or otherwise acquires an New Note at a premium (defined under
the OID Regulations as an amount paid in excess of all amounts payable on the
instrument after the purchase other than qualified stated interest) will not
be subject to the OID rules, and may elect to amortize the "amortizable bond
premium" (defined generally under the Code as an amount paid in excess of the
amount payable at maturity), in which case the amount required to be included
in the Holder's income each year with respect to interest on the New Note will
be reduced by the amount of amortizable bond premium allocable (based on the
Holder's yield to maturity) to such year. Any such election shall apply to all
bonds (other than bonds the interest on which is excludable from gross income)
held by the Holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the Holder and is irrevocable
without the consent of the Service.
A Holder that purchases a New Note issued with OID at an acquisition premium
(defined under the OID Regulations as an amount paid in excess of its adjusted
issue price but less than or equal to all amounts payable on the instrument
after the purchase other than qualified stated interest) will be subject to
the OID rules, but will
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proportionately reduce the daily portions of OID includible in income to
reflect the premium paid relative to issue price. In lieu of such offset, the
Holder may compute accruals by treating the purchase price as the issue price
and applying the constant yield method.
If a Holder of a New Note that had an initial tax basis in such New Note
which is less than the issue price of such New Note, subsequently disposes of
such New Note, holds it until maturity or receives a principal payment, any
gain upon a sale or other disposition (including certain nontaxable
dispositions such as a gift and the receipt of principal payments) will be
recognized and treated as ordinary income to the extent of any "market
discount" accrued for the period that such Holder holds the New Note.
Market discount generally will equal the excess, if any, of the adjusted
basis that the New Note would have in the hands of the original Holder (or in
the case of a New Note issued with the original issue discount, the issue
price plus the aggregate amount of original issue discount previously accrued
thereon) over the purchaser's basis in the New Note immediately after such
purchaser acquired the New Note. In general, market discount on a New Note
will be treated as accruing ratably over the term of such New Note, or at the
irrevocable election of the Holder, under a constant yield method.
A Holder of a New Note with market discount may be required to defer, until
the maturity of the New Note or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such New Note. Such
Holder may instead elect to include market discount in income as it accrues,
in which case the rule described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquire on or
after the first taxable year to which the election applies, and may not be
revoked without the consent of the Service.
NON-U.S. HOLDERS
Interest and OID on New Notes. Payments of interest and Accrued OID on the
New Notes by Holdings or any paying agent to a beneficial owner of a New Note
that is a Non-U.S. Holder will not be subject to U.S. federal withholding tax,
provided that, (i) such Holder does not own, actually or constructively, 10
percent or more of the total combined voting power of all classes of stock of
Holdings entitled to vote; (ii) such Holder is not, for U.S. federal income
tax purposes, a controlled foreign corporation related, directly or
indirectly, to Holdings through stock ownership; (iii) such Holder is not a
bank receiving interest described in Section 881(c)(3)(A) of the Code; and
(iv) certain certification requirements (summarized below) are met. If a Non-
U.S. Holder of a New Note is engaged in a trade or business in the United
States, and if interest or OID on the New Note is effectively connected with
the conduct of such trade or business (and, if certain tax treaties apply, is
attributable to a U.S. permanent establishment maintained by the Non-U.S.
Holder) the Non-U.S. Holder, although exempt from U.S. withholding tax, will
generally be subject to regular U.S. income tax on such interest or OID in the
same manner as if it were a U.S. Holder. In addition, if such Non-U.S. Holder
is a foreign corporation, it may be subject to a branch profits tax equal to
30% (or such lower rate provided by an applicable treaty) of its effectively
connected earnings and profits for the taxable year, subject to certain
adjustments. For purposes of the branch profits tax, interest or OID on an New
Note will be included in the earnings and profits of such Non-U.S. Holder if
such interest or OID is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States.
Under current Treasury Regulations, in order to obtain the exemption from
withholding tax described in the first sentence of the preceding paragraph,
either (i) the beneficial owner of a New Note must certify on Internal Revenue
Service Form W-8 or a substitute form that is substantially similar to Form W-
8, under penalties of perjury, to Holdings or a paying agent, as the case may
be, that such owner is a Non-U.S. Holder and must provide such owner's name
and address or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business (a "Financial Institution") and holds the New Note on
behalf of the beneficial owner thereof must certify, under penalties of
perjury, to Holdings or paying agent, as the case may be, that such
certificate has been received from the
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beneficial owner by it or by a Financial Institution between it and the
beneficial owner and must furnish the payor with a copy thereof. A certificate
described in this paragraph is effective only with respect to payments of
interest or Accrued OID made to the certifying Non-U.S. Holder after delivery
of the certificate in the calendar year of its delivery and the two
immediately succeeding calendar years. In lieu of the certificate described in
this paragraph, a Non-U.S. Holder engaged in a trade or business in the United
States (with which interest payments or OID accruals on the New Note are
effectively connected) must provide to Holdings a properly executed Internal
Revenue Service Form 4224 in order to claim an exemption from withholding tax.
On October 14, 1997, the Service published in the Federal Register final
regulations (the "1997 Final Regulations") which affect the United States
taxation of Non-U.S. Holders. The 1997 Final Regulations are effective for
payments after December 31, 1998, regardless of the issue date of the
instrument with respect to which such payments are made, subject to certain
transition rules (see below). The discussion under this heading and under
"Backup Withholding and Information Reporting," below, is not intended to be
complete discussion of the provisions of the 1997 Final Regulations, and
holders of Notes are urged to consult their tax advisors concerning the tax
consequences of their investment in light of the 1997 Final Regulations.
The 1997 Final Regulations provide documentation procedures designed to
simplify compliance by withholding agents. The 1997 Final Regulations
generally do not affect the documentation rules described above, but added
other certification options. Under one such option, a withholding agent will
be allowed to rely on an intermediary withholding certificate furnished by a
"qualified intermediary" (as defined below) on behalf of one or more
beneficial owners (or other intermediaries) without having to obtain the
beneficial owner certificate described above. "Qualified intermediaries"
include: (i) foreign financial institutions or foreign clearing organizations
(other than a U.S. branch or U.S. office of such institution or organization)
or (ii) foreign branches or offices of U.S. financial institutions or foreign
branches or offices of U.S. clearing organizations, which, as to both (i) and
(ii), have entered into withholding agreements with the Service. In addition
to certain other requirements, qualified intermediaries must obtain
withholding certificates, such as revised Internal Revenue Service Form W-8
(see below), from each beneficial owner. Under another option, an authorized
foreign agent of a United States withholding agent will be permitted to act on
behalf of the United States withholding agent, provided certain conditions are
met.
For purposes of the certification requirements, the 1997 Final regulations
generally treat as the beneficial owners of payments on a Note those persons
that, under United States tax principles, are the taxpayers with respect to
such payments rather than persons such as nominees or agents legally entitled
to such payments. In the case of payments to an entity classified as a foreign
partnership under United States tax principles, the partners rather than the
partnership, generally will be required to provide the required certifications
to qualify for the withholding exemption described above. A payment to a
United States partnership, however, is treated for these purposes as payment
to a United States payee, even if the partnership has one or more foreign
partners. The 1997 Final Regulations provide certain presumptions with respect
to withholding for holders not furnishing the required certifications to
qualify for the withholding exemption described above. In addition, the 1997
Final Regulations will replace a number of current tax certification forms
(including Internal Revenue Service Form W-8) with a single, revised Internal
Revenue Service Form W-8 (which, in certain circumstances, requires
information in addition to that previously required). Under the 1997 Final
Regulations, this Form w-8 will remain valid until the last day of the third
calendar year following the year in which the certificate is signed.
Under the 1997 Final Regulations, withholding of United States federal
income tax may apply to payments on a taxable sale or other disposition of a
Note by a Non-U.S. Holder who does not provide appropriate certification to
the withholding agent with respect to such transaction.
The 1997 Final Regulations provide transition rules concerning existing
certificates, such a Internal Revenue Service Form W-8. Valid withholding
certificates that are held on December 31, 1998 will generally remain valid
until the earlier of December 31, 1999 or the date of expiration of the
certificate under the law in effect prior to January 1, 1999. Further,
certificates dated prior to January 1, 1998 will generally remain valid until
the end of 1998, irrespective of the fact that their validity expires during
1998.
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Disposition of New Notes. Under current law, a Non-U.S. Holder of a New Note
generally will not be subject to U.S. federal income tax on any gain
recognized on the sale, exchange or other disposition of such New Note, unless
(i) the gain is effectively connected with the conduct of a trade or business
in the United States of the non-U.S. Holder (and, if certain tax treaties
apply, is attributable to a U.S. permanent establishment maintained by the
Non-U.S. Holder); (ii) the Non-U.S. Holder is an individual who holds the New
Note as a capital asset, is present in the United States for 183 days or more
in the taxable year of the disposition and either (a) such individual has a
U.S. "tax home" (as defined for U.S. federal income tax purposes) or (b) the
gain is attributable to an office or other fixed place of business maintained
in the United States by such individual; or (iii) the non-U.S. Holder is
subject to tax pursuant to the Code provisions applicable to certain U.S.
expatriates. In the case of a Non-U.S. Holder that is described under clause
(i) above, its gain will be subject to the U.S. federal income tax on net
income that applies to U.S. persons and, in addition, if such Non-U.S. Holder
is a foreign corporation, it may be subject to the branch profits tax as
described above. An individual Non-U.S. Holder that is described under clause
(ii) above will be subject to a flat 30% tax on gain on the derived from the
sale, which may be offset by U.S. capital losses (notwithstanding the fact
that he or she is not considered a U.S. resident). Thus, individual Non-U.S.
Holders who have spent 183 days or more in the United States in the taxable
year in which they contemplate a sale of an New Note are urged to consult
their tax advisers as to the tax consequences of such sale.
A New Note held by an individual who is not a U.S. citizen or resident (as
specially defined for United States federal estate tax purposes) at the time
of his death will not be subject to U.S. federal estate tax as a result of
such individual's death, provided that, at the time of such individual's
death, the individual does not own, actually or constructively, 10 percent or
more of the total combined voting power of all classes of stock of Holdings
entitled to vote and payments with respect to such New Note would not have
been effectively connected with the conduct by such individual of a trade or
business in the United States.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDINGS AND TO CORPORATE HOLDERS
The New Notes will constitute "applicable high yield discount obligations"
("AHYDOs") if the yield to maturity of such New Notes is equal to or greater
than the sum of the relevant applicable federal rate (the "AFR") plus five
percentage points. The relevant AFR for debt instruments issued in September
1997 is 6.45% compounded semi-annually. If the yield to maturity on the New
Notes were to equal or exceed the sum of the AFR plus five percentage points,
such New Notes would constitute AHYDOs. Therefore, a portion of the tax
deductions that would otherwise be available to Holdings in respect of such
New Notes would be deferred, which, in turn, would reduce the after-tax cash
flows of Holdings. If the New Notes were to constitute AHYDOs, Holdings would
not be entitled to deduct OID that accrues with respect to such New Notes
until amounts attributable to OID are paid in cash. If the yield to maturity
of the New Notes were to equal or exceed the sum of the relevant AFR plus six
percentage points (the "Excess Yield"), the "disqualified portion" of the OID
accruing on such New Notes would be characterized as a non-deductible dividend
with respect to Holdings and also may be treated as a dividend distribution
solely for purposes of the dividends received deduction of Sections 243, 246
and 246A of the Code with respect to Holders which are corporations. In
general, the "disqualified portion" of OID for any accrual period will be
equal to the product of (i) as a percentage determined by dividing the Excess
Yield by the yield to maturity; and (ii) the OID for the accrual period.
Subject to otherwise applicable limitations, such a corporate holder would be
entitled to a dividends received deduction with respect to the disqualified
portion of the accrued OID if Holdings has sufficient current or accumulated
"earnings and profits." To the extent that Holdings's earnings and profits are
insufficient, any portion of the OID that otherwise would have been
recharacterized as a dividend for purposes of the dividends-received deduction
will continue to be taxed as ordinary OID income in accordance with the rules
described above in "--Acquisition and Holding of New Notes--Original Issue
Discount." Assuming that Holdings' position with respect to the issue price of
the Old Notes described above in "--Acquisition and Holding of New Notes--
Original Issue Discount" is sustained, the New Notes will be treated as being
issued on the same issue date and at the same issue price as the Subordinated
Discount Notes. Since the yield to maturity of the Subordinated Discount Notes
was less than the AFR plus five percentage points, the yield to maturity on
the New Notes should be less than the AFR plus
87
five percentage points. However, if Holdings' position with respect to the
issue price of the Old Notes were not sustained, it would be impossible to
determine at the present time whether the yield to maturity on the New Notes
would equal or exceed the sum of the AFR plus five or six percentage points.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Under current United States federal income tax law, information reporting
requirements apply to interest (including OID) and principal payments made to,
and to the proceeds of sales before maturity by, certain non-corporate
persons. In addition, a 31% backup withholding tax applies if a non-corporate
person (i) fails to furnish such person's Taxpayer Identification Number
("TIN") (which, for an individual, is his or her Social Security Number) to
the payor in the manner required, (ii) furnishes an incorrect TIN and the
payor is so notified by the Service, (iii) is notified by the Service that
such person has failed properly to report payments of interest and dividends
or (iv) in certain circumstances, fails to certify, under penalties of
perjury, that such person has not been notified by the Service that such
person is subject to the backup withholding for failure properly to report
interest and dividend payments. Backup withholding does not apply with respect
to payments made to certain exempt recipients, such as corporations and tax-
exempt organizations.
In the case of a Non-U.S. Holder, under current United States federal income
tax law backup withholding and information reporting do not apply to payments
of principal and interest (including OID) with respect to a Note, or to
payments on the sale, exchange, redemption or retirement of a Note, if such
Holder has provided the required certification under penalties of perjury that
such Holder is a Non-U.S. Holder or has otherwise established an exemption.
Under current United States federal income tax law, (i) principal or
interest payments (including OID) with respect to a Note collected outside the
United States by a foreign office of a custodian, nominee or broker acting on
behalf of a beneficial owner of a Note and (ii) payments on the sale,
exchange, redemption or retirement of a Note to or through a foreign office of
a broker are not generally subject to backup withholding or information
reporting. However, if such custodian, nominee or broker is a United States
person, a controlled foreign corporation for United States tax purposes, or a
foreign person 50% of more of whose gross income is effectively connected with
the conduct of a United States trade or business for a specified three-year
period, such custodian, nominee or broker may be subject to certain
information reporting (but not backup withholding) requirements with respect
to such payments, unless such custodian, nominee or broker has in its records
documentary evidence that the beneficial owner is not a United States person
and certain conditions are met or the beneficial owner otherwise establishes
an exemption.
In the case of a Non-U.S. Holder, under the 1997 Final Regulations, backup
withholding and information reporting will not apply to payments of principal
and interest (including OID) with respect to a Note if such Holder provides
the required certification to establish an exemption from the withholding of
the United States federal income tax or otherwise establishes an exemption.
In the case of a Non-U.S. Holder, under the 1997 Final Regulations, backup
withholding and information reporting will not apply to payments of principal
and interest (including OID) with respect to a Note if such Holder provides
the required certification to establish an exemption from the withholding of
the United States federal income tax or otherwise establishes an exemption.
Under the 1997 Final Regulations, payments of principal and interest
(including OID) with respect to a Note made to a custodian, nominee or broker
will not be subject to backup withholding or information reporting,
irrespective of the place of payment or the location of the office of the
custodian, nominee or broker, although payments of interest (including OID)
with respect to a Note paid to a foreign intermediary (whether or not a
qualified intermediary) will be subject to withholding of United States
federal income tax at the rate of 30% unless the beneficial owner (whether or
not a United States person) establishes an exemption by furnishing a
withholding certificate or other appropriate documentation. Unless the
beneficial owner establishes an exemption, a payment by a custodian, nominee
or broker may be subject to information reporting and, unless (i) the payment
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has been subject to withholding of United States federal income tax at the
rate of 30% or (ii) the payment is made outside the United States to an
offshore account in a financial institution that maintains certain procedure
related to account documentation, to backup withholding as well.
Under the 1997 Final Regulations, payments on the sale, exchange, redemption
or retirement of a Note to or through a broker may be subject to information
reporting and backup withholding unless (i) the transaction is effected
outside the United States and the broker is not a United States person, a
controlled foreign corporation for United States tax purposes, a United States
branch of a foreign back or foreign insurance company, a foreign partnership
controlled by United States persons or engaged in a United States trade or
business or a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a
specified three-year period or (ii) the beneficial owner otherwise establishes
an exemption.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a person under the backup withholding rules are
allowed as a refund or a credit against such person's United States federal
income tax, provided that the required information is furnished to the
Service.
INFORMATION REPORTING
Holdings is required to furnish certain information to the Service and will
furnish annually to record holders of the New Notes information with respect
to dividends or interest paid, or OID accruing, as the case may be, on the New
Notes during the calendar year. The information with respect to OID (if any)
accruing on the New Notes will be based on the adjusted issue price of the New
Notes and will be applicable if the holder is an original holder of the New
Notes who acquired the Old Notes in exchange for the Units. Subsequent holders
who purchase New Notes for an amount other than the adjusted issue price
and/or on a date other than the last day of an accrual period will be required
to determine for themselves the amount of OID, if any, they are required to
include in gross income for federal income tax purposes.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Company by Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt also
represents TJC and its affiliates from time to time in connection with its
various acquisitions and divestitures.
EXPERTS
The financial statements of GFSI Holdings, Inc. and subsidiary as of June
30, 1996 and June 27, 1997 and for the years then ended included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Winning Ways as of and for the year ended June
30, 1995 included in this Prospectus have been audited by Donnelly Meiners
Jordan Kline, 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.
On January 2, 1997, Holdings by resolution of the Board of Directors,
appointed Deloitte & Touche LLP as its independent auditors, effective January
6, 1997, replacing Donnelly Meiners Jordan Kline, the previous independent
auditors of Holdings.
In connection with its audit for the fiscal year ended June 30, 1995 and
through January 2, 1997, Holdings had no disagreements with Donnelly Meiners
Jordan Kline on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the
89
satisfaction of Donnelly Meiners Jordan Kline would have caused them to make
reference thereto in their report on the financial statements for such
periods. Donnelly Meiners Jordan Kline has furnished a letter addressed to the
Commission stating that it agrees with the above statements.
Holdings currently engages Deloitte & Touche LLP as its independent
auditors. During the most recent fiscal year and through the date of this
Registration Statement, Holdings has not consulted with Deloitte & Touche LLP
on items which concerned the subject matter of a disagreement or reportable
event with the former auditor.
AVAILABLE INFORMATION
The Company has 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 the
Company and the New Notes, reference is hereby made t 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. Upon consummation of the Exchange Offer, the Company will
become subject to the periodic and other informational requirements of the
Exchange Act. Periodic reports and other information filed by the Company with
the Commission may be inspected at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20540, or at its regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, New
York, New York 10048 at prescribed rates. Such materials may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
90
GFSI HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The following sets forth the Unaudited Pro Forma Balance Sheet and the
Unaudited Pro Forma Statement of Income of GFSI Holdings, Inc. and subsidiary
(the "Company") giving effect to the transactions described in Note 1 of the
Notes to the Unaudited Pro Forma Financial Statements as if such transactions
had been consummated on June 27, 1997 (in the case of the Unaudited Pro Forma
Balance Sheet) and at the beginning of the earliest period presented (in the
case of the Unaudited Pro Forma Statement of Income). The Unaudited Pro Forma
Financial Statements of the Company do not purport to present the financial
position or results of operations of Holdings had the transactions assumed
herein occurred on the date indicated, nor are they necessarily indicative of
the results of operations which may be expected to occur in the future.
The acquisition of Winning Ways has been accounted for as a leveraged
recapitalization, and accordingly, the accompanying Unaudited Pro Forma
Financial Statements reflect no change in the accounting basis of GFSI's
assets and liabilities for financial accounting purposes.
P-1
GFSI HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 27, 1997
PRO FORMA ADJUSTMENT
-------------------------------------------
HISTORICAL DR CR PRO FORMA
---------- ------- ------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...... $ 1,117 $ 788(2) $ 758(2) $ 1,147
Accounts receivable............ 23,705 23,705
Inventories.................... 37,562 37,562
Deferred income taxes.......... 927 927
Prepaid expenses and other
current assets................ 1,286 1,286
--------- ------- ------- ---------
Total current assets......... 64,597 788 758 64,627
PROPERTY, PLANT AND EQUIPMENT,
NET............................. 21,548 21,548
OTHER ASSETS:
Deferred financing costs....... 10,004 275(3) 344(3) 9,935
Other.......................... 4 4
--------- ------- ------- ---------
TOTAL............................ $ 96,153 $ 1,063 $ 1,102 $ 96,114
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............... $ 12,198 $ 12,198
Accrued interest payable....... 4,720 4,720
Accrued expenses............... 5,543 $ 483(4) 5,060
Income taxes payable........... 200 138(5) 62
Current portion of long-term
debt.......................... 3,375 3,375
--------- ------- ------- ---------
Total current liabilities.... 26,036 621 25,415
DEFERRED INCOME TAXES............ 1,177 1,177
REVOLVING CREDIT AGREEMENT....... 3,000 3,000
LONG-TERM DEBT................... 211,625 25,000(6) $50,000(6) 236,625
OTHER LONG-TERM OBLIGATIONS...... 450 450
REDEEMABLE PREFERRED STOCK....... 28,080 25,000(7) 3,080
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................
Additional paid-in-capital..... 200 200
Notes receivable from
stockholders.................. (788) 788(2)
Accumulated deficit............ (173,627) 206(3) (173,833)
--------- ------- ------- ---------
Net stockholders' equity
(deficit)................... (174,215) 206 788 (173,633)
--------- ------- ------- ---------
TOTAL............................ $ 96,153 $50,827 $50,788 $ 96,114
========= ======= ======= =========
See Notes to Unaudited Pro Forma Financial Statements.
P-2
GFSI HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED JUNE 27, 1997
(IN THOUSANDS)
PRO FORMA ADJUSTMENT
-----------------------------------------
PRO
HISTORICAL DR CR FORMA
---------- ------- ------ --------
Net Sales........................... $183,297 $183,297
Cost of Sales....................... 102,606 102,606
-------- ------- ------ --------
Gross Profit...................... 80,691 80,691
Operating expenses:
Selling........................... 18,433 18,433
General and administrative........ 26,319 $ 593(8) $ 676(8) 26,236
-------- ------- ------ --------
44,752 593 676 44,669
-------- ------- ------ --------
Operating income.................... 35,939 593 676 36,022
Other income/(expense):
Interest expense.................. (9,098) 18,780(9) 2,863(9) (25,015)
Other............................. 99 99
-------- ------- ------ --------
(8,999) 18,780 2,863 (24,916)
-------- ------- ------ --------
Income before income taxes and
extraordinary item................. 26,940 19,373 3,539 11,106
Provision for income taxes.......... (1,440) 3,002(10) (4,442)
-------- ------- ------ --------
Income before extraordinary item.... $ 25,500 $22,375 $3,539 $ 6,664
======== ======= ====== ========
See Notes to Unaudited Pro Forma Financial Statements.
P-3
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS)
1. Presentation and Transactions:
The unaudited pro forma financial statements assume the following
transactions occurred on June 27, 1997 for the purpose of the unaudited pro
forma balance sheet and the beginning of the earliest period presented for
purposes of the unaudited pro forma statement of income.
Holdings and GFSI, a wholly-owned subsidiary of Holdings, were organized by
affiliates of The Jordan Company and management to effect the acquisition
of Winning Ways. Pursuant to the Acquisition Agreement, Holdings and GFSI
on February 27, 1997, acquired all of the issued and outstanding capital
stock of the Company, and the Company immediately thereafter merged with
and into GFSI. All of the capital stock of the Company acquired by Holdings
in connection with the Acquisition was contributed to GFSI along with the
balance of the Equity Contribution, as described below.
The aggregate purchase price for Winning Ways was $242.3 million consisting
of $173.2 million in cash at closing, a post closing payment at April 30,
1997, of $10.0 million and the repayment of $59.2 million of indebtedness
of Winning Ways including a $2.4 million prepayment penalty. To finance the
Acquisition, including approximately $11.5 million of related fees and
expenses: (i) TJC, its affiliates and MCIT PLC (collectively, the "Jordan
Investors") and certain members of management (the "Management Investors")
invested $52.2 million in Holdings and Holdings contributed $51.4 million
of this amount in cash to GFSI (the "Equity Contribution"); (ii) GFSI
consummated the GFSI Offering; and (iii) GFSI entered into the Credit
Agreement providing for borrowings of up to $115.0 million, of which
approximately $68.0 million was outstanding and $22.9 million was utilized
to cover outstanding letters of credit at closing of the Acquisition. The
Equity Contribution was comprised of: (i) a contribution of $13.6 million
from the Jordan Investors to Holdings in exchange for Holdings Preferred
Stock and approximately 50% of the Common Stock of Holdings; (ii) a
contribution of $13.6 million from the Management Investors to Holdings in
exchange for Holdings Preferred Stock and approximately 50% of the common
stock of Holdings; and (iii) a contribution of $25.0 million from a Jordan
Investor to Holdings in exchange for Holdings Subordinated Notes.
Approximately $0.8 million of the contribution from the Management
Investors was financed by loans from Holdings.
On September 17, 1997 Holdings completed the offering of Units consisting
of $25.0 million 11.375% Subordinated Notes due 2009 and $25.0 million
11.375% Series D Preferred Stock due 2009. The Units were exchangeable at
the option of Holdings, into 11.375% Series A Senior Discount Notes due
2009. On October 23, 1997 Holdings exercised its option to exchange the
Units for the Series A Discount Notes. Holdings did not receive any
proceeds from the sale or exchange of the Units. The Series A Senior
Discount Notes contained registration rights which Holdings is satisfying
by the Exchange Offer.
2. The pro forma adjustment to cash.
Repayment of notes receivable from stockholders, as described in Note
1.................................................................... $788
====
Payment of fees and expenses associated with the transactions......... $275
Payment of accrued interest expense on Holdings Subordinated Notes.... 483
----
Proforma adjustment................................................... $758
====
3. The pro forma adjustments to deferred financing costs represent the
capitalization of fees and expenses associated with the Exchange using
existing cash in the Company and the write-off of financing costs
allocated to the Holdings Subordinated Notes.
4. The pro forma adjustment to accrued expenses represents the payment of
accrued interest on the Holdings Subordinated Notes.
P-4
5. The pro forma adjustment to income taxes payable represents the reduction
of income taxes due to write-off of deferred financing costs on the
Holdings Subordinated Notes.
6. The pro forma adjustments to long-term debt represent the issuance of
Subordinated Discount Notes and the elimination of the Holdings
Subordinated Notes with the exchange transactions described in Note 1.
7. The pro forma adjustment to redeemable preferred stock represents the
elimination of Holdings Preferred Stock with the exchange transactions
described in Note 1.
8. The pro forma adjustment to general and administrative expense:
YEAR
ENDED
JUNE
27,
1997
-------
Additional general and administrative expense related to:
Consulting fee to The Jordan Company............................ $ 333
Board of Directors fees......................................... 93
Wolff non-competition payments.................................. 167
-------
Pro forma adjustment.......................................... $ 593
=======
Elimination of general administrative expense related to:
Officers life insurance premiums................................ $ (289)
Expenses of corporate jet not retained by Company............... (153)
Depreciation on corporate jet not retained by Company........... (234)
-------
Pro forma adjustment.......................................... $ (676)
=======
9. The pro forma adjustments to interest expense:
YEAR
ENDED
JUNE
27,
1997
-------
Elimination of interest expense relating to Winning Ways, Inc.'s
prior debt agreements:
Repay prior 10.125% credit agreement............................ $ (255)
Repay prior line of credit agreement............................ (583)
Repay prior 10.28% mortgage loan................................ (647)
Repay prior 5.78% industrial revenue bonds...................... (11)
Repay prior short-term borrowings............................... (345)
Elimination of interest expense related to the Holdings
Subordinated Notes:
Repayment of the Holdings Subordinated Notes.................... (1,011)
Amortization of deferred issuance costs related to the Holdings
Subordinated Notes............................................. (11)
-------
Pro forma adjustment.......................................... $(2,863)
=======
Additional interest expense related to:
Issuance of the Subordinated Discount Notes (11.375%)........... $ 5,849
Amortization of deferred issuance costs related to the
Subordinated Discount Notes.................................... 133
Issuance of the GFSI Senior Subordinated Notes (9.625%)......... 8,021
Amortization of deferred issuance costs related to the GFSI
Subordinated Notes............................................. 428
Issuance of Term Loans assuming 8.13% interest rate............. 3,549
Issuance of Revolver assuming 7.94% interest rate............... 142
Amortization of deferred issuance costs related to New Credit
Agreement...................................................... 336
Commitment fees related to New Credit Agreement................. 93
Letter of credit fees related to New Credit Agreement........... 229
-------
Pro forma adjustment.......................................... $18,780
=======
P-5
The pro forma adjustments to interest expense do not include the
extraordinary item related to the loss on early extinguishment of debt, of
$2.5 million ($1.5 million on an after-tax basis) included in the Statement
of Income for the year ended June 27, 1997. Such amounts are excluded from
the accompanying pro forma income statement as it is considered a non-
recurring charge.
10. The pro forma adjustment to provide income taxes at an effective rate of
40% recognizes that the Company is subject to income tax upon revocation
of the S Corporation status for income tax purposes.
P-6
GFSI HOLDINGS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT.............................................. F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets--June 30, 1996 and June 27, 1997............ F-4
Consolidated Statements of Income--Years Ended June 30, 1995 and 1996
and June 27, 1997...................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit)--
Years Ended June 30, 1995 and 1996 and June 27, 1997................... F-6
Consolidated Statements of Cash Flows--Years Ended June 30, 1995 and
1996 and June 27, 1997................................................. F-7
Notes to Consolidated Financial Statements.............................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI Holdings, Inc. and subsidiary
Lenexa, Kansas
We have audited the accompanying consolidated balance sheet of GFSI
Holdings, Inc. and subsidiary ("Holdings") as of June 27, 1997 and June 30,
1996, and the related consolidated statements of income, stockholders' equity
(deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of Holdings' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Holdings as of June 27, 1997,
and June 30, 1996, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As described in Note 1 to the financial statements, GFSI, Inc., a wholly
owned subsidiary of Holdings, completed recapitalization transactions on
February 27, 1997 which included the merger of Winnings Ways, Inc. with and
into GFSI, Inc., with GFSI, Inc. as the surviving entity.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
August 22, 1997
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Winning Ways, Inc.
Lenexa, Kansas
We have audited the accompanying statements of income, stockholders' equity
and cash flows of Winning Ways, Inc. (the "Company") for the year ended June
30, 1995. 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 audits.
We conducted our audit in accordance with generally accepted auditing
standards. 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, such 1995 financial statements present fairly, in all
material respects, the results of operations and cash flows of the Company for
the year ended June 30, 1995 in conformity with generally accepted accounting
principles.
Donnelly Meiners Jordan Kline
Kansas City, Missouri
July 26, 1996
F-3
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND JUNE 27, 1997
JUNE 30, JUNE 27,
ASSETS 1996 1997
------ ----------- -----------
Current Assets:
Cash and cash equivalents............................ $ 139,977 $ 1,116,512
Accounts receivable net of allowance for doubtful
accounts of $472,092 and $579,093 at June 30, 1996
and June 27, 1997................................... 22,583,452 23,705,589
Inventories, net..................................... 27,782,953 37,561,766
Deferred income taxes................................ 926,606
Prepaid expenses..................................... 802,311 1,286,646
----------- -----------
Total current assets............................... 51,308,693 64,597,119
Property, plant and equipment, net..................... 23,038,589 21,547,857
Other assets:
Deferred financing costs, net of accumulated
amortization of $51,459 and $394,264 at June 30,
1996 and June 27, 1997.............................. 88,883 10,004,390
Cash value of life insurance, net of related policy
loans of $90,117 at June 30, 1996................... 4,267,871
Other................................................ 7,269 3,995
----------- -----------
4,364,023 10,008,385
----------- -----------
Total.............................................. $78,711,305 $96,153,361
=========== ===========
See notes to consolidated financial statements.
F-4
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND JUNE 27, 1997
JUNE 30, JUNE 27,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1996 1997
---------------------------------------------- ----------- -------------
Current liabilities:
Short-term borrowings............................ $ 7,000,000 $ --
Accounts payable................................. 9,667,536 12,199,032
Accrued interest expense......................... 22,908 4,719,282
Accrued expenses................................. 5,266,090 5,543,206
Income taxes payable............................. 200,000
Current portion of long-term debt................ 1,658,160 3,375,000
----------- -------------
Total current liabilities...................... 23,614,694 26,036,520
Deferred income taxes.............................. 1,176,972
Revolving credit agreement......................... 3,000,000
Long-term debt..................................... 20,617,878 211,625,000
Other long-term obligations........................ 450,000
Redeemable preferred stock:
Series A 12% Cumulative Preferred Stock, $0.1 par
value, 13,500 shares issued and outstanding,
entitled in liquidation to $14,040,000.......... 14,040,000
Series B 12% Cumulative Preferred Stock, $0.1 par
value, 11,000 shares issued and outstanding,
entitled in liquidation to $11,440,000.......... 11,440,000
Series C 12% Cumulative Preferred Stock, $0.1 par
value, 2,500 shares issued and outstanding,
entitled in liquidation to $2,600,000........... 2,600,000
Stockholders' equity (deficit):
Winning Ways, Inc. Common stock $.10 par value,
2,000,000 shares authorized, 1,491,000 shares
issued at June 30, 1996......................... 149,100
Series A Common Stock, $0.01 par value, 1,000
shares authorized, 1,000 shares issued and
outstanding at June 27, 1997.................... 10
Series B Common Stock, $.01 par value, 1,000
shares authorized, 1,000 shares issued and
outstanding at June 27, 1997.................... 10
Additional paid-in capital....................... 1,585,691 200,080
Notes receivable from stockholders............... (788,500)
Retained earnings (accumulated deficit).......... 35,045,220 (173,626,731)
----------- -------------
36,780,011 (174,215,131)
Less treasury stock, at cost 261,250 shares at June
30, 1996.......................................... (2,301,278)
----------- -------------
Total stockholders' equity (deficit)........... 34,478,733 (174,215,131)
----------- -------------
Total.......................................... $78,711,305 $ 96,153,361
=========== =============
See notes to consolidated financial statements.
F-5
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
JUNE 30, JUNE 30, JUNE 27,
1995 1996 1997
------------ ------------ ------------
Net sales............................ $148,196,394 $169,320,620 $183,297,733
Cost of sales........................ 84,869,223 97,307,746 102,606,239
------------ ------------ ------------
Gross profit..................... 63,327,171 72,012,874 80,691,494
Operating expenses
Selling............................ 14,884,100 16,963,137 18,432,943
General and administrative......... 19,544,325 22,216,193 26,319,209
------------ ------------ ------------
34,428,425 39,179,330 44,752,152
------------ ------------ ------------
Operating income................. 28,898,746 32,833,544 35,939,342
Other income (expense):
Interest expense................... (2,522,054) (2,608,154) (9,098,218)
Other.............................. (156,869) 490 99,326
------------ ------------ ------------
(2,678,923) (2,607,664) (8,998,892)
------------ ------------ ------------
Income before income taxes and
extraordinary item.................. 26,219,823 30,225,880 26,940,450
Provision for income taxes........... (1,440,000)
------------ ------------ ------------
Income before extraordinary item..... 26,219,823 30,225,880 25,500,450
Extraordinary item, net of tax
benefit of $989,634................. (1,484,451)
------------ ------------ ------------
Net income........................... 26,219,823 30,225,880 24,015,999
Preferred stock dividends............ (1,080,000)
------------ ------------ ------------
Net income attributable to common
shareholders........................ $ 26,219,823 $ 30,225,880 $ 22,935,999
============ ============ ============
Supplemental information:
Income before income taxes and
extraordinary item................ $ 26,219,823 $ 30,225,880 $ 26,940,450
Pro forma income tax provision..... 10,750,000 12,393,000 11,045,000
------------ ------------ ------------
Pro forma income before extraordinary
item................................ $ 15,469,823 $ 17,832,880 $ 15,895,450
============ ============ ============
See notes to consolidated financial statements.
F-6
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
GFSI GFSI
HOLDINGS, HOLDINGS,
INC. INC. WINNING RETAINED NOTES
SERIES A SERIES B WAYS, INC. ADDITIONAL EARNINGS RECEIVABLE
COMMON COMMON COMMON PAID-IN (ACCUMULATED TREASURY FROM
STOCK STOCK STOCK CAPITAL DEFICIT) STOCK STOCKHOLDERS TOTAL
--------- --------- ---------- ----------- ------------- ----------- ------------ -------------
Balance, July 1,
1994................ $ 149,100 $ 420,746 $ 31,461,792 $(2,602,375) $ 29,429,263
Purchase of treasury
stock.............. (3,958) (3,958)
Reissuance of
treasury stock..... 462,000 126,000 588,000
Net income.......... 26,219,823 26,219,823
Dividends declared.. (24,126,887) (24,126,887)
--- --- ---------- ----------- ------------- ----------- --------- -------------
Balance, June 30,
1995................ 149,100 882,746 33,554,728 (2,480,333) 32,106,241
Reissuance of
treasury stock..... 702,945 179,055 882,000
Net income.......... 30,225,880 30,225,880
Dividends declared.. (28,735,388) (28,735,388)
--- --- ---------- ----------- ------------- ----------- --------- -------------
Balance, June 30,
1996................ 149,100 1,585,691 35,045,220 (2,301,278) 34,478,733
Reissuance of
treasury stock..... 1,134,396 267,791 1,402,187
Net income.......... 24,015,999 24,015,999
Distributions to
Winning Ways, Inc.
shareholders....... (47,807,375) (47,807,375)
Distributions and
recapitalization of
Winning Ways, Inc.. (149,100) (2,720,087) (182,327,938) 2,033,487 (183,163,638)
Issuance of GFSI
Holdings, Inc.
Series A and B
Common Stock (net
of issuance costs
of $1,472,637)..... $10 $10 200,080 (1,472,637) $(788,500) (2,061,037)
Accrued dividends on
redeemable
preferred stock.... (1,080,000) (1,080,000)
--- --- ---------- ----------- ------------- ----------- --------- -------------
Balance, June 27,
1997................ $10 $10 $ $ 200,080 $(173,626,731) $ $(788,500) $(174,215,131)
=== === ========== =========== ============= =========== ========= =============
See notes to consolidated financial statements.
F-7
GFSI HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995 AND 1996 AND JUNE 27, 1997
JUNE 30, JUNE 30, JUNE 27,
1995 1996 1997
----------- ----------- ------------
Cash flows from operating activities:
Net income............................ $26,219,823 $30,225,880 $ 24,015,999
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation.......................... 2,850,834 3,191,595 3,174,863
Amortization of deferred financing
costs................................ 9,356 9,356 394,264
(Gain) loss on sale or disposal of
property, plant and equipment........ 156,869 1,009 (11,659)
Deferred income taxes................. 250,366
Increase in cash value of life
insurance............................ (519,580) (331,967) (1,041,343)
Extraordinary loss on early
extinguishment of debt............... 2,473,192
Changes in operating assets and
liabilities:
Accounts receivable, net............. (4,993,971) (4,502,972) (1,122,137)
Inventories, net..................... (1,873,099) 1,701,718 (9,778,813)
Prepaid expenses, other current
assets and other assets............. 271,658 665,925 (481,061)
Income taxes payable................. 200,000
Accounts payable, accrued expense,
and other long-term obligations..... 1,783,226 3,039,727 7,954,986
----------- ----------- ------------
Net cash provided by operating
activities......................... 23,905,116 34,000,271 26,028,657
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sales of property, plant
and equipment........................ 733,698 131,032 948,993
Proceeds from surrender or transfer of
cash value of life insurance......... 5,309,214
Purchases of property, plant and
equipment............................ (4,988,639) (2,611,019) (2,615,228)
----------- ----------- ------------
Net cash provided by (used in)
investing activities................ (4,254,941) (2,479,987) 3,642,979
----------- ----------- ------------
Cash flows from financing activities:
Issuance of revolving credit
agreement............................ 3,000,000
Net changes to short-term borrowings.. 6,200,000 (1,000,000) (7,000,000)
Issuance of senior subordinated
notes................................ 125,000,000
Issuance of subordinated notes........ 25,000,000
Issuance of New Credit Agreement...... 67,000,000
Payments on long-term debt............ (2,326,424) (2,639,378) (24,276,038)
Cash paid for penalties related to
early extinguishment of debt......... (2,390,546)
Cash paid for financing costs......... (10,398,654)
Distributions to Winning Ways, Inc.
shareholders......................... (24,126,887) (28,735,388) (47,807,375)
Distribution and recapitalization of
Winning Ways, Inc.................... (183,163,638)
Issuance of GFSI Holdings, Inc.
Common Stock......................... (1,272,537)
Issuance of redeemable preferred
stock................................ 26,211,500
Proceeds from sale of treasury stock.. 588,000 882,000 1,402,187
Purchase of treasury stock............ (3,958)
----------- ----------- ------------
Net cash used by financing
activities.......................... (19,669,269) (31,492,766) (28,695,101)
----------- ----------- ------------
Net increase (decrease) in cash...... (19,094) 27,518 976,535
Cash and cash equivalents:
Beginning of period................... 131,553 112,459 139,977
----------- ----------- ------------
End of period......................... $ 112,459 $ 139,977 $ 1,116,512
=========== =========== ============
Supplemental cash flow information:
Interest paid......................... $ 2,496,989 $ 2,628,291 $ 4,074,961
=========== =========== ============
Supplemental schedule of non-cash
financing activities:
Notes receivable from sale of stock... $ 788,500
============
Accrual of preferred stock dividends.. $ 1,080,000
============
F-8
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND JUNE 27, 1997
1. RECAPITALIZATION TRANSACTION
On October 31, 1996, the Board of Directors of Winning Ways, Inc. ("Winning
Ways") executed a letter of intent to enter into a transaction with The Jordan
Company. The transaction included the formation of a holding company, GFSI
Holdings, Inc. ("Holdings" or the "Company") and GFSI, Inc. ("GFSI"), a wholly
owned subsidiary of Holdings, to effect the acquisition of Winning Ways. On
February 27, 1997, pursuant to the acquisition agreement, Holdings and GFSI
acquired all of the issued and outstanding capital stock of Winning Ways, and
immediately thereafter merged Winning Ways with and into GFSI, Inc. with GFSI,
Inc. as the surviving entity. All of the capital stock of Winning Ways
acquired by Holdings in connection with the acquisition was contributed by
Holdings to GFSI, along with the balance of the equity contribution, as
described below.
The aggregate purchase price for Winning Ways was $242.3 million, consisting
of $173.1 million in cash at closing, a post-closing payment at April 30, 1997
of $10.0 million and the repayment of $59.2 million of Winning Ways' existing
indebtedness. To finance the Acquisition, including approximately $11.5
million of related fees and expenses: (i) the Jordan Company, its affiliates
and MCIT PLC (collectively the "Jordan Investors") and certain members of
management (the "Management Investors") invested $52.2 million in Holdings and
Holdings contributed $51.4 million of this amount to GFSI (the "Equity
Contribution"); (ii) GFSI entered into a credit agreement (the "New Credit
Agreement") which provides for borrowings of up to $115.0 million, of which
approximately $68.0 million was outstanding at closing and approximately $22.9
million was utilized to cover outstanding letters of credit at Closing; and
(iii) GFSI issued $125.0 million of Senior Subordinated Notes (the "Senior
Subordinated Notes") which were purchased by institutional investors through a
Regulation 144A private placement. The Equity Contribution was comprised of
(i) a contribution of $13.6 million from the Jordan Investors to Holdings in
exchange for Holdings Preferred Stock and approximately 50% of the Common
Stock of Holdings; (ii) a contribution of $13.6 million from the Management
Investors to Holdings in exchange for Holdings Preferred Stock and
approximately 50% of the Common Stock of Holdings, and (iii) a contribution of
$25.0 million from a Jordan Investor to Holdings in exchange for Holdings
Subordinated Notes. Approximately $0.8 million of the contribution from the
Management Investors was financed by loans from Holdings.
The transactions above are reflected in the accompanying audited financial
statements of Holdings as of and for the year ended June 27, 1997 as a
leveraged recapitalization under which the existing basis of accounting for
Winning Ways was continued for financial accounting and reporting purposes.
The historical financial information presented herein includes the operations
and activities of Winning Ways through February 27, 1997 and the merged entity
subsequent thereto as a result of the merger and the leveraged
recapitalization.
The following summarizes the sources and uses of funds by the transactions
described above (in millions):
SOURCES OF FUNDS:
New Credit Agreement............................................ $ 68.0
New Senior Subordinated Notes due 2007.......................... 125.0
Subordinated notes to a Jordan Investor......................... 25.0
Issuance of GFSI Holdings, Inc. preferred and common stock...... 26.4
Existing cash balances in the business.......................... 9.4
------
Total sources................................................. $253.8
======
USES OF FUNDS:
Cash purchase price of the Acquisition.......................... 183.1
Repayment of Existing Indebtedness.............................. 59.2
Fees and expenses............................................... 11.5
------
Total uses.................................................... $253.8
======
F-9
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to the recapitalization transactions described above, GFSI is a
wholly-owned subsidiary of Holdings. Holdings is dependent upon the cash flows
of GFSI to provide funds to service $25.0 million of Holdings Subordinated
Notes. The annual cash flow requirements to service Holdings Subordinated
Notes is $3 million (principal due in balloon payment in 2008). Pursuant to
the terms of a deferred limited interest guarantee between GFSI and Holdings,
GFSI is obligated to pay accrued and unpaid interest on the Holdings
Subordinated Notes under certain limited circumstances. Additionally,
Holdings' cumulative preferred stock dividends will total $3.2 million
annually.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--Holdings' through its wholly-owned subsidiary,
GFSI, is a leading designer, manufacturer and marketer of high quality, custom
designed sports wear and active wear bearing names, logos and insignia of
resorts, corporations, colleges and professional sports. The Company's
customer base is spread throughout the United States.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Holdings and its wholly-owned subsidiary, GFSI, Inc. All
significant intercompany accounts and transactions have been eliminated.
FISCAL YEAR--During 1997, Holdings converted its fiscal year to a 52/53 week
fiscal year which ends on the Friday nearest June 30. Previously, Holdings'
fiscal year ended June 30. The twelve month periods ended June 30, 1995 and
1996 and June 27, 1997 contain 52 weeks, respectively.
CASH AND CASH EQUIVALENTS--Holdings considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Included in inventories are
markdown allowances of $1,922,038 and $305,608 at June 27, 1997 and June 30,
1996, respectively.
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--During fiscal 1997, Holdings adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Under SFAS
No. 121, impairment losses are recognized when information indicates the
carrying amount of long-lived assets, identifiable intangibles and goodwill
related to those assets will not be recovered through future operations or
disposal based upon a review of expected undiscounted cash flows. The adoption
of this statement had no effect on Holdings' consolidated financial
statements.
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.
F-10
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS--Holdings is a party to an interest rate
swap agreement and an interest rate cap agreement. Income or expense resulting
from interest rate swap and cap agreements used in conjunction with on-balance
sheet liabilities are accounted for on an accrual basis and recorded as an
adjustment to expense on the matched instrument. Interest rate swap and cap
agreements that are not matched with specific liabilities are recorded at fair
value, with changes in the fair value recognized in current operations.
Gains and losses on terminations of interest rate swap and cap agreements
are recognized as other income (expense) when terminated in conjunction with
the retirement of the associated debt. Gains and losses on terminated
agreements are deferred and amortized in those cases where the underlying debt
is not retired. Redesignations which are appropriately matched against
underlying debt instruments will continue to qualify for settlement
accounting.
ADVERTISING COSTS--All costs related to advertising Holdings' products are
expensed in the period incurred. Advertising expenses totaled $865,341,
$1,011,784 and $1,383,261 for the years ended June 30, 1995 and 1996 and June
27, 1997, respectively.
INCOME TAXES--Effective July 1, 1982, GFSI's predecessor, Winning Ways,
Inc., elected to be taxed under the S-Corporation provisions of the Internal
Revenue Code which provide that, in lieu of corporate income taxes, the
shareholders are taxed on the Company's taxable income. Therefore, no
provision or liability for income taxes is reflected in the accompanying
financial statements through February 27, 1997. Upon consummation of the
recapitalization transactions (described in Note 1) on February 27, 1997, the
Company converted from S-Corporation to C-Corporation status for income tax
reporting purposes. In conjunction with this change in tax status, GFSI began
accounting for income taxes using the liability method in accordance with SFAS
No. 109. The liability method provides that deferred tax assets and
liabilities are recorded based on the difference between tax bases 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.
Supplemental information relative to the Statements of Income has been
provided which reflects a provision for income taxes assuming a 41% effective
income tax rate for all periods.
USE OF ESTIMATES--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.
NEW ACCOUNTING STANDARDS--SFAS No. 128, Earnings per Share was issued in
February 1997. This Statement establishes standards for computing and
presenting earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Statement is effective for Holding's fiscal 1998 financial statements,
including interim periods; earlier application is not permitted. Management
does not expect the implementation of this Statement to have a material impact
on its financial statements.
SFAS No. 130, Reporting Comprehensive Income was issued in June 1997. This
Statement established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement is effective for
Holding's fiscal 1998 financial statements. Management does not expect the
implementation of this Statement to have a material impact on its financial
position of results of operations.
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information was issued in June 1997. This Statement establishes standards for
the way that public business enterprises report information about
F-11
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This Statement is effective for Holding's fiscal 1998 financial
statements. Management does not expect the implementation of the disclosure
requirements of this Statement to have a material impact on its financial
statements.
3. PROPERTY, PLANT AND EQUIPMENT
JUNE 30, JUNE 27,
1996 1997
----------- -----------
Land............................................. $ 2,442,373 $ 2,442,373
Buildings and improvements....................... 18,392,598 19,108,548
Furniture and fixtures........................... 16,722,972 14,150,193
----------- -----------
37,557,943 35,701,114
Less accumulated depreciation.................... 14,521,591 15,186,104
----------- -----------
23,036,352 20,515,010
Construction in progress......................... 2,237 1,032,847
----------- -----------
$23,038,589 $21,547,857
=========== ===========
The net book value of assets under capital lease were and $1,576,876 and $0
at June 30, 1996 and June 27, 1997, respectively.
4. SHORT-TERM BORROWINGS
At June 30, 1996, the Company had a $40,000,000 unsecured line of credit
with floating interest of 5.37%. The floating interest rate was based on a 40
basis point spread over bankers acceptance, federal funds, or LIBOR rates
adjusted daily. The line was subject to certain restrictions and covenants,
among them being the maintenance of certain financial ratios, the most
restrictive of which require the Company to maintain a current ratio of
greater than 1.3 to 1.0, a cash flow coverage ratio of greater than 1.5 to 1.0
and a leverage ratio of less than 3.3 to 1.0. Borrowings against this line
totaled $7,000,000 at June 30, 1996.
Letters of credit against this line for unshipped merchandise aggregated
$23,512,080 at June 30, 1996.
As discussed in Note 11 to the financial statements, the floating interest
rate on the above line of credit was partially converted to a fixed interest
rate of 5.30% by an interest rate swap agreement. The notional amount of the
interest rate swap agreement fluctuated based on the Company's anticipated
level of short term borrowings with the maximum notional amount equaling
$19,900,000. This interest rate swap agreement was terminated on February 27,
1997 in conjunction with the recapitalization transactions and related early
retirement of debt. The $300,000 gain realized on the terminated swap was
deferred and will be amortized over the life of the New Credit Agreement.
5. REVOLVING CREDIT AGREEMENT
In conjunction with the recapitalization transactions (see Note 1), the
Company replaced the $40,000,000 unsecured line of credit described in Note 4
with a $50,000,000 secured line of credit (the "Line") with floating interest
of 7.938% at June 30, 1997. The Line is secured by substantially all of GFSI's
property, plant and equipment and matures in December of 2002. The Line is
subject to certain restrictions and covenants, among them being the
maintenance of certain financial ratios, the most restrictive of which require
GFSI to maintain a
F-12
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fixed charge coverage ratio greater than 1.0 to 1.0, an interest expense
coverage ratio of greater than 1.2 to 1.0 and a maximum leverage ratio of less
than 6.5 to 1.0. GFSI is limited with respect to the making of payments
(dividends and distributions); the incurrence of certain liens; the sale of
assets under certain circumstances; certain transactions with affiliates;
certain consolidations, mergers, and transfers; and the use of loan proceeds.
Borrowings against this Line totaled $3,000,000 at June 27, 1997.
Letters of credit against this line at June 27, 1997, for unshipped
merchandise aggregated $27,234,109. Stand-by letters of credit issued against
the Line at June 27, 1997, aggregated $2,541,257.
6. LONG-TERM DEBT
Long-term debt consists of:
JUNE 30, JUNE 27,
1996 1997
----------- ------------
Senior Subordinated Notes, 9.625% interest rate, due
2007................................................. $125,000,000
Term Loan A, variable interest rate, 7.938% at June
27, 1997, due 2002................................... 40,000,000
Term Loan B, variable interest rate, 8.438% at June
27, 1997, due 2004................................... 25,000,000
Subordinated Notes to Affiliate, 12.0% interest rate,
due 2008............................................. 25,000,000
10.125% credit agreement with bank to borrow up to
$10,000,000, unsecured, payable in monthly principal
installments of $119,048 plus interest (paid off
February 27, 1997)................................... $ 4,285,714
Floating interest $10,000,000 line of credit
agreement, interest was 5.71% at June 30, 1996 (paid
off February 27, 1997)............................... 8,000,000
10.28% first mortgage loan, secured by building and
equipment (with a carrying value of $9,556,710 at
June 30, 1996), payable in monthly installments of
$88,935 (paid off February 27, 1997)................. 9,550,324
Capital lease obligation securing 5.78% industrial
revenue bonds, payable in amounts equal to the
principal and interest payments due on the bonds
(paid off February 27, 1997)......................... 440,000
----------- ------------
22,276,038 215,000,000
Less current portion.................................. 1,658,160 3,375,000
----------- ------------
$20,617,878 $211,625,000
=========== ============
On February 27, 1997, the Company entered into the New Credit Agreement with
a group of financial institutions to provide for three credit facilities: (i)
a term loan of $40,000,000 ("Term Loan A"), (ii) a term loan of $25,000,000
("Term Loan B" and collectively, with Term Loan A, the "Term Loans") and (iii)
the $50,000,000 secured line of credit (see Note 5). At closing of the
recapitalization transaction, $68,000,000 was borrowed under the New Credit
Agreement to finance the transactions described in Note 1 to the financial
statements.
The New Credit Agreement is secured by substantially all of the property,
plant and equipment of Holding's wholly-owned subsidiary, GFSI, and is subject
to general and financial covenants that place certain restrictions on GFSI.
GFSI is limited with respect to the making of payments (dividends and
distributions) to Holdings; the incurrence of certain liens; the sale of
assets under certain circumstances; certain transactions with affiliates;
certain consolidations, mergers, and transfers; and the use of loan proceeds.
As discussed in Note 11 to the financial statements, the floating interest
rate on the $10,000,000 line of credit agreement was partially converted to a
fixed interest rate of 5.62% by a $7,000,000 notional amount
F-13
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest rate swap agreement terminating on November 18, 2000. The floating
interest rate was based generally on the higher of the corporate base rate or
the federal funds rate plus 50 basis points adjusted daily. This interest rate
swap agreement was not terminated at February 27, 1997 in conjunction with the
early extinguishment of the debt. Such interest rate swap has been
redesignated to the new Term Loan A debt agreement. As also discussed in Note
11 to the financial statements, a portion of the floating interest rate on the
Term Loans has been capped at 7.50% by a $19,000,000 notional amount interest
rate cap agreement maturing in March of 1999.
On February 27, 1997, GFSI issued the 9.625% Senior Subordinated Notes due
2007 (the "Senior Subordinated Notes") in the aggregate principal amount of
$125,000,000 in a Regulation 144A private placement. Proceeds from the Senior
Subordinated Notes were also used to finance the transactions described in
Note 1 to the financial statements. GFSI's Registration Statement on Form S-4
was declared effective on July 24, 1997, providing for the exchange of the
Senior Subordinated Notes registered under the Securities Act, for the
Regulation 144A private placement Senior Subordinated Notes.
Interest on the Senior Subordinated Notes is payable semi-annually in cash
in arrears on September 1 and March 1, commencing September 1, 1997. 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%
At any time prior to March 1, 2000, GFSI may redeem up to 40% of the
original aggregate principal amount of the Senior Subordinated Notes with the
net proceeds of one or more equity offerings at a redemption price equal to
110% of the principal amount plus any accrued and unpaid interest to the date
of redemption. 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 senior unsecured obligations of GFSI and
pursuant to the terms of the Senior Subordinated Notes indenture, rank pari
passu in right of payment to any future subordinated indebtedness of the
Company, and effectively rank junior to secured indebtedness of GFSI,
including borrowings under the New 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 27, 1997, the Company was in
compliance with all such covenants.
On February 27, 1997, Holdings issued the 12% Subordinated Notes due 2009
(the "Subordinated Notes") in the aggregate principal amount of $25,000,000 to
an affiliate of the Jordan Company. Proceeds from the Subordinated Notes were
also used to finance the transactions described in Note 1 to the financial
statements.
Interest on the Subordinated Notes is payable semi-annually in cash in
arrears on October 31 and April 30, commencing April 30, 1997. As mentioned on
Note 1 to the financial statements, GFSI is obligated to pay accrued and
unpaid interest on the Subordinated Notes. The Subordinated Notes mature on
April 30, 2008; prepayments may be made at any time in multiples of $1,000.
Prepayment is required upon a change in control of Holdings, as defined in the
agreement.
F-14
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Subordinated Notes are unsecured obligations of Holdings and pursuant to
the terms of the Subordinated Notes purchase agreement, effectively rank
junior to the other unsecured debt of GFSI, including the Senior Subordinated
Notes, and the secured indebtedness of GFSI, including borrowings under the
New Credit Agreement.
The Subordinated Notes purchase agreement includes certain affirmative and
negative covenants. As of June 27, 1997, the Company was in compliance with
all such covenants.
Aggregate maturities of the Holdings' long-term debt as of June 27, 1997 are
as follows assuming a 52/53 week fiscal year:
FISCAL YEAR AMOUNT
----------- ------------
1998......................................................... $ 3,375,000
1999......................................................... 4,875,000
2000......................................................... 6,125,000
2001......................................................... 7,625,000
2002......................................................... 9,500,000
Thereafter................................................... 183,500,000
------------
Total.................................................... $215,000,000
============
In connection with the early extinguishment of debt existing at February 27,
1997, the Company recognized an extraordinary loss in the statement of income
for the fiscal year ended June 27, 1997 of $2,474,085 ($1,484,451 on an after-
tax basis). This loss consisted of $83,538 ($50,123 on an after-tax basis) of
deferred financing costs charged off related to the repayment of GFSI's debt
and a prepayment penalty of $2,390,546 ($1,434,328 on an after-tax basis)
incurred in connection with the prepayment of GFSI's then existing first
mortgage loan.
Included in the foregoing schedule of long-term debt is the following
capital lease information on the Company's manufacturing and distribution
facility. At June 27, 1997, no capital lease obligations were outstanding.
JUNE 30,
1996
--------
Total minimum lease payments.................................... $479,657
Less amounts representing interest.............................. 39,657
--------
Present value of net minimum lease payments..................... $440,000
========
7. COMMITMENTS AND CONTINGENCIES
Prior to February 27, 1997, the Company was obligated under stock redemption
agreements to repurchase all shares owned upon the death of any stockholder
and termination of key employee stockholders. The price to be paid was
determined annually by the Board of Directors, and GFSI could elect a ten year
installment payment plan. The majority of the commitment arising from these
agreements was funded by life insurance contracts.
The Company, 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 the Company.
F-15
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. REDEEMABLE PREFERRED STOCK
In connection with the recapitalization transactions described in Note 1 to
the financial statements, the Company issued 27,000 shares of Cumulative
Preferred Stock, 13,500 shares as Series A 12% Cumulative Preferred Stock,
11,000 shares as Series B 12% Cumulative Preferred Stock, and 2,500 shares as
Series C 12% Cumulative Preferred Stock (which along with the Series A and
Series B Preferred Stock shall be collectively referred to as the "Preferred
Stock"). The holders of Preferred Stock are entitled to annual cash dividends
of $120 per share, payable on March 1 of each year, in accordance with the
terms set forth in the Articles of Incorporation. The liquidation preference
for each share of Preferred Stock is $1,000 plus any accrued and unpaid
dividends. Mandatory redemption of the liquidation preference plus any accrued
and unpaid dividends occurs on March 1, 2009.
9. PROFIT SHARING PLAN
During fiscal 1996, the Company provided a non-contributory defined
contribution profit sharing plan (the "Plan") covering all eligible employees.
Contributions were at the discretion of the Board of Directors and totaled
$875,756 for the year ended June 30, 1996.
On August 1, 1996, the Plan was amended to include employee directed
contributions with an annual discretionary matching contribution and renamed
the Plan the Winning Ways, Inc. Profit Sharing and 401(k) Plan. Participants
exercise control over the assets of his or her account and choose from a broad
range of investment alternatives. Contributions made by the Company to the
plan related to the 401(k) and profit sharing portions totaled $131,843 and
$443,624, respectively, for the year ended June 27, 1997.
10. INCOME TAXES
The provision for income taxes for the year ended June 27, 1997 consists of
the following:
JUNE 27,
1997
----------
Current income tax provision.................................. $ 200,000
Deferred income tax provision................................. 250,366
----------
Total income tax provision................................ $ 450,366
==========
Allocated to:
Operating activities........................................ $1,440,000
Extraordinary loss.......................................... (989,634)
----------
Total income tax provision $ 450,366
==========
The income tax provision differs from amounts computed at the statutory
federal income tax rate as follows:
JUNE 27, 1997
------------------
AMOUNT %
----------- -----
Income tax provision at the statutory rate.......... $ 9,429,158 35.0%
Income attributable to S-Corporation earnings....... (9,146,583) (34.0)%
Change in tax status to C-Corporation............... 993,621 3.7%
Effect of state income taxes, net of federal
benefit............................................ 163,804 0.6%
----------- -----
$1,440,000 5.3%
=========== =====
F-16
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 27, 1997, along with the
income tax effect of each, are as follows:
JUNE 27, 1997
DEFERRED INCOME TAX
----------------------
ASSETS LIABILITIES
---------- -----------
Accounts receivable................................ $ 247,215
Inventory valuation................................ 244,624
Property, plant, and equipment..................... $1,611,484
Accrued expenses................................... 547,449
Net operating loss carry forward................... 259,271
Other.............................................. 62,559
Valuation allowance................................
---------- ----------
Total.......................................... $1,361,118 $1,611,484
========== ==========
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company engages in transactions which result in off-balance sheet risk.
Interest rate swap and cap agreements are primarily used in conjunction with
on-balance sheet liabilities to reduce the impact of changes in interest
rates. Interest rate swap agreements are contractual agreements to exchange,
or "swap", a series of interest rate payments over a specified period, based
on an underlying notional amount but differing interest rate indices, usually
fixed and floating. Interest rate cap agreements are contractual agreements in
which a premium is paid to reduce the impact of rising interest rates on
floating rate debt. The notional principal amount does not represent a cash
requirement, but merely serves as the amount used, along with the reference
rate, to calculate contractual payments. Because the instrument is a contract
or agreement rather than a cash market asset, the financial derivative
transactions described above are referred to as "off-balance sheet"
instruments.
The Company attempts to minimize its credit exposure to counterparties by
entering into interest rate swap and cap agreements only with major financial
institutions.
The Company's interest rate swap agreements are used in conjunction with on-
balance sheet liabilities and were as follows:
WEIGHTED AVERAGE
CONTRACT OR ESTIMATED INTEREST RATE
NOTIONAL FAIR ------------------
AMOUNT VALUE RECEIVABLE PAYABLE
----------- --------- ---------- -------
Swaps:
June 30, 1996.................. $21,900,000 $850,000 5.39% 5.62%
June 27, 1997.................. 7,000,000 156,000 5.55 5.62
Cap:
June 27, 1997.................. $19,000,000 >7.50
GFSI has entered into two swap agreements to exchange fixed interest rates
for floating rate debt payments. One agreement carries a notional amount of
$7,000,000 and terminates on November 18, 2000, as further described in Note 6
to the financial statements. The notional amount of the other interest rate
swap agreement fluctuates based on GFSI's anticipated level of short-term
borrowing with the maximum notional amount equaling $19,900,000, as further
described in Note 4 to the financial statements. This agreement was entered
into in January 1995 to be effective July 1, 1996; however, this agreement was
terminated on February 27, 1997.
F-17
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GFSI has a 7.50% interest rate cap agreement which is used to effectively
cap the interest rate on a portion of GFSI's floating rate term loans. The
interest rate cap agreement has a notional amount of $19,000,000 as of June
27, 1997. The cap matures March 31, 1999.
12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement 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
and interest rate swap agreements.
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.
SHORT-TERM BORROWINGS AND REVOLVING CREDIT AGREEMENT--Short-term borrowings
and revolving credit agreement have variable interest rates which adjust
daily. The carrying value of these borrowings is a reasonable estimate of
their fair value.
ACCOUNTS PAYABLE--The carrying amount of accounts payable approximates fair
value because of the short-term nature of the financial instruments.
LONG-TERM DEBT--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value of debt issues with fixed rates. The carrying value of
floating rate debt is a reasonable estimate of their fair value.
DERIVATIVE FINANCIAL INSTRUMENTS--Quoted market prices or dealer quotes are
used to estimate the fair value of interest rate swap and cap agreements.
The following summarizes the estimated fair value of financial instruments,
by type:
JUNE 30, 1996 JUNE 27, 1997
----------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ------------ ------------
Assets and Liabilities:
Cash and cash equivalents.. $ 139,977 $ 139,977 $ 1,116,512 $ 1,116,512
Accounts receivable........ 22,583,452 22,583,452 23,705,589 23,705,589
Short-term borrowings...... 7,000,000 7,000,000
Accounts payable........... 9,667,536 9,667,536 12,199,032 12,199,032
Revolving credit agreement. 3,000,000 3,000,000
Long-term debt............. 22,276,038 24,562,702 215,000,000 215,000,000
Off-balance sheet financial
instruments:
Interest Rate Swap
Agreements
(Asset/(Liability))....... 850,000 156,000
Interest Rate Cap Agreement
(Asset/(Liability))....... --
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-18
GFSI HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
13. RELATED PARTY TRANSACTIONS
The Company has entered into supply agreements with several affiliated
companies controlled by certain members of Company management. The agreements
allow the Company to outsource embroidery work to the affiliates in the event
that demand exceeds the Company's manufacturing capacity. Amounts paid to
these entities were $2,262,967, $3,080,718 and $4,566,713 for the years ended
June 30, 1995 and 1996 and June 27, 1997, respectively.
During the year ended June 27, 1997, the Company loaned the affiliates
$150,000 and $700,000 under separate promissory notes to finance the
affiliates' purchase of embroidery equipment from the Company and to provide
for working capital. The equipment was sold at net book value which
approximated market value. As of June 27, 1997, the remaining balance
outstanding on the notes was $525,000. All outstanding balances were paid
subsequent to year end.
During fiscal 1997, the cash value of life insurance on officers was
liquidated into cash or transferred to the respective individuals at carrying
value. The net proceeds to the Company totaled $5,309,214 for the year ended
June 27, 1997. Prior to June 27, 1997, a shareholder purchased the corporate
aircraft from the Company for approximately $898,000 in cash, resulting in no
gain or loss to the Company.
In connection with the recapitalization transactions on February 27, 1997,
Holdings entered into an agreement with an affiliate to render services to the
Company, including consultation on its financial and business affairs, its
relationship with its lenders and stockholders, and the operation and
expansion of the business. In connection with the recapitalization
transactions, the Company paid the affiliate $3.25 million pursuant to the
terms of the agreement. These fees are included as deferred financing costs in
the accompanying financial statements. In addition, the Company incurred
consulting fees total $166,667 for the year ended June 27, 1997, which are
included in general and administrative expenses in the accompanying financial
statements.
Effective upon the consummation of the recapitalization transactions on
February 27, 1997, Holdings entered into a noncompete agreement with a
shareholder. In exchange for the covenant not to compete, the shareholder will
be paid $250,000 per annum for a period of ten years. At June 27, 1997,
$83,333 of expense related to this agreement is included in general and
administrative expenses in the accompanying financial statements.
The Subordinated Notes, as described in Note 6 to the financial statements,
have been issued to an affiliate of the Jordan Company. Interest expense paid
and accrued to the Jordan Company affiliate totaled $517,000 and $493,000,
respectively, as of and for the year ended June 27, 1997.
F-19
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURI-
TIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUB-
SEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
PAGE
----
Summary................................................................... 1
Risk Factors.............................................................. 13
The Transactions.......................................................... 21
Use of Proceeds........................................................... 22
Capitalization............................................................ 22
Selected Historical Financial Data........................................ 23
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 25
Business.................................................................. 30
Management................................................................ 39
Principal Stockholders.................................................... 42
The Exchange Offer........................................................ 43
Description of Notes...................................................... 52
Description of Certain Indebtedness....................................... 76
Certain Transactions...................................................... 77
Plan of Distribution...................................................... 80
Certain Federal Income Tax Consideration.................................. 81
Legal Matters............................................................. 89
Auditors.................................................................. 89
Available Information..................................................... 90
Unaudited Pro Forma Combined Financial Statements......................... P-1
Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GFSI HOLDINGS,
INC.
11.375% SERIES B
SENIOR DISCOUNT NOTES
DUE 2009
-----------------
PROSPECTUS
-----------------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 attorney's 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 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 note 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 is 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 my be entitled under any by-laws, agreement, vote
of stockholders or otherwise.
(b) 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 included as part of this registration statement is
Contained on the Exhibit Index and is incorporated herein by reference.
(b) Financial Statement Schedules:
PAGE
----
Independent Auditors' Report on Schedule S-1
Schedule I Parent Company Condensed Balance Sheet as of June 27, 1997
and
Condensed Income Statement and Condensed Statement of Cash Flows for
the period
from February 27, 1997 (date operations commenced) to June 27, 1997 S-2
All other 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 the registration statement.
II-1
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:
(i) To include any prospectus in which offers or sales are being
made, a post-effective amendment to this registration statement:
(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 and 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.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant, will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to 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.
(d) The registrant had not entered into any arrangement or understanding
with any person to distribute the securities to be received in the Exchange
Offer and to the best of the registrant's information and belief, each person
participating in the Exchange Offer is acquiring the securities in its
ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the securities to be received in
the Exchange Offer. In this regard, the registrant will make each person
participating in the Exchange Offer aware (through the Exchange Offer
Prospectus or otherwise) that if the Exchange Offer is being registered for
the purpose of secondary resales, any security holder using the exchange offer
to participate in a distribution of the securities to be acquired in the
registered exchange offer (1) could not rely on the staff position enunciated
in Exxon Capital Holdings Corporation (available April 13, 1989) or similar
letters and (2) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. The registration acknowledges that such a secondary resale
transaction should be covered by an effective registration statement
containing the selling securityholder information required by Item 4\507 of
Regulation S-K.
II-2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK,
STATE NEW YORK, ON OCTOBER 27, 1997.
GFSI Holdings, Inc.
/s/ A. Richard Caputo, Jr.
By: _________________________________
A. Richard Caputo, Jr.
Vice President and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS A. RICHARD CAPUTO, JOHN L. MENGHINI AND ROBERT
G. SHAW, AND EACH OF THEM SINGLY, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND
AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN
THIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND ANY AND ALL
DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, 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
CONFORMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR HIS
SUBSTITUTE OR NOMINEE, 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 OCTOBER 27, 1997.
SIGNATURE TITLE
--------- -----
/s/ Robert M. Wolff Chairman and a Director
___________________________________________
Robert M. Wolff
/s/ John L. Menghini President, Chief Operating Officer and a
___________________________________________ Director (Principal Executive Officer)
John L. Menghini
/s/ Robert G. Shaw Senior Vice President, Finance and a
___________________________________________ Director (Principal Financial and
Robert G. Shaw Accounting Officer)
/s/ Larry D. Graveel Senior Vice President, Merchandising and a
___________________________________________ Director
Larry D. Graveel
/s/ A. Richard Caputo, Jr. Vice President and a Director
___________________________________________
A. Richard Caputo, Jr.
/s/ John W. Jordan II Director
___________________________________________
John W. Jordan II
/s/ David W. Zalaznick Director
___________________________________________
David W. Zalaznick
II-3
INDEPENDENT AUDITORS' REPORT
Board of Directors
GFSI Holdings, Inc. and subsidiary
Lenexa, Kansas
We have audited the consolidated financial statements of GFSI Holdings,
Inc., and subsidiary as of the June 27, 1997 and June 30, 1996, and for the
years then ended, and have issued our report thereon August 22, 1997. Our
audit also included the financial statement schedule which follows. The
financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion based on our audit. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information therein set forth.
Deloitte & Touche LLP
Kansas City, Missouri
August 22, 1997
S-1
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
CONDENSED BALANCE SHEET
JUNE 27, 1997
ASSETS
- ------
Current assets:
Accounts receivable, net....................................... $ 18,185
Income tax receivables......................................... 137,750
-------------
155,935
Deferred tax assets.............................................. 259,271
Deferred financing costs......................................... 343,583
-------------
$ 758,789
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities--accrued expenses............................ $ 483,333
Negative investment in GFSI, Inc................................. 121,410,587
Long-term debt................................................... 25,000,000
Redeemable preferred stock....................................... 28,080,000
Stockholders' deficit:
Common stock................................................... 20
Accumulated deficit............................................ (173,426,651)
Notes receivable from stockholders............................. (788,500)
-------------
Total stockholders' deficit.................................. (174,215,131)
-------------
$ 758,789
=============
S-2
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
CONDENSED INCOME STATEMENT
PERIOD FROM FEBRUARY 27, 1997 (DATE OPERATIONS COMMENCED)
TO JUNE 27, 1997
Other income (expense)............................................. $ 18,185
Interest expense................................................... (1,010,737)
-----------
Loss before income taxes and equity in net income of GFSI, Inc..... (992,552)
Income tax benefit................................................. 397,021
-----------
Loss before equity in net income of GFSI, Inc...................... (595,531)
Equity in net income of GFSI, Inc.................................. 24,611,530
-----------
Net income......................................................... 24,015,999
Preferred stock dividends ......................................... (1,080,000)
-----------
Net income attributable to common shareholders..................... $22,935,999
===========
S-3
SCHEDULE I
GFSI HOLDINGS, INC. AND SUBSIDIARY
PARENT COMPANY ONLY
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM FEBRUARY 27, 1997 (DATE OPERATIONS COMMENCED)
TO JUNE 27, 1997
Cash flows from operating activities:
Net income...................................................... $ 24,015,999
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred tax provision......................................... (259,271)
Equity in net income of GFSI, Inc.............................. (24,611,530)
Distributions received from GFSI, Inc.......................... 870,987
Changes in:
Accounts receivable........................................... (18,185)
Income tax receivable......................................... (137,750)
Accrued expenses.............................................. 483,333
------------
Net cash provided by operating activities.................... 343,583
------------
Cash flows from investing activities--Equity contribution to
GFSI, Inc....................................................... (49,938,963)
------------
Net cash used in investing activities........................ (49,938,963)
------------
Cash flows from financing activities:
Issuance of subordinated notes.................................. 25,000,000
Issuance of redeemable preferred stock.......................... 27,000,000
Issuance of common stock, net of offering costs................. (2,061,037)
Cash paid for financing costs................................... (343,583)
------------
Net cash provided by financing activities.................... 49,595,380
------------
Net change in cash............................................... --
------------
Cash, beginning of period........................................ --
------------
Cash, end of period.............................................. $ --
------------
S-4
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
1 Purchase Agreement, dated September 17, 1997, by and
among GFSI Holdings, Inc., and Donaldson, Lufkin &
Jenrette Securities Corporation
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. (incorporated by
reference to Exhibit 2.1 to GFSI, Inc.'s Form S-4
Registration Statement (File No. 333-24189, the "GFSI S-
4")
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. (incorporated by reference to Exhibit 2.2 to the
GFSI S-4)
3.1 Certificate of Incorporation of GFSI Holdings, Inc.
3.2 Bylaws of GFSI Holdings, Inc.
4.1 Indenture, dated September 17, 1997, between GFSI
Holdings, Inc. and State Street Bank and Trust Company,
as Trustee
4.2 Global Series A Senior Discount Note
4.3 Form Global Series B Senior Discount Note
4.4 Registration Rights Agreement, dated September 17, 1997,
by and among GFSI Holdings, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation
5 Opinion of Mayer, Brown & Platt
8 Tax Opinion (included as part of Exhibit 5)
10.1 Credit Agreement, dated February 27, 1997, between GFSI,
Inc., the lenders listed thereto and The First National
Bank of Chicago, as Agent (incorporated by reference to
Exhibit 10.1 to the GFSI S-4)
10.2 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
10.3 Tax Sharing Agreement, dated February 27, 1997, between
GFSI, Inc. and GFSI Holdings, Inc. (incorporated by
reference to Exhibit 10.6 to the GFSI S-4)
10.4 Management Consulting Agreement, dated February 27, 1997,
between GFSI Holdings, Inc. and TJC Management
Corporation (incorporated by reference to Exhibit 10.7 to
the GFSI S-4)
10.5 Employment Agreement, dated February 27, 1997, between
GFSI, Inc. and Robert M. Wolff (incorporated by reference
to Exhibit 10.8 to the GFSI S-4)
10.6 Noncompetition Agreement, dated February 27, 1997,
between GFSI Holdings, Inc. and Robert M. Wolff
(incorporated by reference to Exhibit 10.9 to the GFSI S-
4)
10.7 Form of Indemnification Agreement, dated February 27,
1997, between GFSI Holdings, Inc. and its director and
executive officers (incorporated by reference to Exhibit
10.10 to the GFSI S-4)
10.8 Form of Promissory Note, dated February 27, 1997, between
GFSI Holdings, Inc. and the Management Investors
(incorporated by reference to Exhibit 10.13 to the GFSI
S-4)
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
12 Statement re: Computation of Ratios
23.1 Consent of Mayer, Brown & Platt (included in the opinion
filed as Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Donnelly Meiners Jordan and Kline
24 Power of Attorney (included on the signature page in Part
II of the Registration Statement)
25 Statement of Eligibility of Trustee
27 Financial Data Schedule
99 Form of Letter of Transmittal