UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED June 28, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-38951
GFSI HOLDINGS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 74-2810744
--------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
9700 Commerce Parkway
Lenexa, KS 66219
(Address of Principal Executive Offices and Zip Code)
(913) 888-0445
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes(X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes ( ) No (X)
The aggregate market value of the voting and non-voting stock held by
non-affiliates (as defined in Rule 405) of the Registrant as of December 27,
2002, the last business day of the Registrant's most recently completed second
fiscal quarter, was $185,750.
On September 1, 2003, there were 1,765 shares of the Registrant's common stock,
$.01 par value per share, issued and outstanding.
1
TABLE OF CONTENTS
PART I
Page
----
Item 1 - Business........................................................ 3
Item 2 - Properties...................................................... 7
Item 3 - Legal Proceedings............................................... 7
Item 4 - Submission of Matters to a Vote of Security Holders............. 7
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters......................................................... 8
Item 6 - Selected Financial Data......................................... 8
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
Item 7A - Quantitative and Qualitative Disclosures About Market Risk..... 14
Item 8 - Consolidated Financial Statements and Supplementary Data........ 15
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 37
Item 9A - Controls and Procedures........................................ 37
PART III
Item 10 - Directors and Executive Officers............................... 37
Item 11 - Executive Compensation......................................... 40
Item 12 - Security Ownership of Certain Beneficial Owners and
Management..................................................... 41
Item 13 - Certain Relationships and Related Transactions................. 43
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 45
Signatures..................................................... 48
2
PART I
Item 1 - Business
GFSI Holdings, Inc. ("Holdings" ) was incorporated in the State of
Delaware on February 24, 1997. Holdings, and its wholly owned subsidiary GFSI,
Inc. ("GFSI", or collectively with Holdings the "Company") were organized by
affiliates of The Jordan Company (TJC) and management to effect the
acquisition of Winning Ways, Inc. ("Winning Ways").
On February 27, 1997, Holdings acquired all of the issued and outstanding
capital stock of Winning Ways and immediately thereafter merged Winning Ways
with and into GFSI, with GFSI as the surviving entity. All of the capital stock
of Winning Ways acquired by Holdings in connection with the acquisition was
contributed to GFSI along with the balance of equity contributions.
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, national associations, colleges and professional sports
leagues and teams. The Company custom designs and decorates an extensive line of
high-end outerwear, fleecewear, polo shirts, T-shirts, woven shirts, sweaters,
shorts, pants, headwear and sports luggage. The Company markets its products
through its well-established and diversified distribution channels.
On January 29, 1998, the Company established a wholly owned subsidiary, Event
1, Inc. ("Event 1") to provide a concessionaire outlet for the Company's
sportswear and activewear. Event 1 provides increasing sales for the Company's
products with the National Collegiate Athletic Association ("NCAA"), Big 10
Conference, Big 12 Conference, the Atlantic Coast Conference and Professional
Golf Association ("PGA") tournament events.
On June 25, 2001, the Company acquired 100% of the stock of Champion
Products, Inc., ("Champion") for approximately $9.5 million. In conjunction with
the acquisition of Champion, the Company entered into a 15 year licensing
agreement (the "Licensing Agreement") with the seller which permits the Company
to sell decorated Champion apparel in the college bookstore, military and resort
markets. Under the Licensing Agreement, the Company will pay a royalty to the
seller based upon net sales beginning in fiscal 2004.
On June 29, 2001, the Company sold its Tandem Marketing business for
approximately $2.7 million in cash, net of closing costs, and the buyer's
assumption of approximately $1.2 million in liabilities. The Company recognized
a $629,787 gain on the sale of Tandem Marketing.
The Company operates on a 52/53 week fiscal year which ends on the Saturday
nearest June 30. The twelve month periods ended July 2, 1999, June 30, 2000,
June 29, 2001, June 29, 2002, and June 28, 2003 each contain 52 weeks.
Sales Divisions and Subsidiaries
The Company believes that it enjoys distinct competitive advantages in each
of its sales divisions and its subsidiaries 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 screen
print 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. This allows the Company's 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
sportwear and activewear to over 7,400 active customer accounts, including
destination resorts, family entertainment companies, hotel chains, golf courses,
cruise lines and casinos.
The Company distributes its Resort division products through its national
sales force of approximately 35 independent sales agents. The Company believes
that it is well known and respected in the resort and leisure industry because
of its quick turn around for new orders and re-orders, its product innovation,
its quality and its high level of service.
Corporate Division. The Corporate division is a leading marketer of
corporate identity sportswear and activewear for use by a diverse group of
corporations for incentive programs, employee pride and recognition initiatives,
corporate meetings and outings, company retail stores and catalog programs,
dealer incentive programs as well as office casual wear and uniforms.
3
The Company provides its corporate identity sportswear products to over
1,500 of the leading independent marketing companies, who in turn each employ a
sales staff to service a client base. The Company employs 20 regional sales
personnel who are exclusively dedicated to promoting Corporate division
products. The Company believes this marketing approach leverages the sales force
and marketing contacts of these independent marketing companies. Prior to fiscal
2001, the Corporate division utilized approximately 40 independent sales agents
to market directly to corporate customers.
Licensed Apparel Division. The Licensed Apparel Division includes the
college bookstore business, through both the Gear for Sports(R) and Champion(R)
college brands, (through a subsidiary, CC Products, Inc.) sales under
professional sports team, league and event licensing agreements and sales to the
military. The Company has over 3,500 active college bookstore accounts,
including nearly every major college and university in the United States. The
largest college bookstore accounts include the major college bookstore lease
operators as well as high volume, university managed bookstores.
The Company's professional sports team, league and event licensors include,
among others, the NBA, the NHL and Major League Baseball. The Company 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 Company has over 800 active professional sports related customer
accounts.
Event 1 Subsidiary. The Event 1 subsidiary was established in fiscal 1998
to provide concessionaire services that create additional outlets for the
Company's products. Since its inception, Event 1 has become the leading event
merchandiser in the collegiate championship industry. The subsidiary has renewed
and extended its agreements with the NCAA, Big 10 Conference, Big 12 Conference,
the Atlantic Coast Conference, the Southeastern Conference, PGA and various
other institutions and entities.
GFSI Canada Company. In June 2002 the Company formed GFSI Canada Company
("GFSI Canada"), a wholly owned subsidiary of GFSI, Inc. organized under the
Securities Act of Nova Scotia, Canada. The Company established GFSI Canada to
enable it to conduct business in Canada and reach similar markets with it's
existing product line. Certain of the Company's products had previously been
available in the Canadian market through an international licensing agreement
that expired in December 2001. In June 2002, GFSI Canada entered into a
Management Agreement with Fletcher Leisure Group Inc. ("Fletcher"), a Canadian
corporation headquartered in Quebec, Canada. The Fletcher Leisure Group provides
certain selling, marketing, product distribution and administrative services to
GFSI Canada Company under the management agreement.
Products
The Company's extensive product offerings include: fleecewear, outerwear,
polo shirts, woven shirt, sweaters, T-shirts and bottoms, women's and other
apparel items and accessories. These products are currently offered in over
1,000 combinations of style and color. While 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.
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 2003. Current styles offered by the Company include
classic crew sweatshirts, cowl neck tops, half-zip pullovers, hooded tops,
vests, and bottoms. Products are constructed of a wide range of quality fabrics
including combed cotton, textured fleece ribbed knit cotton and inside out
fleece. This product line offers customers a variety of styles ranging from
relaxed, functional looks to more sophisticated, casual looks.
T-Shirts and Bottoms. The Company's T-shirt and bottoms products
represented approximately 15% of net sales for fiscal 2003. 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, shorts and pants in a variety of styles, fabrics and colors.
Outerwear. The Company's outerwear products represented approximately 12%
of net sales for fiscal 2003. These products are designed to offer consumers
contemporary styling, functional features and quality apparel. Product offerings
include a variety of weights and styles, including heavy nylon parkas, denim
jackets, corduroy hooded pullovers, nylon windshirts and water-resistant poplin
jackets. The Company's products also provide a number of functional features
such as adjustable cuffs, windflaps, vented backs, drawstring bottoms and
heavyweight fleece lining.
4
Polo Shirts, Woven Shirts and Sweaters. The Company's polo shirt, woven
shirt and sweater products represented approximately 11% of net sales for fiscal
2003. The Company's products in this category are designed to be suitable for
both leisure and work-related activities with a full range of materials and
styles.
Women's. The Company's women's products represented approximately 15% of
net sales for fiscal 2003. This product line offers customers a variety of
styles ranging from relaxed, functional looks to more sophisticated, casual
looks.
Other. The Company also sells headwear, sports luggage, and a number of
other miscellaneous apparel items. Event 1 also sells non-apparel items at
events including basketballs, pennants and related items. Sales of "Other" items
represented approximately 20% of net sales for fiscal 2003.
Design, Manufacturing and Materials Sourcing
The Company operates state-of-the-art design, embroidery and screen print
manufacturing and distribution facilities in Lenexa, Kansas, Chillicothe,
Missouri and Bedford, Iowa.
The Company's design group consists of approximately 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 manufacturing process begins. This manufacturing process consists of
embroidery and/or screen printing applications to Company-designed non-decorated
apparel ("blanks"). Most of the screen printing and the embroidery operations
are performed by the Company in its Lenexa, Kansas, Chillicothe, Missouri and
Bedford, Iowa facilities. In addition, the Company outsources screen printing
and embroidery work to independent contractors when necessary.
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 of the Company's blanks are contract manufactured in
various off-shore plants. The Company's imported items are currently
manufactured in China, Columbia, Guatemala, Honduras, Hong Kong, Indonesia,
Korea, Malaysia, Mexico, Peru, Philippines, Singapore, Taiwan, Thailand and
Vietnam. No foreign country has a manufacturing concentration above 25%. The
Company has long-standing contractual relationships with its 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.
Competition
The Company's primary competitors vary within each of its divisions and
subsidiaries. In the resort division, there are few national competitors and
even fewer that operate in all of the varied segments in which 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 Licensed Apparel
division's college bookstore market, the GEAR For Sports(R) and Champion(R)
brands and their closest two competitors have traditionally held greater than
60% of the market.
The following table sets forth the Company's primary competitors in each of
its markets:
Market Primary Competitors
- -------------- -----------------------------------------------------
Resort Cutter & Buck and local and regional competitors
Corporate Cutter & Buck, Ashworth, Callaway, Land's End
Licensed Apparel Jansport (VF Corp.), Cotton Exchange,
Russell Athletic, Nike, Majestic,
Addidas and M.V. Sports
Competition in each of the Company's markets generally is based on product
design and decoration, customer service, overall product quality and price. 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 For Sports(R) and Champion(R) brand names and
differentiate its products on the basis of quality.
5
Employees
The Company employs approximately 806 people at its two facilities in
Lenexa, Kansas, of which approximately 110 are members of management, 236 are
involved in either product design, customer service, sales support or
administration and 460 are involved in manufacturing. The Company employs
approximately 85 people in its Bedford, Iowa embroidery facility and 120 at its
Chillicothe, Missouri screen print facility, all of which are involved in
manufacturing. 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.
Trademarks
The Company markets its products primarily under the GEAR For Sports(R) and
Champion(R) brand names. In addition, the Company markets its products under,
among others, the Pro GEAR(R), Big Cotton(R), Winning Ways(R) and Yikes!(R)
trademarks. 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 in Japan. This
license agreement provides exclusive, non-transferable and non-assignable rights
to manufacture, advertise and promote adult apparel, headwear and bags under the
GEAR For Sports(R) brand name. The agreement provides for royalties as a
percentage of net sales, contains annual royalty minimums, and gives the Company
final control over product design and quality. The Company believes this
licensing arrangement enables it to broaden its geographic distribution and
extend the GEAR For Sports(R) brand name in a cost-effective manner.
In connection with its acquisition of Champion, the Company entered into a
license agreement with Sara Lee Corporation (the "Champion License Agreement").
Pursuant to the Champion License Agreement, the Company is granted the exclusive
right to use the Champion(R) name and C(R) logo and related trademarks on
certain products sold in the collegiate, military and resort markets in the
United States. The Champion License Agreement is scheduled to expire on June 30,
2016. In consideration for the license grant, the Company pays Sara Lee a
quarterly royalty based on a percentage of net sales of products bearing the
licensed marks beginning in fiscal 2004.
Licenses
The Company markets its products, in part, under licensing agreements. In
fiscal 2003, net sales under the Company's 465 active licensing agreements
totaled $88.7 million, or approximately 42% of the Company's net sales. The
Company's licensing agreements are mostly with (i) high volume, university
bookstores, (ii) professional sports leagues such as Major League Baseball, the
NBA, the NHL and PGA Tour and (iii) major sporting events such as the NCAA, U.S.
Open, Ryder Cup and the Indianapolis 500. Such licensing agreements are
generally renewable every one to three years with the consent of the licensor.
On July 1, 2001, the Company entered into a 15 year license agreement with
Sara Lee Corporation for the exclusive use of the Champion logo and related
trademarks in the licensed apparel and resort markets. Under the license
agreement the Company will pay a royalty to Sara Lee Corporation based upon net
sales beginning in fiscal 2004. The royalty rate ranges from 3% to 6% of net
sales from fiscal 2004 through fiscal 2017.
6
Item 2 - Properties
The Company owns each of its four properties: its 250,000 square foot
headquarters and manufacturing facility in Lenexa, Kansas, its 100,000 square
foot distribution facility located approximately two miles from its
headquarters, its 23,000 square foot embroidery facility located in Bedford,
Iowa, and its 50,000 square foot screen print decoration facility located in
Chillicothe, Missouri. Approximately 200,000 square feet of the
headquarters/manufacturing facility, the distribution facility in Lenexa, the
embroidery facility in Bedford and the Chillicothe screen print facility are
devoted to the design and manufacture of the Company's products and to customer
service. The Chillicothe facility was completed and began production in fiscal
2002.
From time to time, the Company leases additional warehouse space under
short term agreements to meet short term seasonal needs.
Item 3 - Legal Proceedings
The Company is not a party to any pending legal proceeding the resolution
of which, the management of the Company believes, would have a material adverse
effect on the Company's results of operations, cash flows, or financial
condition, nor to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 28, 2003.
7
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The only authorized, issued and outstanding class of capital stock of
Holdings is common stock which is held by an aggregate of 29 holders. There is
no established public trading market for Holdings' common stock.
Holdings has not declared nor paid any cash dividends on its common stock
since its formation in February 1997. Holdings' financing agreements contain
restrictions on its ability to declare or pay dividends on its common stock.
Equity Compensation Plan Information
- ------------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under equity
warrants and rights (b) compensation plans (excluding
(a) securities reflected in
column (a))
(c)
- ------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 0 0 0
approved by security holders
- ------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders:
- ------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock 110 $100.00 0
- ------------------------------------------------------------------------------------------------------------------------------
Class A Preferred Stock 195.1 $1,322.00 0
- ------------------------------------------------------------------------------------------------------------------------------
The equity compensation plan is described in Item 8 of this annual report in the Notes to Consolidated
Financial Statements, paragraph 11.
Item 6 - Selected Financial Data
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 years ended July 2, 1999,
June 30, 2000, June 29, 2001, June 29, 2002, and June 28, 2003; and (ii) balance
sheet data as of July 2, 1999, June 30, 2000, June 29, 2001, June 29, 2002, and
June 28, 2003. The historical financial statements for the Company for fiscal
1999 and 2000 have been audited by Deloitte & Touche LLP. The historical
financial statements for the Company for fiscal 2001 have been audited by
PricewaterhouseCoopers LLP. The historical financial statements for the Company
for fiscal 2002 and 2003 have been audited by KPMG LLP. The selected financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and the
historical consolidated financial statements of the Company and the related
notes thereto included elsewhere in this annual report. Certain
reclassifications have been made to the financial data for the years ended July
2, 1999, June 30, 2000, June 29, 2001, and June 29, 2002 to conform to the June
28, 2003 presentation.
8
Fiscal Years Ended (3)
(Dollars in thousands)
July 2, June 30, June 29, June 29, June 28,
1999 2000 2001 2002 2003
----- ----- ----- ----- ----
Statements of Operations Data:
Net sales..................................... $ 208,025 $ 205,500 $ 185,305 $ 197,250 $ 209,273
Gross profit.................................. 83,236 79,326 70,726 73,627 78,155
Operating expenses (1)........................ 52,424 48,103 50,008 50,933 53,940
---------- --------- --------- ---------- ----------
Operating income.............................. 30,812 31,223 20,718 22,694 24,215
Other expense, principally interest........... (24,774) (24,610) (24,241) (24,652) (23,684)
Gain (loss) on early extinguishment of debt... -- -- -- (994) 9,610
---------- ---------- ---------- ---------- -----------
Income (loss) before taxes (2)................ 6,038 6,613 (3,523) (2,952) 10,141
Income tax (expense) benefit.................. (2,165) (2,614) 1,483 1,151 (3,970)
---------- ---------- ---------- ---------- -----------
Net income (loss)............................. $ 3,873 $ 3,999 $ (2,040) $ (1,801) $ 6,171
========== ========== ========== ========== ===========
Balance Sheet Data (as of period end):
Cash and cash equivalents.................... $ 10,278 $ 1,461 $ 5,324 $ 328 $ 1,401
Total assets................................ 105,680 99,436 95,488 105,824 104,024
Long-term debt (including current portion and
redeemable preferred stock)............. 246,407 240,334 233,574 246,702 238,559
Total stockholders' equity (deficiency).... (163,368) (159,792) (162,249) (164,462) (158,503)
Other Data:
Cash flows from operating activities........ $ 21,039 $ 7,216 $ 22,547 $ (3,710) $ 11,697
Cash flows from investing activities........ (2,041) (1,937) (8,412) (4,189) (3,325)
Cash flows from financing activities........ (10,080) (14,097) (10,272) 2,903 (7,481)
Depreciation and amortization............... 3,083 3,235 3,046 4,095 4,137
Capital expenditures........................ 2,291 1,998 1,787 4,203 3,369
(1) Operating expenses for fiscal 2001 include $836 of restructuring charges,
$1,110 of pre-acquisition integration costs related to the acquisition of
Champion and a $630 gain on the sale of Tandem Marketing division.
(2) Income (loss) before taxes includes gains (losses) on the early
extinguishment of debt of $9,600 in fiscal 2003 and ($994) in fiscal 2002.
(3) The Company's fiscal year ends on the last Saturday in June, which results
in a 53 week year from time to time. All fiscal years presented above are
comprised of 52 week periods.
9
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the Company's results of
operations and its liquidity and capital resources should be read in conjunction
with the consolidated financial statements and the related notes thereto
appearing elsewhere in this annual report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of
operations and other sections of this annual report contain forward-looking
statements relating to future results of the Company. Such forward-looking
statements are identified by use of forward-looking words such as "anticipates",
"believes", "plans", "estimates", "expects", and "intends" or words or phrases
of similar expression. These forward-looking statements are subject to various
assumptions, risks and uncertainties, including but not limited to, changes in
political and economic conditions, demand for the Company's products, acceptance
of new products and developments affecting the Company's products. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
Critical accounting policies
The following discussion and analysis of financial condition, results
of operations, liquidity and capital resources is based upon the Company's
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Generally
accepted accounting principles require estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, intangible assets, long-lived assets, deferred income taxes,
accrued expenses, contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that it believes are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ materially
from these estimates under different assumptions or conditions.
The Company's management believes that some of its significant
accounting policies involve a higher degree of judgment or complexity than other
accounting policies. Identified below are the policies deemed critical to its
business and the understanding of its results of operations.
Revenue recognition. The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated or
overstated.
Accounts receivable. Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of the Company's customers were to deteriorate
causing an impairment of their ability to make payments, additional provisions
for bad debts may be required in future periods.
Inventories. Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required. The Company also records changes in
valuation allowances due to changes in its operating strategy, such as the
discontinuances of certain product lines and other merchandising decisions
related to changes in demand. It is possible that further changes in required
inventory allowances may be necessary in the future as a result of market
conditions and competitive pressures.
10
Results of Operations
The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for fiscal 2003, 2002 and
2001:
Fiscal Year Ended
-------------------------------------
June 28, June 29, June 29,
2003 2002 2001
--------- --------- --------
Net sales........................ 100.0% 100.0% 100.0%
Gross profit..................... 37.3 37.3 38.2
Operating income................. 11.6 11.5 11.2
Fiscal year ended June 28, 2003 compared to fiscal year ended June 29, 2002
Net Sales. Net sales in fiscal 2003 increased 6% to $209.3 million from
$197.3 million in fiscal 2002. The increase in net sales was due to strong
growth from college bookstore sales, which was fueled by a 40% increase in
revenue from Champion Custom Products ("CCP") to $60.9 million. The net sales
increase from CCP was partially offset by a 18% decline in Corporate division
sales. Net sales for CCP in fiscal 2003 were $17.5 million greater than last
year while Corporate division sales were $5.3 million less than last year.
Management believes that the Company's customers have shifted their purchases to
lower priced apparel with less expensive decoration, which has enhanced the
sales of CCP's more moderately priced goods. A soft economy and consequent
reductions in corporate spending on marketing and employee incentive programs
have had a detrimental effect on the net sales of the Corporate division.
Gross Profit. Gross profit for fiscal 2003 increased 6% to $78.2 million
from $73.6 million last year. Gross profit as a percentage of net sales was
37.3%, approximately the same as last year.
Operating Expenses. Operating expenses for fiscal 2003 increased 6% to
$53.9 million from $50.9 million last year. Higher sales created the increase in
operating expenses. Operating expenses as a percentage of net sales were 25.8%
for fiscal 2003 and fiscal 2002. The favorable impact of cost control measures
offset the higher royalty and distribution channel costs attributable to
increased college bookstore sales. In fiscal 2004, the Company will begin to
incur a 3% royalty expense related to its CCP sales. The royalty will be paid to
Sara Lee Corporation under its 15 year license agreement.
Operating Income. Operating income increased 7% to $24.2 million in fiscal
2003 from $22.7 million in fiscal 2002. Operating income as a percentage of net
sales increased to 11.6% in fiscal 2003 from 11.5% in fiscal 2002. Cost control
measures combined with higher sales resulted in the increase in operating income
as a percentage of sales.
Interest Expense. Interest expense in fiscal 2003 was $23.7 million, $1
million less than the comparable period last year. The decrease in interest
expense was due to lower borrowings and lower interest rates in comparison to
last year.
Gain (Loss) on Early Extinguishment of Debt. In December 2002, the
Company's wholly-owned subsidiary, GFSI, Inc., completed the private placement
of $9.9 million of unregistered 9.625% senior subordinated notes ("Exchange
Notes") in exchange for $24 million aggregate principal amount at maturity of
the Company's 11.375% Senior Discount Notes (the "Holdings Discount Notes") with
an accreted book value of $19.9 million. The acquisition of the Holdings
Discount Notes by GFSI, Inc. is considered an early extinguishment of debt, and
accordingly, the Company recorded a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs. The Company subsequently filed
a registration statement with the Securities and Exchange Commission which
allowed the holder of the Exchange Notes to exchange them for publicly
registered notes having terms substantially identical to the Exchange Notes.
In fiscal 2002, the Company entered into a $65 million Revolving Bank
Credit Agreement ("RBCA") and repaid its existing $40 million bank credit
facility ahead of its scheduled expiration. A pre-tax charge of $994,000 was
recorded in the third quarter of fiscal 2002 to write off deferred debt
origination costs related to the previous bank credit facility.
Net Income (Loss). Net income for fiscal 2003 was $6.2 million, compared to
a net loss of $1.8 million in fiscal 2002. The gain on early extinguishment of
debt, improved operating income and the decrease in interest expense all
combined to create the $8 million increase in net income over last year.
11
Fiscal year ended June 29, 2002 compared to fiscal year ended June 29, 2001
Net Sales. Net sales increased 6.4% in fiscal 2002 to $197.2 million from
$185.3 million in fiscal 2001. The increase was primarily attributable to the
addition of CCP college bookstore net sales of $43.4 million. The net sales
increase from CCP was partially offset by declines in Corporate and Resort
division sales. The terrorist attacks of September 11, 2001 and the resulting
political and economic uncertainties created in the aftermath, directly affected
the travel plans and the marketing and employee incentive programs of the
customers of these two sales divisions. In addition, the Tandem Marketing
("Tandem") business was sold in June 2001. Tandem contributed $11.7 million in
sales in fiscal 2001.
Gross Profit. Gross profit for fiscal 2002 increased 4.1% to $73.6 million
from $70.7 million in fiscal 2001 due to the increase in net sales. Gross profit
as a percentage of net sales decreased to 37.3% from 38.2% last year. The
decrease in gross profit as a percentage of sales was the result of lower
Corporate division sales, which generally provide a higher gross profit than
sales from the CCP college bookstore sales. Fiscal 2002 gross profit was also
adversely affected by both (i) increased loss on sales of close-out and
discontinued merchandise and (ii) the start-up production costs at the new
Chillicothe, Missouri facility.
Operating Expenses. Operating expenses increased $.9 million or 1.8%, to
$50.9 million in fiscal 2002 from $50.0 million in fiscal 2001. Operating
expenses as a percentage of net sales decreased in fiscal 2002 to 25.8% from
27.0% in fiscal 2001. Operating expenses in fiscal 2001 included costs incurred
from the following non-recurring activities: $1.1 million of integration costs
associated with the acquisition of CCP and $0.8 million in costs associated with
severance and employee termination benefits related to the execution of a
restructuring plan; which were partially offset by $0.6 million in gain related
to the sale of Tandem. If these items were excluded, operating expenses as a
percentage of sales would have decreased in fiscal 2002 to 25.8% from 26.3% in
fiscal 2001. Cost control measures created the decrease in operating expenses.
Operating Income. Operating income for fiscal 2002 increased $2.0 million
to $22.7 million in fiscal 2002 from $20.7 million in fiscal 2001. Operating
income as a percentage of net sales increased to 11.5% in fiscal 2002 from 11.2%
in fiscal 2001. The increase in operating income was the result of the increase
in sales and lower operating expenses.
Interest Expense. Interest expense in fiscal 2002 was $24.7 million,
approximately the same as in fiscal 2001. Increased interest expense on the
Holdings Discount Notes off-set the favorable affects of lower interest rates.
Loss on Early Extinguishment of Debt. In fiscal 2002, the Company entered
into a $65 million RBCA and repaid its existing bank credit facility ahead of
its scheduled expiration. A $994,000 pre-tax charge recorded in the third
quarter of fiscal 2002 to write off deferred debt origination costs related to
the previous bank credit facility.
Net Income (Loss). The Company had a net loss of $1.8 million in fiscal
2002 compared to a net loss of $2.0 million in fiscal 2001. The increase in
fiscal 2002 operating income created the improvement over fiscal 2001.
Liquidity and Capital Resources
In December 2002 the Company's wholly-owned subsidiary, GFSI, Inc.
completed the private placement of $9.9 million of unregistered 9.625% Exchange
Notes in exchange for $24 million aggregate principal amount at maturity of the
Company's 11.375% Holdings Discount Notes. The Exchange Notes are unsecured
obligations of GFSI, Inc., mature on March 1, 2007, pay interest semi- annually
on March 1 and September 1, and were issued under an indenture with
substantially identical terms as the indenture governing the $125 million
aggregate principal amount at maturity of GFSI, Inc. Senior Subordinated Notes
issued on February 28, 1997. The Exchange Notes were guaranteed by each of GFSI,
Inc.'s wholly-owned subsidiaries (Event 1, CCP and GFSI Canada Company). GFSI,
Inc. subsequently filed an exchange offer registration statement with the
Securities and Exchange Commission which publicly registered the Exchange Notes.
Cash provided by (used in) operating activities in fiscal 2003, 2002 and
2001 was $11.9 million, ($3.7) million, and $22.5 million, respectively. Higher
net income and reduced inventories created the change in cash provided (used in)
operating activities between fiscal 2003 and fiscal 2002. Increases in accounts
receivable and inventory to support the acquired Champion Custom Products
college bookstore business created the change in cash provided by (used in)
operating activities between fiscal 2002 and fiscal 2001.
Cash used in investing activities for fiscal 2003, 2002 and 2001 was
$3.3 million, $4.2 million, and $8.4 million, respectively. Cash used in
investing activities in fiscal 2003 and fiscal 2002 was principally related to
capital expenditures associated with the construction of a new garment
decoration facility in Chillicothe, Missouri. The cash used in investing
activities in
12
fiscal 2001 was related to the purchase of Champion Custom Products and
capital expenditures, partially offset by $2.7 million in proceeds from the
sale of the Tandem Marketing division.
Cash provided by (used in) financing activities for fiscal 2003, 2002 and
2001 was $(7.5) million, $2.9 million, and ($10.3) million, respectively. The
$7.5 million used in financing activities in fiscal 2003 was principally used to
reduce borrowings under the Revolving Bank Credit Agreement. The net $2.9
million provided from financing activities in fiscal 2002 was created by
borrowings under the Revolving Bank Credit Agreement to replace existing bank
loans and support increased working capital and equipment needs related to the
acquisition of the Champion Custom Products business. The cash used in financing
activities in fiscal 2001 was primarily related to long-term debt repayments.
GFSI, Inc. anticipates paying dividends to the Company to pay corporate
income taxes, pursuant to a Tax Sharing Agreement, interest on subordinated
discount notes issued by the Company, fees payable under consulting agreements,
fees payable under a non- competition agreement between the Company and Robert
M. Wolff, and certain other ordinary course expenses. The Company is dependent
upon the cash flows of GFSI, Inc. to provide funds to service the Holdings
Discount Notes. Holdings Discount Notes do not have an annual cash flow
requirement until March 2005 as they accrue interest at 11.375% per annum,
compounded semi-annually to an aggregate principal amount of $84.5 million at
September 15, 2004. Thereafter, the Holdings Discount Notes will accrue interest
at the rate of 11.375% per annum, payable in semi-annual cash installments of
$4.8 million on March 15 and September 15 of each year. Additionally, GFSI
Holdings' cumulative non-cash preferred stock ("Holdings Preferred Stock")
dividends total approximately $400,000 annually. Holdings Preferred Stock may be
redeemed at stated value (approximately $3.4 million) plus accrued dividends
with mandatory redemption in fiscal 2009.
A summary of the Company's contractual cash obligations by maturity date as of
June 28, 2003 is as follows:
After 5
Contractual Obligations (in thousands) Total Year 1 Years 2-3 Years 4-5 Years
- ----------------------- ----- ------ --------- --------- -----
Long-term debt (including capital
lease obligations) $ 232,889 $ 324 $ 23,246 $ 135,060 $ 74,259
Inventory on open purchase orders (generally
for delivery within 90 days) 19,047 19,047 -- -- --
Guaranteed minimum royalties and
operating lease obligations 3,468 2,138 1,330 -- --
Consulting, employment and
non-competition agreements 8,790 1,055 2,170 1,985 3,580
Redeemable preferred stock 7,882 -- -- -- 7,882
----------- ---------- ----------- ------------- -----------
Total Contractual Cash Obligations $ 272,076 $ 22,564 $ 26,746 $ 137,045 $ 85,721
=========== ========== =========== ============= ===========
Under our Champion product license, the Company has guaranteed the payment
of $1 million as minimum royalty payments in each of fiscal 2004 and fiscal
2005. There are no guaranteed minimum royalty payments thereafter. It is
anticipated that other product licenses with annual guaranteed minimum royalty
payments and leases that expire will be renewed or replaced, and future
guaranteed minimum royalty commitments and lease commitments are not expected to
aggregate less than the amount shown in year 1.
During fiscal 2002, the Company replaced its existing bank credit agreement
by entering into a Revolving Bank Credit Agreement with a group of financial
institutions to provide a $65 million revolving line of credit which matures in
January 2005. At June 28, 2003, $32.9 million was available for future borrowing
under the Revolving Bank Credit Agreement. We believe that cash flows from
operating activities and borrowings under the Revolving Bank Credit Agreement
will be adequate to meet our short-term and future liquidity requirements prior
to the maturity of the Revolving Bank Credit Agreement in fiscal 2005 although
no assurance can be given in this regard.
13
New Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145 "Rescission of
FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The new standard eliminated the requirement to
classify all gains and losses related to debt extinguishments as extraordinary
items. The Company adopted SFAS No. 145 in the first quarter of fiscal 2003,
and reported the $9.6 million gain related to the GFSI, Inc. bond exchange as
a component of pre-tax income. The Company has reclassified the fiscal 2002
extraordinary loss on extinguishment of debt as other income (expense) in
accordance with the transition provisions of SFAS No. 145.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability because that financial instrument embodies an obligation of the
issuer. SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company is currently
evaluating what impact, if any, this standard will have.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities". The Interpretation addresses consolidation by
business enterprises of variable interest entities which meet certain
characteristics and is effective for all variable interest entities created
after January 31, 2003 and otherwise for the fiscal year beginning after June
15, 2003. The Interpretation does not have any effect on the Company's financial
position or results of operation.
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 2003, net sales of the Company
during the first half and second half of the fiscal year were approximately 55%
and 45%, respectively. The seasonality of sales is primarily due to higher
college bookstore sales volume during the first two fiscal quarters. Sales at
the Company's Resort and Corporate divisions typically show no significant
seasonal variations.
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.
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
The Company's market risk exposure is primarily due to possible
fluctuations in interest rates. The fixed rate portion of the Company's
long-term debt does not bear significant interest rate risk. The variable rate
debt would be affected by interest rate changes to the extent the debt is not
matched with an interest rate swap or cap agreement or to the extent, in the
case of the RBCA, that balances are outstanding. An immediate 1 percent increase
in interest rates would not have a material effect on the Company's results of
operations over the next fiscal year, although there can be no assurances that
interest rates will not significantly change.
14
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
Independent Auditors' Report........................................... 16
Report of Independent Auditors......................................... 17
Consolidated Balance Sheets - June 28, 2003 and June 29, 2002......... 18
Consolidated Statements of Operations - Years Ended June 28, 2003,
June 29, 2002 and June 29, 2001................................... 19
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended June 28, 2003, June 29, 2002
and June 29, 2001.................................................. 20
Consolidated Statements of Cash Flows - Years Ended June 28, 2003,
June 29, 2002 and June 29, 2001................................... 21
Notes to Consolidated Financial Statements............................. 22
Schedule I - GFSI Holdings, Inc. Parent Company
Only Financial Statements......................................... 34
15
Independent Auditors' Report
The Board of Directors
GFSI Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of GFSI Holdings,
Inc. and subsidiaries (Holdings) as of June 28, 2003 and June 29, 2002, and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) 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 consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GFSI
Holdings, Inc. and subsidiaries as of June 28, 2003 and June 29, 2002, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
Kansas City, Missouri
August 22, 2003
16
Report of Independent Auditors
To The Board of Directors
GFSI Holdings, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity (deficiency) and of cash flows of GFSI
Holdings, Inc. and its subsidiaries present fairly, in all material respects,
the results of their operations and their cash flows for the year ended June
29, 2001, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
September 12, 2001
17
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 28, June 29,
ASSETS 2003 2002
------------ ----------
Current assets:
Cash and cash equivalents........................................ $ 1,401 $ 328
Accounts receivable, net of allowance for doubtful accounts of
$906 and $767 at June 28, 2003 and June 29, 2002.............. 34,357 32,626
Inventories, net................................................. 42,663 45,729
Income tax receivable............................................ -- 284
Prepaid expenses and other current assets........................ 1,323 1,268
Deferred income taxes............................................ 1,303 845
--------- ---------
Total current assets........................................ 81,047 81,080
Property, plant and equipment, net.................................... 19,883 19,671
Other assets:
Deferred financing costs, net of accumulated amortization of
$4,661 and $3,684 at June 28, 2003 and June 29, 2002.......... 3,085 4,063
Other............................................................. 9 1,010
--------- ---------
3,094 5,073
--------- ---------
Total assets........................................... $ 104,024 $ 105,824
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................................. $ 7,843 $ 12,010
Accrued interest expense.......................................... 4,365 4,365
Accrued expenses.................................................. 6,279 5,983
Income taxes payable.............................................. 33 --
Current portion of long-term debt................................. 324 177
---------- ---------
Total current liabilities.................................... 18,844 22,535
Deferred income taxes.................................................. 4,957 699
Long-term debt, less current portion .................................. 232,565 241,120
Other long-term obligations............................................ 491 527
Redeemable preferred stock............................................. 5,670 5,405
Commitments and contingencies (Note 2 and 5)...........................
Stockholders' equity (deficiency):
Series A Common Stock, $.01 par value, 1,105 shares authorized,
1,000 shares issued at June 28, 2003 and June 29, 2002....... -- --
Series B Common Stock, $.01 par value, 1,000 shares authorized,
1,000 shares issued at June 28, 2003 and June 29, 2002....... -- --
Additional paid-in capital....................................... 200 200
Accumulated deficiency........................................... (158,689) (164,651)
Treasury Stock, at cost (195 and 152.5 Series A shares at
June 28, 2003 and June 29, 2002, respectively).............. (14) (11)
---------- ----------
Total stockholders' equity (deficiency)................... (158,503) (164,462)
---------- ----------
Total liabilities and stockholders' equity (deficiency) $ 104,024 $ 105,824
========== ==========
See notes to consolidated financial statements.
18
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Years Ended
------------------------------------
June 28, June 29, June 29,
2003 2002 2001
---------- ---------- ----------
Net sales ...................................... $ 209,273 $ 197,250 $ 185,305
Cost of sales .................................. 131,118 123,623 114,579
--------- --------- ---------
Gross profit ......................... 78,155 73,627 70,726
Operating expenses:
Selling ................................... 27,185 24,583 22,304
General and administrative ................ 26,755 26,350 26,388
Restructuring costs ....................... -- -- 836
Acquisition of business ................... -- -- 1,110
Gain on disposition of business ........... -- -- (630)
---------- ---------- ----------
53,940 50,933 50,008
---------- ---------- ----------
Operating income ..................... 24,215 22,694 20,718
Other income (expense):
Interest expense .......................... (23,708) (24,674) (24,656)
Gain (loss) on early extinguishment of debt 9,610 (994) --
Other ..................................... 24 22 415
---------- ---------- ----------
(14,074) (25,646) (24,241)
---------- ---------- ----------
Income (loss) before income taxes .............. 10,141 (2,952) (3,523)
Income tax (expense) benefit ................... (3,970) 1,151 1,483
---------- ---------- ----------
Net income (loss) ......................... 6,171 (1,801) (2,040)
Preferred stock dividends ...................... (391) (408) (412)
---------- ---------- ----------
Net income (loss) attributable to
common shareholders ........................ $ 5,780 $ (2,209) $ (2,452)
========== ========== ==========
See notes to consolidated financial statements.
19
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years Ended June 28, 2003, June 29, 2002, and June 29, 2001
(in thousands)
Series A Series B Additional
Common Common Paid-In Accumulated Treasury
Stock Stock Capital Deficiency Stock Total
Balance, June 30, 2000 $ -- $ -- $ 200 $ (159,990) $ (2) $ (159,792)
Net loss.............. (2,040) (2,040)
Accrued dividends on
redeemable preferred
stock................. (412) (412)
Treasury stock purchase (5) (5)
--------- -------- -------- ------------ ------ -----------
Balance, June 29, 2001...... -- -- 200 (162,442) (7) (162,249)
Net loss............... (1,801) (1,801)
Accrued dividends on
redeemable preferred (408) (408)
stock.................. (4) (4)
Treasury stock purchase --------- -------- -------- ------------ ------ -----------
Balance, June 29, 2002...... -- -- 200 (164,651) (11) (164,462)
Net income............. 6,171 6,171
Foreign currency translation
gain................... 182 182
Accrued dividends on
redeemable preferred
stock.................. (391) (391)
Treasury stock purchase (3) (3)
--------- -------- -------- ------------ ------ -----------
Balance, June 28, 2003...... $ -- $ -- $ 200 $ (158,689) $ (14) $ (158,503)
========= ======== ======== ============ ====== ===========
See notes to consolidated financial statements.
20
GFSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
--------------------------------------------
June 28, 2003 June 29, 2002 June 29, 2001
-------------- ------------- -------------
Cash flows from operating activities:
Net income (loss).................................................. $ 6,171 $ (1,801) $ (2,040)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation.................................................. 3,137 3,095 3,046
Amortization of deferred financing costs...................... 1,008 1,179 1,215
Amortization of other intangibles............................. 1,000 1,000 --
Gain on disposition of business............................... -- -- (630)
(Gain) loss on sale or disposal of property, plant and equipment (24) (2) (99)
Deferred income taxes......................................... 3,800 (424) 156
Accretion of discount on long-term debt....................... 8,812 8,901 7,969
(Gain) loss on early extinguishment of debt................... (9,610) 994 --
Changes in operating assets and liabilities:
Accounts receivable, net...................................... (1,731) (9,932) 5,109
Inventories, net.............................................. 3,066 (7,993) 8,498
Prepaid expenses, other current assets and other assets....... (54) (129) (114)
Income tax receivable (payable)............................... 317 1,406 (1,999)
Accounts payable, accrued expenses and other long-term obligations (4,195) (4) 1,436
---------- ----------- ----------
Net cash provided by (used in) operating activities........ 11,697 (3,710) 22,547
---------- ----------- ----------
Cash flows from investing activities:
Proceeds from sales of property, plant and equipment............ 44 14 203
Purchases of property, plant and equipment...................... (3,369) (4,203) (1,787)
Proceeds from disposition of business........................... -- -- 2,672
Acquisition of business......................................... -- -- (9,500)
---------- ----------- ----------
Net cash used in investing activities...................... (3,325) (4,189) (8,412)
---------- ----------- ----------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowings............ (7,535) 30,527 --
Issuance of long-term debt..................................... 450 300 --
Payments on long-term debt...................................... (196) (26,859) (15,061)
Cash paid for financing costs................................... (69) (912) (190)
Redemption of preferred stock................................... (128) (800) (174)
Seller financing for acquisition of business.................... -- -- 5,158
Proceeds from sale of stock..................................... -- 651 --
Treasury stock purchase......................................... (3) (4) (5)
---------- ---------- ----------
Net cash provided by (used in) financing activities (7,481) 2,903 (10,272)
---------- ---------- ----------
Effect of foreign exchange rate changes on cash...................... 182 -- --
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,073 (4,996) 3,863
Cash and cash equivalents
Beginning of period............................................. 328 5,324 1,461
---------- ---------- ----------
End of period................................................... $ 1,401 $ 328 $ 5,324
========== ========== ==========
Supplemental cash flow information:
Interest paid.............................................. $ 13,888 $ 14,005 $ 15,698
========== ========== ==========
Income taxes paid (refunded)............................... $ (147) $ (2,391) $ 359
Supplemental schedule of non-cash investing and financing activities: ========== ========== ==========
Accrual of preferred stock dividends............................. $ 391 $ 408 $ 412
========== ========== ==========
See notes to consolidated financial statements.
21
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 28, 2003, JUNE 29, 2002 AND JUNE 29, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--GFSI Holdings, Inc. ("Holdings" or the "Company")
through its wholly-owned subsidiary, GFSI, Inc. ("GFSI") is a leading designer,
manufacturer and marketer of high quality, custom designed sportswear and
activewear bearing names, logos and insignia of resorts, corporations, colleges
and professional sports organizations. The Company's customer base is spread
throughout the United States and Canada.
Principles of Consolidation--The consolidated financial statements include
the accounts of Holdings and its wholly-owned subsidiary, GFSI. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year--The Company utilizes a 52/53 week fiscal year which ends on
the Saturday nearest June 30. The twelve month periods ended June 28, 2003, June
29, 2002 and June 29, 2001, each contain 52 weeks.
Revenue Recognition--The Company recognizes revenues when goods are
shipped, title has passed, the sales price is fixed and collectibility is
reasonably assured. Returns, discounts and sales allowance estimates are based
on projected sales trends, historical data and other known factors. If actual
returns, discounts and sales allowances are not consistent with the historical
data used to calculate these estimates, net sales could either be understated or
overstated.
The Company recognizes the costs of customer incentive programs and volume
rebates as a reduction of net sales. The Company records as revenue amounts
billed to customers for shipping and handling.
Cost of Sales, Selling, General and Administrative Costs-- Cost of sales
includes the cost of blank garment acquisition, freight, decoration,
warehousing, related overhead costs and shipping and handling costs to deliver
product to customers.
Selling, general and administrative expenses include sales commissions,
license royalties, marketing expenses, salaries, profit sharing, technology,
professional services and other similar costs.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Accounts Receivable--Accounts receivable consist of amounts due from
customers and business partners. The Company maintains an allowance for doubtful
accounts to reflect expected credit losses and provides for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continually evaluated and updated. If the
historic data used to evaluate credit risk does not reflect future collections,
or, if the financial condition of the Company's customers were to deteriorate
causing an impairment of their ability to make payments, additional provisions
for bad debts may be required in future periods.
Inventories--Inventories are carried at the lower of cost or market
determined under the First-In, First-Out (FIFO) method. The Company writes down
obsolete and unmarketable inventories to their estimated market value based
upon, among other things, assumptions about future demand and market conditions.
If actual market conditions are less favorable than projected, additional
inventory write-downs may be required. The Company also records changes in
valuation allowances due to changes in its operating strategy, such as the
discontinuances of certain product lines and other merchandising decisions
related to changes in demand. It is possible that further changes in required
inventory allowances may be necessary in the future as a result of market
conditions and competitive pressures. Inventories consist primarily of
non-decorated apparel ("blanks").
The following is a summary of inventories at June 28, 2003 and June 29, 2002:
(in thousands)
June 28, 2003 June 29, 2002
------------- -------------
Undecorated apparel ("blanks") and supplies $ 37,924 $ 42,431
Work in process............................ 609 1,114
Finished goods............................. 4,887 2,691
----------- -----------
43,420 46,236
Markdown allowances........................ (757) (507)
------------ -----------
$ 42,663 $ 45,729
============ ===========
22
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-- The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews for impairment
its long-lived assets and certain identifiable intangibles to be held and used
whenever events or changes in circumstance indicate that the carrying amount of
its assets might not be recoverable. The Company has concluded no financial
statement adjustment is required.
Deferred Financing Costs--Deferred financing costs are amortized using the
straight-line method over the shorter of the terms of the related loans or the
period such loans are expected to be outstanding. Amortization of deferred
financing costs is included in interest expense.
Advertising Costs-- All costs related to advertising the Company's products
are expensed in the period incurred. Advertising expenses totaled $2.0 million,
$1.5 million and $1.8 million for the years ended June 28, 2003, June 29, 2002
and June 29, 2001, respectively.
Income Taxes-- The Company accounts for income taxes using the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109. The liability method provides that deferred tax assets and liabilities
are recorded based on the difference between tax basis of assets and liabilities
and their carrying amount for financial reporting purposes, as measured by the
enacted tax rates which will be in effect when these differences are expected to
reverse. The Company files a consolidated federal tax return and is a party to a
tax sharing agreement with its wholly-owned subsidiary, GFSI, Inc.
Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment Information-- Substantially all of the Company's net sales are
derived from sources within the United States of America and substantially all
of its assets are located within the United States of America. During fiscal
2003 sales to one customer represented approximately 12% of consolidated net
sales. No single customer represented 10% or more of consolidated net sales in
fiscal 2002 or 2001.
New Accounting Standards-- In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The new standard eliminated the requirement to classify all gains and losses
related to debt extinguishments as extraordinary items. The Company adopted SFAS
No. 145 in the first quarter of fiscal 2003, and accordingly reported a $9.6
million gain related to the GFSI,Inc. Bond exchange as a component of pre-tax
income. The Company has reclassified the 2002 loss on extinguishment of debt,
previously reported as an extraordinary item, net of income taxes, as other
income (expense) in accordance with the provisions of SFAS No. 145. Net income,
shareholders equity or cash flows were not impacted by the adoption of this new
standard.
In May 2003, the FASB issued Statement of SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability because that financial instrument embodies an
obligation of the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
is currently evaluating what impact, if any, this standard will have on its
financial position and results of operations.
23
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities". The Interpretation addresses
consolidation by business enterprises of variable interest entities which meet
certain characteristics and is effective for all variable interest entities
created after January 31, 2003 and otherwise for the fiscal year beginning
after June 15, 2003. The Interpretation does not have any effect on the
Company's financial position or results of operation.
Reclassifications-- Certain reclassifications have been made to the fiscal
2002 and 2001 consolidated financial statements to conform to the fiscal 2003
presentation.
2. RESTRUCTURING, ACQUISITION AND DISPOSITION
During fiscal 2001, the Company recorded approximately $836,000 in
severance and employee termination benefits related to the execution of a
restructuring plan that eliminated approximately 50 positions.
On April 20, 2001, the Company signed a Stock Purchase Agreement to
purchase 100% of the issued and outstanding stock of Champion Products, Inc.
("CPI" or "Champion") through a wholly-owned subsidiary, CC Products, Inc.
("CCP"), and on June 25, 2001 the transaction closed. The Company paid
approximately $9.5 million for the common stock of CPI and a non-competition
agreement which was payable in four installments through October 1, 2001. In
addition, the Company entered into a 15 year License Agreement (the "License
Agreement") with Sara Lee Corporation (the former parent company of CPI) for the
exclusive use of the Champion logo and related trademarks on certain products
sold beginning July 1, 2001. Under the License Agreement, the Company will pay a
royalty to Sara Lee Corporation based upon net sales beginning in fiscal 2004.
The royalty rate ranges from 3% to 6% of net sales from years 3 to 15 of the
License Agreement. The License Agreement provides for guaranteed minimum
royalties of $1 million per year in years 3 and 4 of the License Agreement. CCP
was designated a restricted subsidiary under the Senior Subordinated Notes and
executed a guaranty for that debt instrument in June 2001.
On June 29, 2001, the Company sold the assets related to its Tandem
Marketing business for approximately $2.7 million in cash, net of closing costs,
and the buyer's assumption of $1.2 million in Tandem related liabilities. The
Company recognized a $630,000 gain on the sale of Tandem Marketing. Tandem
Marketing had revenues of $11.7 million and had operating income of $.5 million
for the fiscal year ended June 29, 2001.
3. PROPERTY, PLANT AND EQUIPMENT
(in thousands)
June 28, 2003 June 29, 2002
------------- -------------
Land....................................... $ 2,540 $ 2,455
Buildings and improvements................. 23,739 21,649
Furniture and fixtures..................... 21,344 19,462
--------- ----------
47,623 43,566
Less: accumulated depreciation............. 28,469 25,928
--------- ----------
19,154 17,638
Construction in progress................... 729 2,033
--------- ----------
$ 19,883 $ 19,671
========= ==========
24
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of:
(in thousands)
June 28, June 29,
2003 2002
--------- ---------
Senior Subordinated Notes, 9.625% interest rate, due 2007............ $ 134,900 $ 125,000
Revolving Bank Credit Agreement, variable interest rate, due 2005.... 22,992 30,527
Senior Discount Notes, 11.375% interest rate, due 2009............... 73,926 84,988
Other................................................................ 1,071 782
--------- ----------
232,889 241,297
Less current portion................................................. 324 177
--------- ----------
$ 232,565 $ 241,120
========= ==========
In December 2002 the Company's wholly-owned subsidiary, GFSI, Inc.,
completed the private placement of $9.9 million of unregistered 9.625% senior
subordinated notes ("Exchange Notes") in exchange for $24 million aggregate
principal amount at maturity of the Company's 11.375% Senior Discount Notes (the
"Holdings Discount Notes") with an accreted book value of $19.9 million. The
acquisition of the Holdings Discount Notes by GFSI, Inc. was considered an early
extinguishment of debt, and accordingly, the Company recorded a pre-tax gain on
the transaction of approximately $9.6 million, net of related costs, in fiscal
2003. In future periods, GFSI Holding's consolidated financial statements will
reflect a net reduction in annual interest expense of approximately $2.3 million
as a result of this exchange.
The Exchange Notes are unsecured obligations of GFSI, Inc., mature on March
1, 2007, pay interest semi-annually on March 1 and September 1, and were issued
under an indenture with substantially identical terms as the indenture governing
the $125 million aggregate principal amount at maturity of GFSI, Inc. Senior
Subordinated Notes issued on February 28, 1997. The Exchange Notes were
guaranteed by each of GFSI, Inc's wholly-owned subsidiaries (Event 1, CCP and
GFSI Canada Company). GFSI, Inc. subsequently filed an exchange offer
registration statement with the Securities and Exchange Commission which
publicly registered the notes.
In fiscal 2002 the Company replaced its existing bank Credit Agreement by
entering into a Revolving Bank Credit Agreement ("RBCA") with a group of
financial institutions to provide a revolving line of credit which matures in
January 2005. Proceeds from borrowings under the replacement RBCA were used to
retire the Company's existing bank debt which was comprised of both term loans
and revolving debt. The Company incurred fees and expenses totaling
approximately $900,000 to close the credit facility. The RBCA provides for
borrowings on a revolving basis of up to $65 million at an interest rate based
upon LIBOR or prime. The weighted average interest rate in effect at June 28,
2003 was 3.3%. In addition, the RBCA provides for the issuance of letters of
credit on behalf of the Company. At June 28, 2003 and June 29, 2002 the Company
had $4.5 million and $8.8 million in letters of credit outstanding and $32.9
million and $23.2 million in unused borrowing availability under the RBCA,
respectively. The Company recorded a pre-tax charge of $994,000 in fiscal 2002
to write off deferred debt origination costs related to the previous bank credit
facility.
25
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The RBCA is secured by substantially all of GFSI's assets and is guaranteed
by GFSI's wholly-owned subsidiaries and Holdings. Borrowings under the RBCA are
subject to certain restrictions and covenants. GFSI and its wholly-owned
subsidiary guarantors are limited with respect to paying dividends, providing
loans and distributions (except certain permitted distributions to Holdings),
the incurrence of certain debt, the incurrence of certain liens, and restricted
regarding certain consolidations, mergers and business combinations, asset
acquisitions and dispositions. The RBCA requires the Company, among other
things, to maintain a minimum fixed charge coverage ratio as defined in the
RBCA. At the most restrictive level, the Company must maintain a fixed charge
coverage ratio of 1.15 to 1.0. As of June 28, 2003, the Company was in
compliance with the restrictions and covenants of the RBCA.
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. Interest on the Senior Subordinated Notes is payable semi-annually
in cash in arrears on September 1 and March 1 each year. The Senior Subordinated
Notes mature on March 1, 2007 and are redeemable, in whole or in part, at the
option of the Company at any time at the redemption prices listed below:
Year Percentage
---- -----------
2003 103.208%
2004 101.604
2005 and thereafter 100.000
Upon the occurrence of a change of control, GFSI will be required,
subject to certain conditions, to make an offer to purchase the Senior
Subordinated Notes at a price equal to 101% of the principal amount plus
accrued and unpaid interest to the date of purchase. The Senior Subordinated
Notes are publicly traded over the counter. At June 28, 2003, the quoted
market price for the Senior Subordinated Notes was 82/100. At June 28, 2003,
the Senior Subordinated Notes estimated fair value approximated $110.6
million.
The Senior Subordinated Notes are senior unsecured obligations of GFSI
and pursuant to the terms of the Senior Subordinated Notes indenture, rank
pari passu in right of payment to any future subordinated indebtedness of
GFSI, and effectively rank junior to secured indebtedness of GFSI, including
borrowings under the RBCA. 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
28, 2003, the Company was in compliance with all such covenants.
The Senior Discount Notes ("Holdings Discount Notes") were issued in 1997
to repay $25.0 million of Holdings' Subordinated Notes and $25.0 million of
Holdings' Preferred Stock and accrued dividends. The Holdings' Discount Notes
accrue interest at a rate of 11.375% compounded semi-annually to an aggregate
principal amount of $84.5 million at September 15, 2004. Thereafter, the
Holdings Discount Notes 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. Holdings is dependent on GFSI to provide funds
to service the indebtedness.
26
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on the Holdings Discount Notes is an unsecured obligation of
Holdings and pursuant to the terms of the Holdings Discount Notes, effectively
rank junior to the unsecured debt of GFSI, including the Senior Subordinated
Notes, and the secured indebtedness of GFSI, including borrowings under the
RBCA. The Holdings Discount Notes include certain affirmative and negative
covenants. As of June 28, 2003, the Company was in compliance with all such
covenants. The Holdings Discount Notes are publicly traded over the counter.
At June 28, 2003, the quoted market price for the Holdings Discount Notes was
32/100. At June 28, 2003, the Holdings Discount Notes estimated fair value
approximated $27 million.
On June 1, 1998, GFSI purchased a building and land in Bedford, Iowa for
approximately $428,000 in the form of a mortgage note payable of approximately
$6,000 per month from July 1998 through June 2004 with a lump sum payment of
$98,000 in June 2004. The note payable to the City of Bedford, Iowa is secured
by the property mortgaged.
Aggregate maturities of the Companys' long-term debt as of June 28, 2003
are as follows: (in thousands)
Year
----
2004................................. $ 324
2005................................. 23,158
2006................................. 88
2007................................. 134,979
2008................................. 81
Thereafter........................... 74,259
-------------
Total $ 232,889
=============
5. COMMITMENTS AND CONTINGENCIES
Rental expense for all operating leases aggregated approximately
$1.2 million, $727,000 and $598,000 in fiscal years 2003, 2002 and 2001,
respectively. It is anticipated that leases that expire will be renewed or
replaced, and future lease commitments are not expected to aggregate less than
the amount shown in fiscal 2003.
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.
6. REDEEMABLE PREFERRED STOCK
The holders of Preferred Stock are entitled to annual dividends of $120 per
share. The dividend has been accrued annually and the annual payment deferred
since 1997. Mandatory redemption of Preferred Stock at $1,000 per share plus
accrued and unpaid dividends is to occur on March 1, 2009.
27
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Redeemable preferred stock consists of the following:
(in thousands, except share data)
June 28, June 29,
2003 2002
---------- ---------
Series A 12% Cumulative Preferred Stock, $0.1 par value
1,428 and 1,503 shares outstanding at June 28, 2003
and June 29, 2002, respectively.................. $ 2,529 $ 2,480
Series B 12% Cumulative Preferred Stock, $0.1
par value, 1,445 shares
outstanding at June 28, 2003
and June 29, 2002................................ 2,559 2,383
Series C 12% Cumulative Preferred Stock, $0.1 par
value, 329 shares outstanding at June 28, 2003
and June 29, 2002. .............................. 582 542
----------- ---------
$ 5,670 $ 5,405
=========== =========
7. PROFIT SHARING AND 401(K) PLAN
The Company has a defined contribution (401k) plan which includes
employee directed contributions with an annual Company matching contribution
of 50% on up to 4% of a participant's annual compensation. In addition, the
Company may make additional profit sharing contributions at the discretion of
the Board of Directors. Participants exercise control over the assets of their
account and choose from a broad range of investment alternatives.
Contributions made by the Company to the plan related to the 401(k) match and
profit sharing portions totaled approximately $576,000, $528,000 and $617,000
for the years ended June 28, 2003, June 29, 2002 and June 29, 2001,
respectively.
8. INCOME TAXES
The provisions for income taxes for the years ended June 28, 2003, June 29,
2002 and June 29, 2001 consist of the following:
June 28, June 29, June 29,
2003 2002 2001
-------- ---------- ---------
Current income tax provision (benefit)...... $ 170 $ (727) $ (1,639)
Deferred income tax provision (benefit)..... 3,800 (424) 156
-------- ---------- ---------
Total income tax provision (benefit)... $ 3,970 $ (1,151) $ (1,483)
======== ========== =========
The income tax provisions differ from amounts computed at the statutory federal
year ended income tax rate as follows:
June 28, 2003 June 29, 2002 June 29, 2001
-------------- ------------- -------------
Amount % Amount % Amount %
-------- ------- --------- ------ -------- -------
Income tax provision (benefit) at the statutory rate $ 3,549 35.0% $(1,033) (35.0)% $(1,233) (35.0)%
Effect of state income taxes, net of federal benefit 395 3.9 (115) (3.9) (163) (4.6)
Other ............................................... 26 0.1 (3) (0.1) (87) (2.5)
------- ------ -------- ------- -------- -------
$ 3,970 39.0% $(1,151) (39.0)% $(1,483) (42.1)%
======= ====== ======== ======= ======== =======
28
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 28, 2003 and June 29,
2002, along with the income tax effect of each, were as follows:
June 28, 2003 June 29, 2002
-------------- -------------
Deferred Income Tax Deferred Income Tax
------------------- -------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Allowance for doubtful accounts .............. $ 352 $ -- $ 299 $ --
Property, plant, and equipment................ -- 1,549 -- 1,038
Accrued expenses.............................. 392 -- 346 --
Long-term debt extinguishment................. -- 3,763 -- --
Other assets, non current..................... 676 -- 338 --
Other......................................... 390 152 348 147
------------ ---------- ------- --------
Total......................................... $ 1,810 $ 5,464 $ 1,331 $ 1,185
============ ========== ======= ========
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that GFSI disclose estimated fair
values for its financial instruments which include cash and cash equivalents,
accounts receivables, short-term borrowings, accounts payables, long-term debt.
Cash and cash equivalents--The carrying amount reported on the balance
sheet represents the fair value of cash and cash equivalents.
Accounts receivable--The carrying amount of accounts receivable
approximates fair value because of the short-term nature of the financial
instruments.
Accounts payable--The carrying amount of accounts payable approximates fair
value because of the short-term nature of the financial instruments.
Long-term debt-- Current market values, if available, are used to determine
fair values of debt issues with fixed rates. The carrying value of floating rate
debt is a reasonable estimate of its fair value because of the short-term nature
of its pricing.
The following summarizes the estimated fair value of financial
instruments, by type: (in thousands)
June 28, 2003 June 29, 2002
--------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- --------- --------
Assets and liabilities:
Cash and cash equivalents...... $ 1,401 $ 1,401 $ 328 $ 328
Accounts receivable............ 34,357 34,357 32,626 32,626
Accounts payable............... 7,843 7,843 12,010 12,010
Long-term debt................. 232,889 161,712 241,297 167,305
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.
29
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTY TRANSACTIONS
The Jordan Company Management Corporation has an agreement through February
2007 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 its business. The agreement will renew for
successive one year terms unless either party, within 60 days prior to renewal,
elects to terminate the agreement. The Company incurred consulting fees totaling
$500,000, $500,000 and $440,000 for years ended June 28, 2003, June 29, 2002 and
June 29, 2001, respectively.
Holdings has a non-competition agreement with a shareholder and an officer.
In exchange for the covenant not to compete, the shareholder is paid $250,000
per annum for a period of ten years. For each of the years ended, June 28, 2003,
June 29, 2002 and June 29, 2001, $250,000 of expense related to this agreement
was included in general and administrative expenses.
The Company has employment agreements with Robert M. Wolff, Chairman and
Chief Executive Officer, a Director and a stockholder of the Company. The terms
of the employment agreements provide for Mr. Wolff to serve as Chairman of the
Company in exchange for a base salary and other employee benefits through 2016.
Under the terms of the employment agreements, Mr. Wolff received an annual
salary of approximately $212,000, $195,000, and $209,000, and use of a Company
vehicle for the years ended June 28, 2003, June 29, 2002 and June 29, 2001,
respectively.
11. STOCK OPTIONS
The Board of Directors' grant stock options to certain officers on a
discretionary basis. The grants are in the combined form of Class A common and
Class A preferred shares. The grant price of the option is generally determined
by a formula which places a nominal value on the Class A common share and a par
plus accrued and unpaid dividend value on the Class A preferred shares.
Management believes this formula reasonably approximates fair value. The
Company's stock is not publicly traded and has no quoted per share value. The
Company recognizes compensation expense to the extent an option is granted for
an exercise price that is less than the formula value at the date of the grant.
The following table summarizes activity for options to purchase Class A common
and preferred stock.
Common Stock Preferred Stock
------------ ---------------
Weighted-average Weighted-average
Class A Shares exercise price Class A Shares exercise price
-------------- -------------- -------------- --------------
Outstanding at June 29, 2002 50 $ 100 88.7 $ 1,247
Granted 70 100 124.2 1,304
Exercised (5) 100 (8.9) --
Forfeited (5) 100 (8.9) 1,646
------- -------
Outstanding at June 28, 2003 110 $ 100 195.1 $ 1,322
======= =======
Options exercisable at June 29, 2002 10 $ 100 17.7 $ --
Options exercisable at June 28, 2003 25 $ 100 44.3 $ 1,247
30
GFSI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides certain information with respect to stock options
outstanding at June 28, 2003:
Stock Options Weighted-average Range of
Outstanding exercise price Exercise Prices
------------- ---------------- ---------------
Common Stock Options 110 $ 100 $ 100
Preferred Stock Options: 35.5 $ -- $ --
159.6 $ 1,616 $1,559-$1,721
The following table provides certain information with respect to stock options
exercisable at June 28, 2003:
Stock Options Weighted-average Range of
Outstanding exercise price Exercise Prices
------------- ---------------- ---------------
Common Stock Options 25 $ 100 $ 100
Preferred Stock Options: 8.9 $ -- $ --
35.4 $ 1,559 $ 1,559
The Company follows APB Opinion 25 to account for stock options granted to
employees. Had the Company accounted for its stock options granted to employees
under FASB Statement 123, the effect would have been insignificant.
12. SUBSEQUENT EVENT
In August 2003, the Company sold its 100,000 square foot distribution
facility located in Lenexa, Kansas, for approximately $2.8 million. The Company
will record a pre-tax gain on the sale of approximately $900,000 in the first
quarter of fiscal 2004. The facility was sold as part of a warehouse
consolidation and automation initiative which will combine the distribution
operations from this facility and several other smaller leased warehouses.
In August 2003, the Company entered into an operating lease for
approximately 240,000 square feet of space in an existing industrial building
near its Lenexa headquarters to support the distribution automation initiative.
Annual rent under the ten year operating lease is approximately $730,000 and
provides for one ten year extension. The agreement also allows the Company an
option to expand into an additional 65,000 square feet of existing space. The
Company expects to complete its move to the new distribution facility in the
second half of fiscal 2004.
31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
GFSI Holdings, Inc.
We have audited the consolidated financial statements of GFSI Holdings,
Inc. and subsidiaries as of June 28, 2003 and June 29, 2002, and for the years
then ended and have issued our report thereon dated August 22, 2003. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the financial statement schedule as of June 28, 2003
and June 29, 2002 and for the years then ended. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
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 set forth therein.
/s/ KPMG LLP
Kansas City, Missouri
August 22, 2003
32
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
GFSI Holdings, Inc.
Our audit of the accompanying consolidated financial statements of GFSI
Holdings, Inc. and subsidiaries referred to in our report dated September 12,
2001 also included an audit of the financial statement schedule which follows.
In our opinion, the financial statement schedule presents fairly in all
material respects, the information set forth therein, when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
September 12, 2001
33
SCHEDULE I
GFSI HOLDINGS, INC.
PARENT COMPANY ONLY
BALANCE SHEETS
June 28, 2003 and June 29, 2002
(in thousands, except share data)
June 28, June 29,
ASSETS 2003 2002
- ------ -------- --------
Current assets:
Cash.............................................................. $ 14 $ 15
Income tax receivable............................................. 8,817 5,371
-------- --------
8,831 5,386
Deferred financing costs............................................... 126 189
--------- --------
Total assets................................................... $ 8,957 $ 5,575
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
Negative investment in GFSI, Inc....................................... 83,972 79,644
Deferred income taxes.................................................. 3,892 --
Long-term debt......................................................... 73,926 84,988
Redeemable preferred stock............................................. 5,670 5,405
Stockholders' deficiency:
Common stock.................................................. -- --
Additional paid-in capital.................................... 200 200
Accumulated deficiency........................................ (158,689) (164,651)
Treasury stock, at cost (195 and 152.5 Series A shares at
June 28, 2003 and June 29, 2002, respectively)............ (14) (11)
--------- ---------
Total stockholders' equity (deficiency)................ (158,503) (164,462)
--------- ---------
Total liabilities and stockholders' equity (deficiency)...... $ 8,957 $ 5,575
========= =========
See independent auditors report on schedules.
34
SCHEDULE I
GFSI HOLDINGS, INC.
PARENT COMPANY ONLY
STATEMENTS OF OPERATIONS
Years Ended June 28, 2003, June 29, 2002 and June 29, 2001
(in thousands)
Years Ended
-------------------------------------------------
June 28, 2003 June 29, 2002 June 29, 2001
-------------- ------------- -------------
General and administrative expenses.................................... $ -- $ -- $ (10)
Interest expense....................................................... (8,836) (8,927) (7,995)
Gain on early extinguishment of debt................................... 9,610 -- --
------------- ------------ -----------
Income (loss) before income taxes and equity in net income of GFSI, Inc. 774 (8,927) (8,005)
Income tax benefit (expense)........................................... (317) 3,482 3,114
------------- ------------ -----------
Income (loss) before equity in net income of GFSI, Inc................. 457 (5,445) (4,891)
Equity in net income of GFSI, Inc...................................... 5,714 3,644 2,851
------------- ------------ -----------
Net income (loss)...................................................... 6,171 (1,801) (2,040)
Preferred stock dividends.............................................. (391) (408) (412)
------------- ------------ -----------
Net income (loss) attributable to common shareholders.................. $ 5,780 $ (2,209) $ (2,452)
============= ============ ===========
See independent auditors report on schedules.
35
SCHEDULE I
GFSI HOLDINGS, INC.
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
Years Ended June 28, 2003, June 29, 2002 and June 29, 2001
(in thousands)
Years Ended
-----------------------------------------------
June 28, 2003 June 29, 2002 June 29, 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income (loss)........................................................ $ 6,171 $ (1,801) $ (2,040)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Equity in net income of GFSI, Inc................................ (5,714) (3,644) (2,851)
Distributions received from GFSI, Inc............................ 324 152 179
Amortization of deferred financing costs......................... 24 26 26
Accretion of discount on long-term debt.......................... 8,812 8,901 7,969
Gain on early extinguishment of debt............................. (9,610) -- --
Changes in:
Income tax receivable...................................... (3,445) (3,481) (1,889)
Accrued expenses and income taxes payable.................. (195) -- (215)
Deferred income taxes...................................... 3,763 -- --
---------- --------- ------------
Net cash provided by operating activities........... 130 153 1,179
---------- --------- ------------
Cash flows from financing activities:
Capital contribution to GFSI, Inc................................... -- -- (1,000)
Redemption of preferred stock....................................... (128) (800) (174)
Proceeds from sale of stock......................................... -- 652 --
Treasury stock purchase............................................. (3) (5) (5)
---------- --------- ------------
Net cash used in financing activities.............. (131) (153) (1,179)
---------- --------- ------------
Net increase in cash..................................................... (1) -- --
Cash, beginning of period................................................ 15 15 15
---------- --------- ------------
Cash, end of period...................................................... $ 14 $ 15 $ 15
========== ========= ============
Supplemental schedule of non-cash financing activities:
Accrual of preferred stock dividends................................ $ 391 $ 408 $ 412
========== ========= ============
See independent auditors report on schedules.
36
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9 A. - Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period ended
June 28, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and the Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls, nor were any
corrective actions required with regard to significant deficiencies and material
weaknesses.
PART III
Item 10 - Directors and Executive Officers
The following sets forth the names and ages of Holdings' directors and
executive officers and the positions they hold as of the date of this annual
report:
Name Age Position with Company
- ---- --- ---------------------
Robert M. Wolff 68 Chief Executive Officer and Chairman of the Board
Larry D. Graveel 54 President, Chief Operating Officer and Director
J. Craig Peterson 51 Senior Vice President, Chief Financial Officer and Director
Michael H. Gary 51 Executive Vice President, Sales Administration and Director
A. Richard Caputo, Jr. 37 Director
John W. Jordan II 55 Director
David W. Zalaznick 49 Director
Set forth below is a brief description of the business experience of each
director and executive officer of Holdings including each person's principal
occupations and employment during the past five years, the name and principal
business of any corporation or other organization in which such occupations and
employment were carried on and whether such corporation or organization is a
parent, subsidiary or other affiliate of the registrant.
Robert M. Wolff has served as Chairman of the Company since its inception
in 1974.
Larry D. Graveel has served as President since September 2000. He has
served as a director of the Company since February 1997 and as Chief Operating
Officer of the Company since 1999. Prior to that, Mr. Graveel served as a Senior
Vice President, Merchandising from 1993 to 1999 and as a merchandising manager
of the Company since 1984.
J. Craig Peterson has served as Senior Vice President and Chief Financial
Officer of the Company since March 2001. Prior to that, Mr. Peterson served as
Chief Financial Officer at eScout.com LLC, an on-line, internet based
marketplace (2000 - 2001), Chief Financial Officer at Gold Bancshares Corp.
(1999 - 2000), and Chief Financial Officer at Unitog Company, a uniform apparel
manufacturer (1991 - 1998). Prior to those positions, Mr Peterson was a partner
at KPMG LLP, a public accounting firm.
Michael H. Gary has served as Executive 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 a director of the Company since
February 1997. Mr. Caputo is a managing director of The Jordan Company, a
private merchant banking firm, with which he has been associated since 1990. Mr.
Caputo is also a director of AmeriKing, Inc. and Jackson Products, Inc. as well
as other privately held companies.
37
John W. Jordan II has served as a director of the Company since February
1997. Mr. Jordan has been a managing director of The Jordan Company since
1982. Mr. Jordan is also a director of Jordan Industries, Inc., Carmike
Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc.,
AmeriKing, Inc., Jordan Telecommunication Products, Inc., Motors and Gears,
Inc., Jackson Products, Inc. and Rockshox, Inc. as well as other privately
held companies.
David W. Zalaznick has served as a director of the Company since February
1997. Mr. Zalaznick has been a managing director of The Jordan Company since
1982. Mr. Zalaznick is also a director of Jordan Industries, Inc., Carmike
Cinemas, Inc., American Safety Razor Company, Apparel Ventures, Inc., Marisa
Christina, Inc., AmeriKing, Inc., Jordan Telecommunications Products, Inc.,
Motors and Gears, Inc. and Jackson Products, Inc. as well as other privately
held companies.
Stockholders Agreement
In connection with the acquisition, Holdings, the Management Investors (as
defined therein) and the Jordan Investors (as defined therein) 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 Holdings.
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 arms-length transaction to a nonaffiliated party may require
the remaining stockholders to sell their stock on the same terms and conditions
and (iv) grant each Stockholder piggyback registration rights to participate in
certain registrations initiated by 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 Holdings
or GFSI, including any proposed dissolution, amendment to the certificate of
incorporation or by-laws or merger, consolidation or sale of all or
substantially all of the assets of the Company. The provisions described under
"Stockholders Agreement" represent all of the material provisions of such
agreement.
Board of Directors
Liability Limitation. The Certificate of Incorporation provides that a
director of Holdings shall not be personally liable to it or its stockholders
for monetary damages to the fullest extent permitted by the Delaware General
Corporation Law. In accordance with the Delaware General Corporation Law, the
Certificate of Incorporation does not eliminate or limit the liability of a
director for acts or omissions that involve intentional misconduct by a director
or a knowing violation of law by a director for voting or assenting to an
unlawful distribution, or for any transaction from which the director will
personally receive a benefit in money, property, or services to which the
director is not legally entitled. The Delaware General Corporation Law does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. Any amendment to
these provisions of the Delaware General Corporation Law will automatically be
incorporated by reference into the Certificate of Incorporation and the Bylaws,
without any vote on the part of its stockholders, unless otherwise required.
38
Indemnification Agreements. Simultaneously with the consummation of the
acquisition of Winning Ways, Inc., Holdings and each of its directors entered
into indemnification agreements. The indemnification agreements provide that
Holdings 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 Holdings) to which any of them is, or
is threatened to be, made a party by reason of their status as a director,
officer or agent of Holdings, or serving at the request of Holdings in any other
capacity for or on behalf of Holdings; provided that (i) such director acted in
good faith and in a manner not opposed to the best interest of Holdings, (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
Holdings, 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 Holdings, directors may also be indemnified to the extent
not prohibited by applicable laws or as determined by a court of competent
jurisdiction against expenses actually and reasonably incurred by them in
connection with such action if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of Holdings.
Director Compensation. Each director of Holdings receives $20,000 per year
for serving as a director of Holdings. In addition, Holdings reimburses
directors for their travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
39
Item 11 - Executive Compensation
The following table sets forth information concerning the aggregate
compensation paid and accrued to the Company's executive officers for services
rendered to the Company during each of the three most recent fiscal years.
Board of
Fiscal Directors
Position Year Salary Bonus Fees (3) Other (2)
- -------- ------ ------- ----- --------- ---------
Robert M. Wolff 2003 $ 250,416 $ -- $ 20,000 $ 253,810
Chairman and Chief Executive Officer 2002 195,354 -- 20,000 257,014
2001 209,005 -- 20,000 257,014
Larry D. Graveel 2003 350,523 -- 20,000 15,513
President 2002 350,727 -- 20,000 4,718
Chief Operating Officer 2001 311,931 -- 20,000 6,352
J. Craig Peterson (1) 2003 260,519 10,000 20,000 14,657
Senior Vice President and 2002 250,666 -- 20,000 4,043
Chief Financial Officer 2001 87,500 -- 10,000 --
Michael H. Gary 2003 325,519 -- 20,000 14,760
Executive Vice President 2002 325,669 -- 20,000 9,531
2001 288,654 -- 10,000 10,152
Jim Malseed (4) 2003 190,515 58,639 -- 17,103
President CCP 2002 180,726 36,616 -- 11,125
2001 59,712 -- -- 3,865
(1) During fiscal 2002 and fiscal 2003, the Company granted J. Craig Peterson
options to purchase a combined total of 50 shares of Holdings' Class A Common
Stock and 88.7 shares of Holdings' Class A Preferred Stock. The options vest
over a period of two years and were generally granted with an exercise price
equal to the formula value at the date of grant. Management believes the
formula value reasonably approximates fair value. As a portion of these
grants, options for 10 Class A Common shares and 17.7 shares of the Class A
Preferred Stock were awarded to Mr. Peterson at prices lower than the formula
values and, accordingly, the Company recorded $16,780 and $14,630 in
compensation expense during fiscal 2003 and 2002, respectively.
(2) Other compensation for Robert M. Wolff includes $250,000 per annum paid
under the Wolff Non-competition Agreement which is described more fully in Item
13. Other compensation for Mr. Wolff and the remaining officers also includes
Company contributions to the qualified 401(k) plan and vehicle reimbursement
allowances.
(3) Mr. Wolff, Mr. Graveel, Mr. Peterson and Mr. Gary each received compensation
as members of the Board of Directors of GFSI Holdings, Inc.
(4) During fiscal 2003, the Company granted Jim Malseed options to purchase 15
shares of Holdings' Class A Common Stock and 26.6 shares of Holdings' Class A
Preferred Stock. The options vest over periods of two to five years. One of the
options was granted with an exercise price lower than the formula value and,
accordingly, the Company recorded $32,410 in compensation expense during fiscal
2003.
40
Incentive Compensation Plan
The Company adopted an incentive compensation plan (the "Incentive
Plan"), for senior executives during the fiscal 1998. The Incentive Plan
provides for annual cash bonuses payable based on a percentage of EBIT (as
defined in the Incentive Plan) if certain EBIT targets are met. No compensation
was paid under the incentive compensation plan during fiscal 2001, fiscal 2002
and fiscal 2003.
Item 12 - Security Ownership and Certain Beneficial Owners and Management
The Company has common stock and three series of preferred stock issued
and outstanding (the "Preferred Shares"). The table below sets forth certain
information regarding beneficial ownership of the common stock of Holdings and
the Preferred Shares held by (i) each of its directors and executive officers
who own shares of common stock of Holdings, (ii) all directors and executive
officers of Holdings as a group and (iii) each person known by Holdings to own
beneficially more than 5% of its common stock and/or Preferred Shares. The
Company believes that each individual or entity named has sole investment and
voting power with respect to shares of common stock of Holdings as beneficially
owned by them, except as otherwise noted.
Amount of Beneficial Ownership(1)
---------------------------------
Common Shares Preferred Shares
------------- -----------------
Number of Percentage Number of Percentage
Executive Officers and Directors: Shares Owned Shares Owned
- -------------------------------- ------ ---------- --------- ----------
Robert M. Wolff (2)(3) 60.0 3.4% 106.4 3.4%
Larry D. Graveel (2)(4) 225.0 12.7 399.1 12.7
Michael H. Gary (2)(5) 225.0 12.7 399.1 12.7
J. Craig Peterson (2)(6) 95.0 5.5 168.5 5.5
John W. Jordan II (7)(8) 78.3 4.4 54.6 1.7
David W. Zalaznick (7) 78.3 4.4 54.6 1.7
A. Richard Caputo, Jr. (7) 50.0 2.8 2.9 0.1
All directors and executive
officers as a group (7 persons) 791.6 45.0 1,185.3 37.1
Other Principal Stockholders:
- ----------------------------
JZ Equity Partners PLC (9) 500.0 28.3 1,445.4 46.2
Leucadia Investors, Inc. (10) 125.0 7.1 82.1 2.6
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days after
September 1, 2003 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 September 1, 2003, there were 1,765 shares of
common stock of Holdings issued and outstanding.
(2) The address of each of Messrs. Wolff, Peterson, Graveel and Gary is
c/o GFSI, Inc., 9700 Commerce Parkway, Lenexa, Kansas 66219.
(3) All shares are held by the Robert M. Wolff Trust, of which Mr. Wolff is
a trustee.
(4) All shares are held by the Larry D. Graveel Revocable Trust, of which
Mr. Graveel is a trustee.
41
(5) 205 shares are held by Michael H. Gary Revocable Trust, of which
Mr. Gary is a trustee. The remaining 20 shares are held in trust for
family members of Mr. Gary.
(6) 25 shares are held by a financial institution as trustee for
Mr. Peterson, 25 shares are held by the J. Craig Peterson and Linda
Z. Peterson Revocable Trust of which Mr. Peterson is Trustee and 50
shares issuable upon exercise of stock options.
(7) The address of each of Messrs. Jordan, Zalaznick and Caputo is c/o The
Jordan Company, 767 Fifth Avenue, New York, NY 10153.
(8) All shares are held by the John W. Jordan II Revocable Trust, of which
Mr. Jordan is trustee. (9) The principal address of JZ Equity Partners
PLC is c/o Jordan/Zalaznick Capital Company, 767 Fifth Avenue, New York,
NY 10153.
(10) The principal address of Leucadia Investors, Inc. is 315 Park Avenue
South, New York, NY 10010.
42
Item 13 - Certain Relationships and Related Transactions
Wolff Employment Agreement. In connection with the acquisition of Winning
Ways, Inc. in 1997, 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. During fiscal 2002, the Company entered into a Supplemental Employment
Agreement with Robert M. Wolff (the "Wolff Supplemental Agreement") which
extended the term of his tenure as an executive of the Company for an additional
ten years at a base salary of $120,000 per annum. The Wolff Supplemental
Agreement generally follows the same terms and provides for employee benefits
similar to the Wolff Employment Agreement.
Wolff Noncompetition Agreement. In connection with the acquisition of
Winning Ways in 1997, Holdings entered into a Noncompetition Agreement with
Robert M. Wolff (the "Wolff Noncompetition Agreement"). Pursuant to the Wolff
Noncompetition Agreement, Mr. Wolff will not, directly or indirectly, (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 or
Holdings for a ten-year period ending on the tenth anniversary of the
Acquisition, (ii) disclose at any time other than to the Company or Holdings any
Confidential Information (as defined in the Wolff Noncompetition Agreement) and
(iii) engage in any business with the Company or Holdings 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 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), Holdings will no longer be obligated to
make any payment to Mr. Wolff, but Mr. Wolff will remain obligated to comply
with the covenants set forth in the Wolff Noncompetition Agreement until its
expiration on the tenth anniversary of the acquisition.
Indemnification Agreements. In connection with the acquisition of Winning
Ways in 1997, the Company and each of its directors entered into indemnification
agreements. The indemnification agreements provide that the Company 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 interest of the Company.
43
Shaw Employment Agreement. In April 2001, the Company entered into an
Employment Agreement with Robert G. Shaw (the "Shaw Employment Agreement").
Pursuant to the Shaw Employment Agreement, Mr. Shaw will serve as Vice President
of the company until February 27, 2007. In exchange for his services, the
Company is to compensate Mr. Shaw with a base salary equal to $60,000, which
base salary is subject to annual increases at the discretion of the Board of
Directors and to provide him with certain employee benefits as set forth in the
Shaw Employment Agreement. As a condition of the Shaw Employment agreement, Mr.
Shaw was required to sell to Holdings all the shares of common stock and
preferred stock of Holdings then held by him and his family and affiliates.
Shaw Noncompetition Agreement. In connection with the Shaw Employment
Agreement, in April 2001 Holdings and Mr. Shaw entered into a Noncompetition
Agreement (the "Shaw Noncompetition Agreement"). Pursuant to the Shaw
Noncompetition Agreement, Mr. Shaw will not, directly or indirectly, (i) engage
in or have any interest in any business that (a) produces or markets decorated
activewear and is competitive with or similar to that of the Company of Holdings
or (b) sells to, supplies, provides goods or services to, purchases from, or
does business with the Company or Holdings, (ii) in any capacity, (a) divert
from the Company or Holdings any business with which he has contact while
employed by the Company or Holdings, (b) induce any salesperson, supplier,
vendor or other person transacting business with the Company or Holdings or (c)
induce or cause any employee of the Company or Holdings to leave
the employ of the company or Holdings, or (iii) disclose at any time any
confidential information (as defined in the Shaw Noncompetition Agreement) other
than to the Company or Holdings.
The Jordan Company. In connection with the acquisition of Winning Ways,
Inc. in 1997, GFSI Holdings entered into an agreement (the "TJC Agreement") with
The Jordan Company Management Corporation, an affiliate of The Jordan Company.
Messrs. Jordan, Zalaznick and Caputo, directors of GFSI, are also managing
directors of The Jordan Company and Messrs. Jordan and Zalaznick are the
principals of The Jordan Company Management Corporation. Under the TJC
Agreement, GFSI Holdings retained The Jordan Company Management Corporation to
render services to GFSI, its financial and business affairs, its relationships
with its lenders and stockholders, and the operation and expansion of its
business. The TJC Agreement expires in 2007, but is automatically renewed for
successive one-year terms, unless either party provides written notice of
termination 60 days prior to the scheduled renewal date. For the first two
years, the TJC Agreement provides for an annual consulting fee of $500,000
payable on a quarterly basis. For the remaining term of the TJC Agreement, GFSI
Holdings will pay The Jordan Company Management Corporation an annual consulting
fee payable on a quarterly basis equal to the higher of (a) $500,000 or (b) 1.5%
of earnings before interest, taxes and amortization, provided that in years
three through five of the TJC Agreement, the annual fee does not exceed $750,000
and thereafter the annual fee dies not exceed $1 million. In addition, the TJC
Agreement provides for payment to The Jordan Company Management Corporation of
(i) an investment banking and sponsorship fee of up to 2% of the purchase price
of certain acquisitions of sales involving GFSI Holdings or GFSI and (ii) a
financial consulting fee of up to 1% of any debt, equity or other financing
arranged by GFSI Holdings or GFSI with the assistance of The Jordan Company
Management Corporation. Both such fees are subject to Board of Directors
approval.
Tax Sharing Agreement. On February 27, 1997, GFSI and GFSI Holdings
entered into a tax sharing agreement for purposes of filing a consolidated
federal income tax return and paying federal income taxes on a consolidated
basis. Pursuant to the tax sharing agreement, GFSI and each of its
consolidated subsidiaries will pay to GFSI Holdings on an annual basis an
amount equal to the amount of the tax liability of GFSI Holdings apportioned
to GFSI and each of its consolidated subsidiaries, which, in each case, is
apportioned in accordance with the ratio that GFSI Holdings' consolidated
federal income attributable to GFSI or any of its consolidated subsidiaries
bears to GFSI Holdings' consolidated federal income. For the years ended June
28, 2003, June 29, 2002 and June 29, 2001 payments (refunds) under this
agreement aggregated approximately ($147,000), ($2,391,000) and $359,000,
respectively. No payments have been made for the six months ended December 28,
2002 under the tax sharing agreement.
Future Transactions. The Company has adopted a policy 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 us than could be obtained from unaffiliated third
parties.
44
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
Reference is made to the Index to Consolidated Financial Statements appearing in
Item 8, which Index is incorporated herein by reference.
(2) Financial Statement Schedule
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are not applicable and therefore have been omitted, or the
information has been included in the consolidated financial statements and
supplementary data or is considered immaterial.
(3) Exhibits
A list of the exhibits included as part of this Form 10-K is set forth
below.
EXHIBIT INDEX
Exhibit
Number Description Page
1 Purchase Agreements, dated February 27, 1997, by and among GFSI, Inc., Donaldson, Lufkin
& Jenrette Securities Corporation and Jefferies & Company, Inc. *
2.1 Agreement for Purchase and Sale of Stock, dated January 24, 1997, among GFSI Holdings,
Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. *
2.2 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated February 27, 1997,
among GFSI Holdings, Inc., GFSI, Inc. and the Shareholders of Winning Ways, Inc. *
2.3 Stock Purchase Agreement, dated as of April 20, 2001, by and among Sara Lee Corporation,
Champion Products, Inc. and GFSI, Inc. ***
2.4 First Amendment to Stock Purchase Agreement, dated June 25, 2001,
by and among Sara Lee Corporation, Champion Products, Inc, and
GFSI, Inc. ****
3.1 Certificate of Incorporation of GFSI, Inc. *
3.2 Bylaws of GFSI, Inc. *
4.1 Indenture, dated February 27, 1997, between GFSI, Inc. and Fleet National Bank, as Trustee *
4.2 Global Series A Senior Subordinated Note. *
4.3 Form of Global Series B Senior Subordinated Note. *
4.4 Registration Rights Agreement, dated February 27, 1997, by and among GFSI, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Jefferies & Company, Inc. *
4.5 Subscription and Stockholders Agreement, dated February 27, 1997, by and among GFSI,
Inc. and the investors listed thereto. *
4.6 Deferred Limited Interest Guaranty, dated February 27, 1997 by GFSI, Inc. to MCIT PLC. *
4.7 Indenture, dated September 17, 1997, between GFSI Holdings, Inc. and State Street Bank **
and Trust Company, as Trustee.
45
Exhibit
Number Description Page
4.8 Global Series A Senior Discount Note. **
4.9 Form Global Series B Senior Discount Note. **
4.10 Registration Rights Agreement, dated September 17, 1997, by and among GFSI Holdings, Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation. **
4.11 Indenture, dated as of December 31, 2002 between GFSI, Inc. and State Street Bank
and Trust Company. @
4.12 9 5/8 % Series A Senior Subordinated Note due 2007. @
10.1(a) Credit Agreement, dated February 27, 1997, by and among GFSI,
Inc., the lenders listed thereto and The First National Bank of
Chicago, as Agent. *
10.1(b) Amendment No. 1 to Credit Agreement dated September 17, 1997
by and among GFSI, Inc., the lenders listed thereto and the First
National Bank of Chicago, as agent. **
10.2 Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First National
Bank of Chicago, as Agent. *
10.3 Trademark Security Agreement, dated February 27, 1997, between GFSI, Inc. and The First
National Bank of Chicago, as Agent. *
10.4 Mortgage, Security Agreement, Financing Statement and Assignment of Rents and Leases,
dated February 27, 1997, by GFSI, Inc. in favor of The First National Bank of Chicago. *
10.5 (a) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Boatmen's
National Bank. *
10.5 (b) Restricted Account Agreement, dated February 27, 1997, between GFSI, Inc. and Hillcrest
Bank. *
10.6 Tax Sharing Agreement, dated February 27, 1997, between GFSI, Inc. and GFSI Holdings, Inc. *
10.7 Management Consulting Agreement, dated February 27, 1997, between GFSI Holdings, Inc.
and TJC Management Corporation. *
10.8 Employment Agreement, dated February 27, 1997, between GFSI, Inc. and Robert M. Wolff. *
10.9 Noncompetition Agreement, dated February 27, 1997, between GFSI Holdings, Inc. and
Robert M. Wolff. *
10.10 Form of Indemnification Agreement, dated February 27, 1997, between GFSI Holdings. Inc.
and its director and executive officers. *
10.11 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Impact Design,
Inc. *
10.12 Promissory Note, dated August 12, 1996, between Winning Ways, Inc. and Kansas Custom
Embroidery. *
10.13 Form of Promissory Note, dated February 27, 1997, between GFSI Holdings, Inc. and the
Management Investors. *
10.14 License Agreement, dated April 1, 1994, by and between Winning Ways, Inc. and Softwear
Athletics, Inc. *
10.15 License Agreement, dated October 27, 1998, by and between GFSI, Inc. and Bonmax Co., Ltd. *
10.16 License Agreement, dated January 1, 1999, by and between GFSI, Inc. and Gear For Sports Ltd. *
10.17 CEBA Loan Agreement, dated April 28, 1998, by and among the Iowa Department of Economic
Development, the City of Bedford and GFSI, Inc. *
46
Exhibit
Number Description Page
10.18 Employment Agreement, dated as of April 1, 2001, by and between the Company and Robert
G. Shaw. ****
10.19 Non-competition Agreement, dated as of April 1, 2001, by and between the Company and
Robert G. Shaw. ****
10.20 License Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC
Products Acquisition, Inc., CC Products, Inc. and the Company. ****
10.21 Supply Agreement, dated as of June 25, 2001, by and among Sara Lee Corporation, CC
Products Acquisition, Inc., CC Products, Inc. and the Company. ****
10.22 Fall 2001 Merchandise Agreement, dated as of June 25, 2001, by and among Sara Lee
Corporation, CC Products Acquisition, Inc., CC Products, Inc. and the Company. ****
10.23 Credit Agreement dated March 28, 2002, among the financial institutions named therein
as the Lenders, and Bank of America, N.A. as the Agent and GFSI, Inc. as the Borrower. @
10.24 Supplemental Employment Agreement, dated March 31, 2002 between GFSI, Inc. and @@
Robert M. Wolff.
10.25 Exchange Agreement, dated as of December 31, 2002, between GFSI, Inc. and
Jefferies Company, Inc. @@@
10.26 Consent and Amendment, dated as of December 31, 2002, to the Credit Agreement,
dated as of March 28, 2002. @@
10.27 Second Consent and Amendment, dated August 12, 2003, to the Credit Agreement, dated
as of March 28, 2002.
21.1 Subsidiaries of GFSI Holdings, Inc.
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
* Incorporated by reference to the exhibits filed with the
Registration Statement on Form S-4 of GFSI, Inc. filed with the
Securities and Exchange Commission on July 22, 1997 (Commission
File No. 333-24189) and all supplements thereto.
** Incorporated by reference to the exhibits filed with the
Registration Statement on Form S-4 of GFSI Holdings, Inc. filed
with the Securities and Exchange Commission on December 17,
1997 (Commission file No. 333-38951) and all supplements
thereto.
*** Incorporated by reference to the exhibits filed with Quarterly
Report on Form 10-Q of GFSI, Inc. filed with the Securities
and Exchange Commission on May 14, 2001 (Commission File No.
333-24189).
**** Incorporated by reference to the exhibits filed on Form 10-K of
GFSI, Inc. filed with the Securities and Exchange Commission on
September 27, 2001 (Commission File No. 333-38951).
@ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc.,
filed with the Securities and Exchange Commission on May 10, 2002 (Commission File No. 333-24189).
@@ Incorporated by reference to the exhibits filed on Form 10-K of GFSI, Inc., filed with the Securities
and Exchange Commission on September 25, 2002 (Commission File No. 333-24189).
@@@ Incorporated by reference to the exhibits filed on Form 10-Q of GFSI, Inc., filed with the
Securities and Exchange Commission on February 6, 2003 (Commission File No. 333-24189).
(b) Reports on Form 8-K.
None.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on September 24,
2003.
GFSI HOLDINGS, INC.
By: /s/ ROBERT M. WOLF
-----------------------------
Robert M. Wolff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
September 24, 2003.
Signatures Title
---------- ------
/s/ LARRY D. GRAVEEL President, Chief Operating Officer
- ------------------------- and a Director
LARRY D. GRAVEEL
/s/ J. CRAIG PETERSON Senior Vice President, Chief Financial Officer
- ------------------------- and a Director (Principal Financial
J. CRAIG PETERSON and Accounting Officer)
/s/ MICHAEL H. GARY Executive Vice President and a Director
- -------------------------
MICHAEL H. GARY
/s/ RICHARD CAPUTO, JR. Director
- -------------------------
RICHARD CAPUTO, JR.
/s/ JOHN W. JORDAN II Director
- -------------------------
JOHN W. JORDAN II
/s/ DAVID W. ZALAZNICK Director
- -------------------------
DAVID W. ZALAZNICK
/s/ ROBERT M. WOLFF Director, Chairman and Chief Executive Officer
- -------------------------
ROBERT M. WOLFF
48