UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
FOR ANNUAL AND TRANSACTION 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. 333-24189
GFSI, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 74-2810748
------------------------------- ----------------------
(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 checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 $0.
On September 1, 2003, there was 1 share 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....................................................6
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...........................................7
Item 6 - Selected Financial Data.......................................7
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................8
Item 7A - Quantitative and Qualitative Disclosures About Market Risk...13
Item 8 - Consolidated Financial Statements and Supplementary Data......14
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................35
Item 9A - Controls and Procedures......................................35
PART III
Item 10 - Directors and Executive Officers.............................36
Item 11 - Executive Compensation.......................................38
Item 12 - Security Ownership of Certain Beneficial Owners and
Management...................................................39
Item 13 - Certain Relationships and Related Transactions...............40
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.....................................................42
Signatures...................................................45
2
PART I
Item 1 - Business
GFSI, Inc. ("GFSI" or the "Company" ) was incorporated in the State of
Delaware on January 15, 1997. The Company is a wholly owned subsidiary of GFSI
Holdings, Inc. and was 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.
4
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.
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
5
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.
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.
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.
6
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.
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. There is no established public trading market for
Holdings' common stock. At June 28, 2003, all common stock of the Company was
held by Holdings.
Holdings has not declared nor paid any cash dividends on its common stock
since its formation in January 1997. The Company's financing agreements contain
restrictions on its ability to declare or pay dividends on its common stock
(except certain permitted distributions to Holdings).
Item 6 - Selected Financial Data
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.
7
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)........................ 52,395 48,093 49,998 50,933 53,940
---------- ---------- ---------- ---------- -----------
Operating income.............................. 30,841 31,233 20,728 22,694 24,215
Other expense, principally interest........... (18,345) (17,450) (16,247) (15,725) (14,848)
Loss on early extinguishment of debt.......... -- -- -- (994) --
---------- ---------- ---------- ---------- -----------
Income before taxes (2)....................... 12,496 13,783 4,481 5,975 9,367
Income tax expense............................ (4,683) (5,177) (1,630) (2,331) (3,653)
---------- ---------- ---------- ---------- -----------
Net income.................................... $ 7,813 $ 8,606 $ 2,851 $ 3,644 $ 5,714
========== ========== ========== ========== ===========
Balance Sheet Data (as of period end):
Cash and cash equivalents..................... $ 10,264 $ 1,446 $ 5,309 $ 313 $ 1,387
Total assets.................................. 104,917 99,179 93,567 105,336 113,784
Long-term debt (including current portion) ... 180,878 167,309 152,341 156,309 158,963
Total stockholders' equity (deficiency)....... (99,014) (86,809) (83,137) (79,645) (74,073)
Other Data:
Cash flows from operating activities.......... $ 18,222 $ 3,555 $ 21,547 $ (3,711) $ 11,891
Cash flows from investing activities.......... (2,041) (1,937) (8,412) (4,189) (3,325)
Cash flows from financing activities.......... (7,263) (10,436) (9,272) 2,904 (7,674)
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 before taxes includes (losses) on the early extinguishment of
debt of ($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.
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
conjunctionwith 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.
8
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.
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
9
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 fiscal 2003 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 $14.9 million,
$875,000 less than the comparable period last year. The decrease in interest
expense was due to lower interest rates in comparison to last year.
Loss on Early Extinguishment of Debt. 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 $5.7 million, compared to
$3.6 million in fiscal 2002. Improved operating income, the decrease in interest
expense and the absence of the loss on early extinguishment of debt all combined
to create the $2.1 million increase in net income over last year.
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.
10
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 decreased $914,000 to
$15.7 million from $16.7 million in fiscal 2001. The favorable effects of lower
interest rates created the decrease in fiscal 2002.
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. The Company had net income of $3.6 million in fiscal 2002
compared to $2.9 million in fiscal 2001. The increase in fiscal 2002 operating
income created the improvement over fiscal 2001.
Liquidity and Capital Resources
In December 2002 the Company completed the private placement of $9.9
million of unregistered 9.625% senior subordinated notes ("Exchange Notes") in
exchange for $24 million aggregate principal amount at maturity of GFSI
Holdings'11.375% Senior Discount notes ("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 $21.5 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
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 $(7.7) million, $2.9 million, and ($9.3) million, respectively. The
$7.7 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.
11
GFSI, Inc. anticipates paying dividends to GFSI Holdings to enable GFSI
Holdings to pay corporate income taxes, pursuant to a Tax Sharing Agreement,
interest on subordinated discount notes issued by GFSI Holdings, fees payable
under consulting agreements, fees payable under a non-competition agreement
between GFSI Holdings and Robert M. Wolff, and certain other ordinary course
expenses. GFSI Holdings 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
- ----------------------- ----- ------ --------- --------- -----
Direct cash obligations:
Long-term debt (including capital
lease obligations) $ 158,963 $ 324 $ 23,246 $ 135,060 $ 333
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 and employment agreements 2,540 305 670 485 1,080
---------- --------- --------- ----------- ----------
Total direct contractual cash obligations 184,018 21,814 25,246 135,545 1,413
Indirect cash obligations:
GFSI Holdings, Inc. 165,857 750 15,912 20,716 128,479
---------- --------- --------- ---------- ----------
Total direct and indirect cash obligations $ 349,875 $ 22,564 $ 41,158 $ 156,261 $ 129,892
========== ========= ========= =========== ==========
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.
Indirect cash obligations include the contractual obligations of GFSI
Holdings which the Company anticipates funding, to the extent that it can, the
necessary amounts to GFSI Holdings, provided the Company is permitted by its
Revolving Bank Credit Agreement and by its 9.625% Senior Subordinated notes
indentures. These obligations include payments to enable GFSI Holdings to pay
interest and principal on its subordinated discount notes, fees under
non-competition and consulting agreements and cash dividends on GFSI Holdings
preferred stock.
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 has reclassified the fiscal 2002 loss on extinguishment of debt as other
income (expense) in accordance with the transition provisions of SFAS No. 145.
12
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 on its financial
position and results of operations.
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.
13
Item 8 - Consolidated Financial Statements and Supplementary Data
Page
Independent Auditors' Report................................................15
Report of Independent Auditors..............................................16
Consolidated Balance Sheets - June 28, 2003 and June 29, 2002...............17
Consolidated Statements of Income - Years Ended June 28, 2003,
June 29, 2002 and June 29, 2001........................................18
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Years Ended June 28, 2003, June 29, 2002
and June 29, 2001.......................................................19
Consolidated Statements of Cash Flows - Years Ended June 28, 2003,
June 29, 2002 and June 29, 2001........................................20
Notes to Consolidated Financial Statements..................................21
14
- -
Independent Auditors' Report
The Board of Directors
GFSI, Inc.:
We have audited the accompanying consolidated balance sheets of GFSI, Inc. (a
wholly owned subsidiary of GFSI Holdings, Inc.) and subsidiaries (the Company)
as of June 28, 2003 and June 29, 2002, and the related consolidated statements
of income, changes in stockholders' equity (deficiency) and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our 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, 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
15
Report of Independent Auditors
To The Board of Directors
GFSI, Inc.
In our opinion, the accompanying consolidated statements of income, of changes
in stockholders' equity (deficiency) and of cash flows of GFSI, 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
16
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 28, June 29,
ASSETS 2003 2002
------------- ---------
Current assets:
Cash and cash equivalents................................................ $ 1,387 $ 313
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
Prepaid expenses and other current assets................................ 1,323 1,269
Deferred income taxes.................................................... 1,303 845
------------ ----------
Total current assets................................................ 81,033 80,782
Property, plant and equipment, net............................................ 19,883 19,671
Other assets:
Deferred financing costs, net of accumulated amortization of
$4,540 and $3,556 at June 28, 2003 and June 29, 2002................. 2,959 3,873
Investment in parent company bonds...................................... 9,900 --
Other................................................................... 9 1,010
------------ ----------
12,868 4,883
------------ ----------
Total assets.................................................. $ 113,784 $ 105,336
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable........................................................ $ 7,843 $ 12,010
Accrued interest expense................................................ 4,365 4,366
Accrued expenses........................................................ 6,151 5,983
Income taxes payable.................................................... 8,850 5,087
Current portion of long-term debt....................................... 324 177
------------ ----------
Total current liabilities.......................................... 27,533 27,623
Deferred income taxes........................................................ 1,194 699
Long-term debt, less current portion......................................... 158,639 156,132
Other long-term obligations.................................................. 491 527
Commitments and contingencies (Notes 2 and 5)................................
Stockholders' equity (deficiency):
Common Stock, $.01 par value, 10,000 shares authorized, one -- --
share issued at June 28, 2003 and June 29, 2002........................
Additional paid-in capital............................................. 59,127 59,127
Accumulated deficiency................................................. (133,200) (138,772)
------------- ----------
Total stockholders' equity (deficiency)............................ (74,073) (79,645)
------------- ----------
Total liabilities and stockholders' equity (deficiency)....... $ 113,784 $ 105,336
============= ==========
See notes to consolidated financial statements.
17
GFSI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(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 26,378
Restructuring costs..................................... -- -- 836
Acquisition of business................................. -- -- 1,110
Gain on disposition of business......................... -- -- (630)
------------- ------------ -------------
53,940 50,933 49,998
------------- ------------ -------------
Operating income................................... 24,215 22,694 20,728
Other income (expense):
Interest expense........................................ (14,872) (15,747) (16,661)
Loss on early extinguishment of debt.................... -- (994) --
Other ................................................ 24 22 414
-------------- ------------- -------------
(14,848) (16,719) (16,247)
-------------- ------------- -------------
Income before income taxes .................................. 9,367 5,975 4,481
Income tax expense........................................... (3,653) (2,331) (1,630)
-------------- ------------- -------------
Net income ................................................ $ 5,714 $ 3,644 $ 2,851
============== ============= =============
See notes to consolidated financial statements.
18
GFSI, 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)
Additional Total
Common Stock Paid-In Accumulated Stockholders'
-----------------
Share Amounts Capital Deficiency Equity(Deficiency)
----- ------- ------- ---------- ------------------
Balance, June 30, 2000......... 1 $ -- $ 58,127 $ (144,936) $ (86,809)
Net income................. 2,851 2,851
Capital contributions from
GFSI Holdings, Inc....... 1,000 1,000
Distributions to
GFSI Holdings, Inc....... (179) (179)
---- -------- ------------ ------------- -----------
Balance, June 29, 2001......... 1 -- 59,127 (142,264) (83,137)
Net income................. 3,644 3,644
Distributions to
GFSI Holdings, Inc....... (152) (152)
---- -------- ------------ ------------- -----------
Balance, June 29, 2002......... 1 -- 59,127 (138,772) (79,645)
Net income................. 5,714 5,714
Distributions to
GFSI Holdings, Inc....... (324) (324)
Foreign currency translation gain 182 182
---- -------- ------------ ------------- -----------
Balance, June 28, 2003......... 1 $ -- $ 59,127 $ (133,200) $ (74,073)
==== ======== ============ ============= ===========
See notes to consolidated financial statements.
19
GFSI, 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....................................................... $ 5,714 $ 3,644 $ 2,851
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation .................................................. 3,137 3,095 3,046
Amortization of deferred financing costs....................... 983 1,152 1,189
Amortization of other intangibles.............................. 1,000 1,000 --
Gain on disposition of business................................ -- -- (630)
Gain on sale or disposal of property, plant and
equipment.................................................... (24) (2) (99)
Deferred income taxes.......................................... 37 (424) 156
Loss on early extinguishment of debt........................... -- 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 taxes payable.......................................... 3,763 4,888 105
Accounts payable, accrued expenses and other long-term
obligations.................................................. (4,000) (4) 1,436
---------- ----------- ------------
Net cash provided by (used in) operating activities........ 11,891 (3,711) 21,547
---------- ----------- ------------
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 borrowing.............. (7,535) 30,527 --
Issuance of long-term debt....................................... 450 300 --
Payments on long-term debt....................................... (196) 26,859) (15,061)
Distributions to GFSI Holdings, Inc.............................. (324) (152) (179)
Capital contributions from GFSI Holdings, Inc.................... -- -- 1,000
Cash paid for financing costs.................................... (69) (912) (190)
Seller financing for acquisition of business..................... -- -- 5,158
---------- ----------- ------------
Net cash provided by (used in) financing activities........ (7,674) 2,904 (9,272)
---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents....... 1,074 (4,996) 3,863
Cash and cash equivalents,
Beginning of period.............................................. 313 5,309 1,446
---------- ----------- ------------
End of period.................................................... $ 1,387 $ 313 $ 5,309
========== =========== ============
Supplemental cash flow information:
Interest paid.................................................... $ 13,888 $ 14,005 $ 15,698
========== =========== ============
Income taxes paid (refunded)..................................... $ (147) $ (2,391) $ 359
========== =========== ============
Non-cash investing and financing activities:
Investment in parent company bonds............................... $ (9,900) $ -- $ --
========== =========== ============
Issuance of debt to purchase parent company bonds................ $ 9,900 $ -- $ --
========== =========== ============
See notes to consolidated financial statements.
20
GFSI, 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, Inc. ("GFSI" or the "Company") is a leading
designer, manufacturer and marketer of high quality, custom designed sportswear
and activewear bearing names, logos and insignia of resorts, corporations,
colleges and professional sports organizations. GFSI's customer base is spread
throughout the United States and Canada.
Ownership--GFSI is a wholly-owned subsidiary of GFSI Holdings, Inc.
Principles of Consolidation--The consolidated financial statements
include the accounts of GFSI and its wholly-owned subsidiaries, Event 1, Inc.,
CC Products, Inc. and GFSI Canada Company. 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").
21
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, 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 is a party to a tax sharing
agreement with its parent, GFSI Holdings, Inc. As such, the taxable income of
GFSI is included in the consolidated federal tax return and certain state
income tax returns of GFSI Holdings, Inc. GFSI's income tax provision has been
calculated as if GFSI would have filed separate federal and state income tax
returns.
Use of Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Segment Information-- 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 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 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.
23
GFSI, 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, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT IN PARENT COMPANY BONDS
In December 2002 the Company 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 of maturity of GFSI
Holdings, Inc. 11.375% Senior Discount Notes (the "Holdings Discount Notes")
with an accreted book value of $19.9 million. As a result of the private
placement, GFSI's financial statements reflect additional long-term debt of
$9.9 million and a corresponding non-current investment in parent company
bonds.
The Company's non-current investment in parent company bonds is recorded
at its purchase cost, reflecting fair value at its acquisition date. Trading
activity in this security has been and is expected to continue to be
infrequent, and consequently, the Company has determined that it will
recognize interest income on the Holdings Discount Notes when it is received
commencing in March 2005 and to recognize the accretion of the purchase
discount should a more established market materialize. The Company would have
recognized interest income and accreted purchase discount of approximately
$1.1 million as of June 28, 2003, had a more liquid market existed for this
security.
5. 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
Other........................................................................... 1,071 782
---------- -----------
158,963 156,309
Less current portion............................................................ 324 177
---------- -----------
$ 158,639 $ 156,132
========== ===========
In December 2002 the Company 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
Holdings' 11.375% Senior Discount Notes (the "Holdings Discount Notes") with
an accreted book value of $19.9 million. The acquisition of the Holdings
Discount Notes by GFSI, Inc. was considered an early extinguishment of debt,
and accordingly, Holdings recorded a pre-tax gain on the transaction of
approximately $9.6 million, net of related costs, in fiscal 2003.
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, 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
Holdings, among other things, to maintain a minimum fixed charge coverage
ratio as defined in the RBCA. At the most restrictive level, Holdings must
maintain a fixed charge coverage ratio of 1.15 to 1.0. As of June 28, 2003,
Holdings 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.
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.................................... 333
-----------
Total $ 158,963
===========
26
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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.
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)............................ $ 3,616 $ 2,755 $ 1,474
Deferred income tax provision (benefit)........................... 37 (424) 156
----------- ---------- -----------
Total income tax provision (benefit)......................... $ 3,653 $ 2,331 $ 1,630
=========== ========== ===========
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....$ 3,278 35.0% $ 2,091 35.0% $ 1,568 35.0%
Effect of state income taxes, net of federal benefit.... 365 3.9 233 3.9 149 3.3
Other................................................... 10 0.1 7 0.1 (87) (1.9)
---------- ----- --------- ----- --------- ------
$ 3,653 39.0% $ 2,331 39.0% $ 1,630 36.4%
========== ===== ========= ===== ========= ======
27
GFSI, 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 --
Other assets, non current........................................ 676 -- 338 --
Other............................................................ 390 152 348 147
------- ------- ------- ---------
Total............................................................ $ 1,810 $ 1,701 $ 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....................... $ 1,387 $ 1,387 $ 313 $ 313
Accounts receivable............................. 34,357 34,357 32,626 32,626
Accounts payable................................ 7,843 7,843 12,010 12,010
Long-term debt.................................. 158,963 134,682 156,309 137,559
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.
28
GFSI, 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 Holdings and its subsidiaries 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. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not necessarily intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with accounting principles
generally accepted in the United States of America. Each of the subsidiary
guarantors are 100% owned by GFSI, Inc. The subsidiary guarantees of GFSI,
Inc.'s debts are full and unconditional and joint and several.
29
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 28, 2003 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
-------------- ------------- ---------------- ---------------
Assets:
Current assets
Cash and cash equivalents $ 1,323 $ 64 $ -- $ 1,387
Accounts receivable, net 25,027 15,300 (5,970) 34,357
Inventories, net 38,367 4,296 -- 42,663
Prepaid expenses and other current assets 1,198 125 -- 1,323
Deferred income taxes 1,303 -- -- 1,303
------------ ------------ ------------ --------------
Total current assets 67,218 19,785 (5,970) 81,033
Investment in equity of subsidiaries 17,331 -- (17,331) --
Property, plant and equipment, net 19,624 259 -- 19,883
Investment in parent company bonds 9,900 -- -- 9,900
Other assets 3,957 (987) (2) 2,968
------------ ------------- ------------ --------------
Total assets $ 118,030 $ 19,057 $ (23,303) $ 113,784
============ ============= ============ ==============
Liabilities and stockholders' equity:
Current liabilities
Accounts payable $ 13,263 $ 550 $ (5,970) $ 7,843
Accrued interest expense 4,365 -- -- 4,365
Accrued expenses 4,877 1,274 -- 6,151
Income taxes payable 8,948 (98) -- 8,850
Current portion of long-term debt 324 -- -- 324
------------ ------------- ------------ --------------
Total current liabilities 31,777 1,726 (5,970) 27,533
Deferred income taxes 1,194 -- -- 1,194
Other long-term obligations 491 -- -- 491
Long-term debt, less current portion 158,639 -- -- 158,639
Stockholders' equity (deficiency) (74,071) 17,331 (17,333) (74,073)
------------ ------------- ------------ --------------
Total liabilities and stockholders'
equity (deficiency) $ 118,030 $ 19,057 $ (23,303) $ 113,784
============ ============= ============ ==============
30
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended June 28, 2003 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------- ------------
Net sales $ 139,980 $ 74,128 $ (4,835) $ 209,273
Cost of sales 90,574 45,379 (4,835) 131,118
Selling expenses 16,637 10,548 -- 27,185
General and administrative expense 22,319 4,436 -- 26,755
-------------- ------------ ------------- ------------
Total costs and expenses 129,530 60,363 (4,835) 185,058
-------------- ------------ ------------- ------------
Operating income 10,450 13,765 -- 24,215
Equity in net earnings of subsidiaries 8,373 -- (8,373) --
Interest expense (14,833) (39) -- (14,872)
Other, net 24 -- -- 24
--------------- ------------- ------------- ------------
Income before income taxes 4,014 13,726 (8,373) 9,367
Income tax (expense) benefit 1,700 (5,353) -- (3,653)
-------------- ------------- ------------- ------------
Net income $ 5,714 $ 8,373 $ (8,373) $ 5,714
============== ============== ============= ============
Year ended June 28, 2003 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
------- ---------- ------------ -----------
Net cash flows provided by (used in) operating activities $ 12,908 $ (1,017) $ -- $ 11,891
Cash flows from investing activities:
Intercompany loan (991) -- 991 --
Purchases of property, plant and equipment, net (3,254) (71) -- (3,325)
----------- ------------ ------------ --------------
Net cash flows used in investing activities (4,245) (71) 991 (3,325)
----------- ------------ ------------ --------------
Cash flows from financing activities:
Net changes to revolving credit agreement borrowing (7,535) -- -- (7,535)
Payments on long-term debt (196) -- -- (196)
Intercompany borrowings -- 991 (991) --
Cash paid for financing costs (69) -- -- (69)
Issuance of long-term debt 450 -- -- 450
Distributions to GFSI Holdings, Inc. (324) -- -- (324)
----------- ------------ ------------- -------------
Net cash provided by (used in) financing activities 7,674 991 (991) (7,674)
----------- ------------ ------------- -------------
Effect of exchange rate changes on cash -- 182 -- 182
----------- ------------- ------------- -------------
Net change in cash and cash equivalents: 989 85 -- 1,074
Cash and cash equivalents at beginning of period 334 (21) -- 313
----------- ------------- -------------- -------------
Cash and cash equivalents end of period $ 1,323 $ 64 $ -- $ 1,387
=========== ============= ============== =============
31
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
----------- ------------ ------------- --------------
Assets:
Current assets:
Cash and cash equivalents $ 334 $ (21) $ -- $ 313
Accounts receivable, net 25,199 8,511 (1,084) 32,626
Inventories, net 43,402 2,327 -- 45,729
Prepaid expenses and other current assets 1,163 106 -- 1,269
Deferred income taxes 845 -- -- 845
----------- ----------- ----------- -----------
Total current assets 70,943 10,923 (1,084) 80,782
Investment in equity of subsidiaries 8,773 -- (8,773) --
Property, plant and equipment, net 19,120 551 -- 19,671
Other assets 4,881 4 (2) 4,883
----------- ----------- ----------- -----------
Total assets $ 103,717 $ 11,478 $ (9,859) $ 105,336
=========== =========== =========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 11,466 $ 1,630 $ (1,086) $ 12,010
Accrued interest expense 4,366 -- -- 4,366
Accrued expenses 5,034 949 -- 5,983
Income taxes payable 5,156 (69) -- 5,087
Current portion of long-term debt 177 -- -- 177
----------- ----------- ----------- ----------
Total current liabilities 26,199 2,510 (1,086) 27,623
Deferred income taxes 504 195 -- 699
Long-term debt, less current portion 156,132 -- -- 156,132
Other long-term obligations 527 -- -- 527
Stockholders' equity (deficiency) (79,645) 8,773 (8,773) (79,645)
----------- ----------- ----------- -----------
$ 103,717 $ 11,478 $ (9,859) $ 105,336
Total liabilities and =========== =========== =========== ===========
stockholders' equity (deficiency)
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
---------- ---------- ----------- ------------
Net sales $ 145,513 $ 55,705 $ (3,968) $ 197,250
Cost of sales 94,379 33,212 (3,968) 123,623
Selling expenses 16,251 8,332 -- 24,583
General and administrative expense 21,722 4,628 -- 26,350
----------- ------------ ------------- ------------
Total costs and expenses 132,352 46,172 (3,968) 174,556
----------- ------------ ------------- ------------
Operating income 13,161 9,533 -- 22,694
Equity in net earnings of subsidiaries 5,813 -- (5,813) --
Interest expense (15,747) -- -- (15,747)
Loss on early extinguishment of debt (994) -- -- (994)
Other income (expense) 23 (1) -- 22
----------- ------------ ------------- ------------
Income before income taxes 2,256 9,532 (5,813) 5,975
Income tax expense (benefit) (1,388) 3,719 -- 2,331
----------- ------------ ------------- ------------
Net income $ 3,644 $ 5,813 $ (5,813) $ 3,644
=========== ============ ============= ============
32
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended June 29, 2002 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
---------- ---------- ------------- -----------
Net cash flows provided by (used in) operating activities $ (3,922) $ 211 $ -- $ (3,711)
Net cash flows used in investing activities (3,910) (279) -- (4,189)
Cash flows from financing activities:
Net changes to revolving credit agreement borrowing 30,527 -- -- 30,527
Payments on long-term debt (26,859) -- -- (26,859)
Cash paid for financing costs (912) -- -- (912)
Issuance of long-term debt 300 -- -- 300
Distributions to GFSI Holdings, Inc. (152) -- -- (152)
------------ ---------- ---------- -----------
Net cash provided by financing activities 2,904 -- -- 2,904
------------ ---------- ---------- -----------
Net decrease in cash and cash equivalents (4,928) (68) -- (4,996)
Cash and cash equivalents at beginning of period 5,263 46 -- 5,309
------------ ---------- ---------- -----------
Cash and cash equivalents end of period $ 335 $ (22) $ -- $ 313
============ ========== ========== ===========
Year ended June 29, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
--------- ---------- ------------- ------------
Net sales $ 178,568 $ 10,536 $ (3,799) $ 185,305
Cost of sales 113,672 4,706 (3,799) 114,579
Selling expenses 19,674 2,630 -- 22,304
General and administrative expense 24,952 1,426 -- 26,378
Restructuring costs 836 -- -- 836
Acquisition of business -- 1,110 -- 1,110
Gain on disposition of business (630) -- -- (630)
----------- ---------- ----------- ------------
Total costs and expenses 158,504 9,872 (3,799) 164,577
----------- ---------- ----------- ------------
Operating income 20,064 664 -- 20,728
Equity in net earnings of subsidiaries 455 -- (455) --
Interest income (expense) (16,746) 85 -- (16,661)
Other income (expense) 417 (3) -- 414
----------- ---------- ----------- ------------
Income before income taxes 4,190 746 (455) 4,481
Income tax expense 1,339 291 -- 1,630
----------- ---------- ----------- ------------
Net income $ 2,851 $ 455 $ (455) $ 2,851
=========== ========== =========== ============
33
GFSI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended June 29, 2001 (in thousands):
Parent Subsidiary Consolidating Consolidated
Obligor Guarantors Adjustments GFSI, Inc.
---------- ---------- ------------- ------------
Net cash flows provided by operating activities $ 21,448 $ 99 $ -- $ 21,547
Investing activities:
Proceeds from sales of property, plant and equipment 203 -- -- 203
Purchase of property, plant and equipment (1,768) (19) -- (1,787)
Proceeds from disposition of business 2,672 -- -- 2,672
Acquisition of business (9,500) -- -- (9,500)
------------ --------- ----------- ----------
Net cash used in investing activities (8,393) (19) -- (8,412)
Cash flows from financing activities:
Payments on long-term debt (15,061) -- -- (15,061)
Cash paid for financing costs (190) -- -- (190)
Capital contribution from GFSI Holdings, Inc. 1,000 -- -- 1,000
Seller financing for acquisition of business 5,158 -- -- 5,158
Distributions to GFSI Holdings, Inc. (179) -- -- (179)
------------ --------- ----------- ----------
Net cash used in financing activities (9,272) -- -- (9,272)
------------ --------- ----------- ----------
Net increase in cash and cash equivalents 3,783 80 -- 3,863
Cash and cash equivalents at beginning of period 1,479 (33) -- 1,446
------------ --------- ----------- ----------
Cash and cash equivalents end of period $ 5,262 $ 47 $ -- $ 5,309
============ ========= =========== ==========
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.
34
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A - 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.
35
PART III
Item 10 - Directors and Executive Officers
The following sets forth the names and ages of the Company's directors and
executive officers and the positions they hold as of the date of this annual
report. The directors and officers hold the same directorships and titles with
respect to Holdings.
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 the Company 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.
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.
36
Board of Directors
Liability Limitation. The Certificate of Incorporation provides that a
director of GFSI 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.
Director Compensation. Each director of the Company receives $20,000 per
year for serving as a director of both Holdings and GFSI. In addition, the
Company reimburses directors for their travel and other expenses incurred in
connection with attending meetings of the Board of Directors of Holdings and
GFSI.
37
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
Position Fiscal Directors
- --------- Year Salary Bonus Fees (3) Other
------ ------ ----- -------- ------
Robert M. Wolff (2) 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, Holdings 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. and GFSI, 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.
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.
38
Item 12 - Security Ownership and Certain Beneficial Owners and Management
All of the issued and outstanding capital stock of GFSI is owned by
Holdings. Holdings has common stock and three series of preferred stock issued
and outstanding (the "Preferred Shares"). The table below sets forth certain
information regarding beneficial ownership of the common stock of 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.
(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.
39
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.
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.
40
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.
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.
41
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.
4.8 Global Series A Senior Discount Note. **
4.9 Form Global Series B Senior Discount Note. **
42
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. *
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. @@
43
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 as of August 12, 2003, to the Credit Agreement,
dated as of March 28, 2002
21.1 Subsidiaries of GFSI, 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 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 exhibits filed with the Quarterly Report on
Form 10-Q of the 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.
44
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, 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 below by the following persons on behalf of the
Registrant and 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
J. CRAIG PETERSON (Principal Financial 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
45